Tuesday, 16 November 2010

Would BDCP staff accept "dots" instead of dollars in their paychecks?

For a process that makes all sorts of high-minded statements about being guided by science, the flim-flam that passes for economics in BDCP is stunning.  Here is the summary of the cost assessment in the BDCP options evaluation. (table E-2, page 13 of executive summary).  Options 3 and 4 include isolated conveyance, a peripheral canal/tunnel.  4 dots is the highest ranking, 3 dots second highest, 2 dots is third highest, and 1 dot is the lowest ranking.


I thought the canal/tunnel had high costs, but according to BDCP, it is the choice that minimizes costs.

How did they do it?  A look at the methods document is revealing.  Instead of adding up dollars, they used unique rating scales for each cost category, thereby converting dollars to “dots” with an arbitrary, subjective scale.  Here is an example of the scale they used (from page 2-59 of the assessment).

Construction Costs Rating Scale:
High Rating = cost less than $1 billion
Moderate Rating = cost likely $1 to 3 billion
Low Rating = cost likely $3 to 5 billion
Very Low Rating = cost likely greater than $5 billion

Reduced Downstream Water Treament Costs Rating Scale:
High = greater than $2 billion
Moderate = $1.5 to 2.0 billion
Low = $1.0 to 1.5 billion
Very Low = less than $1 billion

Apparantly, BDCP analysts reject the notion of assessing all costs with a consistent, uniform measure (dollars) that happens to be the same units that those costs will be paid in the real world.  They reject the idea of using the units utilized by all credible economic assessments and budget analyses.  Instead, it is better to slice the costs up into categories, apply arbitrary and inconsistent rating scales to each category, qualitatively assess the results, and then assign them a ranking. 

It reminds me of those Wall Street geniuses who divided up and rebundled all those sub-prime mortgages into securities that magically made all the risk go away.

What a bold scheme.  A cost category that is unfavorable to your preferred outcome can be assigned $2 billion between increments, whereas a category that is favorable to your preferred outcome can be arbitrarily assigned $0.5 billion per unit on the rating scale.  Even better, we can assign all costs exceeding an arbitrary threshold to the lowest/highest rating.  Thus, if the canal ends up costing more than $5 billion, say $8 billion, $13 billion, it doesn’t matter at all, since everything above $5 billion is in the same rating class.

I wonder if this clever financial innovation can be used when it is time to pay back the bonds issued to finance the BDCP.  If Wall Street bond buyers need a demonstration project to ensure it works, I recommend we use BDCP staff salaries as a pilot program, and issue paychecks in dots instead of dollars.  We can redeem the “dots” for 25 cents on the dollar, using the same arbitrary “exchange rate” used in the BDCP options analysis.  Also, mirroring the options evaluation, anyone earning more than a $100,000 per year will receive a fixed $25,000 payment since all salaries over the threshold are in the “very high” category and treated the same. 

There are even more issues with the cost analysis, from the relevant cost categories that were eliminated, the double counting of issues already assessed for other criteria (cost is one of only 17 criterion used), to the comparison of “economic impacts” with direct costs as if they are the same thing.

Yes, I know the options evaluation was done in 2007, but it remains a critically important assessment.  This is the analysis that was used to conclude isolated conveyance was the “most promising” option, a statement that BDCP participants had to accept to be included in the process.  It is the analysis that was used to justify the singular focus on isolated conveyance from the beginning.

If (when?) BDCP fails, it will most likely be due to excessive costs and the lack of a real financing plans.  Blame will be placed on the recession and other unknowns, but these assessments reveal that BDCP never treated costs or economics seriously from the beginning.

On second thought, I’ve got to try this with my wife.  “Honey, as you can see in Figure 3, for your new car, a cost over $20,000 gets a high cost rating, but for my new car the scale shows that it has to go over $80,000 to get rated as high cost.  Using this scientific scale, it is clearly optimum for us to get a BMW for me and a KIA for you.  You might think it’s unfair, but this is the same process used by the largest, and most complex habitat conservation plan in history that is committed to scientific rigor.  Trust me.”

About the Author

Ethan Jacob

Author & Editor

I am Ethan Jacob Executive Director of the Center for Business and Policy Research at the University of the Pacific, where I have a joint faculty appointment in the Eberhardt School of Business and the Public Policy Program in the McGeorge School of Law..

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