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Atkins: Your taxes and how not to manage risk

The multi-million dollar gap between Dario and the rest of us
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Downtown Sudbury. (File)

It was with some wonder I listened last week as Ward 5 Coun. Robert Kirwan on the occasion of the approval of the design of the new $100-million events centre on The Kingsway remarked on the evolution of the governance of the City of Greater Sudbury from a risk averse culture to one of managing risk.

Keeping in mind that Robert is spending our money I thought it deserved some reflection. One of us is the emperor without his clothes (with apologies to Hans Christian Anderson). 

Of particular importance is the contrast between how the City of Greater Sudbury is managing its risk and how Dario Zulich, our PPP (public private partner), is managing his risk. Although I oppose the casino and the location of the arena, it needs to be said that Dario and his group of advisers have been brilliant. In 40 years of observing this community, I have seen nothing like it. Win, lose or draw, it has been a masterpiece of theatre and marketing over fact and due diligence.
       
Let's compare bids. 
       
Dario’s 

1. Dario's offer to the city is a free piece of land not far from the dump on The Kingsway. It is land heretofore of limited value and has nothing much on it. With an arena, it is very valuable. Score one for Dario.

2. The second investment was a storyline and the cost to build it. It is the story of an arena, a casino, a hotel, a motorsport park, the Fabio Belli Field House, a convention centre and various add-ons, including a sports hall of fame (rest assured more municipal funding requested), unlimited parking, various walkways, bike paths and a big sign. If he doesn't deliver on key elements of the storyline (particularly the casino and hotel) he has capped his risk at $100,000 by agreement with the city. Let's forget for the moment that there is no agreement with the Belli Foundation to locate anywhere near this site and that the motorsport group is on its own to buy Crown land the Province of Ontario is unlikely to sell. The cost of the storyline involves making donations to various community groups around the city to build brand, call meetings to promote the storyline, (Remember that big press conference on turning the downtown arena into a music and art center?), hire someone with animation experience, voice over capability and upbeat music, hire or influence key opinion makers to make his case ( i.e. ex-mayor Jim Gordon) and, of course, good communications staff.

3. Add to this some minimal land preparation, which includes cutting down trees on the property to show momentum and paying his share of an architect (another one of those quick sole-source uncompetitive deals)  to create a schematic to show what might be and you are done. Of course, all sorts of things can and will change before the final design is implemented.

4. Two weeks before the report on the event centre was to be made public, Dario came to council and offered a special deal to the city where his company would take responsibility for all revenues and expenses at the current Sudbury Arena in exchange for a fixed payment from the city, saving taxpayers a couple of hundred thousand dollars, with the potential upside of new revenues from the arrangement. A staff report remarked enthusiastically that the Sudbury Wolves thought this would improve customer experience and maximize revenue and reduce expenses. Not long after the city decided to move the arena to The Kingsway, it became obvious Dario’s offer to manage the old arena was unworkable. Either he withdrew it or the city demurred, but either way Dario gets full points for managing risk by offering a deal when it looked good and getting out of it when it when no longer served his purpose. His business group is either imprudent and not very smart or brilliant by offering something to curry favor before council made a decision, and then, like Houdini, getting out of it. I don't know which is worse. The bigger question is why Council would even consider such a proposal and such a sensitive time.
       
Not to put too fine a point on it, the above is barely table stakes for a deal of this size. There is big money in gambling and big money in development. All you have to do is follow it. The money will be made with the revaluation of the land and the construction of the buildings. This is an extraordinarily small risk for an extraordinary profit. And that's before knowing anything about the future contract between the city and the Sudbury Wolves. For all we know, the Wolves are a loss leader for all of the money made in development and gambling.

The city’s bid:
       
1. The first offer was the most expensive. Political capital. Trust. The city ignored years of hard work to develop a downtown master plan. It ignored the recommendation of the Chamber of Commerce. It ignored the recommendation of the Downtown Business Improvement Association. It ignored Laurentian University, which spent $45 million to build a school of architecture. It ignored the recommendation of its own staff. It ignored the advice of the PriceWaterhouseCoopers consultant whom they hired to advise them on location of the event center. It ignored easily accessible stories of communities unhappy with locating arenas outside of downtown and it ignored ample evidence of the negative economic impact of casinos on midsize communities like ours. Although the arena’s location is old news and mightily debated, the truth is that by making such an irrational decision the city council can no longer be predicted. Capital seeks stability. Just like mining companies seek stable countries developers seek stable communities. There is a discount when you have no idea what the jurisdiction is going to do next. 

2. Locally, it is more complicated. Most developers who build in this city are unhappy about the special preference this one development is getting. You won't be hearing much from them. They can't afford to make noise because their life is in the hands of the city. Whether it's the discussion about how much tax these developers need to pay for vacant land or the individual treatment of their own developments, they cannot afford to be vocal on this topic. One developer was told to be careful about what he had to say on this project if he didn't want trouble. The cost of this part of the bid is impossible to guess. It is a departure from rational administrative process. It is harder to sever a building lot in Chelmsford than move a $100-million arena out of the city.

3. The city agreed to support a casino. That involves sending a billion dollars over the next 10 years out of the community and importing the associated social problems. It is a very high price. We know a casino does not work in a city of this size. The primary benefactors will be Gateway Casinos, the province of Ontario, Dario Zulich and anyone else who wins the land lottery out there.

 4. The city apparently has no clue how viable its main tenant for the arena is. We know three things. 1) The Wolves do not fill the current arena on a regular basis. 2.) The Ontario Hockey League faces a class-action lawsuit, which, if they lose, will make operating a junior hockey team much more expensive in the coming years. 3) The Wolves apparently can't afford to run the old Sudbury Arena for even a couple of years, which they offered to do with great fanfare. What's up?

5. The city has agreed to hold downtown development hostage to this event centre. 

  • It will only fund downtown projects with shared funding from other levels of government if it happens to come through. By throwing all of its money into the new events centre, it puts at risk three other important municipal initiatives (library, art gallery, and the downtown convention centre and performance space formerly called the Synergy Centre), which may or may not qualify for shared funding or may or may not make it past the next election if they do.
  • Downtown projects are conditional on either the demolition of the old arena or being squeezed into the arena themselves. The logic here is magical thinking.
  • We will build a new arena although we already have one, but we may put an art gallery in the old arena. Brilliant.

6. Finally, if you wanted to hire the Boston Consulting Group to produce the most inefficient, cost-prohibitive and money-wasting harebrained bid to leverage municipal assets this is what you would do.

  • You would move the arena out of town to a new location away from already established infrastructure of water, roads, sewer and energy, and build new capacity out of town while knowing you need to improve older infrastructure downtown anyway.
  • You would move the event centre away from the bus terminal, which is already feeding the downtown, and you would invest in new routes to service the new centre.
  • You would spend the money to demolish the old arena instead of spending half the money to renovate it.
  • You would allow a hotel at the casino to create convention-type capabilities to compete with the Synergy Centre you are building downtown. This gives the city the opportunity to lose big money twice: once on a new arena and again on the Synergy Centre. Twice the losses for twice the money.

 The city isn't managing risk; it is manufacturing risk. It is ignoring that giant sucking sound of $2 million a week flowing out of our community. It is ignoring the embedded cost of doubling up on its infrastructure cost. It is ignoring the embedded cost of operating shortfalls with a casino hotel/meeting complex competing with its own Synergy Centre. It is risking downtown development for a generation.

The city has no way to mitigate its losses once ground is broken for the arena. That shovel jump starts a round of falling dominoes that taxpayers will be funding for the next 50 years.

It is a perfect storm of fiscal madness. Unfortunately, I'm a taxpayer, not a shareholder in Dario's company.

Time to smarten up before it is too late. 

Michael Atkins is the president of Northern Life.



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