Thoughts and Opinions On Today's Important Issues

Monday, April 26, 2010

How Canada Will Control US Land Border Crossings With Michigan's Help

What is wrong with the Michigan bureaucrats? For that matter, what is wrong with those at Infrastructure Ontario and at the PCO and PMO? Are they all mad? Why are they screwing taxpayers:
  • "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."

Oh don't worry we are told, we will control those Wall Street bankers with our P3 legislation and tough contractual terms. Let us look at merely one small point: toll increases. An obvious way to control them is to put a limitation on them, something the Ontario bureaucrats forgot to do with Highway 407. How about this as a control: increases in the consumer price index.

Sounds perfectly logical to me until you do the math. As I Blogged before:

  • "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."

Let me take you through the P3 process so that you will understand how the game is played. I will use the legislation set out in the Michigan House Bill so that you understand exactly how it works

  •  The MDOT Director will determine that a P3 should be required for the DRIC Bridge

  •  The Michigan Transportation Commission will approve the project

  •  MDOT will negotiate the agreement with the P3 Company on whatever terms and conditions that it chooses

  •  The P3 Company will hire the contractors and engineers for the project

  •  MDOT will issue bonds for the project and its only obligation is to repayt those bonds from the revenues generated by the DRIC bridge

  •  Chances are that the purchaser of the bonds will be a pension fund because supposedly it wants a longer-term investment to match its requirement to pay out pensions to its members over the long term and it wants a stable rate of return. Let us assume that OMERS is that pension fund, or rather it will be one of a number of pension funds involved to put up the money

  •  Naturally there will be some concern about Michigan’s financial position and to ensure that this project goes forward, Canada will guarantee the indebtedness of Michigan. We are such nice people after all and gifts to Michigan are permitted under the Michigan legislation

  •  At each stage of the process Wall Street Bankers will be generating huge fees because after all we are talking about a $2 billion project. These fees are paid up front

  •  We are told, and this is the way that the Ontario DRIC Road is going to be financed, that no payments will be required to be paid by Michigan until such time as the project is completed.

  •  Accordingly, the P3 Company will need to do some interim financing until the project is completed in which the Wall Street Bankers will also get a fee

  •  When the project is completed, then Michigan will loan the money that it borrowed from OMERS to the P3 Company who will then pay off the contractors

  •  Almost immediately, there will be a default because traffic numbers were not as projected but much lower

  •  Here is where the fun begins… the Wall Street Bankers will be called in to help renegotiate everything at a huge fee

  •  Chances are that the P3 Company will go bankrupt because it is not earning enough money to pay off its loan to Michigan. No one will care because it was a front anyway.

  •  Michigan will now be required to take over the DRIC bridge because it has an obligation to salvage the project

  •  Unfortunately, because of the lack of traffic, Michigan will not be able to pay down the loan from OMERS and a Wall Street Banker will do some projections and will advise that because of the lack of traffic Michigan can never pay off the complete debt in this loan transaction ever.

  •  Michigan will not be too concerned because its obligation is to pay down the loan based on revenues only. The shortfall will go to the account of OMERS

  •  However, OMERS will raise a fuss because its poor pensioners would be taking a huge loss

  •  Naturally, it will call on Canada to make good on its guarantee, which of course Canada will do

  •  The guarantee between Canada and Michigan will state that if Canada is required to pay based on its guarantee then it takes over Michigan’s role in the transaction

  •  As the P3 legislation states, in any P3 arrangement, Michigan is the owner

  •  Accordingly, Canada now owns the US side of the DRIC bridge as well as its own.

Remember I suggested to you before that the Tunnel deal could work in a similar fashion if Windsor paid to take over the US half and I expect a similar situation to take place at the Blue Water Bridge as well. It is on the MDOT list for possible P3ing and is on Canada's list for assets that can be "disposed of" perhaps by a P3 as well.

Before you know it, Canada is in control of all of the crossings in SW-Ontario and SE-Michigan excpet for that damned Ambassador Bridge whose owner is screwing all of this up by not selling out.

And as for the Dubai ports risk, hey, it is merely exercising rights under a guarantee. No one will be the wiser.

Nice plan isn't it.