P3 Cocaine (Part 2)

Oh my. Quick our Finance Minister Jim Flaherty may be a P3 addict! Has he not learned anything from the economic melt-down? Is there a P3 Anonymous so that he can join? Can he be sent to a P3 rehab clinic? Could this become a new area of expertise for Brentwood?

Did you read today what the Finance Minister said at a conference? The stock markets may collapse if this gets wide-spread distribution:

• "Ottawa wants to build billions of dollars of bridges, hospitals and other infrastructure as a way to lessen the blow from the financial crisis, Finance Minister Jim Flaherty said Monday.
  
  Speaking at a conference in Toronto, Flaherty said investments in infrastructure will be "a key part" of the government's strategy to stimulate the economy...
  
  Flaherty said all levels of government need to work together to roll out P3s as quickly as possible in order to keep Canadians employed and the economy going. He said co-operation between the different levels would be key to the effort."

I Blogged before that taxpayers would be fleeced by P3 deals with Windsor as the template. Look at the DRIC project as a classic Megaproject that has run amuk. I hope someone sends the Minister my BLOG soon or we taxpayers are in BIG trouble.

Have we been "Delrayed" in Windsor yet by the idea of the DRIC/Greenlink multi-billion dollar road with parklands for the masses and a new bridge? When you figure out what it will really cost us over 40 years if they really go ahead, don't we really have better uses for the billions that will go into the P3 operators' pockets?

This BLOG will demonstrate the absurdity of the DRIC project financially. It will require a massive Government subsidy or it will go bankrupt taking the other area border crossings down with it. P3s like this will result in the biggest transfer of money from the public purse to the private sector for years considering that some of the leases go on for 99 years. It will make financial meltdowns the norm as Governments are called on their guarantees to support these foolish deals!

Here is a quote you will hear repeated many times if we allow these P3s to become the way Governments carry on business:

• "The 50km, $27.5 billion Eurotunnel, nicknamed the Chunnel, has become a classic example of a technological marvel that has been unable to justify the costs of its creation.
  
  "Without a doubt, the Channel Tunnel would not have been built if we'd known about these problems," Richard Shirrefs, Eurotunnel's former chief executive officer, said."

Take out a calculator as you read along and you can do the math as well as I. As an easy step, just figure out what 5% of $5B a year is for borrowing costs alone and figure out how that will be paid for considering that estimates of the Ambassador Bridge income is a fraction of that amount. Don't forget to add on top of that operating costs and a significant return on investment ie profit!

Estimates for the road are around $1.6 billion but they are just based on MTO guidelines not on actual numbers. We just saw the cost of work at Manning Road going from $125M to $200M in one year. If we assume that there will be some kind of a financing deal for the road, Plaza, and bridge, then we are looking at a project in the neighborhood of $3-$5B or more, about twice the number that we’ve been quoted to date.

How the heck can that huge amount of money be paid for? Users cannot afford to do so. Let me give you two examples:

HIGHWAY 407

The consortium that acquired this project spent about $3 billion as the acquisition price for a 99 year deal. The length of the road is 108 km with 400,000 users per day. These days the maximum toll for Highway 407 for a car at peak time is: $20.50. For trucks, it is $61.51.

CONFEDERATION BRIDGE

It is a two lane,12.9 kilometre long bridge that took four years to build at a cost of about $1.3 billion. Strait Crossing Bridge Limited (SCBL) privately manages, maintains and operates the bridge until 2032, after which time such operations will be transferred to the Government of Canada. OMERS is also involved in this project. The tolls for cars are $41.50, more for trucks based on number of axles and are charged when one leaves PEI. As for volumes,

• “Traffic statistics are not released to the public as this is privileged and confidential information of Strait Crossing Bridge Limited, the privately-owned operator of the bridge.”

However, I did find a number of about 720,000 vehicles or about 2,000 per day

CBC reported that

• “The other source of revenue for the bridge is a $42-million-a-year subsidy from the federal government.”

Now let’s take a look at Windsor:

DRIC PROJECT

It is a project for a six lane bridge, 100+ acre plaza and 9 kilometre road. Usage if there was such a road today would probably be not more than 50,000 vehicles per day. Your guess is as good as mine as to what the final cost would be but for the sake of argument let’s say it is between $3-$5B.

My point for giving all this information is to ask whether anyone would use the DRIC road and bridge assuming that tolls were comparable to Highway 407 or the Confederation Bridge. Of course not is the obvious answer because they could use the Ambassador Bridge at a much lower cost and would use Huron Church and other Windsor streets at no cost. Now you understand why the Bridge Company has to be put out of business and how the road system will be used as the ultimate Government weapon to do so.

Look at the numbers. Highway 407 is about the cost of the DRIC project while the Confederation Bridge is a third of it. Highway 407 would have about eight times the volume while the Confederation Bridge would have about 1/25th of the volume.

Highway 407 fought a lawsuit with the Province with respect to their right to charge whatever toll they wanted while in PEI, the Government provides a huge subsidy annually for the Confederation Bridge.

The length of the DRIC proposed P3 deal would be about the same as that of the Confederation Bridge, 40 years, while the Highway 407 Consortium has 99 years to make back its money.

The Bridge Company I believe said that their analysis showed that tolls at a DRIC bridge would be about three to four times higher than theirs.

Using Highway 407 as an example, since the cost is about the same, a toll on the DRIC road if one was charged should be about $20 even though the length of Highway 407 is so much longer. However, only 1/8 the number of users would use the DRIC road and the P3 operator would have about half the time to collect its money compared with the operators of Highway 407. On that basis, the cost of the toll could approach $200 per car and not be considered unreasonable.

What should be obvious by now by looking at all of these numbers is that the DRIC project is not financially viable whatsoever.

And I have not yet talked about competition from the Bridge Company or the Detroit/Windsor Tunnel. The expectation from US DRIC is that the new project will take away about 80% of the Bridge Company’s business and a good chunk of that from the Tunnel and the Blue Water Bridge. They have to say that don’t they or else no one would be interested in the project whatsoever. Wasn’t it a 50-50 split before between the DRIC Bridge and the Ambassador Bridge? If those assumptions are not correct, then what happens to the new bridge? Obviously, it goes broke.

The Government cannot have that. They have invested too much time and effort to beat the Bridge Company to have this fail. They have to figure out some way to make this project pay or no one will invest. Shadow tolls may well be the answer because it is really a way of financing a project. There may be tolls or levies on the road provided that the Canadian Automobile Association or the Ontario Trucking Association don’t object to much. Look at the PEI subsidies to make that project work. It pays off the “mortgage.”

Any way you want to look at it however this project is not financially viable and taxpayers will be stuck paying the bill. Has anyone explained that to you yet in the mountains of paper that had been produced by the DRIC consultants? Is there a section on Governance and Finance in the new DRIC Draft EA material. If so, I don’t remember seeing it. If not, now you know the answer why! It could never be justified.

Are the investors concerned? Not in the least. They are happy about it. They are encouraging it. They are trying to induce the Governments across North America and elsewhere to do even more of these types of projects.

Could DRIC be one of OMERS' Michael Nobrega's "Alpha" infrastructure projects ie a major infrastructure asset. If you want an "alpha" deal to open up your London office and to invite all those oil-rich Sovereign Funds to participate in, it has to be a multi-billion project and not one for a paltry few hundred million. Come on, you need big amounts and MegaProjects to play in the P3 big leagues.

Is Nobrega facing competition from "Australians" who have been talking with MDOT, perhaps for the same project? I wonder who those Australians are. It's time that MDOT tell us don't you think and what they talked about.

The DRIC project financing will be guaranteed in some way or be subsidized by the Governments or the P3s will not be involved. They will want their huge rates of return including fees for setting up a project, management fees, grossly excessive rates of return and so on. It is not a small project either. Considering the excessive amounts of money that we are talking about, it is gigantic. Imagine what this will cost us over the life of the P3 deal. I don’t think that my calculator has enough digits to figure out what the answer is.

It is no wonder that apologists for P3s don’t want to talk about money. They would be laughed out of a room trying to put this kind of a proposition forward to a group of taxpayers who understood what was going on.

We are given all of the nice information about parkland, tunnels and quality of life with the DRIC project to put us as taxpayers into a state of stupour. Mix in a bit of Canadian economic nationalism and pejorative terms like monopoly and private enterprise and you have a winner in this area.

What utter rot.

Why would anyone spend 10 times the cost of any other road in Ontario, or perhaps 20 times by the time this is done, just to build a DRIC road from Highway 401 to the bridge? Why are the Governments thinking at all about building a new crossing when in 1998 the Ambassador Bridge announced that it was going to build one? Why would the American Governments be interested in building a comparable plaza a mile down the road after they spent about $200 million on the Ambassador Gateway project which can handle twice the volume of traffic today without the need for new bridge. Why does Michigan want to give up billions in matching federal grants?

It just does not make sense unless politicians and bureaucrats are P3 addicts. They been hooked on P3 money and they just cannot escape. Their brains have been fried. They need the money and they need it desperately. They do not care what it costs because after all the pocketbooks of taxpayers are unlimited.

How fortunate the purveyors of P3s are that we have the so-called infrastructure crisis. They can take comfort at what the Prime Minister and Premiers are saying just the other day:

• “Prime Minister Stephen Harper and country's premiers agreed Monday that investment in the country's infrastructure is the best and fastest way to use public funds to help Canada avoid the worst of a global economic recession.
  
  "We all agreed that we should see infrastructure spending accelerated," Harper said."

You are shaking your head in amazement now. I know that you cannot believe that what I am saying is true. No one would be this foolish. No one would spend this kind of money. No one would burden future generations with huge deficits that we will incur if this moves forward the way it is being proposed. I do remind you however that the Conference Board of Canada has just said:

• “Canadian governments should run short-term deficits to support infrastructure spending and tax cuts to fend off a recession and deal with the current financial crisis.”

Dear reader, you have forgotten what makes politicians tick. You are not yet cynical enough to understand. Remember this from Margaret Thatcher’s chief speechwriter:

• “The decisions that really matter to political leaders are those to do with the getting and holding of power. Other decisions may turn out well or ill. They may cost billions of pounds or hundreds of lives, but for enlisted politicians those decisions are secondary. What matters to them is: will I still be here after this?”

Enough already, I need to sniff a $1,000 bill! I need my fix.