Thoughts and Opinions On Today's Important Issues

Tuesday, May 04, 2010

Waiter, The Bill For Michigan's $550M Free Lunch

Here it is in a nutshell. You do not have to read to the end. It's simple:

  • P3 investors want no risk whatsoever in a new DRIC bridge when money is tight, there is low traffic and Ambassador Bridge competition. They want taxpayers to bear the financial risk in the DRIC Bridge project or they will go elsewhere.

Some free lunch!

Of course Michigan is being held hostage by Canada. It manifested itself ever since the Governor unilaterally removed the downriver areas as potential crossings to help get her re-elected. Canada got control then. Do it our way or else

  • "Granholm said this morning she would be happy to support the second Ambassador span, but pointed out the Canadian government is opposed to Moroun's plan... "I've long said that if he could get the permits, we'd be all in."

It's like in the movies with this strange line being used. Yup, get 'em when they are down and squeeze:

  • "I hope we've made them an offer they can't refuse," said local [Canadian Member of Parliament] Jeff Watson."

The whole purpose is to get Matty Moroun out of there, not to build a DRIC bridge. Want proof, listen to this:

Canada knows as you will also by the end of this BLOG that few have any interest in investing in a DRIC Bridge if their money is at risk.

Here it is, the huge Michigan risk in this so-called riskless P3 financial deal, buried in 521 pages of "Part 6: Proposals submitted in response to RFPOI issued on January 27, 2010" along with similar comments by other proponents.

That is what was distributed in the very last minute by MDOT so no one in the Michigan House could examine it closely before the House Committee vote. It was said by a division of one of Canada's major banks that knows this border crossing well, Scotia Capital:

  • "As briefly provided above, all payment mechanisms provide benefits to both the project and the public. In all cases, the private partner is motivated to maintain the facility in order to receive the maximum payment,whether it is in the form of user tolls, availability payments, or a mix of both. There are however, other considerations regarding payment method that will need to be reviewed by the procuring Authorities. For instance, certain payment mechanisms will be interpreted in different ways by various parties to the transaction. From the prospective of a lender, credit risk is decreased if remuneration to the private partner comes in the form of an availability payment. There are many reasons for this; however, the most significant is the lack of demand risk. Lower than projected traffic has plagued many user toll-based PPPs around the U.S., and as a result, senior lenders are more restrictive in providing credit to demand based facilities. This issue is particularly relevant for the proposed project considering the current economic climate. The Windsor/Detroit region has been heavily affected by the current recession, and given that a large amount of the trade volume (approximately 60-63%) between the U.S. and Canada is related to transportation products, the possibility for less than robust traffic patterns over the coming years is a significant concern. Additional risk associated with a demand based payment mechanism relates to the sharing of potential users with competing facilities such as the Ambassador Bridge. This competition may further strain demand assumptions especially if traffic patterns continue to falter for economic and other reasons.... However, if a demand based payment mechanism is utilized instead of an availability payment, an item which may require clarification relates to competition with the Ambassador Bridge. Bidding consortia along with senior lenders will need to be comfortable with the prospect of the twinning of the existing span as well as anticipated sharing of traffic volumes between the two facilities. It is also assumed that all legal matters with the Ambassador Bridge’s current owner will be resolved before the beginning of the formal procurement process."

I just wish, dear reader, that you had listened to me before and I would not be in this pickle again. I said this much more bluntly but not as nicely and professionally as the Scotiabank people who after all want the project. I am telling you now, upfront, that taxpayers including those in Canada, Ontario and especially Michigan will have to pay and pay and pay if they adopt P3s, especially for the $5B DRIC project! With no legislative oversight in Michigan, Michiganders are looking at billions of dollars that will be taken out of Michigan's economy by foreign companies, dollars that should never be paid out if traditional government road financing was employed. Just look at the list of possible foreign P3 proponents.

Not too many good old American companies in that list. Nothing like selling out your roads to foreigners, eh.

The Governor effectively admitted that her legacy is that she has rundown Michigan's economy and now needs a life-line from Canada. No wonder she favours DRIC so she can build a monument to herself for the future no matter what:

  • "Granholm said Thursday that Canada's offer means Michigan -- facing a $1.7 billion deficit next budget year -- would not have to put a penny towards construction, which could create up to 10,000 jobs. "They know that Michigan is financially strapped," Granholm said this morning on WJR-AM 760, referring to Canada. "They know that our roads need repair. So this frees up our money to be able to use on our roads and it allows the bridge to be built.

If Michiganders think you are financially strapped now, you ain't seen nothing yet after the foreign P3 investors get through with you! Why, why, why. Why is it always me? Why do I have to be the one who always bursts the bubble? After all, didn't some Detroit reporters win the Pulitzer prize for investigative reporting on a big scandal in the City? Don't the TV stations still send out reporters to investigate stories of interest although some key staff have been let go recently? Bill Shea of Crains at least took some of the heat off of me with his piece today "Private sector wary of tolls to finance new bridge." The Canadian media---give me a break, they have little interest in Windsor stories. And the Windsor Star---they are neutered given who their parent company is. So the Obliging Blogosphere once again has to take charge and do what the traditional media should be doing but aren't [Sigh]. Bill's piece is on his BLOG by the way. It's not like a lot of digging has to be done. Transport Canada Minister Baird gave it all away in his interview. But more importantly, MDOT's Captain Kirk did so as well and in writing too. What, you did not see it? You do not understand. Well you know what the DRIC supporters have been saying don't you about tolls, P3s, risks and so on:

  • "This is obviously a significant offer from the Canadian government," Granholm said. "It removes the risk from the state of Michigan for all of this."

  • "Infrastructure and Transportation Minister John Baird said the money would be repaid fully by tolls collected."

  • Detroit Free Press---"The Canadian government's offer to cover up to $550 million of Michigan's cost to build a proposed new U.S.-Canadian bridge downriver from the Ambassador Bridge should remove any doubts in the Legislature about the publicly owned crossing. The Canadian offer would practically eliminate any cost for the state to build a new entry plaza for the proposed bridge, and to connect it with I-75. Bridge construction would be paid with public bonds that would be repaid over time with toll revenues, which also would repay the Canadian government for the $550 million."

Is this another falsehood to be repeated time and time again because no one dares question it because no one understands it. That is why Captain Kirk and Minister Baird can pull the wool over everyone's eyes. They can spout off P3 theory but in practice, the reality can be quite different. Oh I have tried to educate readers. I really have. I told you that

  • the DRIC financing costs are too high with a desired rate of return of 13-20%

  • that P3 investors want a monopoly and hate competition because then they cannot get their huge rates of return. They want no risk.

  • traffic had dropped and may pick up but slowly

  • P3 money is so tight that companies like Macquarie lost the Port Mann P3 project because they could not raise the required cash


In other words, a DRIC P3 project would go broke and no one would invest in it without some kind of Government guarantee or subsidy. OR AVAILABILITY PAYMENT.

I told you as well, that Tranport Canada already signalled some time ago that there was huge trouble in their P3 dreamworld and that something else other than the traditional model might have to be followed. Do not forget that Canada has never set aside a single cent in their Budget for the DRIC bridge unless it has been hidden (the $400M was for the DRIC Road only). A P3 was supposed to pay for it. Now desperation has set in and plans are changing. As I Blogged:

  • "How the heck can this be financed with tolls from users? The Cost Exhibit ensures that it cannot be. But no one told that to the P3 investors That is why separately Transport Canada's Mark Butler said: "We are continuing our discussions with Michigan on governance issues and financing issues,” said Mark Butler, a Windsor-based spokesman for Transport Canada... Butler said the Canadian government would prefer that the new cable-stayed or suspension bridge be undertaken on the basis of a public-private partnership. But he said this approach is not yet set in stone." Now you know why it is not set in stone. But it gets even worse: "Given the anticipated tolled nature of the border crossing, MDOT says there are several public-private partnership models ranging from real tolls to availability payments that could be applied to the DRIC under current market conditions." What a joke...from real tolls to phony tolls ie payments support by either direct Government payments or guarantee or subsidies. All at extra taxpayer expense forever! They dare not say that in the RFPOI because then the Legislator who reads it would know that this is a financial disaster. "Current market conditons" is a euphemism for saying there is no way that a "real toll" bridge could ever be considered because of ---the multi-billion cost which would drive users away ---economic melt-down, ---lack of infrastructure money and ---competiton from the Ambassador Bridge whose tolls would be 1/4 of that of the DRIC bridge."

However, you did not take my word for it. I am a mere lonely Blogger. I am no P3 expert. Of course there are experts around, 20 or so at least. Those are the groups who sent in an expression of interest for being involved in the DRIC project on some basis.

No. I am dead wrong. When you see what they say, you will know exactly why they want to be involved. But first, here is how Captain Kirk put it so nicely that no one knows what he is saying but his butt is covered for the future when this all fall apart.

And remember what Baird said about rolling up the UP TO $550M into the financing.

When you look at Slide 1 what has to be done---it is all P3s including Canada's UP TO $550M which will be rolled in as Captain Kirk also said, when talking only about Michigan's $100M, and the funds for Canadian projects since that is a P3 too. Then in Slide 2, the Captain tells us that it would be better if all of the components were tied up together in one single project.

Hahaha..we all know who is going to be the successful party already for that project even though they seemingly did NOT put in an expression of interest. But they did you know. You, dear reader, just do not know it yet. You will find out soon enough.

Here its comes now. Hang on to your hats:



It is the phrase "availability payment model" that will destroy Michigan financially.

Here is how another proponent, Acciona, describes the "availability payment model:

  • "Availability payments: Is the best option to achieve best value for money, and all or at least the vast majority of the payment should be availability-based. Certainty on the revenue stream will be essential to finance the project. This type of P3 structure transfers the risks of designing, building, financing and operating/maintaining a project to the private partner. Risk of volume and vehicle traffic remains in hands of public sector that is better positioned to assume the risk related to the revenues generated from the users."

The private partner builds it and get paid for it in periodic payments by the Government s who bears all of the revenue risk if traffic projections don't work out. So much for the tradional P3 model that no longer exists after the finacial meltdown and after many toll roads have gone bust. Just ask Macquarie with their good and bad roads companies that were split off. A no-brainer all right Governor, for the private partner! It's really a loan deal but because it is called a P3, then the private party can rip-off the taxpayer with the no legislative oversight thanks to MDOT supposedly because it bears some of the construction risk. 13-20% rate of return too. Of course, that approach also works in a traditionally financed project where, by contract, risk and reward can be passed on to the contractor with penalties and bonus payments. But shhhh, we are not supposed to know about that. It's not just Scotia Capital who prefers a virtually riskless, for them, availability payments model. Here are what other proponents have said. I won't repeat all of them: Another Canadian bank, Bank of Montreal:

  • "The Availability Payment alternative would appear to best suit the characteristics of the DRIC project. This is largely due to the following main factors: 􀂃 the project is “Greenfield” 􀂃 uncertainty regarding traffic levels, especially given the availability of alternate crossings nearby 􀂃 reduced risk appetite of lenders in the aftermath of the credit crises

  • "There are a number of alternative business models that could be used to successfully deliver the Project. The most common models that we have seen include Availability Payment Models; Real Toll Concession Models; and Hybrid Models. The challenge in selecting the most optimal model will be getting a better understanding of the Project’s economics. Can traffic forecasts and tolls support the project without any governmental subsidies? Part of the difficulty in answering that question is the uncertainty surrounding the Ambassador Bridge – will that remain as a competitor or will it be acquired by a governmental entity and the operations (revenues) and maintenance be included in this Project. Based on discussions that we have had with possible developer partners, we recommend a business model that: a) relies on a significant share of the financing to be provided by the private sector; and b) uses a payment mechanism based on Availability Payments to compensate the private consessionaire for its services."

Here's another one:

Here is one that effectively kills any hope of having tolls pay for the project and it means no financing at all if that is the basis:

Do you get it now? The UP TO $550M big number "riskless" payment idea is merely a 2-page letter that even Minister Baird is embarrassed about in presenting. It is just a way to get Michigan to sign up for the P3 deal that Canada needs so it can control the border.

P3 deals require government guarantees no matter what they are called or they will not move forward. P3 operators cannot raise money unless there is a riskless, for them, guaranteed deal since many toll roads have consistently been oversold based on phony traffic projections.

Michigan taxpayers are being sold down the river by term-limited Governor who has been afraid to tell the Canada that she will not allow hundreds of families and businesses to be moved just so that the Canadian Government can try to take over the Ambassador Bridge by pressuring Moroun to sell.

It really is a no-brainer Governor. Build a bridge no matter what it costs your citizens for the next 50 years so you can sleep at night pretending to yourself that you have accomplished something while your State has fallen apart under your watch!

Waiter, the check please!