While researching dams and risk contingency I came across an article in the Journal of the American Planning Association (vol. 68, no. 3, Summer 2002, pp. 279-295) called “Underestimating Costs in Public Works Projects: Error or Lie?” It details the results of a study looking at 258 transport projects across 20 nations and 5 continents suggesting that cost underestimation appears to be a global phenomenon. The study reveals that;
Four kinds of explanation of cost underestimation are examined: technical, economic, psychological, and political. Underestimation cannot be explained by error and is best explained by strategic misrepresentation, i.e., lying. The policy implications are clear: In debates and decision making on whether important transportation infrastructure should be built, those legislators, administrators, investors, media representatives, and members of the public who value honest numbers should not trust the cost estimates and cost-benefit analyses produced by project promoters and their analysts
Strategic misrepresentation is not only a transport related phenomenon and the authors also reference The Economist (“Under water, over budget,” 1989);
Of course the numbers add up
…anyone persuaded in this way to buy shares in Eurotunnel in the belief that the cost estimate was the mean of possible outcomes was, in effect, deceived. The cost estimate of the prospectus was a best possible outcome, and the deception consisted in making investors believe in the highly unlikely assumption–disproved in one major construction project after another–that everything would go according to plan, with no delays; no changes in safety and environmental performance specifications; no management problems; no problems with contractual arrangements, new technologies, or geology; no major conflicts; no political promises not kept; etc. The assumptions were, in other words, those of an ideal world.
We have already seen the Waimea Community Dam project budget blowout from $79-$82 million to in excess of $100 million. It would appear that a $26 million blowout before the project even starts, despite being told “we are 95% certain it will come in on or under budget,” would definitely be a contender for a case of strategic misrepresentation.
The case is all the stronger when considering that a number of questions had been asked about the robustness of the budget given the current contractor environment and escalating costs and also the extremely underwhelming figure given to clear and prepare the reservoir. To put the figures in context $1.2 Million was allocated to cover the costs of clearing and stabilising the 70-hectare lake reservoir in challenging terrain compared to (for example) $3 million to widen Bateup road, or almost $5.5 Million to upgrade Borck Creek (different in scope but also significantly different in scale).
The case for continued strategic misrepresentation is no less moving forward given the extreme pressure to reduce the budget to an “affordable” amount as the Council elects whether or not to embark on the Waimea Dam journey. A cynic might also reiterate that a lower quote price works in favour of those partners who’s spend is capped once a price is agreed upon and construction blowouts fall on other parties.
Local chartered accountant Ian MacLennan isn’t convinced that the true costs of the Waimea Dam have been revealed. His own research indicates that the true cost of the dam could be as high as $400 million by the time it is paid off.
It was “alarming to me that at no stage has there been open and honest financial modelling of either project risk or interest rate risk to underpin the discussions, decisions and commercial arrangements”.
In the absence of such a financial model from the council “I have prepared one as I was interested to properly understand … the true commitment TDC was making for ratepayers”.
MacLennan said he had taken publicly available information from the WIL disclosures for its capital raising and disclosures in the council’s Long Term Plan 2018-28 consultation documents, and calculated the GST-inclusive cash commitment required “as most of us ratepayers cannot get that back”.
Three build and operating cost scenarios, three interest rate scenarios and three loan-term scenarios of 25, 30 and 40 years, were run.
MacLennan made that 19-page financial model available to the council.
He said in light of a recent revelation of a $26m budget blowout, the minimum initial dam project cost would be at least $114m but could go “well beyond” $131m in his upper net project cost scenario.
MacLennan is also a believer that irrigators are receiving a subsidy by the urban water user and general ratepayer. “He estimated irrigators would gain at least 80 per cent of the benefit from the proposed dam, earmarked for the Lee Valley, but would pay $136m of the $300m-$400m project life-cycle costs.”
If the dam continues to be built under the current financial model McLennan believes there will be a significant transfer of wealth on the Waimea plans – perhaps of the magnitude not seen since the Maori first signed a deal with the early settlers.
A further explanation of MacLennan’s model can be downloaded here along with the figures that he produced downloadable here.
Council staff are having the figures independently reviewed for comment at the council meeting on the 28th of August.
An MPI study revealed a different story to that which the Mayor and staff endorse:
The Waimea Plains is one of New Zealand’s major horticulture areas and is highly reliant on irrigation. Irrigators draw water from a complex integrated surface water and groundwater systems. Freshwater resources in the Plains area are over-allocated in terms of quantity, 64% above the allocation limit. Water users face significant seasonal restrictions due to natural fluctuations in river flow and low groundwater storage, that is, water in the Plains is unreliable.
The proposed Waimea Community Dam (the dam) would address over-allocation and unreliability and would allow expansion of current irrigated areas. However, if the dam does not proceed, the Tasman District Council would have to phase out over-allocation by cutting back on water permits or making other changes to the management regime.
Strategic misrepresentation appears to be a significant concern across the boundary in Nelson City as well with projects going well over budget and work not being completed, meanwhile, governance is kept in the dark.
Nelson City councillor Matt Lawrey had the following comment to make on the Waimea Dam “My message to members of the Tasman District Council is that it isn’t just their hairstyles that have changed since the ’70s; lots of things have changed including the concept that you can save a river by damming it, the idea that it’s acceptable to socialise costs and privatise profits, and the notion that growth is justifiable at any cost.”
Lawrey’s not the only Nelson City Councillor who is not convinced about the Waimea Community Dam process, his colleague Paul Matheson said the process was “one of the most appallingly managed projects [he had] ever experienced”. “The water has become so muddied that it’s like a porridge that’s been sitting out for a while.”
Have we been sold a line of strategic misrepresentation?
I suppose I will have to visit the local barber to get the low down.
Photo Credit BRADEN FASTIER/STUFF