The "Shadow Toll" Governments (Part 2)

You have been given the Wake-up Call in Part 1. Now learn how you, dear reader, as a taxpayer will be fleeced in Part 2. Be prepared, it's a 2-coffee BLOG as well that hopefully will give you some insight on the border financing!

Thank heaven for the economic crisis. It has made it simple for taxpayers to be ripped off for generations by politicians, bureaucrats and P3 operators. I will demonstrate this using Windsor and the DRIC road as the example how this will be done.

I am not opposed to upgrading E C Row provided that DRTP is really dead and provided that trucks have their own separate lanes so that they do not mix in with local traffic. I am not opposed to the "cheap solution" border road or a below grade road.

However, I see NO value in a $3B DRIC road which is what it will cost by the time it is done as we saw with Manning Road estimates. I see even less value in Greenlink which will add at least another billion to the cost. What do these roads offer us other than hundreds of acres of green space where weeds can grow freely since we cannot even look after properly the new landscaping on Dougall Road! It does little for the environment based on the studies to date and on the changing truck emissions and fuel standards.

If there is the desire to waste money, then build Windsor the cheap solution road and give us the balance of the billions of dollars to fix up our City! But that will not happen since there is nothing in it for the money boys.

Congratulations to Windsor. We are now a big city.

It appears that Windsor is going to be a leader in the Province by getting our own equivalent to Highway 407. It is called DRIC’s Windsor–Essex Parkway. No one but P3 investors will be able to afford to build that road we will be told in due course! Certainly not a have-not Province like Ontario has become or a Federal Government that may run a deficit and have to sell assets.

Obviously, I don’t know all the gory details but a toll road was hinted at some time ago by Transport Canada except that there will not be any tolls charged. Rather there may be a “levy” or extra fee to use the speedy Customs lanes. That supposedly is designed so that the Ontario Trucking Association and the Canadian Automobile Association who are opposed to tolling won’t get on the backs of the Senior Levels and denounce them.

• “Ownership would be with the government of Canada, but you need to know how much traffic will be on the new bridge, how much tolls will be and so forth," Butler said. The surveys given to trucking firms will gauge interest in paying an extra fee to travel in a dedicated Nexus or FAST lane that will start along the highway to the next bridge. "

Why do I say that you ask? It is obvious from the Windsor Star story:

• “Border jobs on agenda for province, industry
  
  Infrastructure Ontario officials will be in Windsor today for the first of a series of meetings with local construction, trade and labour leaders to discuss hiring for the planned $1.6-billion border feeder highway project in Windsor.
  
  The ministry is scheduled to sit down with Jim Lyons, executive director of the Windsor Construction Association, as well as other local industry leaders, said Steve Dyck, spokesman for Infrastructure Ontario.
  
  "We are at a very preliminary stage. We will try to give a better sense of what they can expect and answers questions on whatever they want to learn more about," he said…
  
  There will be several more meetings staged in Windsor by the infrastructure ministry over the next six weeks with labour leaders and other business groups, Dyck said.
  
  At the end of this month, many of the same construction association leaders will be invited to Toronto to participate in a provincewide seminar led by the infrastructure ministry about its project requirements…
  
  Ontario's transportation ministry officials will also take part in many of the meetings, but offered no new information Wednesday about the hiring process…
  
  Despite the global economic crisis and the Ontario government's growing financial woes, Duncan said last week funding of the border highway is not a concern despite the massive price tag.
  
  "It's a capital project that's financed over 40 years," he said. "

The obvious point to make is that the project is being run by Infrastructure Ontario and not the Ministry of Transportation who is normally responsible for road building. And guess who has joined with Infrastructure Ontario as I told you previously: Len Kozachuk, formerly of URS and intimately involved as Deputy Project Manager for the DRIC project.

The only reason why Dwight would not be concerned about finances is because the Province would not be putting up the money. Rather, a P3 road operator would be doing that. In this case, the structure of the P3 is not known by me but it is still a convenient term to use for ease of reference.

We can suspect then that the term of the deal with the private enterprise P3 operator would be 40 years. Remarkably, that is also the longest time period for loans that Infrastructure Ontario makes. In other words, their maximum term for debentures for borrowings they would make on behalf of a project would be 40 years.

In passing, here is a real friction point with the Federal Government. As you know, they want to do a P3 deal as well for the bridge and plaza. I would have thought that the two Governments would have a joint offering for a P3 for the road, plaza and bridge but it seems that each of them is going down their own road, if you will please excuse the play on words.

If the amount of money that a P3 road operator puts in requires a significant toll or levy, then it will discourage traffic from using that toll road. That means that the number of vehicles that would use the DRIC bridge would go down. If that volume then goes down, then the P3 Bridge operator might not be able to recover its investment in the plaza and bridge. That messes up everything.

Here’s the funny part. If the Province refuses to back down and will not join in a P3 package with the Federal Government, then the Federal Government still has the power to declare the road as a federal matter under the International Tunnels and Bridges Act. If that is the case, then Dwight is laughing. The Federal Government would have to pay for the entire road on its own and Ontario would not have put up a penny.

Is that Dwight’s diabolical plan, to place the responsibility entirely on the Feds? Or is it to try and force the Feds to pick up more than 50% of the cost using some creative financing tools that the other provinces will not recognize?

Here is how all of this will be presented and sold. It is really the P3 sales pitch these days trying to justify why the Government should NOT do it and why the private sector is deserving of massive profits. It comes from Michael Nobrega of OMERS/Borealis:

• “I think the pension funds themselves - large capital pools in this country - are ideally suited to be partners with governments on the very large infrastructure projects. We can be substantial partners with the governments on what I call the infrastructure required to trade. One (example) is the North American Free Trade Agreement, which removed tariffs and, hence, barriers for free trade amongst Canada, the United States and Mexico, but has put a lot of pressure on our existing infrastructure at the borders. Secondly, the demand for our resources and our two-way trade with China and India and the emerging countries, especially in ports like Vancouver and Montreal. Goods that are coming to those ports have to be moved across the country. We don't have the rail infrastructure to handle (the traffic) and we don't have the ports or roads infrastructure to make us efficient.
  
  I think there's a real drag on the economy in Canada - right across the country - from our lack of major infrastructure. You're talking billions of dollars. The benefit for government is that they don't have to divert money that could go to health care, education (or) to service the national debt. So they have a capital source.
  
  A huge number of jobs would be created from that expenditure. It would also generate a lot of productivity, efficiency and wealth in the economic system. For pension funds, it would provide an opportunity to put a number of dollars into the Canadian marketplace that will give us stable returns over the long period of time without having the political risks and the currency risks that automatically go with making investments outside of Canada."

This is very important since I told you before that P3 operators are looking for huge returns in infrastructure even though they are effectively granted a monopoly by the Governments:

• “Jane Welsh, a senior investment consultant at Watson Wyatt, said infrastructure funds were typically aiming to make inflation-linked returns of about 12% a year after management fees of 1% to 1.5% and performance fees of 20%.
  
  The riskiest opportunities, such as those involving the building of a tunnel for a tollroad, may aim to generate returns of more than 20% a year.”

Do you think this is getting too far-fetched. Read this from Wikipedia about Highway 407:

• “As part of a controversial plan to finance revenue for tax cuts, the highway was sold to a conglomerate of private companies in 1999 for $3.1 billion. The deal included an unprecedented 99-year lease agreement, unlimited control of the highway and its tolls…
  
  Today, the highway is valued at over $10 billion, and the Progressive Conservative party has been heavily criticized for the poor terms of sale, including underestimating the value of the road... "

While Highway 407 is 108 KM and the DRIC road would be under 10KM, the costs are about the same. These days the maximum toll for Highway 407 for a car at peak time is: $20.50. For trucks, it is $61.51. Note also that there are about 400,000 trips per workday taken on that highway.

Now you will understand why a P3 for the bridge and a P3 for the road must be joined together. No one would ever use P3 bridge given that kind of a toll structure if the user is to pay for the road project. The investor in the bridge would go broke.

Here though is where all of this seems to fall apart. There are under 50,000 border crossings per day in our area. No one would ever cross the border with those kind of tolls unless they were forced to do so. Presumably they would have to pay an increased amount for the tolls as well because of the significantly fewer trips, about 1/8th of Highway 407. For full cost recover in tolls, that could mean a $160 or more toll since the capital recovery time period is half that of Highway 407 too if the math is comparable!

Almost $200 to use the DRIC Road and to pay tolls 3-4 times higher than the Ambassador Bridge to use the DRIC bridge! What are they smoking!!!

To be direct, cross-border business would die here and no tourist would ever cross the border unless they crossed at the Ambassador Bridge where tolls could be significantly lower and people could use local roads at no cost to get to the border.

Now you will understand why the Bridge Company has to be eliminated as a competitor.

So what happens next? Shall we expect a $2-300 million “cheap solution” road rather than an "estimated" $1.6 billion DRIC Road? It would not shock me at all to see that happen. In fact, I expect it. Some changes to Huron Church and the upgrade of the Expressway to make it a redundant road to the border. Based on the numbers, this makes the most sense.

However, if we are to assume that we will have everything as promised by the Governments, then how are they going to convince a P3 operator to construct any of that stuff. Of course, the Governments could offer subsidies and guarantees but that would get them into big trouble with the Bridge Company who would demand payment as well. Moreover, the public would finally understand the idiocy of the transaction and how they were being ripped off. Another reason that the Governments need to get rid of the Bridge Company.

And that could happen too. The Governments could well make an offer to the Bridge Company that could not be refused and then build the equivalent of the Enhancement Project with a cheap road. All the Economic Nationalists would rejoice and would not worry too much about quality-of-life issues if that happened.

My guess however as to how the road will be paid for is a project that a law firm colleague of former Senator Michael Fortier was involved in and which was probably what was supposed to happen in Windsor. Fortier became after all the point man on the border file because of his financial background. That project was the 218 km Fredericton-Moncton Highway.

It is a shame for the movers behind this transaction that the Senator resigned and then lost in the federal election. There just does not seem to be anybody right now who is prepared to push this deal forward from a financial perspective. As I pointed out there is no responsible Minister for the border crossings in the central part of Canada.

We may see something called “shadow tolls” that were used by the Government in that project to give the P3 investors what they need to build a bridge, plaza and road. No one will care or know since it will never be visible. It will be a mere line-item in MTO's budget and that of Transport Canada who is to pay 50% of the eligible capital costs, an expense item charged every year for the next 40 years. It will be buried in other words, effectively hidden from public view unless you know what you are looking for and where to find it. Of course, the money comes directly from taxpayers. This should give you an idea of what is involved:

• “Shadow tolls can be an element of a highway finance approach whereby a public or private sector developer/operator accepts certain obligations and risks — such as construction, operations and most specifically traffic — and receives periodic shadow toll payments in place of, or in addition to, real or explicit tolls paid by users. Funds for shadow tolls can come from diverse (and multiple) government and/or private sector sources....
  
  Shadow tolls automatically spread periodic or annual payments to a facility operator over a concession or franchise period; this can place the initial financing responsibility on the developer/operator rather than placing this burden on the public sector agency sponsoring the project…
  
  Shadow tolls are not a financing source in themselves, but rather a payment approach which can employ a range of financing methods, innovative or traditional, and can permit a viable financing structure that fits the characteristics and needs of certain projects. The concept of shadow tolls is, therefore, particularly applicable to public/private partnerships.”

To put this in a nutshell, shadow tolls are a financing tool and a way that the Governments can pay to private enterprise huge sums of taxpayer money that is generally invisible to taxpayers on a project that doesn’t make any sense in the first place.

If the Government dared to issue a 40-year debenture or a "mortgage" for the $3B cost, the public would go crazy since the actual costs would be easy to calculate. Instead, P3 it so that the private enterprise operator appears to bear the risk but gets up to a 20% guaranteed return or more at taxpayer expense for 40 years!

This needs to be emphasized again. A P3 operator will not accept or be satisfied with a bond interest only return of 5%.

Why should OMERS as an example invest in the DRIC project at such a low rate when their overall infrastructure return in 2007 was 12.4%. Believe it or not, that return was 23.2% in 2005! I would think that the OMERS' Board and management could risk being accused of negligence for investing at such low returns if other higher return projects are crying out for money!

The P3 investor will make multi mega-billions over the 40-year term on a project that unnecessarily costs mega-billions because bureaucrats and politicians are seduced by the ease of obtaining private money. Why support a multi-million dollar project that provides all that is needed when for the same effort you can have a Megaproject. It will be the most expensive road ever built in Ontario and an unnecessary DRIC Signature Bridge and Plaza that cost multi-billions in total. The project will a nice, safe guaranteed return to private enterprise P3 investors for 40 years. It just does not get any better than this.

The politicians with their indexed pensions will be long gone by the time the project is completely finished after being re-elected by a supposedly grateful electorate, the bureuacrats will be retired and taxpayers will be left holding the bag. But we won't complain now because all we are hearing about is the glut of jobs to be created by the P3 deal, not the due diligence required.

Of course, this is all mere speculation on my part and I am sure will be subject to change as the Governments come closer to doing whatever it is that they are going to do. Just understand that we will see the greatest transfer of taxpayer money from the Governments involved to the private sector in our history as these P3s unfold!

Taxpayers are being robbed and in broad daylight too. And no one seems to know or care.