Monday, 30 June 2014

COST OVERRUNS: YOU CAN'T HANDLE THE TRUTH

Nalcor CEO Ed Martin, last week, delivered an update on Muskrat Falls.  It was a bit like listening to the corrupted Col. Jessop in the movie, starring Jack Nicholson, “A Few Good Men”. Questioned by Daniel Faffee, the Defense Attorney, who suspects him the real culprit, the Col. says: You want answers? To which Kaffee replies: I want the truth!   Col. Jessep responds: You can’t handle the truth! 

The public’s right to know is constantly filtered by both the Provincial Government and its energy Agency.  The truth is what Nalcor defines.  Ed Martin's justification for the new slate of cost overruns are those of one fearful the public might know too much, too soon.  

Martin says he is “comfortable with the cost envelope”. He thinks we, too, should be happy with his accounting.  He offers no documentation, no independent verification, and no evidence of the kind of contracts to which Nalcor is committed.  We only have his word.

When did Ed Martin earn our trust?


Even the new estimated cost figure of $6.99 billion isn’t correct.

He avoids use of the higher digit; ostensibly $6.99 billion is more palatable than $7.0.  If he includes ‘interest costs’ the that much higher number might cause alarm. 

Interest costs are just as important as a bag of cement. The idea that a CEO would put a price on a multi-billion dollar project without including interest during construction is so unprofessional and patently dishonest that, were he a Chartered Accountant, you would have him investigated by his peers. 

If Ed can’t add the numbers, you and I can.  $6.99 billion added to it $1.2 billion interest costs (that figure will grow, too, as more equity from the public coffers is needed), that’s $8.19 billion.  The number is far higher than the $5 billion presented to the PUB in 2010, or the figure of $6.2 in 2012.   The PUB must surely see some vindication in all of this.

From $5 billion to $8.19: and the project has barely begun!

That is the key point. 

The public should brace for much higher costs yet.  I can offer you five reasons why:

1.         Work on the Muskrat Falls project is not advanced enough to draw any firm conclusion that costs are contained.  We have no idea how Nalcor’s planning and logistics have resulted in reduced productivity or inefficient contractor coordination. A couple of months ago Martin was talking delay; now he is sticking with first power in 2017.  I wonder if the Independent Engineer is convinced? Every month the project is delayed means higher costs.

2.         “Design Risk” is one of the largest problems encountered on any construction project. That most of the engineering design is completed is no assurance of anything. Simply put, the drawings and specifications have not been tested.  Errors, omissions, new information, and a plethora of other reasons consistently drive the necessity for “Change Orders” and, in turn, drive up construction costs.  

With no work begun on the North Spur, the power house or the transmission line, as well as on other major components of the Project, no experienced builder would give the kind of assurances Martin is attempting. Martin has no such experience himself.  He relies on an inexperienced construction team.  Next time he should bring along an “independent” report of “change orders” and their costs. Credibility must be earned.

3.         We do not know the nature of the Contracts to which Nalcor has agreed.  Ed Martin told the media: "I believe that we have narrowed down the risk of additional cost increases very, very, very significantly”. I have also noted Martin uses “unit pricing”, rather than fixed pricing, (which would imply Nalcor’s risk will increase if the number of “Units” increases). “Unit pricing” is distinct from a “fixed priced” contract.  Martin has not said how much labour cost risk Nalcor has assumed, though this scribe has learned the Agency has assumed a great deal.

We also know Nalcor has experienced difficulty attracting “fixed priced” Bidders. 
Without Nalcor coming clean on the risks to which it is exposed, bland assurances about cost overruns are meaningless.

Nalcor has also added risk by having taken responsibility for procurement and delivery of certain items. If these items are not available, within the time frame committed, a claim will be made for any costs the delay has caused the Contractor.

Then, too, 'fixed price' contracts are rarely actually fixed. Any time there is a significant interference (that is not the contractor's fault), the contractor will also make a claim that the interference delayed its progress of the work. Up goes the price again.

Owner's often put contractors in the field because they are either fed bullshit by the engineers or they need to get contractors in the field for political reasons. This might explain why Nalcor has so many people employed on the Project but has little to show for it.

4. Hydro Quebec’s challenge of CFLco’s right to sell power in excess of the original Recall block from the Upper Churchill has the potential to defeat the Water Management Agreement.  We await adjudication of the Case in the Quebec Superior Court.  A defeat would mean far less power from Muskrat than its 824 MW capacity.  That would be financially catastrophic.

5. This Province is responsible for 50% of the cost overruns on the Maritime Link.

“Can I say that there could never be another cost driver”, asks Ed Martin? “Well, I can't say that”, he answers his own rhetorical question.  “But I think what we're focused on now — I don't think, I know — it's the execution of the project", he adds.   He had better be focussed on execution; what else, at this point, would preoccupy him? 

We have gone from $5 billion to $8.19 billion. He refuses to release the Power Purchase Agreement which defines how ratepayers will be charged.

The latest cost increase is worth only $8.00 per month to ratepayers, says Ed Martin, unconvincingly.  What’s another $8!

The problem is Ed Martin will be back again and again. 

With all the construction risk still in front of Nalcor the figure will be much higher, soon.

How much?

Ask Ed Martin. But, like Colonel Jessop, he probably thinks you can’t handle the truth.   

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