Digging Deeper On The Tunnel Deal

It is so simple but this BLOG will not be that way I am afraid. It should make your eyes glaze over about half-way through. And if you do read it though to the end, then what can I say but thanks for your perseverance!

If only our political leaders trusted their constituents, I would not have to write another overly long BLOG about the Tunnel deal with Detroit and you would not have to spend so much time to read it. Instead, there is secrecy and it appears that not even the Councillors on both sides of the river know what is going on yet.

The Detroit Free Press is disgusted with what is happening and ties the Text Messaging scandal into this:

• "What a tragedy of mismanagement that the administration took a full year to get a deal agreed upon with Windsor before presenting it to council to fulfill the budget promise. And what a shame that a rushed decision now must be made, in the face of very real threats to the city's financial health.
  
  And as with everything mayoral these days, the situation has to make you wonder about the effect of scandal on the incompetence. Has the mayor been distracted since January from getting the deal done? Certainly, he faces taller obstacles with City Council now, given the massive breach of trust he committed against its members...
  
  At minimum, the administration needs to get council members' many questions about the deal answered promptly, so they at least know the parameters of what's on the table."

Interestingly, I don't remember the Windsor Star writing a similar Editorial on this deal. Don't our Councillors deserve to know what is going on too.

I hope I am wrong but I fear, along with the East End arena, that the Tunnel will become this Mayor and Council's Canderel and MFP. The secrecy surrounding it gives me a great deal of concern. After reading the Spitfires' deal, I am disgusted at how poorly this City negotiates especially when Councillors claim they never read the Agreement but relied on a Report from Administration.

Why no one has come out yet publicly and told us what the deal is boggles the mind. Is it to be rammed down the throat of Councillors on both sides of the river at the last possible moment? It is for a lot of money after all. Shall we assume it is risky especially for Windsorites? Why do we have to guess especially when we are given mixed signals?

This BLOG is a bit complicated and overly detailed I am afraid because these transactions are complicated. Unfortunately as well, the transaction is secret so one can only speculate considering the transactions terms are being thrown around so loosely. So you may have to read it carefully to understand it fully. I hope that I do a proper job with the explanation to make it as clear as I can for you.

There is no doubt in my mind that the Tunnel deal will be another of our Megaprojects run wild. We will see outrageous claims for all the money that it will bring in. The numbers boys will use spreadsheets to figure out costs and revenues building in inflation, contingencies and any other matter that you can dream up to show us how huge the profits will be over the 75 year life of the deal.

We will see projections of revenues that will be mind boggling. We will see traffic numbers that will bring us back to the late 1990s since Eddie's economic development plans will bring back tourism and industry with a vengeance. We will see costs of maintenance that will make it appear as if this Tunnel has just been built rather than being a hundred years old. Who knows, even Sam Schwartz might be brought back to talk about this since he is a Tunnel guru too. We will seen valuations of June, 2007 rather than February, 2008 with no recognition whatsoever of the competition of a new DRIC bridge.

As far as I'm concerned, I will wonder why, if the Tunnel is such a magnificent operation:

• it has consistently lost market share for almost the last decade,
• it lost a huge portion of its volume and will probably lose more
• the Tunnel Ventilation Building project was so over-budget
• the huge dividends of the past have been reduced to zero dollars, and
• why the City cannot afford to do the Tunnel Improvement Project even though the Senior Levels are picking up two thirds of the costs.

But I'll probably be a voice in the wilderness, a naysayer and whiner, with the headlines from the sycophants and cheerleaders proclaiming the brilliance of our politicians. I will be left wondering why an inexperienced lawyer, entrepreneur and border operator is smarter than the owner of the Ambassador Bridge.

I wish I could tell you what the Tunnel deal is but I cannot. All that I can do is speculate based on comments in the media, which comments themselves are contradictory.

It would appear to me that an outright sale of the Tunnel is out. I don't see either side of the river consenting to a sale of this asset except to a related company or authority. As I mentioned before, Mr. Sutts, the City's lawyer, stated:

• "According to Sutts, the move allows the city and the new corporation to arrange financing independently of each other. However, any sale of tunnel assets would require the approval of the City of Windsor -- the corporation's sole shareholder."

Notice, that he only talked about sale requiring approval. So that's not going to happen. He did give us a hint however when he talked about independent financing so I would expect that whatever is going to be done will be done by the new Tunnel Corporation to try to keep the City's exposure at risk. I don't see how that can happen to be honest but what do I know.

If is not a sale, then perhaps Windsor will lease the Detroit half for the amount of $75 million and operate the entire tunnel and make all of the revenues and profits or alternatively money will be borrowed based on some kind of security I would assume.

Now the Detroit Mayor keeps on talking about leasing but I think if that was going to be the case, that has changed dramatically now. He said the following in the Budget speech that Detroit Council refused to hear a few days ago:

• "The largest of these is the proposal submitted to you a week ago Friday to transfer our portion of the Windsor Tunnel to a holding company for the next 75 years. In return, we will receive a lump sum payment of $75 million. After using a portion of the proceeds to fund an annuity for an insurance package on the tunnel as well as financing and legal fees, we should net at least $65 million. The Windsor City Council already has taken action to transfer their portion of the tunnel to the holding company."

Only a few days before he talked about:

• " a proposal to lease the city’s half of the Detroit-Windsor Tunnel to prop up the city’s budget."

Then just recently the Free Press reported that we are back to some kind of arrangement whereby Windsor operates both sides or maybe it is a Joint Operating Agreement. It is so confusing:

• "Now, the mayor proposes to sell the city's half of the tunnel to an authority appointed by the mayor and council.
  
  With the city's fiscal year ending June 30, time is running short to complete the deal or find another way to balance the budget. Adams talked of layoffs to find the $65 million.
  
  Under the new version of the deal, both Windsor and Detroit would permanently turn over their halves of the tunnel to separate authorities that would be composed of appointees of the two city governments.
  
  On the Detroit side, Kilpatrick and the council would appoint members to the newly created Detroit Tunnel Authority. Windsor already has transferred ownership of its half of the tunnel to the newly created Windsor-Detroit Tunnel Corp.
  
  The $75 million would originate from the Ontario government and be routed to the Detroit authority, which would give $65 million to the City of Detroit and use the rest for insurance and transaction costs.
  
  In 2020, when the existing lease on Detroit's half of the tunnel expires, both the Detroit authority and the Windsor corporation would operate the tunnel, said Kilpatrick press secretary Denise Tolliver. But the report from the council's research division suggests the agreement would enable the Windsor corporation to operate both sides of the tunnel.

We know that the City of Windsor incorporated their Canadian Holding company but we have not heard that they have incorporated the American Holding company that was going to operate the US side. Did Kwame mean that Detroit's interest would be transferred into the Canadian Holding company? I would find that hard to believe because our Mayor said:

• "The city's efforts are to ensure that the border continues to remain in public hands, and that the two (sides) continue to operate as one entity," Francis said. "It's not the city taking control from Detroit. It's not Detroit giving up control."

If the Detroit Mayor is talking about transferring Detroit's interest in the Tunnel into a Holding company as well, then it seems to me that the parties have agreed to transfer their interest in the Tunnel into separate Holding companies, each one owning their half of the Tunnel. The argument would be used on the other side as it was here that it is being done for liability reasons... you know those big bad terrorists.

Again it seems to me that the idea of leasing seems dead based on the Detroit's Mayor's remark and what Eddie said about the two sides operating as one entity. Yet Detroit Council's research division suggested otherwise.

Let's assume a structure like a Joint Operating Agreement where the two cities work together in one entity. That has been discussed in the past if I recall correctly. In such an entity, each side would be represented, probably equally. President Cockrel in Detroit said recently

• "I'm willing to see what they come up with. I've always liked the idea of a joint management agreement, but the idea has to make sense for both cities."

So let's take the next step and say that something is going to be set up perhaps along the lines of the Public Authority concept at some of the other border crossings. In other words the parties will each own still their half of the Tunnel but through a holding company and these holding companies will set up a third authority to operate the Tunnel.

Kwame still insists that Windsor is going to provide $75 million to Detroit and that this money is going to be coming from the Province of Ontario.

Let's back up a bit. The City of Windsor has rolled over their Tunnel asset into its Holding company for $101 million and has taken back a promissory note at 5% interest. Let's agree that Detroit has done something similar. Why wouldn't the rollover amounts be the same? That's because Alinda still has the right to operate the Detroit half of the Tunnel for another dozen years or so naturally Windsor's side would be worth more.

However, do not assume that the Tunnel is worth at least $176 million. Obviously, Detroit wanted $75 million or else it would not do the deal. Presumably therefore someone had to calculate the Windsor side at more than $75 million or this deal would not make sense for anyone. I know there was a valuation report based on revenues that said that the Windsor side was worth $111 million. But you know what I think about traffic projections and valuations based on them given the DRIC traffic projection fiasco.

The real proof in what the Tunnel is worth as far as I am concerned is that the Bridge Company was prepared to give to the City of Detroit significantly less money for a much longer-term and that the Canadian Federal Government walked away from this transaction as well either because the valuation was too high, the Tunnel condition was bad or both. However, maybe a lender is prepared to loan money based on the valuation.

Again my concern is that if the Bridge Company and the Feds are correct, we are getting into a deal based on a valuation that bears no relationship to reality that could mean that this deal is a disaster from the start.

So if we have eliminated both a sale and lease, we are left with a loan. It seems that Windsor is the party that has to find the money to pay the City of Detroit.

Let's just stop right here for a moment. Both Detroit and Windsor I am sure know about the experience in Chicago and in Indiana when assets were leased out for a long term and the governments involved received huge amounts of money. Why wouldn't they do such a transaction jointly with respect to the Tunnel? Why would they do a loan?

What problems do we not know about have they run into such that the transaction seems to have changed so drastically according to the Detroit Mayor. And as we know, Detroit Council does not believe that the transaction can be completed before June 30 since they have only seen the skimpiest of documentation.

I don't have an answer for this and that is what is starting to worry me. Why wouldn't they do one of these P3 deals that look so attractive in bringing so much money and I would think pose little risk to the two Cities in the event of failure. The risk would be transferred to the private party wouldn't it. I wonder if DCTC and its Bank owner did well with the Detroit Tunnel. I would tend to think not given the fall of market share but I do not know. If they did not, then shouldn't that give us pause before we rush headlong into doing a deal.

Remember in the Star it was said:

• "the new corporation to arrange financing" and
  
• "How Windsor can fund a deal to take full control of the tunnel remains unknown.
  
  "Our legal team is looking at different financial options that are available," Francis said."

My guess has to be that private sources of P3 financing have dried up or alternatively no one is prepared to put in this kind of money into the Tunnel in a P3 lease deal. After all, it is a declining asset with shrinking revenues. The Province of Ontario as far as I know is not in the P3 leasing business either if they are the financing source.

So the conclusion that I'm coming to is that this is going to be some kind of a loan transaction. My recollection is that the Detroit Council at one time said that if the Mayor's deal fell through they could always go and get some borrowings to plug their Budget hole. Perhaps this is what is being proposed now.

While I find it completely inconceivable, and it will cause a major blow up at Queen's Park, it may well be that the Windsor or Windsor's Holding company will be able to borrow from the Province's Infrastructure Fund an amount in the sum of $176 million or more. After all, Windsor has to get a lot of money too or else why enter into the transaction. It has to be paid off by its subsidiary for the asset.

Windsor is eager to do a deal with Detroit rather than on its own because presumably it is easier to borrow against an entire Tunnel rather than only a half and probably there is an ability to borrow more. Again, my concern me is that our Mayor is overestimating the value of the Detroit half in putting us in jeopardy in the event that Detroit defaults.

I thought that Detroit was at its borrowing limit so that is probably why a Holding company is set up to do borrowing but the money is transferred to the City as part of their rollover transaction.

I suspect that the financing structure will be similar to what was done at the University of Windsor so that the loan is interest only for the life of the loan (probably 40 years because that is what I believe Infrastructure Ontario's loan period is) with a final lump sum payment to pay off the entire principal amount.

Let's assume that money can be borrowed by the Holding company. It would do so and then give $75 million to Detroit as a loan to be paid back over 40 years and pay off the promissory note to the City for $100 million thereby putting cash into the City. Why Detroit would do a loan transaction I am not sure.

Presumably that deal for $176 million would have to be secured. I would assume that it would be secured by the property, the Tunnel, the revenue stream and perhaps guarantees by the Cities involved. This stuff is starting to scare me because in the event of default, the Tunnel could be lost or the City could be stuck on its guarantee.

The hope has to be that revenues will be allowed to increase over time (how that can happen with the Bridge Company's tolls being lower today and with a possible new competitor in the future I do not understand) and that no costly maintenance will be done with respect to a 100-year-old tunnel. The proposed new regulations for the International Bridges and Tunnels Act may put a damper on that expectation!

How would this fit in with a comment that I wrote before:

• "Going back in history, Mr. Sutts has effectively told us that the City will not be at risk in this transaction. That is a pretty nice guarantee that Mr. Sutts and his firm are providing to us.
  
  "the deal will not be completed until he is fully assured local taxpayers will not be hurt.
  
  “We will be extraordinarily cautious so costs of the acquisition will be self-supporting of the project itself. That there will be no need to go to the well of the city to support this transaction."

Whew, absolutely no risk to taxpayers or City assets ever. The Mayor and Mr. Sutts repeated in the last few days this assurance by saying:

• "But Sutts and Francis said Tuesday they are being careful not to complete any tunnel deal that could prove costly in the years to come."

Nice to have Eddie personally on the hook as well.

It could be that another alternative for the borrowing is that it would be done by the joint operating party as it is with the other border authorities. But that joint company would have to own the assets and I do not believe that is going to happen. Again, I would think that the City of Windsor and perhaps Detroit also would have to guarantee the loan unless a lender was foolish enough to take it on a nonrecourse basis on the security of the Tunnel assets only or on the revenue stream.

Confused. Me too. It is pure speculation and I don't feel so bad about it since this deal was supposed to have been completed in June 2007.

If it works out, terrific.

We will get a massive amount of cash in up front on the borrowing, just like when you get a mortgage on the equity in your house. We can use that money for whatever purposes we want. The Tunnel is in good shape and will not require any significant kind of maintenance or repairs over the next 75 years we will be told. We will have more than enough money from revenues to pay off the interest. The increasing tolls will make us feel even more comfortable as the money keeps pouring in. When traffic volumes increase, as they will again, the Tunnel will again become a cash cow for us. The principal amount of the loan will be paid back after 40 years because of the structure put in place and then for the next 35 years it will be gravy for both the cities of Windsor and Detroit.

It will be presented that way because this is how Megaprojects have to be presented. And as you will remember from the BLOGs I did an Megaprojects, quite often, deliberately or inadvertently, everything about what we are told never turns out and there are horrific consequences. But the people involved don't really care anymore. They won't be around. They will have been proclaimed a hero and a genius long before all this falls apart. It will only be the taxpayers left holding the bag.

Still, if we can deal with the Hurst financial disasters, I guess we can cope with Eddie's. And I still don't expect to ever be able to see what this deal is all about without a Municipal Freedom of Information application that will take years to process because of confidentiality and all of the appeals or perhaps when I read the Bankruptcy Court files.

I hope that this transaction does work out because it could help relieve some of our financial distress in the City at a time when we need it. I just can't get rid of this nagging feeling that this will turn into a disaster since the deals I've seen so far with the City seem to have done so. The City is just not capable from past experience of being able to do this kind of sophisticated financial transactions and here we go again.

On this transaction, you can call me a naysayer unless I get a lot better proof of why this deal should work. And all of the secrecy and games playing to keep information away from citizens hardly makes me feel confident.