Michigan P3s: Do The Math

Let's get down to it. Follow the money. That's what's important to taxpayers in the end.

Honestly, I just do not understand the need for P3s. It is all BS since the economic meltdown meant that private firms are having a great deal of difficulty in raising money, even suggesting that Governments do it for them! Can you believe that? What purpose do the Wall St. bankers serve now? They are not engineers or contractors but strictly money boys who want big fees and obscene profits.

As a commentary on what the Ontario Auditor General said in an analysis of an Ontario P3 hospital deal stated:

• "To P3 or not P3, that is the question.
  
  Public-private partnerships (P3s) are an increasingly popular method for financing the construction of public works projects, from sewage systems through to hospitals.
  
  But a recent report by the Auditor General of Ontario should give pause.
  
  Auditor General Jim McCarter examined in detail the deal that saw a private consortium build Brampton Civic Hospital and lease it back to the province.
  
  Using the ever-cautious words of an accountant, his bottom line was: "Our work indicated that the all-in cost could well have been lower if the government had built the hospital itself."
  
  Put more bluntly: Taxpayers got screwed."

After all, there is a reality as would exist with the DRIC bridge as the A-G stated:

• "Our review of available information suggested that only a limited number of construction contractors in the province are able or willing to undertake a project of this size. The same construction companies would be involved in the bidding and work regardless of whether WOHC followed the traditional procurement or P3 approach."

That is why P3s are ludicrous. Similar contractors would be used. The only difference is the huge P3 financing fees and profits.

Some simple math should demonstrate why a P3 makes no sense. Why are taxpayers asked to pay the burden on a deal where there are no tolls to be paid (the DRIC road in Ontario) and why do the profits of the P3 go to the P3 Wall Street financiers (or the equivalent street in other countries)?

• Example 1---Cost of the $2B DRIC bridge project financed the traditional way using Government bonds at say 5% for 40 years
  
  Summary (in millions of dollars)
  Principal borrowed: $2,000,000.00
  Annual Payments: 1 Total Payments: 40 (40.00 years)
  Annual interest rate: 5.00% Periodic interest rate: 5.0000%
  Regular Payment amount: $116556.32 Final Balloon Payment: $0.00
  Annual Debt Service Constant: 5.8278%
  Minimum amortizing payment for this Principal and Interest rate: $100,000.01
  
  The following results are estimates which do not account for values being rounded to the nearest cent. See the amortization schedule for more accurate values.
  
  Total Repaid: $4,662,252.80
  Total Interest Paid: $2,662,252.80
  Interest as percentage of Principal: 133.113%



• Example 2---Cost of the $2B DRIC bridge project financed the P3 way using a rate of return on investment of 16.5% (miday between 13-20% as the going rate for toll roads) for 40 years. (Note I would expect that the principal amount of a P3 would be higher as well as the P3 operator has to build in contingencies, maintenance, etc)
  
  Summary (in millions of dollars)
  Principal borrowed: $2,000,000.00
  Annual Payments: 1 Total Payments: 40 (40.00 years)
  Annual interest rate: 16.50% Periodic interest rate: 16.5000%
  Regular Payment amount: $330,735.26 Final Balloon Payment: $0.00
  Annual Debt Service Constant: 16.5368%
  Minimum amortizing payment for this Principal and Interest rate: $330,000.01
  
  The following results are estimates which do not account for values being rounded to the nearest cent. See the amortization schedule for more accurate values.
  
  Total Repaid: $13,229,410.40
  Total Interest Paid: $11,229,410.40
  Interest as percentage of Principal: 561.471%

The difference in financing costs alone ($11.2-$2.7) is about $8.5B

Yes, that is right, $8.5 billion of taxpayers' money!

Why? For what reason? How can this rip-off be justified?

Let us do a third example, financing the Ambassador Bridge Enhancement Project. I will take a slightly higher interst rate--7%-- for this financing since it is private not Government. I also assume that $500M would be borrowed

What I am interested in here is the annual paydown cost (in millions of dollars): $37504.57

This annual amount of $37.5M compares with the DRIC traditional Governmental bond cost of $116.5M and $330.7M for a DRIC P3.

Please explain to me how the DRIC bridge can compete with the Ambassador Bridge with about 3.1 to 8.9 times higher financing cost. Then tell me who would ever use the DRIC bridge if their tolls would have to cover the actual costs as MDOT claims! I can just hear OTA's David Bradley now!

I am sure that the math is much more complex than this in putting together a P3 proposal but I would assume that my numbers are in the ballpark. After all the BC failed Port Mann Bridge project when taken over by the Government was projected to cost a billion dollars less using the same contractors as Macquarie would have used.

Once the math is done, and no one seems to want to do it in all of the articles praising P3s, why would anyone want one? Not me as a taxpayer.