Gordie Howe's mysterious $3.5 billion cost increase
It has been about 100 hours since the end of my time as Chairman of the Windsor-Detroit Bridge Authority (see prior post “On the launch pad: The Gordie Howe International Bridge
” Dec. 16-15), and I’m already shocked by news coming out of Windsor. According to a Canadian Press wire story, the new government has been advised to plan for an additional “$3.5 billion” in costs as a result of i) a weaker Canadian currency, and ii) an “extra” $1.5 billion contingency fund to handle the potential for rising interest rates and negative currency moves.
The bit about the Canadian dollar dropping over the last two years isn’t a shock to any of us on Bay Street, but the need for an added $1.5 billion in “extra” contingency funding for the WDBA project is definitely news to me, and the project cost sure hasn’t increased by CP’s $2 billion to $3.5 billion.
At least not as of November 2015, and I doubt very much as of today either.
In a November 4th briefing letter I wrote to the new Infrastructure Minister on behalf of the agency tasked by Parliament with actually building the project, I outlined a variety of changes to the forecast cost of the Gordie Howe International Bridge. The project’s external advisory team updates the business case from time to time, and the 2014/15 update was completed a few months ago. The weaker Canadian currency was definitely on the list of cost adjustments, given the fact that some 900 properties need to be acquired on the U.S. side of the border. A lower Canadian dollar makes those more expensive to buy, for example. The construction of the I-75 interchange and U.S. Port of Entry will involve a lot of U.S. labour, so that’s now more expensive too. But to the tune of $2 billion in aggregate? No way.
The hit to the project budget from a weaker dollar is actually less than $500 million, all-in. When you balanced all of the increases and decreases, when we recently reviewed the situation, the total cost of the project was estimated to be less than $900 million higher than the earlier 2012-era projection. Not $2-3.5 billion! And that forecast increase wasn’t all for the government’s account, either, as the eventual P3 proponent is contributing meaningful capital to the overall construction costs of the project.
People always seem to forget that.
Since the new government is being open, transparent and blindingly quick in releasing its “secret briefing notes” to CP, I think I should be equally forthcoming…saving CP the effort of requesting a copy of my letter from the Feds under Access legislation. Although my letter was 11 pages in total, I’ll just excerpt the key section from pages 4 and 5 for you:
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. A so-called Deputy Minister Working Group was briefed in Ottawa last month on these updated figures by the WDBA management team. I am advised by our CEO, Mike Cautillo, who was present at the meeting, that these project cost adjustments were accepted by this committee; in total, they amount to [<$900] million, even after finding economies in other areas.
As you will note, these adjustments to the overall estimated cost of the project are largely outside of the control of the WDBA Board of Directors:
– $X million increase due to the drop in the Canadian dollar;
– $X million increase due to scope changes for the U.S. POE (I am advised that CBP briefed the Deputy Minister Working Group directly on this topic during their aforementioned Oct. 16, 2015 meeting);
– $X million increase in capital performance payments associated with construction costs;
– $X million increase due to decision taken by government that the project would pay the utility costs of CBSA and CBP; and
– $X million increase due to costs associated with the acquisition of U.S. land.
Coincident with this project cost review, our Board of Directors challenged every major component of the business case where possible and within our areas of expertise. This process generated two significant reductions in the forecast cost of the overall project and are now reflected in the revised Business Case:
– $X million cost decrease due to a reduction in the projected Internal Rate of Return that we believe will be required / sought by the eventual P3 proponent;
– $X million cost decrease due to a reduction in the projected debt financing costs of the project
Overall Government Financial Contribution To Gordie Howe Project
For several years, the standing Business Case has anticipated that the government will be expected to contribute 50% of the required capital for the project (referred to as “Capitalized Construction Costs”). As per the presentation our team made to your Deputy Ministerial Working Group last month, it is more complicated than that. As per slide 9 in that presentation, these are the following financial elements as they relate to the Government of Canada: [Note to blog readers: So as to not give the private sector any hints about the government’s own cost assumptions, as with above, I’ve blacked-out these specific costs, but the <$900 million above is the number you really should care about...and that's not all for the Crown's balance sheet, either]: - $X million “pre-procurement, procurement and public sector ancillary costs”; - $X million “GoC portion of capitalized construction costs”; - $X million “shortfall” funding during operating period (an [<20] year period where costs are expected to exceed toll revenue); - $X million “contingencies for foreign exchange and interest rates”.
At our October 30, 2015 Board meeting, we directed the management team to require that our private sector bidders provide two financing structures in the RFP document:
1. The standing Business case, where the P3 proponent and the government each contribute 50% of the $X-X billion of capitalized construction costs of the project; and
2. A 75/25 scenario, where the government contributes 25% (resulting in a ~$X00 million lower near-term outlay by the government).
The benefits to the government of the 75/25 approach are clear: i) 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) the government frees up ~$X00 million of near term financial capacity to invest in other worthwhile infrastructure projects across the country.
The drawbacks, you will be advised, are as follows:
1. The private sector’s cost of financing the project will rise due to its requirement to raise additional debt to finance their additional share of the project’s cost;
2. The governments of Canada and Michigan will potentially receive toll revenues later than as currently forecast (already estimated to be approximately [X] years from now).
While it is true that the interest costs of the private sector debt facility would rise, the mitigating factors are clear:
1. The more equity the P3 proponent has invested in the project, the more committed it will be to its successfully completion; and
2. The present value to the government of a reduced financial outlay today is far more valuable than the potential for diminished toll revenue 50 years from now – particularly when the forecast traffic volumes for, say, 2065 are so difficult to pinpoint.
Based upon my intimate knowledge of the project, one can only assume that CP misunderstood the figures in the briefing note. Minister Amarjeet Sohi toured the Canadian customs plaza construction site a few weeks ago and confirmed that the project was going ahead. That was the right call on his part. Canadian exporters are anxious for this project to be completed, and the $120 billion of two-way trade at this key gateway can’t be taken for granted in these difficult times.
Hopefully, someone in Ottawa will fix this bad info forthwith. If not, CP should read the memo again, and do some follow-up ATIP requests if need be. Canadian taxpayers already think they’re being taken advantage of given the U.S. Customs Plaza situation, and these erroneous figures don’t help.
(disclosure – this blog, as always, reflects a personal view)