Thoughts and Opinions On Today's Important Issues

Wednesday, December 09, 2009

Separating DRIC Fact From Fiction

Believe it or not, I wrote this BLOG in February, 2008 and have not had a chance to BLOG it. Until now.

It is still a good read.

However, I'll let you figure out all that has changed over the past 2 years as you read through it, all for the worse too. It includes the delays in building the DRIC bridge from 2013 to 2016 or later, huge drop in traffic and the economic melt-down drying up funds for P3s.

Recall what I said about Wilbur Smith given their role in Canada and their reports not being issued and in Michigan as well in the advocacy ad for DRIC.


If I was the Ontario Research Policy Chair in Cross-Border Transportation Policy at the University of Windsor, Dr. William Anderson, the first thing I would do is get up to speed obviously on the border file. But I'd also want to make a big splash for my entrance as the Head of the Cross-Border Transportation Studies Institute. How to do it... I would invite over to Windsor the Danish professor, Bent Flyvbjerg, to deliver a speech on Mega-Projects because, after all, we have an international Mega-Project in the Windsor/Detroit area.

And a huge one it is. US DRIC just talked about the costs on the US side alone being around $1.5 billion. On our side presumably the cost would be comparable plus the cost of the DRIC road from Highway 401 to the border.

Do we really know what the actual costs are? Don't be so silly. We've been given estimates both by DRIC and by Sam Schwartz with respect to Greenlink. I would suspect those numbers are questionable to be generous about it. After all if the numbers were real why wouldn't the City and the DRIC have exchanged those numbers already rather than holding them close to the vest and playing poker?

I am not sure how Sam did his numbers but DRIC's basis is not based on actual engineering costs:
  • "Quantities for major construction items were estimated from the conceptual plan, profile,and typical cross-section drawings. Unit costs were obtained from the Ontario Ministry of Transportation’s unit cost database and other sources, as appropriate."

Now the good professor from Denmark has written some very interesting articles and a book on the subject of Mega-Projects. One of the things that he talks about is that these projects always seem to underestimate the costs and overestimate the benefits.

Of course that would never happen with our proposed international crossing. We will not have anything like the Big Dig in Boston where costs quadrupled from where they started to about $15 billion. Who would dare question that the new DRIC Bridge might capture up to 80% of all of the truck traffic and 60% of the total traffic if one looks at the DRIC bridge and the Ambassador Bridge traffic as a whole. You see with such accurate cost numbers and defined benefits who would not want to invest in a DRIC bridge.

Oh just one thing. I guess they forgot to mention in those numbers that the DRIC Bridge toll costs would be about three times higher than that of the Ambassador Bridge and that the owner of the Bridge is known to be quite competitive and able to take away market share from his competition. A good example is the declining market share of the Detroit/Windsor Tunnel. Even DRTP did not think that it could take away that much volume from the Bridge but our DRIC consultants are obviously so much smarter.

If by chance there were a few mistakes how would the Danish professor explain the errors. I'm sure that you remember those charts that the Bridge Company presented to the Senate where they showed how inaccurate the traffic estimates were for both the Blue Water bridge and for the Windsor crossings. They bore no relationship to reality whatsoever.

Sure, he could claim as some experts do that mistakes are due to errors in calculation because this is a very difficult matter to determine. I mean really, who can predict the future. Who could have predicted 9/11 or the decline of the US automobile companies or the manufacturing meltdown in Ontario due to the high Canadian dollar. Those are built-in excuses that anyone can make any time. That would be easy. However he goes much further and states the following in one of his articles:

  • "Based on a sample of 258 transportation infrastructure projects worth US$90 billion and representing different project types, geographical regions, and historical periods, it is found with overwhelming statistical significance that the cost estimates used to decide whether such projects should be built are highly and systematically misleading. Underestimation cannot be explained by error and is best explained by strategic misrepresentation, that is, lying. The policy implications are clear: legislators, administrators, investors, media representatives, and members of the public who value honest numbers should not trust cost estimates and cost-benefit analyses produced by project promoters and their analysts."

GULP... that is a very strong statement to make. Does he actually mean that people deliberately tell lies involving projects costing billions of dollars? Would people actually make up numbers to justify spending all of those taxpayer dollars just so that they could make huge fees and profits on the project? Do some people calculate that even if everything they are doing is a lie, there are no consequences to them because no one is going to do anything about it anyway.

That is unbelievable. That is certainly something for the University of Windsor school to take a look at wouldn't you think with respect to the DRIC Mega-Project. After all, the Danish professor states that for "fixed links (tunnels and bridges) [cost overruns are] 34%" and for roads are about 20%. How many more billions would that cost taxpayers if the numbers are wrong.

I give you this background because of an interesting situation that I saw that took place at a P3 conference in Toronto and at a Parliamentary hearing. There seems to be a disconnect between the politicians and bureaucrats with the respect to the traffic numbers.

Why is that important... if this project is designed to deal with capacity issues, then there is a legitimate question to ask whether the project should be built at all given that traffic numbers seem to be rising much less than projected or are even falling. After all CBSA absolutely refuses to use at this time the six new booths that the Bridge Company has opened on the Canadian side because there is no need for them. In other words, CBSA does not think that there is a capacity issue or obviously one of security or redundancy also.

But let's just deal with capacity. We know that MDOT in Michigan has said that there is no need for a new bridge for capacity reasons for some time:

  • "Stuedle said construction on the bridge needs to begin somewhere between 2015 and 2030 depending on traffic flow."

The Ambassador Gateway consultant (who is also the DRIC consultant) years ago said that this project can handle several million trucks more than go through the bridge today, about 2 million more. We know that the capacity of the Bridge is in the 50 to 60% range today.

Moreover, we're getting a mixed message from Transport Canada. Here's what the Deputy Minister Louis Ranger said in the Senate on December 13, 2007:

  • "All the conditions converge to a P3. It's a structure where you can control access. The volume is there.

    Three weeks ago there was a conference in Toronto, and we held a session for two hours with the best minds in Canada in terms of experts in P3. Everybody agrees, all the conditions are met."

Yet, here is what the Minister said said at the P3 conference that Louis Ranger referred to just weeks before:

  • "The existing border crossings between Windsor and Detroit have performed admirably in moving commuters, travellers and goods from one country to the other for many years...

    We have to increase capacity over the next few decades in order to maximize trade and strengthen our already strong partnership with US neighbours."

Given all these conflicts on traffic, thank goodness that the Government of Canada has just hired the firm of Wilbur Smith to do some more traffic projections. I don't really think that they have been hired to solve the conflict but rather to provide "investment grade" traffic and revenue study for private equity investors to take a look at.

The Danish professor warned us about that too:

  • "As regards self-interest, when a project goes forward, it creates work for engineers and construction firms, and many stakeholders make money. If these stakeholders are involved in or indirectly influence the forecasting process, then this may influence outcomes in ways that make it more likely that the project will be built. Having costs underestimated and benefits overestimated would be economically rational for such stakeholders because it would increase the likelihood of revenues and profits."

The results of that study could be very interesting. The obvious expectation is that the investment grade support will provide the basis for P3 investors take a serious look at a DRIC bridge. But what happens if the numbers are not any good and in fact confirm that the likelihood of traffic growing in the foreseeable future to justify a new bridge is remote.

Is that the excuse that the Governments need to call off this insanity or are they hellbent to spend taxpayer money regardless. Will a poor report allow the Governments to save face and to justify the millions of dollars spent so far to build a crossing that private enterprises is prepared to pay for on its own and to assume the risks and making it pay? They can say that the study was done for insurance purposes in case the Bridge Company did not move forward and then they could table the DRIC Report until such time as capacity increases to justify a new crossing. All that they would need to do is to protect the DRIC corridor for future use.

Imagine the pressure now on Wilbur Smith. If the Danish professor is correct, can you imagine the pressure that could be put on them to make sure that their numbers support the building of the project. Conversely, pressure could be put on to kill the project A lot of money is at stake after all. Their report is pretty crucial isn't it:
  • If they are wrong and costs do not match benefits, and taxpayers could be out billions of dollars over the lifetime of the bridge with respect to payments and subsidies
  • if they are wrong, will investors be able to sue the various Governments
  • if the numbers are wrong, and a new crossing is built, what happens to the other crossings from which traffic supposedly would be drawn... bankruptcy because there is not enough traffic
  • clearly the numbers have to be there if the bond rating agencies are to give a good investment grade rating to the project. If the rating is not favourable, and costs go up again

You know what though, if the numbers are wrong, it probably doesn't matter. If the Governments built the project and it had to be refinanced by the investor, the experts would probably be retained again to come up with new numbers for the refinancing at a huge fee. Heck, the people that finance these kind of projects probably know that the traffic estimates are probably wrong anyway and factor that into their decision to invest or not.

As the Danish Professor said, in Mega-Projects, that's how the game is played. After all, we're not really dealing in the real world of business... what's the incentive since in the public sector, no one's money is at risk as it is with private enterprise. We are just dealing with taxpayer money where there is no accountability for mistakes.