On the launch pad: The Gordie Howe International Bridge

The clock is running down on my role as Chair of the Windsor-Detroit Bridge Authority, and with a new $300 million venture fund to deploy…not a moment too soon.

When the new Minister of Infrastructure was sworn in on November 4th, I wrote Mr. Sohi to say that I thought he’d be best served if he chose his own Board Chair forthwith. This was not a partisan comment (in fact I’m a big fan of the current Ministers of Finance and Treasury Board, for example); just a recognition that Minister Sohi and his new government would most certainly have plans for the role given the new bridge’s importance to the future of the Ontario economy. With that in mind, I told him I’d resign as of December 31, 2015 (three and a half years before the expiry of my five year appointment) on the assumption that he could get someone in place by then (once my offer was leaked to the media, the speculation about a replacement began immediately). The Minister reached out later and was both gracious and complimentary; based upon his resume, he’s a great fit for the role and it’s already showing. I didn’t want to leave either he or the project in the lurch, and offered that the transition would be as long or as short as they needed. I’d be surprised if you don’t hear news on that front when he’s in Windsor tomorrow. It’s all good, as they say.

Given the new PM’s election promise of ever more transparency in government, I’m sure the new government won’t mind if I share my perspectives on the past ~18 months as well as the challenges that lie ahead for the project. I blogged about my vantagepoint from the PortsToronto Board over the years (see representative prior posts “Does 7,850 trump 1,600,000?” Feb. 4-10, “Rovinescu ‘sees open skies’” May 16-10, “Bridging the facts of a bridge” Jan. 18-11, “Were you compared to a Nazi today?” Apr. 8-13 and “Chicken Little is alive and well” Apr. 20-13), and never got in trouble with Ottawa then, either.

I was asked by the previous government to accept this position based upon, in part, my role in the successful initiation and completion of the P3 pedestrian tunnel project at Billy Bishop Toronto City Airport. As the underwater tunnel had been first announced in 1935, but never completed, I suspect the prior Cabinet saw some parallels in that odyssey with this particularly tricky infrastructure project. With an active professional and personal life, and many, many years of public service already under my belt, I initially resisted the invitation. And yet, once I came to appreciate the positive impact of this project on 10,000 Canadian Exporters, I was honoured to be asked to be the inaugural Chair of the organization. I leave with a clean conscience, and the belief that we’ve made real progress with the project.

Site prep (“fill and settlement”) for the construction of the Canadian Customs plaza began in August, which was 18-24 months earlier than Transport Canada had planned. The Board pulled this component of the project out of the P3 procurement process on its own initiative in the Fall of 2014, and I’m glad we did. This is why the Minister has something meaty to tour tomorrow, even if we won’t be there to show him around ourselves. The P3 RFQ analysis is done, as well as the drafting of the actual P3 RFP documents. Our Board of Directors had previously advised that the proponent short list would be announced yesterday (December 15th), along with the release of the formal P3 RFP document, which was echoed by our CEO on August 5, 2015. In our minds, releasing the RFP this month was essential to meet the previous government’s public commitment of a Q4 2020 opening date. Not to mentioned the public’s strong desire that we get building asap.

As the Windsor Star reported last night, the government has delayed that critical announcement to an unspecified future date. That’s the Department’s prerogative, despite the fact that the WDBA was set-up to be an arms length Crown Corp. with a mandate to get the bridge built.

Our Board of Directors got down to work on July 30, 2014, and I believe we have made excellent progress on all of our key deliverables. The bridge is an essential infrastructure project and will accommodate future capacity demands, offer travelers and truckers the first and only highway-to-highway connection in the area, as well as providing redundancy at Canada’s busiest truck border crossing (i.e. overflow capacity as well as an alternative). Canadian exporters are anxious for this project to be completed, and we were steadfast in our resolve to deliver it on their behalf.

The Windsor-Detroit Bridge Authority is a fairly new entity for all intents and purposes. At the outset of our appointments, we were handed a Crown Corporation in name only. There wasn’t even a bank account. We started with one OIC-chosen / appointed executive (Michael Cautillo), borrowed office space, and a firm “in-service” date of Q4 2020.

The “2020” in-service date announced by the previous government on July 30, 2014 was approximately two years earlier than the then-working version of the project timeline (which projected that the opening would occur in January 2023). Our Board recognized that the export economy desperately needed this bridge, and appreciated the benefits of the previous government declaring a private sector-minded “stretch target.” It was our understanding that the staff involved with the project resolved to “get ‘er done” (as then-Minister Lisa Raitt would say) on that basis, and we all set out to meet the Minister’s clarion call.

We took on this huge challenge with gusto, recognizing the clear economic benefits to Canada that would flow if we were able to deliver on the accelerated “2020” timeline. The Gordie Howe bridge project (aka DRIC, aka NITC) has been underway for more than a decade, and this accelerated in-service date has been a useful tool in stimulating all of the parties involved.

On July 20, 2015, we began the launch of the formal procurement process with the issuance of the Request For Qualifications for the P3 proponent. The issuance of the RFQ was less than twelve months following our first day of work, which serves as a source of pride within the organization. On October 14, 2015, we announced that six different North American and international teams had formally responded to the RFQ. This was a robust outcome.

At our October 2, 2015 Board meeting, we were advised by WDBA management that the previous government’s “2020” in-service date remained viable. I love that we were still on target at that point, 14 months into our tenure. In my mind, 2020 was always predicated on the expectation that the P3 RFP would be issued in 2015 as per the WDBA’s 2015-16 Corporate Plan (a corporate plan which was approved by the Treasury Board earlier this year; these documents aren’t secret: you can find last year’s plan here, for example).

At our Board meeting of October 30, 2015, we passed a motion reconfirming December 15, 2015 as the date for the public release of the Request For Proposal document; this was made public via Twitter on November 3, 2015. All of this was with the view to delivering on 2020 and not letting up on the gas pedal. That some associated with the project may soon qualify that firm 2020 opening date target with the words “aspirational” is both unnecessary and unsettling.

Canada will never “own the podium” if it sets its sights on the Bronze medal.

Much work remains, obviously, before construction of the actual bridge span can begin. But the project is closer than ever to completion. There are still some hurdles to overcome, such as the concerted effort and ultimate success of our Michigan partners (particularly Michigan Attorney General Bill Schuette) when it comes to the immediate acquisition of the U.S. lands required for the project. Equally important is the receipt of timely support, approvals and funding from various Federal departments over the coming weeks, months and years. Although Parliament approved a specific five-year funding envelope for the bridge project via the 2014 Federal Budget, the WDBA does not have access to these funds at the present time — you have the money but they won’t let you spend it, if you know what I mean. That’s a painful piece of the equation.

The following reflects a short summary of the key milestones we’ve achieved and our activities to date:

– 44 WDBA employees have been hired, representing ~90% of our targeted FTEs (we had a single staff member in August 2014);
– The WDBA Board of Directors has held more than two dozen Board and Board committee meetings;
– All major consulting and advisory roles have been filled, including Intelligent Transportations Systems, project scheduling, the General Engineering Consultant, Capital Markets Advisor, Transaction Advisor, Senior Advisor to the Board and so forth;
– Our Board created a Capital Markets Advisory Panel to assist us and the government with certain key elements of the project. We sought out and attracted four leading industry experts (Donald A. Wright {Chairman}, Dominic D’Alessandro, Sheryl Kennedy and Richard J. Kostoff). The Panel’s membership was announced on March 6, 2015, and the group has met twice to date (hopefully the new Minister will keep them involved going forward);
– The previous government informed the WDBA that the new bridge would be named after Gordie Howe – which was announced on May 14, 2015;
– The Board of Directors identified the “Early Works” contract opportunity (preparation for the Canadian PoE) in the Fall of 2014, which we awarded in August 2015;
– The funding mechanism for acquiring the U.S. properties has been structured and instituted;
– >290 of the required U.S. properties have been acquired in the City of Detroit;
– >60 “good faith” offers have been issued by MDOT for specific Michigan properties under U.S. condemnation laws;
– The process to acquire certain U.S. properties under more complex condemnation rules began on October 5, 2015; and
– Six different domestic and international proponent groups responded to our P3 procurement RFQ; these responses have been analyzed.

That doesn’t mean that the 2020 in-service date isn’t under pressure, ’cause it is. As I formally advised the previous government on May 5, 2015, the ability of WDBA management to deliver against the previous government’s targeted 2020 in-service date required that the P3 RFP be released before the end of this calendar year. With an estimated 42 month construction schedule, there is little time to spare. A week here or there isn’t going to change the world as you’ll soon hear from the spindoctors, but to state the obvious: if you don’t actually start the formal procurement process, THE BRIDGE WILL NEVER OPEN.

Unfortunately, no one within the Ottawa bureaucracy has their bonus tied to getting the bridge open by a certain date. The project has strong supporters within the permanent government, of that there is no doubt, but private sector folks across the land know what I mean: there are no financial or career repercussions in Ottawa if the bridge is delayed to 2021 or beyond for reasons that are within our collective control.

With the passage of time and a more detailed analysis by a broader group, including our Board (which was not involved in the preparation or approval of any of the Gordie Howe project’s business cases), there have been many changes to the 2012-era Business Case. The material adjustments were beyond the control of the WDBA Board of Directors, such as the drop in the value of the Canadian dollar or the decision of the previous government to have the P3 project pay for the U.S. customs plaza (just as it was always going to pay for the Canadian customs plaza btw).

Our Board of Directors challenged every major component of the business case where possible and were lucky that several points were within our areas of specific expertise. We sought input of our external Capital Markets Advisory Committee as well as other industry experts, including a former senior exec from Borealis, the perfect guy for a project of this nature. Our business case review process generated two meaningful reductions in the forecast cost of the overall project, which I’m sure taxpayers appreciate: one was a material cost decrease due to a reduction in the projected Internal Rate of Return that the Board believes will be required / sought by the eventual private sector P3 proponent; the second was a reduction in the projected debt financing costs.

Something a fixed income guy understands only too well.

There’s definitely broad public interest regarding the overall Federal government financial contribution to the Gordie Howe Project. As you’ve likely read in the media over the past few years, there is an expectation that Canadian taxpayers will contribute a significant portion of the required capital for the project (referred to politely as “Capitalized Construction Costs”). At our October 30, 2015 Board meeting, we directed the WDBA management team to prepare a RFP scenario where our private sector bidders were required to provide the vast majority of the capital for the project. Just as the private sector did on the award-winning P3 pedestrian tunnel project at Billy Bishop Toronto City Airport (a minority of the capital for that project came via construction progress payments drawn from airport passenger AIFs; none of the money came from taxpayers).

The benefits to the government of this minority-contribution approach were clear to us, even if we weren’t tasked by anyone to find such economies on behalf of Canadian taxpayers:

i) with an increased financial contribution, the private sector will be even more committed to delivering the project on time, given its increased financial outlay at the outset of the project, and

ii) if more money came from the private sector, the government would free up hundreds of millions of dollars of near term financial capacity to invest in other worthwhile infrastructure projects across the country.

Like everything in life, folks will try to poke holes in this approach. The private sector’s cost of financing the project will rise if there is a requirement to raise incremental debt to finance their additional share of the project’s cost. Second, the governments of Canada and Michigan will potentially receive toll revenues later than is currently forecast. While it is true that the interest costs of the private sector debt facility would rise, assuming the additional capital was debt and not equity, the mitigating factors are clear:

1. The more capital the P3 proponent has invested in the project, the more committed it will be to its successfully completion; and

2. The value to the government of a reduced financial outlay in the near term is far more valuable than the present value of the potential for diminished toll revenue down the road – this is not merely a “present value of cash flows” comment but a recognition that the forecast traffic volumes for, say, 2045 are difficult to predict.

The previous government directed that the Gordie Howe project be delivered using a public-private partnership model (P3). This was codified in the Crossing Agreement executed by Michigan Governor Rick Snyder. It is widely believed that these P3 structures allow governments to transfer risk to the private sector, while ensuring that we, as the client, receive our project on a fixed timeline and at a fixed price.

Invariably, there is risk – even expectation – that the “cost” of the construction elements of the project will be higher given the natural requirement for the private sector proponent to earn an appropriate return on their equity investment as well as the higher cost of borrowing when its undertaken by the private sector versus the Government of Canada. Likewise, there is an expectation that the private sector will operate the bridge concession at a lower cost than the government could do on its own.

This particular P3 project has certain risks which are unique to itself (land, legal, traffic/toll, political):

• We and our partners in Michigan do not currently own all of the land required to build the project;

• We are relying on the State of Michigan to acquire most of the key properties on our behalf;

• Ottawa-based mandarins do a great deal of checking and challenging and risk analysis and delaying and approving for a project that is supposed to be managed by an arms length Crown Corp. (and the risks they analyze never seem to include: “what is the risk to the economy if the project is delayed even further?”);

• The owners and management of the Ambassador Bridge have (as is natural in the competitive world of business) deployed significant financial, legal and political resources to stall, if not prevent, the construction of the Gordie Howe bridge. They are fabulous business people, astute and should not be underestimated; and

• The fact that there is a competitive crossing in the Ambassador Bridge, whose owners have the right to set their own tolls, complicates anyone’s ability to predict revenue and traffic volumes for the Gordie Howe. This creates the perception (conclusion?) that the private sector will resist taking on any toll or traffic risk during the 30 year concession period. I’m not sure I agree with the conclusion, but I understand the argument.

• Governor Snyder won’t be there forever (he is term-limited and has but three years to go), and the next Governor might not be as supportive of the project. That kind of sea change could hugely impact the ease at which State government departments currently perform their duties under the Crossing Agreement. What if, for example, a new Governor refused to carry out certain elements of the agreement? The opening would be delayed for years, at least.

If you ever wonder why this project is so complicated, see above.

The independent WDBA Capital Markets Advisory Panel has done a fabulous job of assisting our consideration of all of the key facets of the project. The Panel reviewed a number of issues relating to the financing structure and financial risks of the Gordie Howe International Bridge. The Panel’s recommendations and insights around F/X risk, interest rate risk, and the percentage of private capital that could/should be invested in the project were very compelling. All of which has been shared with Ottawa; I hope they give this advice due consideration.

When our new Minister gets briefed by staff tomorrow, I hope he agrees that the Gordie Howe project is in excellent shape. Michigan Governor Snyder, his executive office and MDOT officials are completely committed to the successful completion of the project, and we have an excellent working relationship at all levels. That’s been a true joy. I had dinner with Detroit Mayor Mike Duggan a few weeks ago and he too is foursquare behind the project. Canada is lucky on both fronts. We also have the good fortune to have six very committed members of the WDBA International Authority. These individuals, led by Chair Kristine Burr, are completely engaged in their duties.

That said, we are a long way from the finish line. I am reminded on a daily basis as to the importance of modernizing the Windsor trade corridor for the benefit of our economy, and like many Canadians, look forward to the new bridge’s official opening.

The project is on the launch pad and ready to go. Over to you to “get ‘er done.”

MRM
(disclosure – this blog, as always, reflects a personal view)