Canadian Gov commits $550m loan to help Michigan cover costs of new Detroit River toll bridge

April 30, 2010
By Peter Samuel

With a legislative deadline looming May 1, Michigan Governor Jennifer Granholm announced a surprise Canadian promise of $550m in loans to help cover Michigan's costs since neither private investors nor the state can finance the new Detroit River International Crossing (DRIC) toll bridge. Politicians both sides of the border are desperate to launch the new toll bridge as a competitor with the much despised Ambassador Bridge - a private charter-in-perpetuity run by an unpleasant crew. However the economics of the DRIC bridge remain highly dubious.

'Jobs, jobs, jobs' the invocation

The politicians see the DRIC bridge 3km (1.8mi) downstream as a huge jobs generator and a modern government-controlled alternative to the Ambassador Bridge. The new bridge would be built at Zug Island so in previous reports we've called it the Zug Bridge.)

On one claim 40,000 people will work on this bridge during construction and 25,000 new jobs will be sustained by it after construction. The basis for these huge numbers isn't detailed.

The governments involved have most of the needed environmental clearances and a traffic study claiming the DRIC opening with weekday volume of 18,700 in 2016 rising to 34,600 vehicles in 2035.

Traffic but no revenue study

But they provide no revenue projections at all, and no real financing plan.

In January the state of Michigan issued an RFP for expressions of interest in a public private partnership to finance and build the new bridge, and today it released the responses - a long list of companies from tiny and local to huge and international, some responding singly others as teams. The responses weren't proposals, just expressions of interest (see nearby Michigan DOT presentation slide of "Proposers".)

No taste for toll risk

The respondents strongly favor an availability payments model, whereby they get paid for providing the bridge and operating it, regardless of toll revenues. This means the major business risk is carried by the governments, not the investors.

The unwillingness of responders to take any risk on toll revenues suggests they are highly skeptical about it as a self-financing project.

Availability payment

Availability payments P3s are really a means of government borrowing against a commitment of future taxpayers to cover losses.

TOLLROADSnews does revenue projections

In the absence of any professional revenue estimates we've done our own based on the WSA traffic projections and toll rates with a slight premium on the present Ambassador Bridge tolls. This gives toll revenues on opening in 2016 $76m, 2025 $108m  and 2035 $141m. If operating costs are $25m/yr net revenues are 2016 $51m, 2025 $83m, 2035 $116m.

Capital cost of the project is put at $2,177m and that excludes over a billion for the Windsor Essex Parkway connector road on the Canadian side.

The net revenues are only yielding in 2016 2.3%, in 2025 3.8% and in 2035 5.3% on capital cost.

NOTE: a correspondent argues that our $25m/yr operating costs is too high. He notes that the Blue Water Bridge costs about $20m/yr to operate. He may well be correct that we're a bit on the high side there, so readers should take our numbers with the proverbial salt dose - editor. 2010-05-03

2.3-fold hike in traffic assumed

And even those numbers are based on extremely strong growth in traffic, that may well not be realized. The 2016 revenue for the DRIC for example assumes 2.97m trucks traveling the new bridge. That compares with Ambassador Bridge trucks in 2009 of 2.29m. Total truck traffic would have to grow to 5.26m or 2.3 fold (from 2.29m) in 7 years (2009-2016) if the Ambassador were held to last year's traffic and 43% of the total, and for the DRIC to get its projected 2.94m and a 57% share of combined truck traffic.

If growth were a mere 50%...

If growth in total truck traffic by 2016 were only 50% to 3.44m and the Ambassador kept its 2009 traffic of 2.29m then the DRIC would only get 1.15m or a shortfall of 60% on its projected 2.94m. At that rate toll revenue would be about $30m in the first year v $76m and net after operating costs a mere $5m v $51m.

With even weak (2.3%, 3.8% and 5.3%) returns on capital from the highly optimistic traffic growth (2.3x in 7 years) it is not a surprise that the private partners show little appetite for a toll concession.

Governments and taxpayers bearing risks

The Canadian Government through the Canadian Transport Minister John Baird in a letter today committed to "increase its financial participation" to $550m for components of the project that wouldn't be funded by the private sector or the US Government. This was presented by the media as the Canadians generously being prepared "to cover up to $550m of Michigan's costs" (AP).

In fact the Canadians are offering $550m on terms still to be negotiated and on which to quote Baird's offer "Canada would expect repayment from anticipated toll revenues..."

The Canadian offer is probably a political coup for Michigan proponents of the new bridge and will ensure that public private partnership and other enabling legislation is passed in the state assembly. But many issues remain to be worked out.

Skeptics, opponents

One skeptic among politicians is state Senate Republican leader Alan Cropsey. He says the traffic doesn't justify a new bridge and favors allowing the Ambassador Bridge company to build a modern span alongside the old.

It is unclear how much support he has from colleagues or whether Republicans int he state upper house will use their majority to block the project with a party line vote.

A Republican candidate for governor Mike Bouchard said last night that if he were elected he'd oppose the DRIC bridge. On TV he said: "Why would you take Michigan taxpayer dollars and put it into a venture to build a second bridge when you've got a private investor that's willing to do it on their own? We chase around the world for new businesses, and we kick one in the teeth here."

Bouchard is presently sheriff of Oakland County, a major suburban area of metro Detroit.

Ambassador Bridge people say it's all a Canadian plot

Statement from Ambassador Bridge company president Don Stamper:

"Michigan Gov. Granholm, who is both a Canadian and an American citizen, has offered to sell the Michigan border to Canada. Meanwhile, the governor has consistently caused red tape from the state of Michigan to prohibit an American company - Detroit International Bridge Co. - from building a second span to replace its 80-year-old Ambassador Bridge. Instead, she wants to tear down hundreds of homes, businesses and churches in Southwest Detroit to obtain money from Canada.

"It is incredible that Gov. Granholm spends thousands of dollars in taxpayer money to travel around the world to find jobs for Michigan, while at the same time attempting to destroy a Michigan company that has paid state taxes since the early 1920s.

"The Michigan governor now has caused Canada to offer to buy Michigan's future for $550 million. The question is whether the Michigan Legislature is more committed to Michigan's future than the governor. Michigan is not and should not be for sale.

"This offer from Canada and acceptance by Gov. Granholm will assure that construction jobs for the public bridge will be Canadian jobs, when and if jobs are ever created."

INSERT 2011-01-20: Reading more carefully the letter from the Canadian transport minister to the Michigan governor it is a mistake to characterize the offer of $550m as a loan to Michigan. It is couched more vaguely as an offer to pay Michigan's upfront capital costs up to $550m hoping to recoup the money on terms yet to be defined.

Here is the 2 page letter: (added 2011-01-20)

Materials released today (April 30, 2010) are at the project website under Key Correspondence:

COMPARISON: While Detroit-Windsor has quite large truck numbers compared to other international crossings larger numbers of trucks are carried on major east and west coast toll bridges. Compared to the 2.29m trucks of the Ambassador Bridge the George Washington Bridge NY-NJ carried 8.57m, Delaware Memorial Bridge NJ-DE 4.61m, Goethals Bridge NJ-NY 2.8m, Lincoln Tunnel NJ-NY 2.83m. Several California bridges and Baltimore's tunnels are also ahead of the Detroit-Windsor truck traffic too.

TOLLROADSnews 2010-04-29 ADDITIONS 2010-04-30 12:45  INSERT 2011-01-20

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