Edward de Bono wrote much. His book, Simplicity, I think is very appropriate to apply to asset management and KPI decision making. The part that resonated with me is the difference between simple and simplistic.
In Infrastructure decision making a simple model is a great thing, a simplistic model is a destructive and dangerous thing. This is true in all fields, engineering, economic and social included. Simplistic by definition is overly simple. Unfortunately many of out decision makers have a simplistic understanding of both the English language and the role of infrastructure. You will hear many people calling for a more simplistic solution or approach. They mean “simple”, but one doubts whether the inability to differentiate between simplistic and simple translates into the making of sound decisions.
Regardless, satisfaction surveys, mandated bureaucratic KPIs, single-digit comparisons to like organisations and other such endeavors are simplistic management techniques. They have been over-simplified and are as a consequence of no value.
Simplicity before understanding is simplistic; simplicity after understanding is simple.
– Edward De Bono
Simplistic decisions are tolerated and often demanded by our populations. I believe this is because the general public has little understanding of the complexities of the modern world, and no desire to embrace that understanding. While the situations and decisions can be presented simply by our leaders, there is no political advantage in straying from binary arguments, right and wrong, black and white. The issue here is to help people understand that complex arguments about infrastructure can be presented simply, and be debated on their merits. With this understanding, the people can call for rational debate, not simplistic decision making. As professionals in our fields we can assist by presenting our work as simply as possible and resisting pressure to make our work simplistic.
Question for the day:
What techniques do you use, or know of, that help you to determine whether your reasoning is ‘simple’ or ‘simplistic’?
A hole in your budget needn’t be the end of the road!
In the previous post we looked at a city council’s response to a sudden $60m hole in its budget – and the consequent media storm. Could this have been treated differently?
Put yourself in the City Council’s situation. Faced with a sudden $60m hole in your budget through external circumstances, what are your options?
- You can cut back on services (but these are services that the community want and that you have already prioritised into your budget)
- You can borrow (and borrowing might be a short term option to maintain service continuation but only if there were expectations that the external cut would be reversed in the near future or that other revenue increases could be anticipated)
- OR, and this is the option that the City adopted, you could withdraw the funds from your fully owned subsidiary – in this case BC Hydro – in exchange for a city asset portfolio (city street lighting).
BC Hydro now needs to make a return on the assets it has bought and so it engages in a forward contract to maintain, operate and supply street lighting services to the council.
Bear in mind, that any profit made by BC Hydro reverts to its shareholder – the City Council. If the costs of the contract are greater than the costs that would have been incurred by the City if it had retained ownership of the assets, then this will be reflected in a larger profit made by BC Hydro. Conversely if the contract costs are less than the City would have otherwise paid, it saves on ratepayer funds but (unless BC Hydro can run the streetlighting more cost effectively) it will receive a lower return on its BC Hydro shareholder funds.
OK, so these are the financial facts. The transaction enables the City to continue providing all the services that its ratepayers want and expect in the face of a sudden hole in its budget caused by the withdrawal of provincial funding. Out of one pocket into another but the same city coat! This being the case, why did the question of how much that was paid for the contract become the major story?
I would suggest that there are a number of lessons to be learnt here:
- The City could have sold this as a smart solution to the problem of continuing needed community service in the face of sudden withdrawal of funding by the Provincial Government. It could have promoted the idea of BC Hydro being in a better position to cost effectively manage street lighting given its expertise in lighting and power generally. It could have used this problem to market the value of its ownership of BC Hydro. In other words, on a PR basis, it could have got out in front of the story. But it didn’t. Instead it hid the contract details for 5 years before eventually acceding to Freedom of Information requests. Whatever the facts of the case, this action itself makes the council guilty in the eyes of the public.
- The public generally have very little understanding of the ratio of ongoing operations and maintenance costs to the initial capital costs. If we don’t tell them – in ways that they can understand – their natural reaction is to see the annual payments in the light of (exhorbitant) interest payments.
- The time to generate this greater understanding is BEFORE you need to use it to substantiate council decisions
- In all likelihood, the councillors (and perhaps senior staff members) did not understand the full import of operations and maintenance costs either. Their reaction in hiding the costs from public view suggests that they did not believe they were defencible.
Lesson 1 may not apply to you now, but Lessons 2-4 will always apply.
Comment: What are you doing to ensure this level of understanding of O&M is generated in your council and staff (or in your senior management and board)
Managing the media is a fine balancing act
Without buying into any nonsense about ‘fake’ news, we do know that the media has a hard time coming to grips with infrastructure issues and presenting them clearly to their readers. This is true, even when the journalists are not seeking the sensational.
Take the following example. In 2005, the City of Toronto faced a sudden $60M hole in its budget when the Province reduced its funding at short notice. It made a deal with Toronto Hydro, a wholly owned trading enterprise of the City, to buy its street lights for $60 M and lease them back to the City. The contract details, when released, showed that the City had agreed to pay $13.6 M a year to lease back the lights. The Press had field day and the Council went on the defensive. (Additional fact: The City tried to block the release of the contract and it took 5 years for a Freedom of Information request to produce the information requested.)
The news story about Toronto City Council selling off its street lights and leasing them back put the City Councillors on the back foot, fending off public criticism of the “rip-off”. On the face of it, you can see why the public were angry when the figures were stated baldly as selling off for $60M and paying close to $420M over the next 30 years to lease them back.
So today, two questions
- Was this a fair comparison? Are these figures really comparable? Anticipating media reaction, what extra information would you have required, what questions would you have asked – and potentially discussed in a media release? How would you have handled this situation? What would you have advised the Toronto City Council to do?
- Or, What have you learned from media storms like this that you could pass on to others, ways of ensuring readers could potentially get a better understanding of what is really happening?
Should I jump?
In 1993 a very successful American bond trader gathered together a few of his disciples and a handful of super-economists and set up a new hedge fund company that promised to be different from anything that had gone before. The new company apparently genuinely believed that their ingenious computer models would allow them to bet on the future with near mathematical certainty. Because their team had some high powered players – including two who were to be future Nobel Prize winners – investors believed them. The company portfolio grew quickly to $100 billion when a default in Russia set in train a sequence of events that the models had not anticipated. This placed the whole financial system at risk and the Federal Reserve quickly called in Wall Street’s leading bankers to underwrite a bailout. Roger Lowenstein in “When Genius Failed” (Fourth Estate. 2002) tells the whole fascinating story.
How could anybody – let alone the super intellects in that hedge fund company – possibly believe that a computer model, no matter how finely tuned, could predict ‘with near mathematical certainty’ future stock markets (which, after all, reflect the volatility that Keynes referred to as ‘animal spirits’). How could investors clever enough to have amassed the funds to invest, believe them!
Pondering these questions, I thought of the managers I have met who so passionately believe in their models that they brook no doubt, no exploration of better ways, no questioning – and I thought of the problems that this causes. Possibly it starts because to get financial backing in the first place, either from your organisation or from the market, you need to assume and project confidence.
However, confidence is one thing, blind confidence completely another.
So my question for you today is: How do we transit from the confidence we need to be persuasive before the project is adopted, to the level of confidence we need, after the project is adopted, that allows some room for doubt enabling resilience when the world changes (as it certainly will)?
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