Thoughts and Opinions On Today's Important Issues

Wednesday, April 28, 2010

Are Riskless Michigan P3s Risky

Has anyone seen yet the Wilbur Smith financing report on a P3 DRIC bridge that MDOT has had in its possession? MDOT released months ago the questionable traffic numbers report based on a phony premise, a report which in my opinion does not meet Legislative requirements. The failure to release information before the P3 House hearings has to tell you that P3s are financially risky without even reading a page of the report!

MDOT has learned from Canada how to withhold information from Legislators except in Canada it may result in a Constitutional crisis and in Michigan I think it should lead to a Motion for the Legislature to censure the Governor and MDOT. After all, the projected P3s would cost multi-billions and Legislators are being asked to vote without facts and with MDOT giving them some information in a Presentation in the last second. Is that how Government should operate:
  • "Speaker smashes government secrecy
    DEMOCRACY IN ACTION: Reaction to historic ruling
    Rules MPs have right to view all Afghan-related documents

    Parliament's right to know has trumped the government's right to keep national security secrets in a historic ruling by the Speaker of the House of Commons.

    However, Peter Milliken has given both sides two weeks to reach a compromise, setting the stage for critical backstage negotiations aimed at avoiding an ugly parliamentary showdown, a potential court battle or even an election.

    Milliken sided Tuesday with opposition parties in concluding MPs have unlimited power to demand the release of all uncensored documents related to the alleged torture of Afghan detainees. He said that power is absolute and goes to "the very foundations upon which our parliamentary system is built."

    And he said it applies even to sensitive information the government fears could jeopardize national security, the lives of Canadian troops in Afghanistan and Canada's international relations."
Check out this article to see what I mean about Presentations: "We Have Met the Enemy and He Is PowerPoint"

Are P3s risky? Taxpayers could be called upon to pay outrageous amounts in taxes to support projects, road users could have to pay sky-high tolls to meet P3 profit goals especially when traffic declines and investors could lose their shirts. But to P3 bankers from Wall street and Australia there is no risk. In fact they make ultra-millions in extra fees when the projects collapse:

  • "Macquarie finds new ways to gouge MIG

    Just when you think Macquarie’s broken model of gouging infrastructure investors is winding down, the Millionaires Factory pulls another doozy from the wreckage of Macquarie Infrastructure Group as it proposes splitting it in two.

    Macquarie, a company that owes its existence to protection by the Australian taxpayer, has no shame. Having delivered stunning underperformance running MIG while paying itself a fortune through all the usual Macquarie fee channels, it now has the cheek to propose resetting the performance bonus clock at the bottom of the cycle.

    If MIG stumbled on under its current structure, given the billions in underperformance racked up, I can’t imagine Macquarie seeing a performance fee in my lifetime and perhaps not my children’s.

    But reset the clock on ‘‘Active MIG’’ (a euphemism for ‘‘Debt-laden MIG’’, as opposed to ‘‘Mature MIG’’, aka ‘‘Solvent MIG’’, in the proposed split-up of the current MIG) at the bottom of the cycle and there’s a rather nice chance that the 20 per cent grab of outperformance could very well be on again.

    And that is on top of an increased base fee, never mind nine figures in various fees, charges, postage and petties for splitting MIG and allowing the extremely low-maintenance Mature MIG to be finally free of the gougers...

    Macquarie’s going to cop a fee of 1 per cent of the post-restructure market capitalisation of Mature MIG, plus another fee of $50 million “for its role in doing all things necessary to implement the restructure including provision of transition services”. I’d bet there will be plenty of other fees as well"

Come on now, there are no risks to Michigan as their P3 legislation is structured. Why the P3 companies bear all the risk of finding the money and cost over-runs. If there is default, why the general obligation of the State is not called into pay, just the revenues from the project are at risk:

  • Sec. 7e. (1) The department may issue and sell bonds or notes for the purpose of providing funds to carry out the provisions of this act with respect to the development, acquisition, construction, financing, maintenance, or operation of a transportation facility provided for by a public-private agreement or the refunding of any bonds or notes, together with any costs associated with the transaction.

    (2) Any bond or note issued under subsection (1) does not constitute a pledge of the faith and credit or indebtedness of this state or any political subdivision of this state within the meaning or application of any constitutional provision or limitation. A bond or note issued under subsection (1) is payable solely as to both principal and interest from revenues generated from use of the transportation facility authorized by the public-private agreement, the proceeds of bonds or notes sold to finance the refunding of the outstanding bonds or notes, if any, or investment earnings on the proceeds of the bonds or notes.

Sure. And I have a bridge for you to buy in Brooklyn and some swamp land in FLA.

As the Ontario Auditor General told us in his hospital report, to protect against every conceivable contingency that may happen in the future:

  • "WOHC and the Ministry engaged approximately 60 legal, technical, financial, and other consultants at a total cost of approximately $34 million. About $28 million of these costs related to the work associated with the new P3 approach"

Yes, nothing can go wrong over the next 50 years or so, can go wrong, can go wrong...

  • "Province 'stuck' with ironclad Hwy. 407 deal, minister says

    Transportation Minister Jim Bradley has confirmed..."The court confirmed the contract was ironclad. They ruled on the side of 407."

    Now, Ontario consumers are left to pay the price, he said.

    "Unfortunately the lawyers for Highway 407 negotiated an extremely good deal, from their point of view, with the Conservative government of the day, and we are stuck with it," he said.

    The 407 can raise rates "almost whenever they want to; they have the right to have licences suspended when there is nonpayment," Bradley said. "I disagreed with it then and I disagree with it now."

Here are a few risks that Michigan Legislators should think about with their proposed new riskless P3 Bill:

  • The big risk is what happens if the P3 project goes broke. Michigan has to take it over when they had no intention of doing so and could be in a big jam if it has NOT been completed. eg Port Mann bridge.

  • Usually P3 operators want a monopoly and prevent the State from building competitive facilities. This is to protect their profit position. What if I-75 was expanded through Oakland County in a P3 deal but because of growth, MDOT wanted further expansion. They could NOT do so unless MDOT paid a penalty or was forced to buy out the operator at a premium.

  • What if tolls were increased to levels that the public could not tolerate---MDOT might have to buy out the project at a premium.

  • Re Section 7E, the reason the State may have to raise State bonds to get money is that the private operator cannot raise the money theses days with the economic meltdown eg Macquarie's Port Mann bridge in British Columbia. Private investment was the reason for P3s in the first place...who needs them when the State can borrow at a lower cost and use the same contractors to build the road----that is exactly what happened in BC where the Government was forced to take over the project and actually saved a billion dollars!

  • If the P3 contractor went broke and MDOT raised money under Sec 7E, then it would be a horrific mess---MDOT would have to pay back the money but may NOT be able to do so if revenues were less than the financing costs. It might not be able to afford to pay back the financing so that a third party takes control of a State asset.

  • I also heard that there is a proposed amendment that money not allocated to the P3 operator can be used for State transportation purposes! This is also a way to get around Legislative control even if there is NO P3 for the new project! Use the extra money for it and the charge is applied to the P3 project. Favoritism abounds now.

  • I heard as well that there is a new amendment to make the separate P3s into a private entities. We have that experience in Windsor where our airport and the Tunnel were "privatized" into City-owned private companies. Our Mayor kicked out reporters and the public from meetings that were previously open to the public but now were not since it was a "corporate" matter. That means there is NO legislative control at all just like with the Peace Bridge Authority in Buffalo. Check out as well the stories about public authorities and corruption

  • Contract default by government could result in substantial cash payment to concessionaire and stress to government rating

    A default by the government on the terms of the concession, on the other hand, could result in a substantial termination payment equal to the fair market value of the concession at the time of the termination. In the case of the Chicago and Indiana concessions, events of default by the government include a failure to abide by the terms of the concession, payments due from an encumbrance on the toll road created or incurred by the government, or an inability of the government to pay its debt or a filing for bankruptcy protection—a remote risk in Moody’s opinion. Termination payments could necessitate a use of reserves, a bond sale or both; and these actions could have a negative impact on a government’s credit rating.

Oh I am sorry, Didn't anyone mention these slight hiccups before to Legislators? Now you know why.