Yesterday’s Honolulu Advertiser featured a front page story by Sean Hao that compared early economic projections of the Convention Center’s impact with its actual performance. The projections, which turned out to be wildly optimistic, were used to justify the high cost of building and operating the convention center. Most of the economic projects appear to have been off by a factor of 5, consistently predicting returns five times greater than what were achieved last year.
Hao quotes several people variously pointing fingers of blame at hotel executives and legislators.
Funny thing, though. The article fails to name the consultant paid to produce this section of the larger environmental impact statement, and in fact doesn’t even mention that it was produced by a consultant. The word “consultant” doesn’t appear in the story.
But if you’re assigning blame, isn’t the author of the inflated claims most culpable?
The convention center’s final environmental impact statement, cited as the source of the economic projections, can be found in the online library of the Office of Environmental Quality Control, in a folder containing Oahu projects from the 1990s (identified as “1995-07-OA-FEIS-CONVENTION-CENTER-I”).
The Final EIS contains a summary of the findings, and the full report is attached as Appendix H, “Economic and Fiscal Assessment” prepared by KPMG Peat Marwick LLC.
Individuals who worked on the report are not identified, and the transmittal letter is signed only with the name of the firm.
The KPMG transmittal letter, included in the appendix, contains a significant caveat.
Several of the key construction phase assumptions were provided by Nordic/PCL, the design/builder, and the Hawaii Convention Center authority (CCA), which is the State coordinating agency for the project. KPMB also obtained information from other State agencies, travel wholesalers, hotel operators, convention centers and experienced convention center planners and consultants….KPMG’s projects of the Center’s economic and fiscal impacts are generally based on the inputs provided by the above sources.
Are they saying, in essence, errors aren’t our fault? It’s not exactly clear.
Back in 2006, I suggested consultants should be held accountable and liable for these kinds of faulty projections. A reader responded with a lengthy comment, which is right on point:
I’m not sure that we, the people, are getting our money’s worth from consultant reports prepared under contract to the state.
Unfortunately, experts’ reports in Hawaii often reflect the views of the government agency contracting the report more than they should. If one could compare consultant’s preliminary reports with the final (which is usually impossible to do because the preliminary reports are not available for inspection), I suspect that there would be some surprises.
Why is that? Contracts contain (or used to contain) a clause to the effect that the last payment is withheld pending review of the product to make sure it is satisfactory. This makes sense if the contract is for some construction, but not if it is for information. It’s too easy to say, “your report doesn’t make our point, so it’s unsatisfactory.”
I have seen how the process works. The preliminary report doesn’t quite reflect the conclusions the agency would like it to, so it goes back to the consultants. The final report is different.
I’m convinced that Hawaii’s “high-tech boom,” for example, which keeps plenty of people employed in DBEDT and elsewhere, is a product in part of this ability to modify experts’ reports.
I don’t know if the same clauses are in the medical school contracts or were in contracts for the Convention Center or what influence may have been exerted on the supposedly neutral opinions because of those clauses, but if they are there, it could explain much.
And so it goes.
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Wasn’t the Advertiser a big booster for construction of the convention center? I didn’t read that in Hao’s story.
“Are they saying, in essence, errors aren’t our fault?”
yes. they are saying “don’t look at me. I blame that nebulous vague collection of un named others I dismissively gesture towards. Don’t ask for individual contacts though. I haven’t any. It’s the american way of business in this area; ‘ghost scapegoats’. (scapeghosts)”
Do you know; If you get the word
Con
and the word
Insult
and put them together,
You get
Consultant.
This story makes me wonder about the validity of rail ridership projections.
I believe all right thinking people in this state have ALWAYS “wondered” about the validity of ANY rail projections.
Perhaps you should reassess the word “blame” …Are you sure you understand either the process by which projections are produced or the use of projections?
Anybody who has prepared business plans or household budgets knows that they are dependent on the assumptions that are used in preparing them. There are a large number of knowns from the past and the present, but you are trying to figure out what the smart thing is to do in planning for the future, and you have to make assumptions about what conditions will be like in the future.
You make your best guess about what will be coming in and what will have to be spent, and go forward with what seems the best plan at that moment. If as you go along, the future turns out to be different than what you had planned than you have to make another projection and revise your plans.
Key assumptions for planning for the convention center would have been what the trend line was going to be for business convention travel internationally and domestically, and what share Oahu could capture of that business.
There is no way that analysts in the 1990s could have anticipated 9/11, the invasion of Iraq, and the Great Recession of 2008 among other events. It is no wonder that the ambitious trends that planners projected for Oahu convention growth in the 1990s were adversely impacted by those shocks to the system.
You probably could find that many other projections made at the same time also are not coming true twenty years later. It is not necessarily a matter for “blame;” it is just the nature of projections — they are a tool we use in the present to try to figure out what to do about the future and we need to be aware, in using them, that there is a definite risk that they will not come true and our plans need to be robust enough to withstand a significant shortfall.
“it is just the nature of projections” as it is with the nature of lying to get what you want. “Confuse them with verbosity and soon you can lead them by the nose.” This whole rotten game still stinks to high heaven. Another of the ways and means of a very corrupt local government/political system.
As to what the consultant meant when he said that certain assumptions were provided by the State, and other sources, they were not saying that any errors were not their fault.
KPMG was using standard boilerplate that they always put on their reports making it clear who had responsibility for what parts of their analysis. You would probably find similar boilerplate in market reports that they prepared for private clients at that time. Part of what they were paid for was to assemble information and assumptions from all the sources they mentioned and then prepare projections based on those assumptions. However that is what anybody does who prepares projections for major projects, regions, states or countries.
What you should be looking for in their report is a clear identification of what those assumptions were and a description of how the outputs (revenues, number of convention goers, employees) were generated from those assumptions.
If that was present in their report, than it should have been possible to do a “risk assessment” that would analyze how sensitive the outputs were to change in the assumptions.
And with our perfect 20/20 hindsight, it should be relatively easy to see what caused the shortfall in projections. Which of the assumptions proved not to be correct?
A key question would be whether the shortfall was due to the total international/domestic convention business not not expanding as much as was forecast, or because Hawaii’s share of the business did not match what was forecast?
As to the signature, that also is KGMB style. The firm as a whole stands behind the report. But the partner who had the responsibility for preparing the report was probably Malcom Tom, who headed KPMG’s Management Consulting practice in the 90s.
Ian,
I can’t believe you seriously mean hat people should be “held accountable and liable” for failing to predict the future correctly. Under this standard, we would have to quadruple the size of the court systems and still wait ten years for a trial.
If I were to read the report correctly, I think I would be hard pressed to find the ward “guaranteed” in there anywhere. Like any model, it’s garbage in, garbage out.
Kimo,
Please be specific about what the corrupt act was and who did it. Unless you have specific knowledge or evidence, you are just airing your paranoia. There are much more simple explanations for optomistic projections than “corruption”.
Optimistic people make optimistic assumptions which result in optomistic projections. All major decisions are done in a political context and the winners get to make the choices, including what assumptions should be used in planning.
You might want to consult Akerlof and Shiller’s recent book “Animal Spirits” which offer sound human psychology reasons why at some point, individuals, firms, cities, states, and countries jump on the bandwagon and make investments that rely as much on gut feeling as rational calculation, and why at other times, you can’t even get people to extend credit to borrowers with exemplary records.
It is sadly true that the role of animal spirits is not often recognized in our planning and decision making processes. If it was, there are remedies that can help temper irrational exuberance and guard against adverse outcomes. Sensitivity analysis can be used to assess the riskiness of these optimistic projections. Contingency planning can be done to prepare alternatives to provide mitigations and resiliency if projections fall drastically short of reality.
“Please be specific about what the corrupt act “the old saw goes; “ya can’t see the forest for the trees”… This whole system and most every manini element that comprises it is corrupt. No one sees it nor do they care. rather they wallow in the morass, celebrating it by spouting convoluted verbosity and legalese to obfuscate it, hoping the masses will be impressed with its complexity and leave it alone, allowing the players to continue the charade unimpeded.