Thursday, 9 February 2012

The market for dodgy

If a consulting firm is asked to produce a dodgy report, and delivers what the client wants, where's the harm? Bill Kaye-Blake asked that last week.

Crucial figures for the $68.5 million Claudelands Events Centre were influenced by city council staff who increased the number of events and inflated the revenue expected in the first three years of operation.

A $30,000 peer review of the original "overly optimistic" 2009 Claudelands business case has revealed Hamilton City Council staff told the original author of the business case, Campbell Consulting, to increase the already optimistic number of events in the business plan by up to 50 per cent. [Emphasis added]

Staff also used higher revenue projections than those provided in the business case in the council's 10-year budget - inflating the figures in the first three years by between 6 and 11 per cent. But at the same time they lowered the operating costs by 6 to 9 per cent, which made the budgets look more attractive.

Hamilton mayor Julie Hardaker said she was waiting for chief executive Barry Harris to complete his investigation into what happened and refused to speculate on whether the council had been deliberately deceived. Council staff had been unable to explain the variation.
So instead of turning a $1.1 million surplus, Claudelands returned a $1.5 million deficit.

You can argue that Campbell Consulting is entirely blameless. They were asked by Council to provide revenue forecasts under a few different scenarios and did so to the best of their ability. Or, you can argue that they were party to a fraud on predictably gullible Hamilton voters undertaken by the Claudelands's backers within Council; they either knew or ought to have known that the revised figures requested by the funders were hopelessly unrealistic and only really had evil applications.

Voters seem to love Councils putting up big stadiums and events centres - they want to believe the lie that the venue will either turn a profit directly or will stimulate sufficient indirect economic activity to cover its costs in the grand scheme of things. If Campbell hadn't provided the case, somebody else likely would have. There's a demand for dodgy ultimately because voters like it, at least in the short run. I still think we ought heap scorn on those supplying that demand to increase the reservation price for producing dodgy reports. But in a world in which voters have no individual incentive to sort out which firms specialize in dodgy and which ones turn down RFPs where the funders make pretty clear what kind of result they want, it probably doesn't do much to solve things.

HT: Fair Play and Forward Passes, where Sam Richardson writes:
It is a sorry state of affairs, but by no means an isolated event. Hamilton ratepayers don't have to look too far to see a similar story with the V8 supercar race a prominent example. Unfortunately the same story has been repeated all around the world - overstated measures of benefit, understated measures of cost and a projected bottom line that is much more palatable than what actually eventuates.
V8 Supercar Races, Events Centres, Stadiums, Monorails, Escalators to Nowhere...



12 comments:

  1. Great post, Eric - this cuts to the chase as far as the rationale behind these types of studies. Kevin Delaney and Rick Eckstein (Public Dollars, Private Stadiums) refer to these types of studies as fantasy documents. These documents tend to be most effective in converting the marginal voters from the "no" camp to the "yes" camp. Ethically defendable practice? Hmm.

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    1. I generally reckon it a fraud on the public.

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  2. This might also take your fancy - Eckstein and Delaney published a piece from their book as a journal article "The Devil is in the Detail ..."(http://crs.sagepub.com/content/29/2/189.refs). Here they discuss ways in which pro-stadia and prod-subsidy advocates consider independent academics as 'quacks' and rubbish the studies they do.

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  3. “If a consulting firm is asked to produce a dodgy report, and delivers what the client wants, where's the harm?”

    We could rephrase that to something like:

    “If an auditing firm is asked to produce a dodgy report, and delivers what [Feltex/National Finance/Enron] wants, where's the harm?”

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    1. Close, dragonfly. But if an auditor's scope of investigation is limited by the client, the report will clearly state the audit's limitations. It's just that private investors have really strong incentive to check the audit's scope and make sure that it was up to the necessary task; nobody except wierdo academics check whether the baseline assumptions on government-commissioned consulting reports on the costs or benefits of X make any sense, voters don't trust academics, do like the idea of stadiums, and have zero incentive to get anything right where the marginal effect of a vote is nil.

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    2. “… if an auditor's scope of investigation is limited by the client, the report will clearly state the audit's limitations.”

      That will be true for an honest auditor, just as it will be for an honest consultant. But my comparison is between the dishonest auditor who manipulates numbers and ignores or conceals relevant facts to suit its client, and the dishonest consultant who does the same.

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    3. I haven't read the consulting report here at issue, but I have no reason to expect that they wouldn't have said something like "The client requested projections based on blah de blah starting assumptions; these projections hold for those assumptions..."

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  4. I have a different target of blame. The developers of video games - Sim City being my special hate. In said game additional of stadiums is critical to keeping your populace happy, they're seen as a legitimate planning item that govt simply must delivery.

    More broadly (and as I saw somewhere - perhaps here?) the whole concept of a video game whose basic premise is that top down planning works - and in fact a game you can only win by believing in top down planning - is flawed. Sure, a game in which you set the regulatory framework and then stood back and watched would be kinda boring, but it would be more true to life.

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    1. @PaulL: Agreed!! Check my post from 2009 here: http://offsettingbehaviour.blogspot.co.nz/2009/08/gaming-socialist-calculation-debate.html

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  5. Market opportunity for a database recording these consultancy reports/authors and then matching with outcomes 1,2,5,10yrs later?

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    1. That works where the person paying the consultant cares about getting an accurate result. But where voters are the target audience and they don't pay much attention to those kinds of accuracy measures....

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  6. Thinking back to the issue of 'is it a problem that there is a market for dodgy figures which some consultants are happy to provide?'... I'm stretching for an analogy here, but it's as though, in voting, voters are giving 'power of attorney' to their representatives. If I am left mentally-impaired after a horrible accident, I expect my proxy to act in my best interests. If they don't they are not fulfilling their legal obligation. So on that model, yes there is a problem if consultants and councillors stitch up a deal (even if voters are uninformed or apathetic).

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