Thoughts and Opinions On Today's Important Issues

Thursday, June 10, 2010

Michigan Senate P3 Hearings

Watch the video at the end of this BLOG. It sums everything up very nicely.

Also, think about how good traffic surveys are as you go through this BLOG:

In a 1997 study,

  • "Of the 14 toll road projects evaluated, JP Morgan reports that only one exceeded its original revenue forecast. Three forecasts were wrong (optimistic) by up to 25% and, for four of the projects, revenue was lower than 30% of the forecasts."

In a 2009 report "Error and optimism bias in toll road traffic forecasts" the author concluded

  • "The author had access to commercial-in-confidence documentation released to project financiers and, over a 4-year period, compiled a database of predicted and actual traffic usage for over 100 international, privately financed toll road projects. The findings suggest that toll road traffic forecasts are characterised by large errors and considerable optimism bias...

    on average, the respective forecasts were optimistic by some 23%...

    Trucks often pay 4–10 times the respective car tariff. Although trucks represent less than 10% of vehicles using France’s toll road network, for example, they contribute over 25% of the revenues and on some US toll roads they contribute around a half of revenues. For this reason, toll road revenue projections that are reliant upon forecasts of high truck usage should be treated particularly cautiously by potential investors.

    The implications of the research reported here are that, in terms of error, the predictive accuracy of traffic models—used for toll or toll-free road forecasts—is poor."

The author gives this classic example:

  • "Despite the absence of comparative data, however, there has been a history of considerable scepticism about traffic forecasting accuracy among private financiers. A key reason for this is that often a number of traffic forecasts are made by different parties for the same project road, with very little consistency among the results. Figure 9 shows four base-case forecasts for a well-known toll road, made by internationally recognised traffic consultants within months of each other. As the data was released to the author on a confidential basis, the vertical axis scale is omitted to preserve project anonymity. This omission does not detract from the message, however. These ‘base case’ forecasts are significantly different from each other—as is highlighted in Table 3.

    Even over the short to medium-term, the forecasts depart significantly (by 100% over 15 years). In terms of forecast reliability, this real-world example is all the more alarming when one considers that the different forecasts result from different input variable assumptions, yet these assumptions are themselves drawn from an entirely plausible (and relatively narrow) range."
I must admit that the P3 hearings really have had so far very little to do with the Bill but more to do with building the DRIC bridge.

I should not be surprised because that was the strategy of MDOT and Canada to try to tie together the two concepts to make it easier for the Bill to pass so that Canada can put pressure on Bridge Company to sell out cheaply. In my view, that was a mistake because it allowed opponents of P3s to join up with opponents of a Government bridge where they might not have done so if only the P3 bill was being debated. Only time will tell who was right.

Again, in my opinion, the Bill is so poorly drafted as I have shown before with power being grabbed by the Bureaucracy that it should never get out of Committee to be voted on. However, $550 million, or at least a two-page letter, has resulted in it being examined by the Senate.

There have been two days of hearings so far. Let me give you some reactions to what I have heard in no particular order:

1) Construction is construction.

Finally someone from the building trades was forced to concede that the Ambassador Bridge Project would hire workers. Up until now it seemed that only the DRIC bridge would have to hire anyone and that the Ambassador Bridge's project would somehow just appear overnight without human intervention. Finally, someone has admitted that thousands of jobs would be created by that project as well.

2) Apparently Texas had P3 legislation drafted almost as broadly as that of Michigan. That State pulled back completely and now approvals are given by specific project as some Legislators in Michigan have proposed. In other words a Government Bureaucracy would not have absolute power as in Michigan.

3) Senator Bash-him was at it again if one dared to oppose DRIC. The gist of his question to a gentleman from a Michigan taxpayers group that had legitimate questions about some of the provisions of the P3 Bill... well, you can listen to it for yourself here

His approach is so reminiscent of that of another politician that it gave me chills. Strange though, he did not ask similar questions of DRIC supporters nor did he ask Representative Gonzales who gave him campaign contributions.

4) Here is the Wilbur Smith disclaimer at the beginning of their traffic refresher:
  • "Current accepted professional practices and procedures were used in the development of these traffic and revenue forecasts. However, as with any forecast of the future, it should be understood that there may well be differences between forecasted and actual results that may be caused by events and circumstances beyond the control of the forecasters. The WSA review and analysis has relied upon the accuracy and completeness of all of the information provided (both written and oral) by Michigan Department of Transportation and several local and state agencies. Publicly available and obtained material has neither been independently verified, nor does WSA assume responsibility for verifying, such information and has relied upon the assurances of the independent parties that they are not aware of any facts that would make such information misleading.

    WSA has made qualitative judgments related to several key variables within the analysis used to develop the traffic and revenue forecasts that must be considered as a whole; therefore selecting portions of any individual results without consideration of the intent of the whole may create a misleading or incomplete view of the results and the underling methodologies used to obtain the results. WSA gives no opinion as to the value or merit to partial information extracted from the report.

    All estimates and projections reported herein are based on WSA’ experience and judgment and on a review of independent third party projections and information obtained from multiple state and local agencies including Michigan Department of Transportation. These estimates and projections may not be indicative of actual or future values, and are therefore subject to substantial uncertainty. Future developments cannot be predicted with certainty, and may affect the estimates or projections expressed in the report, such that WSA does not specifically guarantee or warrant any estimate or projections contained within this report.

    While WSA believes that some of the projections or other forward-looking statements contained within the report are based on reasonable assumptions as of the date in the report, such forward looking statements involve risks and uncertainties that may cause actual results to differ materially from the results predicted.

    WSA take no responsibility or obligation to advise of changes that may in any matter affect the assumptions contained within the report, following the date of this report as they pertain to: socioeconomic and demographic forecasts, proposed residential or commercial land use development projects and/or potential improvements to the regional transportation network."
Wow now that is something to relieve oneself of liability if one is dead wrong and the Governments spend billions of dollars on the DRIC project based on an estimate that is horrific.

When WSA was asked about their "track record" the answer given was that it was 50-50 i.e. 50% of the time their projections were below actual and 50% of the time they were above.

I wonder what Chuck Gaidica's track record is.

I have to admit that I would expect that this is one of the cases where WSA will probably be above actual. After all, the DRIC engineers who have consistently been overly optimistic with respect to their traffic numbers. In fact, during the 12 month or so period between the FEIS and the WSA report, the traffic numbers were 10% lower as determined by WSA.

One of the Senators asked whom he could trust with respect to traffic projections.

5) Did you know that WSA did the traffic forecasting for the twinning of the Blue Water Bridge? As you know, that bridge has never had as much traffic on the two bridges as it had on the single bridge. And MDOT chose them to be their expert for this border crossing! I believe that someone said that the Blue Water Bridge traffic peak was in 1991.

Effectively what it means is that if there were private investors doing a P3 on the Blue Water Bridge, they might be bankrupt by now.

Now can we guess what may happen in Windsor/Detroit if similar results take place?

6) We know now that MDOT has not complied with the provisions of section 384. The report prepared by WSA was not investment grade traffic survey, although Director Steudle keeps saying that it is, but rather a "refresher." A real study takes 8 months to a year to do.

It is really only PART of a report. It was a refresher of a Canadian Government report that WSA prepared that has not been released yet by Canada publicly. Of course, a Senator asked to see a copy of that report so that he could understand what the underlying assumptions of WSA were. The answer given to him was that the WSA was not sure that the report or even the assumptions could be released to him unless Canada granted permission to do so.

In other words, Michigan legislators are being expected to approve a Bill and a multibillion dollar project dealing with traffic numbers when they have no idea of the basis upon which those numbers were created. I think they will be very surprised when they see what some of the assumptions were because in my opinion, WSA's mandate was severely limited as to what they could do.

7) Again, no financial numbers with respect to financing costs were provided to Legislators. Confidentiality is more important to the Director, and presumably to Canada, than informing Senators. To me, if I was a Legislator, it would be unacceptable to me. Not releasing this information, to me would say that MDOT does not have the evidence to support that this project wil be risk-free to taxpayers.

8) I do not have a copy of the WSA slides but one of the Senators said that the traffic numbers today are at the same level as in 1972.

9) One of the strangest comments made by WSA was that they took a macro view of traffic but not industry-specific. I do not understand that as the vast majority of Bridge traffic is auto related. You know the comment made about how many times a part crosses the border before a car is finished. If the number of vehicles produced declines or if Mother plants are built with parts supporting plants around them, then the number of times a part would cross the border would be decreased substantially and obviously Bridge traffic would be reduced substantially.

10) There was a discussion about assumptions being made in a project (I forgot the name of the road) where the WSA traffic projections were wrong. The excuse given was that a competing facility was expanded.

DUH... if the Ambassador Bridge is allowed to build their Bridge, since MDOT seems to think that it should be done since they want two bridges in the area, then I would assume that the WSA projections will be just as wrong here where a competitor is allowed to expand as they were in the other road project.

11) Clearly, the WSA a representative was embarrassed by the fact that his "local WSA group" was one of the signatories to a DRIC advocacy advertisement. That certainly sounds to me like a reasonable apprehension of bias type argument that should be considered to throw out the work done by WSA. Someone should have asked as well whether WSA is doing or has done any work on projects that compete with that of the Ambassador Bridge.

12) Back to section 384 which says:
  • "Section 384 (1) The department may continue with preliminary legal, financial, traffic and revenue study, permitting, engineering, and other ancillary work for the Detroit River International Crossing (DRIC) so that it can solicit from the private sector, requests for proposals for public-private partnership to construct the bridge, plaza, and related infrastructure. The department shall submit proposals to the legislature by May 1, 2010. Those activities associated with the DRIC project shall not bind the state in any way to construction.

    "(2) The department shall submit an investment grade traffic study to the legislature by May 1, 2010 from a reputable traffic company with appropriate experience intended to provide a detailed traffic projection for the ensuing 10 years, taking into account projected infrastructure modifications, expansions and improvements announced.

The Director says he need NOT provide any revenue information but only traffic information ie subsection (1) says the department may continue "legal, financial, traffic and revenue study" while subsection (2) says that only an investment grade traffic survey need be produced.

In my opinion, the 2 subsections have nothing to do with each other. They are separate matters. It is a nice try but the key word is "investment." That means someone has to look at revenue which is part of the study.

The American Association of State Highway and Transportation Officials NEPA handbook "MANAGING THE NEPA PROCESS FOR TOLL LANES AND TOLL ROADS" states:
  • "The NEPA traffic forecasts are intended to provide the basis for an informed federal decision about the project. For projects involving private investment or bonding, it also will be necessary to conduct an “investment grade” traffic and revenue study. This study serves a different purpose: it provides assurances to investors that traffic levels will be sufficient to support the toll revenues anticipated for the project."

How can one be assured unless one knows the finances. It is all part of the package which investors must see.

I read this which is also of interest:

  • "As the Project has moved forward a more comprehensive and rigorous forecasting exercise is required to forecast traffic and revenues. This report summarizes the extensive work undertaken to provide a forecasting toll which allows the testing of different tolling alternatives on the Bypass. We consider that the selection of a preferred option will permit the development of an Investment Grade traffic study on the back of the work and analysis carried out.

    The term “Investment Grade” is an often used but seldom defined term. A formal definition is difficult to find although recent informal discussions with staff at Standard & Poor’s London Office who specialize in “rating” toll roads (and other transport infrastructure projects) suggested this definition:

    “We generally assume Investment Grade traffic forecasts are undertaken and reported in such a way and to such a level of detail that they can be forwarded, without too much 'overlay' by the financial advisors, for investor scrutiny. A standard public sector traffic forecasting report would be the usual 40 pages describing the model build and 3 pages on sensitivity testing. For investment-grade, we would expect, maybe not the exact opposite, but more of a balance in favor of sensitivities and stress tests and with all assumptions explicitly defined.”

Obviously, MDOT does NOT want the financial information out or else people would find out that the project is not riskless and "availability payments" may be required from taxpayers.

The Senators should note also that no "proposals" were submitted just "proposals of interest."

In the end, I thought the gentleman from the taxpayer group who actually provided input on the P3 Bill really put it properly into perspective: