What’s right, and wrong, with Boring Company’s Tunnels?
Source: Bloomberg
This article will explain how, in the near future, toll tunnels will generate a 2,500% ROI on multi-billion dollar projects. A net profit 25 times greater than the construction cost.
On December 17, 2016, Elon Musk tweeted, “Traffic is driving me nuts. Am going to build a tunnel boring machine and just start digging.” That tweet ushered in a new era of transportation tunnels. It separates the past and present when transportation tunnels do not exist from the future when they will be ubiquitous.
Today, most people are unaware of what a transportation tunnel is. Even Musk didn’t understand the potential transportation tunnels will provide when he first sent the tweet out into the world. The few articles that have been written mainly poke fun at the idea and at the couple of practice tunnels so far constructed. But they fail to truly grok how these new tunnels are about to transform the world we live in, making travel easier than it has ever been.
Part of the confusion stems from the initial negative reaction to the tunnels. And part stems from the way the Boring Company and Musk were twisted into thinking that these tunnels needed to be public transportation systems. The natural evolutionary path the Boring Company has followed has been to create a system where cars in tunnels replace a subway train. In other words, the Boring Company is developing systems built to move pedestrians from one place to another.
This becomes clear if we consider the projects that have so far been proposed:
Las Vegas Convention Center
Las Vegas connections between casinos
Chicago downtown to O’Hare International airport
For Lauderdale Loop to transport people to the beaches
Dodger Stadium
Source: Urban Planning
These projects are great public service projects, don’t get me wrong. But they aren’t the best business projects from an ROI perspective. The boring Company has been side tracked into pursuing sub optimal projects by a couple false beliefs imposed by city planners.
The first incorrect belief is that the best application for the tunnels is for them to become public transportation systems akin to a subway system. This belief is pushed onto the Boring Company by municipal planners who believe this to be true. Planners are working every conceivable angle to get people to quit using private automobiles to move from one place to another. The Boring Company is being responsive to these erroneous assertions.
The second incorrect belief is that the Boring Company needs a municipality to pay for the construction of a tunnel project. This makes excellent sense and indeed, is the normal way business is done. If a municipality desires to have a roadway installed, then that municipality ought to pay to have a company build it.
Combined, these two false beliefs have pigeon holed the Boring Company management and engineers into what Musk has called a local maxima. A local maxima is where one considers the best solution to a problem and finds that the best solution is to create XYZ. The engineers get to work optimizing XYZ to be the best it can possibly be.
The problem arises when there is actually a better global solution than XYZ. The engineers are stuck building the best subway alternative they can possibly figure out to construct. But if a subway alternative is actually the wrong solution, then the engineers and management are stuck in a sub optimal solution. This is where the Boring Company is today.
OK, so if there is a better solution, what is it? The answer is, Toll Tunnels that the public can use with their private cars.
To understand this consider that we build a tunnel in some location. We could operate the tunnel as a subway by installing cars into the tunnel and allowing people to walk to the cars and take a ride along the path of the tunnel. We could alternatively arrange for the tunnel to be operated as a toll tunnel where people can drive their own cars into the tunnel and exit where they want. People who use the tunnel can pay a toll similarly to the people using the subway variant paying to get a ride from one location to another.
But there’s yet another variant. We could enable both scenarios at the same time. There could be a fleet of taxi cars to whisk pedestrians from one location to another and there could also be a toll gate for people with private cars to use the tunnels.
Preventing private citizens from using the tunnels eliminates an entire segment of revenue from the tunnel operation. This is the first error imposed upon the Boring Company by planners who don’t want people driving their private cars.
But the greater problem with these tunnels stems from an incorrect belief that the Boring Company needs to get municipalities to pay for the construction of the tunnels. This belief has killed most of the projects the Boring Company has considered to date.
It turns out, if one analyzes the expected cost and expected revenue that the Boring Company, or any toll road operator for that matter, can build these tunnels at zero cost to the municipalities involved.
The single greatest reason a municipality says “no” to building a project is the cost of the project. If the cost were $0.00, then the answer would far more often be, “yes”.
But if the cost of building a tunnel might be say $1 billion, how could a company build it for zero cost to the local municipality? The answer to this is simple. If the construction is going to return more than $1 billion then it could be offered for zero cost.
It turns out that the construction of a $1 billion project will return a net profit of around $25 billion. That is a 2,500% ROI. To be clear, the profit derives from the tolls collected and the profit on new vehicles sold to people living near the tunnel. But the toll road operator will be able to charge auto manufacturers a royalty for allowing their vehicles to use the tunnels.
Anyway, the profit margin is so huge that these numbers won’t make sense to any experienced financial person. It is unusual to have an ROI of 200%. And the higher the cost of a project the lower the ROI tends to be. So to have a 2,500% ROI on a $1 billion project is unheard of.
Source: Business case analysis
And yet there are thousands of projects that will have this huge of an ROI dotted around the globe. You know where these places are. They are everywhere that the worst stop and go traffic happens to exist worldwide.
If the Boring Company knew it could pay to build a $1 billion project and then earn income making the project worth $20 billion, it would take minutes to raise the $1 billion to cover the cost of building out the project. Municipalities that say “No, we can’t afford to pay to build that project” would instead be saying, “Yes, absolutely. If you’re going to pay to build it, we’ll give you ownership of the hole in the ground where you can build and operate your tunnel”.
Indeed, once the first projects are operational and the tunnel company has earned a huge net profit and the traffic on a surface freeway has been eliminated, there will be an immediate global demand for the construction of transportation tunnels. The key is to eliminate the cost to build the tunnel from being a barrier to project approval.
For now the Boring Company is stuck in a municipal planner imposed rut, trying to build a new form of subway. This path has a degree of merit. But it is not optimal by a long shot. It attracts the worst of projects from a business ROI perspective.
It may take years for the Boring Company to figure this out and to change course. But once this reality is understood, the global transportation systems will shift to a much better form where stop and go surface freeway traffic is a thing of the past. A future where high speed, 120MPH (193KPH) travel is ubiquitous worldwide.
Hopefully this makes sense now. Basically the financial situation is the following. If you spend $1 building a lemonade stand, I’ll hand you $25 to buy the stand from you. In other words:
A $1 billion cost tunnel will be worth $25 billion.
= 2,500% ROI
Who wouldn’t build as many of those as fast as possible? Once this economic incentive to build this new class of tunnel is fully understood we will witness explosive development of this new infrastructure. Transportation Tunnels, unknown today, will be globally ubiquitous tomorrow.
Built for free, everyone will want them. This is not unlike how railroads were given ownership of the land if they build a new railroad. In this case, the tunnel toll road operator will be given ownership of a hole in the dirt that no one is using in exchange for the operator building the tunnel to serve the local community.
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