Thoughts and Opinions On Today's Important Issues

Wednesday, April 28, 2010

DRIC P3---Forward To The Past

I know how boring these BLOGs are on P3s for you to read. Heck, I have to sit down and write them so take pity on me.

I hope I can convince a few Legislators in Michigan to kill their proposed P3 legislation since in my opinion it will ruin the financial position of Michigan in the future when they have to pay back the money. After all, beware Wall Street bankers bearing P3 gifts.

My opposition has little to do with the DRIC bridge either other than outrageous P3 fees and payments. I am against P3s as a financing tool as a taxpayer. It rips us off. PERIOD.

Remember what the Ontario Auditor General wrote about the hospital P3 and how much extra it cost taxpayers here:
  • "The province’s 5.45% cost of borrowing at the time the agreement was executed was cheaper than the weighted average cost of capital charged by the private-sector consortium. Had the province financed the design and construction costs at its lower rate, the savings would be approximately $200 million over the term of the project’s P3 arrangement."

  • "We found that the cost estimates for the government to do the project were overstated by a net amount of $634 million"

And the hospital itself was going to cost originally under $400M. You just have to read his Report to see how the bureaucrats played with numbers to justify a P3. As a taxpayer, it makes me sick.

It invites the obvious question: why. And suggests the obvious answer: [Fill in Blank yourself]

If a Michigan Legislator has the nerve, then do this. May I respectfully suggest that at the next Michigan P3 hearing on Thursday, right after MDOT makes their pitch, that Legislator should ask point-blank and demand an answer to this simple question:

  • what would it cost to finance the DRIC project the traditional way ie using bonds compared with what the cost would be if it was done as a P3.

The consultants or MDOT should be able to give an approximation but I bet they will say that they cannot for obvious reasons. No point getting Legislators all upset. The difference would be multi-billions! See my BLOG where I guesstimate it to be $8.5 billion over 40 years.

This BLOG's title is a play on the movie title as I am sure you can figure out.

But I want to take you forward to a few years from now if the DRIC bridge had been built, by going back to 1999 when the DRIC matter started. I want to wave my magic wand and assume that a DRIC P3 bridge had been built. I want then to come back to the present to try and guess what would have happened.

Back in 1999, the Ontario Government had commissioned a report, Southwestern Ontario Frontier International Gateway Study, to be undertaken by a distinguished firm, McCormick Rankin, about future traffic projections for a bridge in our region.

Here is the graph they produced.

Nice projected increase in traffic that would have excited investors to a P3. Except, we know now that it is all wrong. It bears no relationship to what actually happened. It over-estimated traffic numbers as DRIC has been doing constantly. Wilbur Smith, their own consultant, demonstrated it conclusively in their recent traffic report.

45,000 vehicles per day at the Ambassador Bridge by 2021 was predicted. In 2009, it looks like around 36,000 vehicles on the graph. 2009 actual: 17,800, about half. In fact, volumes approached that number in 1999 and have sunk like a stone since. Here are the latest graphs I have respecting our region. I believe subsequent years are even worse.

Oh, and in case you forgot, DRIC projected in 2035 that the number would be 38,218 while about a year later, Wilbur Smith projected a number about 10% less at 34,000. That's a far cry from 45,000 in 2021!

By the way, this is not so far-fetched. Take a look what happened at the Blue Water Bridge which was twinned. Since that time, I do not believe that volumes have grown back to where they were in the past.

Accordingly, with a decade of traffic declines, how would the P3 investor survive in our region ie cover their debts, pay for operations and maintenance? The answer is simple. They would not.

Bankruptcy is the likely outcome just as happened in California where Wilbur Smith traffic projections were off by 60% for the South Bay Expressway [WSA also is doing the traffic guessing for both Canada and MDOT on the DRIC project]:

  • Toll road operator files for Chapter 11
    South Bay Expressway use below forecasts

    What was heralded in late 2007 as the next big thing in regional commuting — a 10-mile, privately operated toll road in South County — may wind up testing the wisdom of public-private partnerships.

    In its court filing this week for Chapter 11 bankruptcy protection, the company that runs the South Bay Expressway cited the ripple effects of a rotten economy. It said the collapse in home prices and the spike in unemployment have hurt its fortunes since the road opened nearly three years ago.

    “What’s driving this is that we’ve been severely impacted by the recession,” said Greg Hulsizer, chief executive for South Bay Expressway Ltd. “We find ourselves in a position where in the not-too-distant future, we’re going to run out of financial reserves.”

    On average, nearly 22,600 cars travel the road each day, far below initial projections of 60,000. Riders typically marvel at the seemingly empty stretches of pavement, even during peak traffic hours.

    While revenue is steady because of rising tolls, the company is falling about $16 million short each year in what it owes its direct lenders, according to court filings....

    In a phone interview, however, Hulsizer said turning over operations to another private business or the company’s lenders may be an option, depending on the outcome of bankruptcy proceedings that could last a year or more.

    Many South County commuters said they weren’t surprised by the bankruptcy bid and blamed the operator, saying its decision early last year to boost tolls drove away customers...

    Ken Monk of Bonita said his extended family was drawn to the roadway at first. “They all used it, all of them,” he said.

    But once the higher tolls kicked in, they stopped completely. Monk and others said many rush-hour commuters now cut through residential neighborhoods to avoid paying the higher tolls...

    Turning over toll operations to Caltrans may hold little appeal to the agency, given its budget constraints. But a government agency takeover wouldn’t be unprecedented.

    In 2003, the Orange County Transportation Authority paid $208 million to buy out the developer of the state Route 91 express lanes because the agreement negotiated by the builder prevented California from widening the overall freeway.

    Hulsizer said South Bay Expressway, a subsidiary of the Macquarie Infrastructure Group of Australia, owes its lenders $510 million, including $170 million to the U.S. government. He said the money is in the form of direct loans, not bonds, and does not involve an underwriter..."

Here is something even gloomier:

  • "While the companies had predicted that traffic volumes would reach 60,000 vehicles per day during 2009, actual traffic was only 23,000 vehicles per day. The result was that "actual revenues compared to original projections were 70% and 53% respectively for 2008 and 2009, with revenue growth from 2008 to 2009 of only 4%, compared to 36% in the original projections."

Naturally, the Chapter 11 filing is no one's fault. Everyone was right. It's the fault of the economy. Blame it on the downturn. Wouldn't that be the same result here. The economy forcing the DRIC bridge into bankruptcy based on an overly-optimistic travel projection.

I will be helpful to my MDOT friends. I will set out the comments that a DRIC President can use when the DRIC Bridge will fold. Just make a few Detroit/Windsor modifications and the script can be used here:

  • 61. The planning and financing of the Expressway project were based upon certain projections of population and employment growth and traffic volume in the South Bay region that depended upon the strength of the residential real estate market and the availability of financing for both home builders and home buyers. As a consequence of the now well-documented economic downturn, including the collapse of the sub-prime housing market and the nationwide credit crisis, the projected growth underlying the development and funding of the Expressway failed to materialize. In addition, recent traffic flow has been further weakened by a decline in cross-border commercial traffic and a rise in unemployment in the South Bay area. As a result, commercial traffic and commuters—the Debtors’ target customer base—increasingly choose to travel via free routes that are now seldom congested.

    62. At the time the Expressway project was approved, the South Bay area was, and had been for many years, identified by state and local authorities as a high-growth area in need of additional transportation routes to ease congestion. Indeed, plans for a southbound extension of SR-125 had been included in state and local transportation plans since 1959. During the construction phases of the Expressway, population and development in the South Bay area grew, as families flocked to affordable new housing developments. The Expressway was intended not only to reduce traffic congestion on interstates I-5 and I-805, Otay Mesa Road, and local streets in Chula Vista and Bonita, but also was expected to propel development of the localities along the route.

    63. Unfortunately, the nationwide housing market collapse hit the South Bay area
    particularly hard, resulting in population and employment growth far below projections. In the year preceding the opening of the Expressway, foreclosures were reportedly up 247% in San Diego County, with Chula Vista zip codes consistently ranked among the highest foreclosure rates in the county. As a result of the credit crunch that followed, new residential development projects plummeted. The graphs below illustrate the decline in San Diego residential real estate values over the last five years and the decline in residential developments between 2001 and 2009.

    64. Further, cross-border traffic from both ports of entry is significantly down from its peak in 2005. The following chart shows that there has been a 30% decrease in incoming traffic since 2005 at the San Ysidro port of entry and the Otay Mesa port of entry (less than one mile from the Expressway). This has relieved previously-congested alternate routes. As a result, traffic entering the Toll Road at the southern end, particularly truck traffic, has declined significantly below
    initial projections.

    65. The adverse market conditions and resulting decline in traffic flow have taken a toll on the Debtors’ financial position. Projections underlying the Senior Loan and the Franchise Agreement estimated that traffic flow on the Expressway in 2009 would be approximately 60,000 vehicles per day. Actual traffic flow on the Expressway in 2009 averaged approximately 23,000 vehicles per day.

    66. In 2009, the Debtors’ revenue totaled $21 million compared to $21.7 million for 2008. Original projections estimated revenue of $42 million for 2009 and $31 million for 2008. Actual revenues compared to original projections were 70% and 53% respectively for 2008 and 2009, with revenue growth from 2008 to 2009 of only 4%, compared to 36% in the original projections. Moreover, the Debtors’ adjusted EBITDA for 2009 on a cash flow basis was only $3.4 million compared to $3.1 million in 2008. As a result, the Debtors are unable to maintain sufficient liquidity to meet their debt service obligations and are having to use reserves for such obligations.

    67. Typically, in the private toll road industry, a new toll road operator will experience significantly increased traffic flow and revenues in its first two years of operation, but the severity of the economic recession prevented the Debtors from growing as originally projected."

It does not take a crystal ball in the present to predict our P3 future by looking at the past.