Monday, 22 July 2013

Ignorance is no excuse; or is it bliss?

Political scientists and economists, often discuss Agency Theory which is the relationship between a principal and an agent. In this relationship the principal (Council) delegates (the Administration) to perform work. The theory deals with two problems:  the first is that the goals of both the principal and the agent are in conflict, and it can be difficult for the principal to verify the agent’s work. The second is the risk sharing issue, because the principal and the agent have different risk tolerances.

In light of several recent reports from Council dealing with costs overruns, it may be time for Calgarians to take a good look at the Agency Theory to explain the reasons for some if not all the costs overruns of Calgary's capital projects.

The latest of these audit reports address the costs of the West Leg LRT. While the line is in operation we still have additional costs not yet accounted for. In 2007, Council approved $700 for vehicles, construction design and land purchase. In 2008, due to several revisions to the original plan, Council approves and additional $121.4 million. Between 2009 and the 2012 opening of service Council adds an additional $389.7 million, including $142m for land. In 2010 the budget is reduced by $5 million but the cost of landscaping is yet to be included in 2013.

As you can see, it seems that this project never had a full analysis before approval. Council seemed to be eager to move on with the project despite the fact that there were many unknowns. One fact that is not very well known is that the former Mayor owned two properties on the proposed line.  Of course after the audit, Management accepts all the recommendations made to improve the Corporate Project Management Framework. What else could administration do, say No to the recommendations? Unfortunately for the taxpayers , as usual the horse had already bolted.

This is not the first time that projects at City Hall have suffered the same results and audit scolding. We had the debacle of the East Village, the widening of 16th Avenue, the Crowchild bike path, the problems with the Centre Street Bridge, the lack of a budget for a kitchen in the Telus Convention Centre, and of course the yet to be resolved costs of the Peace Bridge among other projects.

If it is not coincidence it must be a clear pattern of the agency theory problems; one either Council does not have a grasp of what administration is doing, or that the risk taking differences are so large that they cannot be reconciled. Either way, the costs of the consequences of bad management falls directly on the taxpayer who in the end always pays for the mistakes.

It seems that Council has the problem of fulfilling its promises to the electorate without looking clearly at the risks of undertaking such promises. The other issue is that administration is willing to low ball the costs, and minimize the risks to please their masters and get the project going, despite the fact that the full extent of the project costs may not be known at the time of approval. It may be in the interest of administration to do so because it seems that the high ranked executives may have their bonuses attached to performance and the completion of these projects.

More importantly for Ald. Pincott, a Chair of the audit committee, and some of his colleagues to claim ignorance or lack of information is inexcusable. Clearly due diligence and oversight were missing. Given these past problems and the often un-scrutinized bonuses at City Hall, Calgarians should demand that we move away from the current practices of project analysis, budget management and lack of proper accountability. Although P3s may not be the panacea for better management, it seems that it could well be time to consider more private/public partnerships with strong and verifiable contract caveats, including penalties for non-compliance and late delivery.

A departure from current practices is more imperative now than ever due to the amount of reconstruction that will be required as a result of the 2013 Flood. Calgarians cannot afford anymore blunders, or bad budgeting for future projects, notwithstanding whether they are essential or nice to have. The latter of course should be completely discarded and ignored.

Marcel Latouche

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