CHICAGO — Despite legislative setbacks and an ongoing battle with a powerful Detroit family, the leaders of Michigan and Canada continue to tout as a top priority a new $4 billion bridge to span the nation's busiest trade route between Detroit and Canada.
Gov. Rick Snyder has highlighted the project in both of his state of the state addresses, saying Michigan's future depends on its role as an exporter, and vowing that no tax money would back the debt used to build the span.
Canadian Prime Minister Stephen Harper last week, in a visit to Washington D.C., said the bridge would be done before he leaves office. He faces re-election in 2015.
The project is even featured in the historic consent decree between the state and Detroit that was approved last week with the state pledging to pursue it to help strengthen the city's economy.
The pledges, however, have failed to advance the project as it remains stalled in the Michigan Legislature, where lawmakers have defeated a bill that would allow state to enter into public-private partnerships.
If it eventually advances as the governor envisions, the bridge project would mark one of the country's largest P3s and one of the only to partner with another country.
The setbacks hindering the project highlight the differences between Canada's mature P3 market and the political tangles that have stunted the growth of the market in the U.S., according to analysts who cover public-private infrastructure projects.
On the legal front, the state has been embroiled in a series of court battles with the family-run company that owns the Ambassador Bridge, currently the only span crossing the busy trade route, located two miles upriver from the proposed public span.
The private bridge company, run by Manuel "Matty" Moroun and his son, has said it wants to build its own second span to replace the current 82-year-old bridge. It has targeted the state in a series of television ads while intensely lobbying lawmakers to defeat enabling legislation.
"The political and philosophical issues are quite important in the United States," said Chee Mee Hu, an analyst at Moody's Investors Service. "This is a very viable sector," Hu said. "Part of the reason it hasn't gone gangbusters is because in 50 states, each state operates under different constraints. Each state has a completely different philosophy about funding infrastructure."
For investors, key questions will include traffic projections, the final structure of the project and who is offering the pledge backing up the debt.
A government pledge based on a so-called appropriation model, where the private company fronts the money to build the asset and the government promises regular payments over a set period of time regardless of project revenue, is common in Canada and Europe but remains rare in the U.S.
The small U.S. P3 market has so far been dominated by a demand model, where the government gets an unfront payment from a private operator who then collects revenue from the asset for the length of the lease.
In Michigan, critics are opposed to an availability-based model as that would require the state's pledge.
But a deal structured on a demand-model would drive up interest costs as investors demand a premium for debt backed solely by toll revenue, several studies show.
A final deal could use some kind of combination of the two, like in the Ohio Rivers bridge project, where Indiana and Kentucky are using two different models to finance their respective sides of the massive project.
"That project shows how infrastructure can be created in very different manners in this country," Standard & Poor's analyst Jodi Hecht said. "It becomes a public policy issues. It's all driven based on what the policy decisions are."
The proposed bridge is dubbed the New International Trade Crossing. The price tag is estimated at around $4 billion, including the expense of building customs plazas and interchanges.
The bridge itself is projected to cost around $950 million.
Revenue bonds backed by tolls and rents from duty-free shops would finance 44% of the total costs, according to Snyder's preliminary proposal.
The project is a partnership between the governments of Michigan; Windsor, Ontario; Canada and the United States.
Canada, which is the project's biggest supporter, has offered to loan Michigan $550 million to build the plazas and interchanges on the U.S. side. The Obama administration has approved Snyder's request that the state use that money as badly needed local matching funds to secure $2.2 billion of federal dollars for transportation projects.
Michigan would repay Canada from bridge toll revenues after the revenue bonds have been paid off.
Snyder's legislation would create a new bond-issuing authority that could enter into a public-private partnership for up to 50 years. The authority would then issue 50-year tax-exempt bonds backed solely by project revenue.
The bills bar the issuance of any debt that carries a moral or general obligation pledge from Michigan and specifically prohibits the state from making availability payments to a private operator.
At the end of 50 years, Michigan and Canada would each own half of the bridge, and the state could re-lease the asset.
If revenues fall short of projections, tolls could be increased. The legislation, however, leaves open the question of who would control toll rates, an issue that would affect bond repayment liability and final project cost.
One option would give a private company the power to set toll rates, and in that case the legislation would require a bank or other financial guarantor to take full responsibility for timely payments to bondholders.
That option would likely mean that the market would demand higher interest rates to take on the risk, driving up the final cost.
The more likely scenario would have the authority retain toll-setting power. In that case, Canada has offered to take on any risk of a revenue shortfall by covering all debt payments if toll revenue falls short.
That prospect worries the Ambassador Bridge company. A new public bridge is already expected to take a 50% bite out of the Ambassador's market share, and a Canadian pledge would weaken the company's only leverage — lowering toll rates to draw more drivers.
"If you have the Canadian government agreeing to pay all of Michigan's costs and to subsidize all the cash losses that this bridge would have, how could we compete?" said Fred Calderone, vice president for the Detroit International Bridge Co., which runs the Ambassador Bridge. "If we try to keep our market share by cutting tolls, how does that help? They could just cut their tolls and the government would subsidize. You can't compete against a government enterprise where it promises to pay whatever is needed."
As in all toll-based infrastructure projects, the bridge's traffic projections will also prove critical, as will the presence of a privately owned competing asset two miles upriver, analysts said.
"It's an important factor," Hu said. "The first thing we look at is the service area, the market, what is its size, its growth, and what is the market share of the competing assets serving the same market,"
The state's studies project that traffic will double over the next 20 years, and that toll revenue would total $60 million in 2016 and $117 million by 2014. The study projects an average annual revenue growth rate of 3.5%
But armed with its own team of advisors and set of studies, the Ambassador Bridge officials show traffic projections that fall far below the state's own projections.
The company's studies show slow to flat traffic growth that will translate into annual net cash-flow losses for the project ranging from $71 million in 2016 to 2035.
"The traffic isn't there," Calderone said. "The revenues simply aren't there to generate the kind of tolls it would take for a financing of the NITC bridge to pay for itself."
Michigan's legislative approval is the last hurdle blocking the project. Enabling legislation has not yet been re-introduced in the Legislature.
The governor's office is reportedly working with the state attorney general to explore options to bypass the Legislature.
Despite Canada's push, some say the project will remain on hold until after November's legislative elections.
