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

Tuesday, 2 July 2013

Water Management

A recent report issued by the Federation of Canadian Municipalities estimates that to replace Canada’s water, stormwater and wastewater infrastructure will cost approximately $80 billion or more.
In Canada, municipalities and the public at large have taken water for granted, and as a result over the years the management of water may have been left to be desired. Either there was no long term planning or it was lucrative to charge users for water and wastewater treatment and pocket the surpluses instead of re-investing in infrastructure as may have been the case for some cities.

It is reported that all around the country infrastructure is crumbling. That as a result of growth and climate change the burden of water management will increase. There is no doubt that this may be true, but to call it a deficit for some cities without exploring all the facts is disingenuous.

Denise Deveau of the Natonal Post , reported that Paul Fesko, manager, strategic services for water resources with the city of Calgary commented :
“The only way we could grow as a city was to be more efficient in the way we use water,”... “Those rivers aren’t getting any bigger and no extra money is coming in. We just have to keep getting better at reducing per capita demand.” 
In the case of Calgary, there is no doubt that we need better water management, but to have an informed debate, the public must be given the true facts. First and foremost for years Calgary refused to have water meters, because a former Alderman Sue Higgins always opposed it. Over the years the policy has changed and we now have meters in new homes and increasingly older houses. The question is whether it is a deficit or poor management?
Case in point; the City of Calgary  recently had to postponed the opening of a multi residence apartment because it was found that the existing sewer system would not be able to accommodate the increase usage in that area. Furthermore, policies in Calgary have pushed for increased development in the downtown area, which has old infrastructure which needs upgrading. Although there has been an aggressive infrastructure replacement program over the years, one must remember that in the eighties the water utility operations had an estimated deficit of $2 million per year.

The perennial mantra for more money does cut mustard in Calgary. In a report done for then Ald. Ric McIver –The Case for Controlling Utility Rates, It was found  that over the years, through a unique utility model and policies, the City had been siphoning out millions of dollars from the utilities by charging a 10% franchise fee and a 10% dividend payable by both water and wastewater utilities. These charges were in the range of $50 million per year. All the money was diverted to general revenues which were then spent on other services. I termed this policy ‘vicarious taxation’ because unlike some other cities, the price of utility services is not included in property taxes; hence the claim that Calgary has one of the lowest property taxes in Canada.

The policy was changed to cap the yearly payment to $25 million. Had the revenues been placed into a replacement reserve, millions could have been spent on both new infrastructure and maintenance costs, and rates would not have to be  increased to build new facilities.

For years the Institute for Public Sector Accountability has called for a different governance structure for Calgary’s utilities, one more in line with the structure used by Edmonton for Epcor, who serves 50 other communities. The model is not privatization, but an arm’s length operation which forces them to have better long term planning, and as a result produces a more efficient use of resources.

In Calgary, the diversion of revenues generated by the utilities to the general fund is one of the reasons why we may have an infrastructure deficit or a lack of money for maintenance. And a policy to increase density in old areas will definitely acerbate the problem.
Any Canadian City using the same utility model and policies as Calgary could find themselves in the same wanting situation. But is it lack of funds, or is it lack of management foresight? Should we look at privatization as a long term solution?

Marcel Latouche