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This page contains a single entry from the blog posted on January 24, 2006 11:30 AM. The previous post in this blog was Perhaps the worm has turned. The next post in this blog is Quotation of the Month. Many more can be found on the main index page or by looking through the archives.

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Tuesday, January 24, 2006

That ain't Ovaltine

The latest writeup of the aerial tram fiasco [rim shot] points to currency fluctuations as one of the causes of the massive cost overruns on the project. From today's Trib:

Since then, unforeseen difficulties, such as the dollar's collapse versus the Swiss franc -- the main contractor is Swiss -- as well as a skyrocketing steel market and post-Hurricane Katrina inflation in the construction industry have helped add another $15 million or so, bringing the total to $45 million.
Wait -- are we saying now that the city and OHSU signed an eight-figure construction contract, denominated in Swiss francs, and they didn't buy a hedge against the currency risk?

Folks, that would be beyond ordinary negligence.

Comments (12)

Jack,
They bought the new water billing software from a Canadian outfit. Maybe we'll make it up on devaluation of the Canadian dollar. Oh wait... never mind.. I think that contract was written for US dollars.

I thought the main contractor was Kiewit Pacific. A subsidiary of Peter Kiewit Sons from Omaha.

http://www.portlandtram.com/072704.htm

They only take Francs in Omaha?

Also:

http://finance.yahoo.com/currency/convert?from=USD&to=CHF&amt=1&t=5y

The contract was awarded in July 2004. The franc definitely dipped afterward, but seems to have recovered since. So does the city get the benefit of that recovery? Or did Kiewit hedge their bet on Portland's dollars?

That little graph shows the dollar weakening during 2004 from about CHF 1.25 to about CHF 1.15 -- maybe 9%. That accounts for as much as $150,000 of the $30,000,000 increase in the project cost. I think we need look no further.

Take a look at the North Macadam Agreement, then you'll really laugh at the competence of our city legal department with the oversight of the City Council, that included Jim F. an attorney. The Agreement is a godsend for the developers with many "undefined" parts "that will be defined later" clauses. Just like the PGE Park Agreement. I don't like the word "Agreement". What ever happened to a "Contract" that is all inclusive that covers the unforseen? Like most of us live with ?

I remember looking at what was described as a letter of resignation for the consultant who was recently let go (I wish I would have kept it, I almost posted it but didn't have the time). In the resignation of the consultant he cited currency fluctations as a main reason for the cost overruns.

I found that to be extremely unlikely. How much of a tram is being fabricated overseas? Are you telling me that the stealth ship, rail-car, Freightliner truck and steel manufacturing city of Portland can't find a team capable of fabricating the structure that makes up the Tram which was designed here on the west coast?

The majority of the cost of any construction project I've ever seen is materials, labor and onsite general contracting expertise. Essentially the actual bid that represents the contract. Furthermore, isn't the world's business (contracts usually inclusive) denominated in Dollars, Yen, or Euro's these days?

Kinda fishy if you ask me. This answer just shows how stupid the city of Portland/PDC really feels the public is.

Jack, great point about hedging.

If the city made committed to paying for something in the future in Swiss Francs, buying the Francs forward would have been a transaction so simple, so rudimentary, that only Eric Sten would have neglected to do it.

Was he in charge?

Really, if it is true that they neglected to take the world's easiest step to inure the city from currency exposure, even if it "only" amounted to a $150K loss - that is just more evidence of the stunning incompetence of whoever it is making the decisions on this thing.

Unreal.

Either they're making up lies about what really went wrong, or they screwed up on the currency issue. Either way, it stinks to high heaven.

I want to see the contract on this one (public records request anyone?). I will soil myself if it's true that the brain trust running the Tram project wrote a contract promising to pay a contractor in Swiss francs. Next thing you know, we'll be printing our own currency! (Don't get any ideas, Erik.)

A cute little graph (tinyurl.com/dmp6p) shows that at the absolute worst, currency fluctuations against the franc would have accounted for no more than 10% of the cost overruns. These Tramsters play the entire city for fools: first the Chinese and their demand for steel, then the Mexicans and their cement, then a "spike" in labor costs, and now the Swiss. Blaming the French in 3... 2... 1 ...

Riddle me this, Tramsters ... Will we get back to the $15 million figure when the dollar gets back to its 2003 level against the franc?

If the use of imported labor and materials is a sufficient excuse to allow someone in the city to start playing the futures market, and the currency futures market no less, then I see a growth opportunity that makes the placement of PERS bond proceeds into the hands of the OIC to buy a piece of KKR look tame by comparison.

"What is your Economic Development strategy?" Play the futures and buy stuff from out of the country.

"Whatever happened to the effort to purchase locally and force private parties that are privy to a government contract to buy within the state or city?" Huh?

The wording is such that it offers some after-the-fact reasonable explanation other than an explanation that is pegged to willful knowing deception for purposes of criminal official misuse of public position or office.

It ain't as bad as the OIC's participation in hedge funds, and interest rate swaps on bond issuances . . . even before they close. These local folks are so amateur that it is believable that they did not know what they were doing. This is perhaps just the training ground for bigger and better games, where the weaker players are culled out.

The City ceased having any responsibility for currency fluctuations as of the day it signed the contract with Doppelmayr, if the city signed it in the form posted by Commissioner Adams. The unsigned copy of tram contract A (the Doppelmayr contract), posted by Commissioner Adams on his site, includes the following two clauses:

I.1 The parties agree that the tramway equipment * * * will be fabricated in Switzerland and Austria, and that the fabrication of the equipment and theinstallation portion of the project being undertaken by Swiss-based employees of the Contractor have been priced using Swiss Francs (CHF) as the cost basis. The Cost of the Work identified in Exhibit A is based on an exchange rate of 1.21 CHF/US Dollar.

2. Upon execution of the Agreement by all the parties, the Cost of the Work will be adjusted based on the previous day's closing exchange rate for Swiss Francs/US Dollars [with reductions added to the contingency allowance and increaes paid for from the contingency allowance].

3. Other than the adjustment contemplated by Paragraph I.2 above, the Contractor shall assume all risk for fluctuations in exchange rate once the Contract has been executed. Contractor already has priced this risk completely within the Cost of the Work previously provided to the City. * * *

Nice detective work, Officer Issac. Looks like the CoP and the Big O are going to need to interview some new straw men.

Maybe if Sam flew to Switzerland and personally inspected the tram, he could figure out a way to bring the costs back in line with the budget.

From there, he could go to Germany and negotiate with the HQ office of architecture firm. Perhaps were losing money in Euros on the design/engineering tab?

I suggest he start with, "do you know who I am?" It always works wonders for me when I'm trying to get a 1st class upgrade for free. If that doesn't work, maybe he can fire the production manager in Switzerland, or persuade the CEO of the architecture firm to fall on his sword. Heads must roll. They won't know Sam's in charge if they aren't afraid they could be next!

The mention of the hedging here (pricing the risk, what ever that means) does little more than to establish that it is far more than reasonably foreseeable that the other party will hedge their cash position.

Any loses or gains from hedging by the other party to a cash deal would clearly be a damages issue if the city/OHSU Medical Group cancel a deal. Their damages, the Swiss supplier, would only come into play in the event of cancellation of the cash side of the transaction.

If the Swiss folks took it on faith that they needed to buy material and anticipated future receipt of US dollars to cover the deal then they would have taken hedges that would have already returned to them a handsome pile of money in the futures market. Thus, cancellation of the city contract might leave the Swiss folks with no real damages from the whole deal, at least if such hedging position gains are considered mitigation of damages for losses on the cash side of the transaction.

If the Swiss folks did not hedge, and did not gain on such positions, could they claim loss on their failure to hedge if they are instead relieved of the duty to perform on the contract?

The rising cost of stuff complained of to raise the city costs look instead like a bonus, of the same magnitude, to cancel the contract. But we live in an upside down world, so who knows.


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