What Is The Tunnel Worth

It is very clear that there is a movement to do something with the Detroit Windsor Tunnel.

Never fear, Windsor taxpayers who actually own the Tunnel will never be asked what our opinion is. It will be presented as a fait accompli by Eddie, but a brilliant one at that, when we hear how much money will be coming into the civic coffers. Moreover, we probably won't be asked either but will be told what will happen with the money---more monuments to be built after all, like a new "signature" City Hall for instance.

It is clear to me now, after what I posted recently, that this has been the Mayor's Plan ever since he signed Phase 1 of the border agreement with the Senior Levels and then tried to sneak through the infamous Agenda Item #5. Why else did Eddie and Councillor Budget say what they did when the Bridge Co. announced its plans for the border? Why else did the Feds dump on the deal involving the Tunnel? Why else was there the need for the Joint Councils meeting? The City wants to prevent anyone from messing up whatever the deal is supposed to be.

Infrastructure is sexy these days. Organizations like OMERS, Teachers Pension Plan, Canada Pension Plan, and Macquarie Bank amongst others have so much money around that they are going after these deals as part of their portfolios. It's the trendy thing to do. It would not be a big surprise to me if OMERS/Borealis of DRTP fame would love to buy into the DW Tunnel somehow (and probably as part of the deal to get rid of the DRTP Corridor---rails for trails after all).

What is the Tunnel worth? It could be worth a lot of money actually depending on the kind of deal structured. It could be a long-term lease deal or payment based on securitizing revenues or some kind of management agreement. I doubt if there would be a sale. It could be worth a lot more if it went out to competitive tender too. [Oh it won't be by the way. That's not the Mayor's style. He has to be in total control. It will be a Public/Private partnership so it will fall under the Single Source exemption under the Purchasing By-law] It would be worth more if Windsor and Detroit dealt with it as a whole rather than two separate parts.

OR perhaps the Tunnel is really not worth very much at all!

Eddie's failure to execute in a timely manner may mean that the world has passed us by. Reality about the Tunnel's operations may have reduced significantly what that City asset is worth as more stories come out about its problems.

Let's play wheeler-dealer entrepreneur and figure out how much the Tunnel is worth. Let's pretend that we are playing in the big leagues, and have a couple billion Blog Dollars to park in an infrastructure investment. (Just like the big boys, it's more fun to play entrepreneur with other people's money – except no taxpayer money or pension or privatized social security retirement investments will be at risk in our friendly Blog-hypothetical.). Let's figure out what the few comparable deals have made and then factor in some business risks like the following to come up with an amount:

1) DCTC problem

The Detroit & Canada Tunnel Corporation has an agreement with the City of Detroit with 14 years left to run and one that ends in 2007 with Windsor. We'd want to get rid of them right away so we'd have to buy them out. But that's a big problem.

"In January 2001, the owners of DCTC agreed to sell their shares to Macquarie North American Infrastructure Inc. (a wholly owned subsidiary of the Global Infrastructure Fund (GIF)). The acquisition of DCTC was funded by $US53.5 million of senior debt." Moreover, DCTC is not a non-profit so it would be losing profits over the next 14 years. Don't forget that Windsor makes $6 million plus per year on the Tunnel while Detroit makes 1/10th of that and, even though DCTC pays the costs, there has to be a signifcant profit aspect that must be dealt with.

The buy-out amount would be huge...the amount outstanding on the debt and 14 years worth of profits represent big money. It's like a mortgage on your house that would have to be paid off before it was sold.

2) The Tunnel is getting old

"The tunnel was opened in 1928, one year after its competitor the Ambassador Bridge."

Remember how Gridlock Sam made a big deal about the age of the Ambassador Bridge. Well tunnels get old too and need reconditioning. Take the Brooklyn-Battery Tunnel in New York City, Sam's hometown. "Beginning in the late 1990's, after nearly a half-century of service, the tunnel received the first major rehabilitation in its history."

• $100 million was spent to install a new ceiling and new lighting in the tunnel.
• "In 2002, MTA Bridges and Tunnels completed a $55 million project to rehabilitate the tunnel superstructure, roadway and drainage system. The project addressed the deterioration of the roadway slab in both tubes of the tunnel. Tunnel leak repairs and wall tile replacement was also performed. That year, the agency also completed a $10 million rehabilitation of the vent buildings."
• "The final part of the project, which will be completed in 2003, involves a $35 million installation of new pumps, exhaust fans, fire standpipe and waterline valves, variable message signs, and traffic control and signal systems."
  
  

We've seen the cost over-runs of the Tunnel Ventilation building here...the cost has sky-rocketed to $20 million. While we do know that "A $50 Million renovation program was launched in 1993, including a completely new road surface, new sidewall tiling, new lighting, complete video surveillance and restoration of the Tunnel's stone cover beneath the Detroit River," I must admit I have no idea what else needs doing in the Tunnel. Presumably a big chunk of money would have to be set aside for repairs by any operator of a 75 plus year old structure if a long-term deal is arranged.

3) Detroit will want its fair share

Detroit has 10 times the population but only gets 1/10th the revenue. No matter what the deal, Windsor will get less than before if the contract is opened up.

4) The Tunnel access roads are a mess.

Eddie wants $30 million to build a parking lot for vehicles going to the Tunnel to keep them off City streets. Well, that is partially true but it is really for the redesign of the Plaza to further his ambitions at the cost of someone else. If the Senior levels choose not to finance it, then who will since the Canadian side is such a mess?

Is the US side any better with the tie-ups on Jefferson. Moreover the ability to do major renovations on the US plaza is hampered by the lack of room given the Tunnel location.

"Preliminary engineering designs estimate that the cost to provide a workable solution on the US side within the existing 4.5-acre footprint would be in the range of US $50 to US $70 million."

5) Unique security risk

That's what the Tunnel is. The shocking part is that this must have been known for a long time yet the focus has been put on the Ambassador Bridge. I think that Senator Kenny was not given all of the facts!

What action will have to be taken to make the Tunnel meet US requirements and how much will that cost? Will certain kinds of traffic be banned thereby reducing revenues as well? Is there a Bill C-3 risk to the Tunnel if Transport Canada ever wakes up.

6) Tunnel volumes

If you buy an asset, don't you want one that has the potential to grow, not remain the same or decline. Since 1999, the Tunnel's volumes have declined from 9.6 million vehicles to about 6 million in 2005.

The Tunnel Plaza Improvement notes stated "Although traffic growth has slowed in recent years, it is still expected that traffic will grow substantially over the next 20 years: about 50% for cars and buses, and 40% for trucks." In other words, in the next 20 years it will get back to where it was in 1999.

With the high Canadian dollar, terrorist threats, passport requirements, No Smoking law, health scares, new Casinos in Detroit, border delays and so on, do you see room for optimism for increased volumes?

7) Competition

The Tunnel could not take away business when its tolls were less than that of the Bridge going into the US. It increased its tolls in July 1 and its volume decreased by 60-70,000 vehicles.

When the Bridge project for 200 booths opens, when its enhancement project is finished and if a new bridge with car lanes opens who will want to use the Tunnel with its few lanes!

8) The Councillor Brister bomb-shell that remains hidden

He's on the Windsor Tunnel Commission so he knows. In May 2005, Henderson quoted him as saying "[Brister sees] "a number of big-dollar issues on the horizon that lead me to believe we should not be proceeding this way. I don't think we need to be spending more tax dollars on bricks and mortar at this point. In my opinion, we're going to need those funds." The budget chairman said he cannot provide any details but there are major issues pending involving the Windsor-Detroit tunnel and Enwin that will consume "a significant amount of taxpayer resources."

We still do not know what this means and how much it will cost.

SUMMARY

So what do you think the Tunnel is worth? Is it an investment that you think will grow and if so at what rate? Given the unknowns, how do you factor that into price?

Is the Tunnel beyond hope as an investment or something that financiers should leap at? Clearly steps can be taken to make the Tunnel a viable crossing long into the future and to solve the problems I have identified. There are some obvious actions that can be taken right away but that take creative thinking, a willingness to compromise and a recognition that there is a need to work with others. That will never happen with this Mayor and Council

As for me, I'll stick with mutual funds!