COMMENTS ON THE RELEASE OF THE GRANT THORNTON FORENSIC AUDIT ON THE CONSTRUCTION PHASE OF THE MUSKRAT FALLS PROJECTRead Now
(February 18, 2019 – St. John’s, NL) As was the case with Phase One of the Muskrat Falls Inquiry, the construction phase of the Inquiry has commenced with the release today of the forensic audit conducted by Grant Thornton.
The audit sets the stage for the examination of witnesses crucial to the understanding of how the project went so badly wrong. Our detailed review is attached here.
EARLY WARNING SIGNS
The key finding of the forensic audit is that between the decision to sanction the project on December 17th, 2012 and the financial close of the project several months later, “bids were received from contractors whom ultimately were hired which collectively, exceeded the the DG3 budget by approximately $600 million, a 25% overage.”
The result was that the contingency set aside at that point of $368 million “was exhausted.”
When the project manager, Paul Harrington, was asked why Nalcor did not reexamine the cumulative present net worth (CPW) of the project given those facts, he responded “not my call.” When asked to clarify whose call it was he said “senior management [Ed and Gilbert] ...and Government.”
This is crucial because up to the point of financial close it was still possible to have given sober second thought to the wisdom of continuing with the project without incurring financial penalties other than the costs of some early contract awards. Once financial close occurred we were locked into completing the project.
This was an early warning that the project was going sour and we need to know who knew and why they didn’t exercise the due diligence which was owed to the taxpayers and ratepayers of the province.
The key questions are:
We expressed concern at a very early stage about the award of the main contract to Astaldi given the fact that this would be their first contract in North America and that they had never done a project in the north. As we now know our concerns were well placed. Their bid was an outlier, well below two bids from experienced Canadian contractors. And that contract accounted for almost one third of the cost-overruns, $1.2 billion.
In addition, the estimate of labour hours in the Astaldi bid was 6.82 million hours as compared to Nalcor’s DG3 estimate of 3.66 million hours, a difference of over 2 million hours.
THE TRANSMISSION LINE
The next largest overruns came from the transmission line contract with Valard , 20%, or $649 million. The original tendering strategy was to divide the project into four separate contracts, consistent with the approach used by Hydro Quebec. The forensic audit has revealed that no geotechnical work was done to support the estimate which in turn led to the use of an “open book negotiation” rather than the normal competitive tender process.
We look forward to hearing from the managers responsible for this project as to why there was only one contract and why the normal competitive bidding process wasn’t used.
ENGINEERING, PROCUREMENT, CONTRACTING AND MANAGEMENT (EPCM)
Originally it was planned to use SNC Lavalin as the EPCM contractor, but as we know from the first phase of the Public Inquiry that approach was abandoned in favor of an “integrated management team”, composed of the Nalcor Management Team and SNC Lavalin. The increased costs of the change amounted to another $406 million.
CORE MANAGEMENT TEAM
The forensic audit notes that “the core management team, with the exception of Ron Power, did not have any hydro experience.