Thoughts and Opinions On Today's Important Issues

Monday, June 28, 2010

Would DRIC Availability Payments Be Illegal

Forgive me but unless you are a lawyer or wannabe Perry Mason, you may find this BLOG difficult to read. Perhaps "boring" is the better word to use since statutory interpretation is required. However, trust me, you will find the discussion fascinating and the end result a shocker.

A Reader gave me some material to read that opened up a whole new dimension for me about the issue of financing the DRIC project. It is no wonder that the DRIC-ites want no questions asked about the toll revenue financing and why they really do not want to get into the question of "availability payments." It is no wonder that no financials have been provided either.

As you shall see, it is much more than whether or not the toll revenues will be sufficient. The fundamental question is whether or not the P3 Bill permits any kind of financing other than toll revenue financing. In other words, is a project built on availability payments illegal under the P3 bill?

It's so much fun trying to figure out what Transportation Minister Baird says he is doing. In Ottawa for the Canadian taxpayers who have to put up the cash, what he is doing is loaning money that has to be repaid.

In Michigan though, he claims it is NOT a loan but still the money has to be repaid

A DRIC loan by any other name is still a loan even if the Minister talks about "availability payments"

Here is what was said in a California Project about availability payments and loans

  • "A project structured with availability payments from future state funds is, in certain respects, similar to a loan to the State with de facto loan payments that include interest cost over a period of time, in this case 30 years (recognizing that availability payments are only payable to the extent performance measures are met). As such, future availability payments inevitably create new commitments of state transportation revenues. Although discounting future payments to present value is a reasonable approach to comparing the economics of different implementation approaches, it does not negate the fact that new commitments of state transportation revenues are being proposed."

And what is the difference between toll charges and availability payments

  • Although a toll charge could be considered a type of user fee, strictly speaking it could also be used to generate revenues in excess of the cost of making the facility available. What tolls and user fees have in common is that they are paid by someone using the service that is provided. Before the money is used to pay the toll or fee, it belongs to a private person. In other words, it is not paid out of public funds in competition with other possible public uses for such funds.

    An availability payment is a payment in consideration of a facility of some type being made available for use. The Federal Highway Administration provides the following definition:

    An availability payment is a periodic payment made to a concessionaire by a public authority for providing an available facility. Payments are reduced if the facility is not available for a period of time, or not being maintained in satisfactory condition. Using an availability payment structure eliminates the need for the concessionaire to assume any traffic risk and protects the interests of the public by giving the concessionaire a financial incentive to maintain the facility in satisfactory condition and operating at a specified level of performance.

    Thus, unlike revenue from tolls or user fees, the amount of an availability payment generally does not depend on how much the facility is used. “Rather than relying on achieving certain levels of traffic and revenue, the concessionaire receives a predictable, fixed set of payments over the life of the agreement.” “[A]n availability payment is a payment for performance made irrespective of demand...

    The amount of use of the completed project generally has no bearing on the amount of the availability payments. By contrast, toll and user fee revenues depend directly on the amount of usage of the facility, and only indirectly on how well the facility is maintained.

    Thus, a very important distinction between tolls and user fees and availability payments has to do with how risk is allocated. As noted in the Federal Highway Administration’s definition set forth above, with availability payments a concessionaire does not assume any traffic risk. “From the private sector's perspective, availability payment transactions are attractive because they provide a more predictable payment stream, with nearly all traffic and toll-revenue risk and upside potential held by the public sector. The concessionaire and its lenders rely on the agency's credit rather than an often unpredictable toll revenue.” With availability payments, “the public sector takes [the] revenue risk”

    In addition, availability payments come from a different source than do tolls and user fees. Availability payments come from public funds. A commitment to make availability payments thus has a direct potential impact on funds that could otherwise be committed for other public purposes."

So whatever it's called, it is in effect a loan that has to be paid back by the public over time. The end-result is a scheme that takes away from other State projects since funds have to be committed for the pay-back.

Humour me in this BLOG. Yes, yes, yes I know that the MDOT Director and the Transport Canada Minister have all said that the project is economically viable. By that they mean that toll revenues will exceed costs over the life of the project. However, neither of them have produced any records whatsoever to demonstrate that. My spreadsheet shows a blimp payment of billions of dollars being required at the end of 50 years. Accordingly, let us draw the inference that availability payments have to be made, as the vast majority of the RFPOI responders stated. After all, they ought to know more than the Blogmeister about things like this... or MDOT.

We know that the State of Michigan does not have $84 million to undertake 243 road and bridge projects and has had to postpone them. I believe that we can therefore draw the conclusion that the State cannot afford financially to make availability payments on the DRIC project.

We know as well that Canada is not being generous in giving money to Michigan. Rather, any monies given out have to be repaid. Even if one uses the Blue Water Bridge analogy, and the way it is being described in Michigan and by the Transport Canada Minister is not correct according to the BWB Authority, the money put up by the United States for that bridge eventually was paid back.

Accordingly, the question to ask is whether the P3 Bill allows for availability payments or is the only way that a project can be built is through user fees.

The answer in my opinion is that only user fees may be charged. No project that provides for "availability payments" is legally permissible.

Since the DRIC project will have revenue shortfalls because user fees are not sufficient, is the Project now dead? The answer is yes except for one unlikely scenario as I shall describe given what a rational banker would do and what Canada has said it would not do.

Let us look at the proposed P3 Bill in detail. Yes, I know it is boring to read statutes but you need to do so unless you want to take my word that user fees must be charged. And remember, we must assume that the Legislature is familiar with the difference between toll revenues, user fees and availability payments.

  • The people of the State of Michigan enact:

    An act to… authorize public-private agreements relating to ... financing... charging user fees, or other arrangements for the creation and operation of public transportation facilities that may be financed by user fees, charges, and other revenue.

    [The Act is very specific about "charging user fees" since Legislative authority is needed constitutionally to charge tolls. A strong argument can be made especially using the language of "other arrangements" that only a user fee regime is permitted. The only weasel word out is the word "financing" and I will show you what that means subsequently and why we know that this can never happen.]

  • "Public-private agreement" means an agreement between a private entity and the Department or between a private entity, the Department, and 1 or more other Instrumentalities of Government that relates to researching, planning, studying, designing, developing, financing, acquiring, constructing, charging user fees, operating, or maintaining a public transportation facility, or any combination of those activities.

    [As above re "charging user fees" and "financing."]

  • A public-private agreement may contain terms and conditions that the Department may determine or negotiate to facilitate the researching, planning, studying, designing, developing, financing, acquiring, constructing, charging user fees, governing, operating, or maintaining of a public transportation facility in the public interest.

    [As above]

  • A public-private agreement shall provide for the terms of the use and operation of a public transportation facility by a concessionaire for a period the Department determines is necessary for the development and financing of a public transportation facility and the economic feasibility of the public-private agreement.

    [Note that the P3 must be economically feasible. That has to mean if it is a user fee regime that revenues will exceed costs. Obviously, the State does not want to have to finance the shortfall because that would take away from other projects such as the 243 road and bridge projects that have to be deferred for lack of money. There is supposed to be an end date to the P3 project. That can ever happen if the bridge financing can never be paid off. The State is not granting operations to a private party in perpetuity.]

  • The [Public-private] agreement may provide for an initial operating term not exceeding 50 years from the later of completion of construction or commencement of collecting user fees if user fees are collected unless a longer term is required for the economic feasibility of the public-private agreement as determined by the Department and approved by the commission.

    [The outside period is normally expected to be 50 years from the date of the first collecting "user fees." A longer period may be granted but there does have to be an end date. The test for the extension is again "economic feasibility" which must mean that at some point in time tolls will exceed costs. If not, how can the project be feasible economically or otherwise.

    There may be a case where user fees are not collected and the P3 Bill provides for that. No one however has ever suggested that no user fees would ever be collected for the bridge.]

  • No provision of a public-private agreement shall allow the public to be deprived of the use and benefit of a public transportation facility except as necessary to implement user fees or ancillary charges authorized by this section.

    [Again strong evidence that user fees must be charged or else people can use the new bridge for nothing]

  • A public-private agreement may provide for the charging and collection of user fees and ancillary charges for the use of a public transportation facility.

    [Specific authority is granted to collect user fees]

  • For any international bridge crossing that does not exist as of the effective date of the amendatory act that added this section, a public-private agreement for any such international bridge crossing shall include risk allocation provisions specifying the risk assumed by the concessionaire and each Instrumentality of Government that is party to the public-private agreement related to the public transportation facility, including the risk relating to construction cost overruns and, as applicable, toll revenue shortfalls.

    Before approving and entering a public-private agreement for any international bridge that does not exist as of the effective date of the amendatory act that added this section, the Department shall ensure these risk allocation provisions provide for the most economically beneficial way for this State to perform the project, while minimizing liability for construction cost overruns and toll revenue shortfalls for which this State could be held liable, and the Department shall submit a report to the governor explaining how this mandate was fulfilled.

    [There is recognition that there may be "toll revenue shortfalls." Note that the only parties who are to assume the risk are the concessionaire or the Instrumentality of Government, not the State. And again, clearly there is recognition that no project may go forward unless user fees exceed costs. Or unless that risk can be allocated to a third party.

    The Department must show "the most economically beneficial way for this State to perform the project... while minimizing liability for toll revenue shortfalls for which the State could be held liable."

    The only way you can be economically beneficial and minimizing liability is if some third-party assumes that business risk.]

  • The Department shall consider all of the following factors in evaluating and selecting a bid or proposal to enter into a public-private agreement:
    (a) the proposed cost of and financial plan for the public transportation facility.
    (c) the proposed design, operation, and feasibility of the public transportation facility.

    [The Director is being disingenuous by not providing financial costs because of this section and the need to show "feasibility." That is why the inference must be drawn that this project will have user fee shortfalls. If that is the case, then this project is not feasible. Except for one situation that I will describe below.]

  • The Department may issue and sell bonds or notes for the purpose of providing funds to carry out the provisions of this act with respect to the development, acquisition, construction, financing, maintenance, or operation of a public transportation facility provided for by a public-private agreement or the refunding of any bonds or notes, together with any costs associated with the transaction.

    A bond or note issued under subsection (1) is payable solely as to both principal and interest from revenues generated from use of the public transportation facility authorized by the public-private agreement,

    [The money must come from project revenues to pay off the bonds and not from State funds. Again, confirmation that user fees must exceed costs.]

  • The Department may accept from any source, and use for supporting a public transportation facility authorized by a public-private agreement, any grant, donation, gift, or other form of conveyance of land, money, other real or personal property, or other item of value.

    [Here is the only exception in my opinion to a user fee regime. Canada or a banker or a Concessionaire would have to agree upfront to either make a donation or gift to Michigan or perhaps forgive the user fee shortfall.]

  • A public transportation facility authorized by a public-private agreement may be financed in whole or in part by contribution of any funds or property made by any person or entity.

    [As above]

  • The Department may combine federal, state, local, and private funds to finance a public transportation facility authorized by a public-private agreement.

    [As above]

In my opinion, it is absolutly clear that the State has recognized that it understands the difference between user fees paying for a project and availability payments being the basis for financing a project.

It has made the choice that a P3 project must be paid for by the users and not by taxpayers. After all, isn't that the basis of how the riskless, no-brainer offer made by Canada? If it did not make that choice, then monies in the future could be taken by the availability payments from the State Budget so that other projects could not be undertaken.

While it would have been better if the State had not used the word "financing" because that could give rise to the idea that availability payments could be made, in my opinion that word "financing" must be narrowly interpreted. That word cannot be used as the basis of supporting an availability payments regime in light of the specific sections quoted above.

However, the State recognized that there could be any shortfall in toll revenues but that the project could still go ahead if some third-party made up the difference. In the DRIC bridge case, obviously the State has no money to make up that difference, no rational banker would give the State billions of dollars of freebie gifts and donations for the shortfalls to which it was entitled and Canada has made it clear that any monies that it pays out have to be repaid.

Since the payment scheme for the P3 project must be a user fee basis in which the user fees exceed financing costs and there is no reasonable possibility of anyone making up that shortfall, the DRIC project is dead.

The verdict: DRIC Case dismissed.