Maybe Master’s Rule is not ok?

This article takes a critical look at the Consultant’s report, the financial analysis, and the conclusions reached as MidCoast Council considers relocating their three amalgamated councils into the cavern of the former Master’s building in Taree.  

 

MCC & Master’s: A critical look at the Relocation Report

By Mike Deignan

Many ratepayers question the hasty decision by MidCoast Council to purchase the Master’s site, to centralise offices. Now, a Consultant’s report has arrived, has been accepted by MCC, and endorsed by Councillors at a meeting in February 2018. Will the contents of this report add more fury to heated criticism of Councils’ determination to move to the Master’s site? Councillors Peter Epov and David Keegan did vote against the proposal and Cr Peter Epov called for a Peer Review of the Consultant’s Reports, but that was rejected.

The Consultants

Savills,’ the consultants, gave Councillors, prior to the Council meeting on 20 December 2017, details of their report, which is now on the MidCoast Council website. (Refer to Council Meeting 14 February, 2018, “Attachment A, Late Report 2 – Office Relocation Investigation, Biripi Way, Taree”).

The report scarcely mentions the name ‘Master’s’, and evaluates two options: a)Single Site Option, which is the Master’s site and b) the Campus option, being the retention of all four existing sites (MCC Forster and Taree and MidCoast Water also Forster and Taree),  bringing like-departments together. The Single Site option is the consolidation of all four within the Master’s site. Gloucester Council, although part of the amalgamation, scarcely receives a mention, other than saying, ‘no change’.

MCC Culture

Most readers would expect public sector staff, employed on an optional 9-day fortnight, generous leave per year, job security from a State Government freeze on loss-of-position, would be happy, content and efficient in their secured positions. Not so, according to MCC,  which carried out a second workplace survey in August 2017, and found a non-constructive workplace culture, with the primary style being ‘Passive / Defensive, followed by Aggressive / Defensive, with both styles being least value-adding for customers, stakeholders and staff at MCC’.

You may wonder what this has to do with the mooted relocation to Master’s. Well, according to MCC and Savills, they are inextricably linked. The report assumes that workplace cost savings from MCC’s culture transformation program (CTP), coupled with a move to the Master’s site, will be more than double the amount achieved without any move. The viability of the Master’s option rests primarily upon the success of the MCC culture program. The financial analysis and conclusions reached are so dependent on CTP success, that the word ‘culture’ is mentioned 133 times in the report.

In briefing Savills, the MCC advised that the top two objectives  were ‘Improved work efficiencies and culture’, followed by ‘Net financial benefit, based on annual operating costs, and forecast asset maintenance’.

Culture Conflict

In business circles, it is well known that many mergers and acquisitions fail because of Management’s failure to successfully bring together  two or more cultures. There may be other negative factors, but this is often the prime factor. It requires strong, determined management, backed by a well deployed program, to arrest the malady. Savills’ cites Lion Nathan as a shining example, which they say achieved impressive financial performance. The report fails to give evidence of success in the public sector (government and councils) specifically, perhaps as there is none. Google searches are fruitless. The report correctly states that the failure rate with these culture transformation programs is high, and that the heavily negative cultural style at MCC ‘are the most prevalent styles across the Local Government sector’. Business consultants admit that failure rates with CTP’s are as high as 90%, over both private and public sectors. It would appear that MCC has a serious challenge, with high risk of failure, to defy the odds and achieve success with their CTP. The report does caution: ‘It takes time to change the culture of an organisation; case studies suggest 8 to 10 years turnarounds are normal.’ (Maybe now that the controversial GM, Mr Handford, has resigned, everybody may feel a little happier? Ten years feeling miserable in your job seems a bit tough. Some unemployed might think a job on Council to be on a par with winning Lotto. Ed.)

MCC took its first CTP workplace survey in 2016, and again in 2017, recording an overall 13% decline in constructive styles. The culture elements measured were: Achievement, Self-actualising, Humanistic-encouraging and Affiliative. The author of this article admits to bewilderment with the foregoing elements and their compatibility with the CTP culture factors used in the report’s financial analysis: staff turnover, rework hours lost per day, time-wasted, and stress. Potential saving is calculated by multiplying an industry-wide rating (not a MCC survey percentage!) to the 2016/2017 annual payroll cost to arrive at the potential cost savings.

The report conclusions reached from the latest MCC survey are revealing. ‘The comparative culture results from 2016 to 2017 support the proposal to move to a centralised head office. This is a critical factor in minimising the risk of an ongoing defensive workplace culture, and the subsequent impact on productivity and effectiveness of the workforce.’ There is absolutely no evidence that this statement is true. A ratepayer may ask, if the workplace culture was rectified, would the need to move to Master’s site disappear?

The report also states: ‘Efforts to improve culture will continue to be hampered by the existing dispersed operations. A move to a centralised location is seen as one of the most significant actions that can be undertaken to facilitate and support the desired culture shift’. There is no evidence in support of this statement either. Why has MCC inextricably linked the success of the CTP program with the Master’s site option? Ratepayers and Councillors deserve an answer.

It would be informative to do a CTP survey now, and present the results. No doubt, it would show a further  decline. Senior management changes, and other disruptive factors, seriously undermine and derail progress in culture-change programs. For MCC, this does not bode well for the potential success of their CTP, and significantly undermines the credibility of the hypothetical CTP figures used in the report’s financial analysis.

Report Key Figures

For both the Master’s option and the Campus option, the financial analysis includes all relevant costs, proceeds of sale of existing properties, operating expenses, detailed fit-out costs, refurbishment costs, operational expenses, gains from operational efficiencies and estimated residual values at the end of the 20-year analysis period

The report shows that $38,114,369 would be achieved in CTP savings for the Campus option, and $107,072,491 for the Master’s site option, over the analysis period. These figures are based on the assumption that the Master’s site option, in CTP terms, will deliver 2.8 times that of the Campus option. Combining all costs and revenues just for the Master’s option, the report concludes ‘the cost benefit analysis favours the Single Site option, the baseline assessment returning an NPV of $86.66m and a benefit/cost ratio of 12.5 relative to the Campus option’, over the analysis period. The CTP figures in the report dwarf, and stand in stark contrast to, the other expenditure, costs and returns in the analysis.

Terms: NPV is net present value: To use an example, a loan amount is the net present value of all repayments over the life of the loan. Cost benefit ratio: the return from an investment divided by the cost / investment amount. Baseline assessment is the net present value for all costs, savings and returns for the Master’s option.

Report Seriously Flawed

The financial analysis in Savills’ report is flawed, and heavily biased in favour of the Master’s option. The figures extolling the financial benefits from the CTP are based on false assumptions, are incorrect and lack credibility. It is interesting to note that there is absolutely no need to include CTP savings in the analysis, if CTP were deemed to deliver the same benefit equally to both Master’s and Campus options. The assumption that the Master’s option will deliver 2.8 times better savings, compared to the Campus option, is unfounded and without evidence. CTP figures should be entirely removed from the financial analysis.

A significant omission is the interest cost on the $20.1m loan to finance the Master’s site development. Without more detail, we estimate an interest cost of $8m. This omission seriously distorts the analysis in favour of Master’s.  MCC needs to explain to Councillors, and ratepayers, why this key item was omitted from the financial analysis.

There are other discrepancies. The residual value for IT & audio-visual equipment for the Master’s option is incorrect. It shows the residual value to be higher than the total spend over 20 years, overstated by $4.7m. The total figure for all residual value items is also incorrect, with two interdependent tables showing a discrepancy of $109,000 and, consequently, it is a guess as to which figure is correct. Also missing, is the cost of the Project Manager and related recruitment expenses, about $120,000. The discrepancies distort the analysis in favour on Master’s option.

Report’s Conclusion

The report reaches the conclusion that the cost benefit analysis ‘strongly favours the Single Site Option, with a net present value investment return of $86.66m and a benefit/cost ratio of 12.5, relative to the Campus Option’. The report goes on to state ‘the strong result reflects MCC assessment that the Single Site is critical to the achievement of generic cost efficiencies, but the ‘building economics are also sound’. It further concludes ‘the very large savings from operational efficiencies, and improved workplace culture that the Single Site provides, confirms its position as its preferred option’. This is totally without foundation.

You may ask, is the Master’s option viable when a) CTP figures are removed, b) residual values are corrected, c) loan interest is included and d) other omissions and mistakes are rectified? Without access to working figures underlying the analysis, a reply would have no credibility. However, a tentative spreadsheet shows the Master’s option is more expensive than the Campus option.

Other Options

Savills’ report makes  no mention, or evaluation, of the option to extend/add floors to the existing MCC Forster and adjacent library building, or the existing MCC Taree and adjacent library building. MCC did not include this option in its submission to Savills. Why? There may be other viable options.

Councillors and Ratepayers Hoodwinked?

When Councillors reflect on the appraisal by Savills and MCC finance staff, and their decision to proceed with the next investigative step, they surely must feel misled. You can well understand their predicament: a lengthy detailed document to peruse, little time to digest it, and pressure to reach a decision. Now, they share accountability. Ratepayers will be relieved that Councillors exercised caution, by deferring a decision on Master’s, until they had time to read and digest Savills’ report. MCC needs to explain to Councillors and ratepayers why Savills’ heavily biased report was not fully checked and proofed for validity, before public disclosure.

The inclusion of CTP savings, the anomalies and omissions, make the Savills’ financial analysis, the conclusions drawn and the recommendations, invalid and superfluous. Linking CTP to Master’s, and assuming CTP will deliver more than double the financial return compared with staying in existing premises, is without foundation, and absurd to the report reader. CTP figures have no place in the financial analysis. Councillors should insist upon a revised, complete and unbiased financial analysis, including other viable options, and halt any further expenditure on the Master’s option, until a credible report and analysis are presented.

Finally, Councillors need to hold MCC finance staff and management accountable. MCC and Councillors are welcome to meet and discuss the author’s findings.

Mr Deignan is a local resident, qualified in engineering and whose business career covered 40 years in computer software development for financial applications.

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