Thoughts and Opinions On Today's Important Issues

Saturday, June 05, 2010

BLOGExtra: The DRIC Sub-Prime P3 Mortgage Deal By The Numbers

Oh dear. If the purpose of the MDOT/Transport Canada document is this:
  • "This document explains the proposed P3 arrangement and how financial risks would be allocated. It also addresses the issue of whether anticipated toll revenues could cover future costs, and demonstrates that Michigan would not be liable for any costs for the DRIC project."

then someone is in big trouble. I would NOT want to be the person defending it in front of the Michigan Senate.

Michigan Senators be alert. House members, demand a reconsideration of the P3 bill! It is not too late. Governor, take another outside of the State jaunt to look for jobs, say until election-time, so you cannot be breathless again and do more damage to your State.

Oh my, if MDOT does every P3 deal in the manner being proposed for DRIC, the State will be bankrupted!

Honestly, they cannot be serious with their financial information. It’s a disgrace. Three pages of garbage that say nothing. You can read it here at

The end result. DRIC is dead financially even before it gets started. Heck, Canada’s $550M offer will not be paid back for years.

The DRIC people and Transport Canada/MDOT finally understood that the Legislators had no intention to treated as fools by their minions. So in the last possible second they have finally provided dribs and drabs of information that is supposed to satisfy everyone so that the DRIC project can now move forward. Of course, the information provided is an insult but what can one expect from people who are trying to hide the truth from taxpayers and the Legislators.

Let us forget everything that we know about MDOT’s traffic projections by Wilbur Smith Associates. Let us forget that it is not an investment grade traffic survey but rather is a refresher of a Canadian study prepared by the same company that has never been made public. Since we do not know that the basis of the Transport Canada study, we have no idea if the refresher is right or wrong. Let’s just go with it for the purposes of this BLOG.

The first thing that jumps out at me in reviewing the materials is that somehow someone has forgotten that Canada’s $550M loan or whenever it is going to be is really a P3 investment by a private operator. It has to be paid back from the tolls remember.

I’d bet Gridlock Sam would not agree that less than $3M per year on maintenance for a major bridge crossing is smart. Wasn’t he very critical about how public bridges are looked after given his experience in New York. But the sums are so small I will ignore them for the exercise that follows. I’ll even forget salaries, benefits and profits too.

The next thing that is very interesting is that the revenues in 2016 are $60M, what the Ambassador Bridge earns today we are told. Amazing, traffic will double in 5 years if each bridge will carry half the traffic, how who knows. It appears that the assumption being made is that the new bridge will capture the vast majority of the business right off the bat. That is hardly realistic considering the Bridge Company competition, something that the P3 proponents have been very concerned about.

Risk allocation is also quite funny considering the provisions put into the P3 Bill which deals with this matter and allows MDOT to make the final determination. Someone seems to have forgotten that if there is a default, the bankers take it over and who knows what happens then.

Actually, it will be Canada who takes over because that is what Canada’s plan has always been. No wonder a constitutional amendment is being proposed in Michigan to thwart that.

There is a funny provision as well put in respecting the ramp up period. The bald assertion is made that shortfalls will be capitalized and repaid subsequently. For those who don’t understand what that means, shortfalls are added to the principal outstanding and that has to be paid back as well with interest. Interest on interest now too.

Oh, one other thing. That $1.6 billion for the road in Canada is a P3 deal as well with Canada and Ontario making availability payments. Take pity on me and my fellow countrymen. We are the stuck paying for that and for money on the U.S. side due to the generosity of our Transport Minister.

There seems to be a section missing however in this material. That deals with the annual cost for principal and interest that has to be paid back on the P3 deal. Was someone ashamed to show that, knowing that if it was set out then the deal would be dead? Obviously.

Don’t you find it silly. No, don’t you find it typical. It is insulting that this is all that can be produced to Legislators. No Senator should allow his/her bureaucracy to get away with it. Frankly, I would demand the full WSA financial report or hold MDOT in contempt if the Senate rules provide for that.

We are in fact invited by this handout to do the mathematics ourselves. So the BLOGMeister will do it.

We know that the Canada P3 loan will have to be paid back first. Let’s calculate what the amount will be per year for the $550M over 50 years. At 16%. That rate is about the halfway amount between the rates of return expected by a P3 operator who invests in a toll road (13-20%) would want to get back.

Then let’s do a calculation on $1.5 billion the total cost of the American side only on the same basis.

For the Canadian $550M payment, the amount to be paid back annually is $91.5M or a $31.5M shortfall from revenues.

For the total loan the amount to pay back annually is $250M leaving a shortfall of $190M to be capitalized and added to the principal.

Explain to me therefore how the P3 will be paid back based on a revenue of $60,000,000. Based on the total loan, the shortfall in year one would be huge and that amount would have to be added to the principal outstanding. That shortfall undoubtedly would continue for years with all those amounts being added to the principal. I am not going to do the math for that because frankly that’s beyond my ability as a mere lawyer and Blogger but I am sure that you get my drift.

Oooops, I think I can see how Michigan may have to pay something if we are on availability payments, can't you? So much for: "Michigan would not be liable for any costs for the DRIC project."

There is little possibility that I can see how this loan can be paid off within 50 years unless tolls are increased so dramatically that no one would ever cross the bridge. Alternatively to keep the tolls low, payments could be so organized that there would be a gigantic balloon payment at the end of 50 years that would have to be paid off by someone. Taxpayers no doubt. Alternatively, and as allowed under the House Bill, the term of the P3 agreement would be extended until who knows when so that Canada keeps control forever.

I guess we have to take what is given to us at face value because we are never going to be shown that the revenue projections can demonstrate “that there will be more than sufficient funds to cover costs.” If those projections are as good as the traffic projections then someone is in big trouble. If they could prove that this was a riskless no-brainer, then they would have been provided wouldn't they!

Clearly, based on the assumptions in this handout, most of the traffic must go to the new DRIC bridge. The scraps will be left over for the Ambassador Bridge and the Detroit/Windsor Tunnel. A big chunk of the business from the Blue Water Bridge would be taken as well. So much for their financial stability.

If this handout was designed to give someone some confidence that DRIC finances work, then it failed miserably. The DRIC-ites should surrender before the Senators have no choice now but to kill this DRIC project.

You know what I am thinking after seeing the numbers. It is time for someone to ask the question why this project has been allowed to go on for years at a cost of millions of taxpayers dollars when it was clear from early on that the traffic was not there and neither was the revenue.

Did they really think that Moroun could be scared that easily and could not figure out the math himself?

Oh I forgot, they are bureaucrats. In their world he would have been terrorized by now and would have sold out cheaply.