Thoughts and Opinions On Today's Important Issues

Monday, March 23, 2009

The Push For P3s

Push, push, push for P3’s.

I suspect that the real border fight in Windsor/Detroit if the Governments prevail in building a DRIC bridge will be which consortium wins the big prize to finance the border crossing. That would only happen, of course, if the Owner of the Ambassador Bridge has sold out. Otherwise, no one would be interested because P3 operators do not like to compete. They like monopoly situations in order to get a significant return on their investment.

Don’t you find it fascinating how governments in North America have all of a sudden discovered this financing concept? They all seem to be acting like lemmings.

I have to admit that I do not understand the fascination for or the attraction of P3s, especially today, when Governments can find financing even cheaper than P3 organizations can, if they can find any money at all, and when Governments can bring in projects on time and on budget. Take a look at the Ambassador Gateway project as an example.

A P3 is nothing more than a more sophisticated financing tool and a very expensive one as well. The Port Mann bridge financing cost would have been $200M higher under a P3 even without taking into account toll revenues!

I have Blogged this before but it is worthwhile repeating:
  • “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. "

For OMERS, as an example, its overall private equity rate of return in 2007 was 18.6%. Its rate of return for infrastructure was 12.4%.

Can you imagine if we had P3’s all over the country, as the Federal Government seems to want! How much taxpayer money would be paid out as profits to the P3 operators? The amounts could be staggering on returns of 12% or 20% per year on toll roads considering how low interest rates are today!

The first major P3 project in North America was the Chicago Skyway toll road. The City of Chicago, as our Mayor well knows, leased that road for 99 years and received an upfront fee of $1.8 billion.

That clearly is the inducement for Governments to sell out their taxpayers. They get dazzled by the huge upfront amounts and forget about future generations who lose out. After all, the politicians are not elected by the children of today’s taxpayers.

Seriously, can you contemplate what our Mayor and Council would do if they were given a huge sum of money today as they very well may one day if they P3 Enwin or WUC or the Tunnel. Heaven help us.

I read an article about that Chicago project. Here are some of the astounding statements made by the authors that ought to make one very leery about any P3 project:

  • -In the case of the Chicago Skyway sale there was no apparent sensitivity to ratepayer impact, with an allowance for initial rate increases averaging 12.50% per year for a total of 150% in a twelve-year period and ongoing increases of 2% to 7% or more over the life of the franchise that will drive the beginning $2.00 toll up to over $60.00 per passage if rates increase at 3.00% per annum and vastly higher at greater per annum increases.
  • -Thus if GDP growth were to continue at the high historical rates of 4-7% ultimately tolls to cross this 7 mile span could be over $1,000 per trip. (ie with 7% GDP growth, the toll would be $1,800.36)
  • -To give these toll increases some perspective, if the appropriate index were used to control toll rates from the time of opening of the Holland Tunnel, connecting New York and New Jersey, beginning in 1927 when the toll was $1.00 (50 cents each way) until today the river crossing toll would now be $185.13… rather than the $6.00 that is being currently charged.”
  • - All of these private profit dollars would otherwise flow back to the public transportation funding system and allow for investment in infrastructure over this extended period, including roads that are impacted by the growth in traffic volume connecting to the sold roadway.
If you want a practical Canadian example of this, take a look at the profits for Highway 407 in the Toronto area. Tolls have just about doubled, off-peak rates are virtually the same as peak, from a loss of about $70M to a profit of $41M in only 7 years with operating costs stable, no payment of taxes and another 89 years left on their agreement

Next time you hear Canada’s Minister of Finance or Transport Canada Minister extolling the virtues of P3s or, if you live in Michigan and MDOT is trying to convince you that P3 legislation should be introduced, show them my BLOG.

In addition, in Michigan, you might want to ask MDOT why they want to give all that money to those Australians when Michigan drivers need the money for their road network that is so deficient.