Kananaskis golf course costs continue to rise, contracts cleared by Alberta's auditor general

Payments by Alberta taxpayers to a Tory-connected firm with an untendered lease on a government-owned golf course keep mounting, even as the province's financial watchdog announced that a secret deal made by the former Progressive Conservative regime met contracting rules and made financial sense.

An official with with the province's auditor general confirmed Tuesday the government will have to pay up to an additional $2.5 million to cover lost profits to Kan-Alta Golf Management Ltd. and extend its lease for the luxury mountain facility by a year because the flood-damaged course is not reopening as initially planned.

"They're going to get a fully rebuilt course when it's done, but until then or at least for the next year they will be compensated for any lost revenue," assistant auditor general Brad Ireland said in an interview.

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In a report released today, the watchdog said the sole-sourced contracts signed with Kan-Alta in 2014 that will pay the firm $18 million to rebuild the 36-hole course and potentially another $13.9 million for lost profits while the links are shuttered were prudent given the unending nature of the prior leases.

"The agreements made financial sense given the existing contractual arrangements the department had with Kan-Alta at the time of the flood," Auditor General Merwan Saher said in his report.

Conservative insiders

The auditor general's work was largely based on last year's review by Deloitte LLP that found putting the rebuild and operation of the publicly-owned links out to tender would mean Alberta taxpayers would have to pay and additional $16.9 million to tear up the existing agreement.

The deal with Kan-Alta dates back to the course's opening in 1983, when documents show the firm owned by friends and former associates of former Premier Don Gettywho have donated $2,600 to the Tories in recent years was awarded the contract to operate the facility even though government documents show they were not the lowest bidder.

Deloitte's review of the agreements with the firm dating back to 1999 found the terms regarding liability for damage in the event of a disaster like a flood were "unfavourable to the Crown," but that the company and successive Conservative governments "negotiated in good faith" during extensions of what was, until two years ago, a de facto "perpetual" contract.

Wildrose critic Todd Loewen faulted the auditor general for not looking at the government's agreements before the 2014 revisions.

"If we don't dig into the history of this deal, we are condemned to make the same mistakes," Loewen said.

Compensation for flood damage

The initial deal in 1983 required the firm to obtain business interruption insurance, but the Deloitte report revealed that the course's location in a flood plain meant Kan-Alta was unable to obtain coverage, something the government knew when it inked the agreement.

When the 2013 floods destroyed all but four of the holes on the course, a clause in the contract required taxpayers to compensate Kan-Alta for all of its losses above a $100,000 deductible.

As a result, when the terms of a new deal to rebuild the course at public expense were negotiated in July, 2014, the government agreed to compensate for operating costs and lost profits while the facility remained closed.

Figures supplied by officials with Alberta Environment and Parks indicatethat in the last two years the government has paid Kan-Alta $10.1 million to compensate the firm for lost profits and another $2.9 million for rebuilding the course.

So far this year, the province said it has also reimbursed the firm for $2.3 million towards the cost of the course's reconstruction.

"We have always believed that the government should not be in the golf course business," Shannon Phillips, the minister responsible, said in a prepared statement.

"We decided to make the best of a bad situation."

Revised deal on future losses

Officials saidadditional money beyond rebuilding costs paid to Kan-Alta this year will be based on "operating costs" as opposed to "losses", a figure that has not yet been determined, but thatwill be less than previous years.

In addition to eliminating any future liability for Kan-Alta losses from another disaster and allowing a public tender when the current deal expires, the Deloitte report said the revamped agreement also improved the annual return to taxpayers by approximately $500,000 per year.

Under the 1999 arrangement signed by the Ralph Klein regime, Kan-Alta only had to pay a maximum of 4.5 per cent of gross revenues as rent for the world-class course, a figure that experts have said is less than half the market rate.

Saher's report reveals the province is also spending $7.8 million nearly three times the original estimate to widen the adjacent Evan Thomas Creek and raise berms around the course to protect against future flooding.

Paige MacPherson, Alberta director of the Canadian Taxpayers' Federation, questioned whether those measures are enough to ensure the province won't be on the hook in the event of future floods.

"I understand this new deal means taxpayers won't have to pay for Kan-Alta's future losses," said MacPherson, "but we need to be asking if the government should be taking on the risk rebuilding a golf course in a floodplain during these economic times."

Flood mitigation

Richard Starke, the Progressive Conservative minister who inked the 2014 contract and is now the party's critic for the recreation and parks portfolio,said he was pleased the auditor general found no fault with the renegotiated deal.

"The flood mitigation measures are not only to protect the golf course, but also the other facilities and the entire recreational area," Starke said.

"There's no 100 per cent way of guaranteeing that any flood mitigation measures willprotect against a future flood event, but you do the very best that you can with the information and technology you have available."

Alberta taxpayers will be on the hook for up to $8.8 million of the construction cost that is not covered by Ottawa's disaster assistance plan, the Deloitte report found.

During last year's provincial election, the New Democrats campaigned against the government's decision to spend money on the "luxury golf course" while hospitals went without repairs.

But once in power and with the Deloitte report in hand, the party decided last fall that it wouldproceed with the renovations agreed to by its Progressive Conservative predecessors.

Kan-Alta officials could not be reached for comment, but the company's website indicates they hope to re-open for the 2018 season, a year later than the government had initially hoped.

Low rents, sweetened deal

The Deloitte report found the original 1983 deal resulted in no payments to Alberta's treasury in many years, after deductions for capital improvements and maintenance at the facility.

In 2003, the agreement was extended by five years and amended to provide for a fixed base rent instead of a percentage of revenues.

While Deloitte estimated those changes to the agreement slightly increased the total return to taxpayers by about $1 million over the remaining 15-year term, a former assistant deputy minister told the consultants the changes further sweetened the deal for Kan-Alta.

The contract shows that for the five years prior to the 2013 floods, annual rents paid to the province averaged just over $80,000 on a course the company said was producing annual net profits of $2.5 million.

Under the 2014 deal, the base rent for the facility changed from a fixed amount back to a portion of gross revenues that ranged from 10.5 per cent to 12.5 per cent if annual receipts exceeded $10 million.

'Adequate contracting practices'

Saher found Alberta Recreation and Parks used expert advice and assessed the costs, benefits and risks before deciding to sign the improved deal with Kan-Alta in 2014 and go ahead with the sole-sourced rebuild.

"The department used adequate contracting processes," he said.

"We found the decision to engage Kan-Alta to act as the project manager was reasonableas the operatorhad a history of performing redevelopment workover the yearsand it knew the site well."

Saher said the firm had a vested interest in seeing the restoration proceed properly and efficiently.

The auditor general's office made no recommendations to the department as a result of its examination.