Sunday, December 27, 2009

#yegcc: consultant hiring "completely mismanaged" - auditor

Amongst the various gems in the report by Edmonton city auditor David Wiun are the revelations that "consultants are being hired to check with other consultants, and thousands of dollars has been spent on contracts that haven't been completed" and "documents show 25% of consulting contracts cost more than what was agreed upon. And almost 60% of the time, the information submitted was deemed insufficient." Moreover, "contracts were awarded even though no business plan was drawn up detailing what the administration wanted from the consultant, and with several contracts, no final report was ever delivered."

Now one would think that if one isn't delivering a final report, one would lose the city's business to competing consultants (never mind in-house staff, who are even less expensive), but the people in this racket apparently have little to worry about since "only 12% of consulting engagements in [a] sample were acquired through open tender, 68% were awarded through the sole-source process".

Mayor Stephen Mandel explains that city government has grown so much under his watch that city council has to farm out its responsibilities to unelected contractors: "City council is doing more now than we ever have in the past... I think when I first became mayor, we were spending $400 million in capital and now it's up to $1.7 billion last year..."

I'd make two observations here. One, whatever one's opinion of increasing government spending, surely we can agree that the spending that is the most inefficient and vulnerable to abuse should be increased at the slowest rate. Yet consultant spending has soared 30% annually since 2000 to $92 million in 2008. To put $92M into perspective, the Salvation Army's Christmas Kettle fundraising goal is less than half a million, the Salvation Army having raised its goal by one-twentieth of a million this year in order to keep up with a 21% increase in demand for its services.

Two, perhaps city council would not have to hire so many expensive consultants without documentation, competitive bidding, or even a final report if the people in the council chair had more of a relevant skill set themselves. If one truly can't let city management make the decision, or approve the hiring of the people the city needs to make such decisions, then how about doing more analysis of one's own? One of the many councilors who seem to have no comment about the auditor's report relays information that was provided to him by the city with respect to the cost estimates for expanding the LRT west that cries out for NPV analysis. A Net Present Value calculation is taught in every 1st year MBA program and if the city were run like a corporation there would be no chance that competing billion dollar investments like this would be considered apart from a NPV analysis. Before anyone suggests that Brian Dell is displaying his snobbery again I remind readers of the $92 million in taxpayer resources that were spent on consultants do this sort of analysis and the fact city council does not seem to understand what they are receiving from the consultants (why is it left to the auditor to note the lack of real work done? why haven't councilors expressed dissatisfaction with what they have been receiving as opposed to just a professional expert like the auditor?) This isn't to say that the current council is completely out of its depth (it may compare favourably to previous councils which have included tax evaders, thieves, drunks and wife batterers), but rather to suggest that a gap remains between the typical background of an Edmonton city councilor and the private sector manager of a corporation with comparable revenues.

How can council approve a $3 billion+ LRT expansion decision, which will require double digit property tax increases even with the province and Ottawa carrying half the cost (as admitted by Mayor Mandel on Dec 15), without providing us with estimates of the numerator to a NPV analysis? That is to say, the revenue expected to be generated from the various route choices. This is not just a matter of accountability but demonstrating to the province and the feds that city council knows what it is doing. Besides the fact that operating the LRT along 87 avenue to West Ed is 25% less than Stony Plain Road by the city's own analysis, and that not going the 87 avenue route will mean the NAIT trains will require their own permanent turnaround facility south of Health Sciences, and the fact a whole new sort of "low level" train is to be used for Stony Plain Road, how many of the increasing number of residents living west of West Edmonton Mall are going to be inclined to take trams along Stony Plain Road to downtown relative to the faster 87 ave route? The fact that ETS Planning is proposing just 2-car trains here and ETS wants 5 car trains to the U of A from the south should speak volumes on this point. It is well established that the majority of transit users are commuters, and the idea here is to get cars off the road, no?

At issue here is the added risk of cost over-runs and lower with a new "low floor" system relative to building out the existing system. With respect to revenues, the European experience with trams is not analogous because many more of them do not have a car option to begin with, and the "potential development" of Stony Plain Road's urban stops should be considered in the context where development around the urban stops of Stadium, Coliseum, and Belvedere in Edmonton's northeast has been scarcely comparable to around the more suburban final stop at Clareview. Even the New York Times, the voice of the liberal US northeast, notes that costs for Denver's FasTracks project have soared from US$4.7 billion to nearly US$7 billion since approval in 2004 such that residents are being asked to support another tax hike while the project is mostly still just on the drawing board.

The real head scratcher for me is how this 3 comma expenditure on transit expansion can make sense when the communities themselves don't want it. Both west end councilors (Karen Leibovici and Linda Sloan) voted against the plan that included the Stony Plain Road expansion. This is the route that is supposed to keep west enders and residents from other areas of the city attracted to west end services! How is increased private investment along Stony Plain Road likely when existing businesses don't want this? If 87 ave residents don't want it either than why spend a billion plus to take rail to the west at all? I lived in Ottawa for years and the level of ridership is far higher than Edmonton's, despite the fact its rail network is negligible. If the private sector is skeptical that Stony Plain Rd can be turned into the northwest's version of pedestrian-oriented Whyte Avenue that ought to be a red flag. Dare I add that Whyte became more upscale over the last couple decades without a tram? 87 avenue has long been perceived as the logical route but in recent months Mayor Mandel seems to have concluded that the U of A, the biggest jewel in the city's crown, shouldn't be the anchor tenant of the transit system.

Lest anyone think I am public transit hostile, I have not owned my own vehicle for almost 8 years now. A possible difference between me and a lot of environmentalists is that I am more interested in my own responsibility for emissions and road congestion than in telling others what to do. I wonder if the councilors who approve of a tram stopping every few metres have any idea how the biggest headache for people who depend on public transport on a day to day basis is the time involved.

The overriding problem with Edmonton city council is, as is usually the case with left-leaning politicians, an over-focus on what they want to do as opposed to a focus on how to increase the resources that enable them to do what they want to do. Thinking about all grand things to be done instead of how to pay for them, in other words. The second question is what good politicians concentrate on, in my view, because the first question inevitably gets reduced into how much to steal from Peter to pay Paul. Compare the typical town and its council from the Middle Ages with 21st century cities; the difference between then and now is economic innovation and growth, not coming up with schemes that increased taxes on the businesspeople and merchants in town.

Lowe's, the world's second biggest home improvement retailer, applied in January for a permit to construct and operate a warehouse store in South Edmonton Common, but because Edmonton dragged the approval process out so long relative to Calgary, Calgary will get not one but three stores (along with the corresponding jobs and tax revenue) before Edmonton sees a store. "We believe in the economy of Calgary," said Lowe's Canada president. "As retailers of this calibre choose Calgary as their entry point for Western Canada, it tells the market Calgary continues to be the go-to market," an analyst observed. While business might not have any confidence in #yegcc, consultants enjoy council's full faith and confidence!

If this post weren't so lengthy already, I would call attention to Don Cayo's Vancouver Sun columns on municipal taxation, the sort of the thing that ought to appear in the Edmonton media and occur to #yegcc but does not. One problem at a time!


Anonymous said...

Wrong to assume all consultants do is provide advice. That may be all MBAs do, but the Auditor's report lumps in all contractors, including people who DO the work i.e. construction engineers, architects, public consultation facilitators, etc. The end result is a completed road, bridge work, etc, and the best measure is on time and on budget, rather than a report at the end. Your tirade starts complaining about sloppy consulting (fair comment) but you reveal you're mor concerned with the LRT routes - and seem to want revenue potential as part of the justification. Do you do the same for health care analysis?

Brian Dell said...

Some of the consulting associated with the 87 ave route may have been been done by engineers but the end result is apparently not going to be a completed public work. Rather, it is all wasted money because the city is not going to go down that road. If the ultimate reason for not going in this direction is non-technical, why was any technical money spent exploring the option?

Obviously some money has to be "wasted" in the sense that options are explored that will not be pursued. But this could be done in a fashion that is more hard-headed and less what I'd call aspirational. Otherwise resources are going to be squandered chasing one scheme after another. Are we going to spend a million or more on ALL of bringing the World Banjo Championships, the Northwestern Esoteric Art Festival, the Summer Olympics, and a new NHL arena to the city? I would define the city's "core" business more broadly than, say, Mike Nickel would but much of council does not seem to recognize anything as being "core". I did go on too much of a tirade but the consulting costs that offended the auditor are arguably just a symptom of a larger problem.

The LRT going down Stony Plain Road is just an example of an idea that seems to have come almost out of nowhere in the last couple of years, apparently largely based on "wouldn't it be great" thinking about developing the Stony Plain Road area when it was not clear what was so broke about the 87 ave route that a new scheme was needed.

Public transit investment is going to be negative NPV, meaning on the basis of cash return it is going to cost the city. I don't dispute that, and while private firms should never undertake negative NPV projects, the metric for public entities is different, as there are considerations like the environment involved. But that doesn't mean that looking at the project like an investment is not the way to approach it.

All else equal, healthcare spending that can be construed as investment as opposed to current consumption is preferable, and just because only a small component of today's healthcare spending may benefit future generations that does not mean that we should not be looking for opportunities to maximize spending of that sort where possible.