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Monday 18 February 2019

FORENSIC AUDIT: NALCOR IGNORED BIG EARLY WARNING SIGNS

The Uncle Gnarley Blog has posted two commentaries on the second Forensic Audit Report of Grant Thornton released today by the Commission of Inquiry into the Muskrat Falls Project. Both articles were prepared by Ron Penney, David Vardy and Des Sullivan who have standing at the Inquiry on behalf of the Concerned Citizens Coalition. 

This piece contains  the key findings of the Forensic Audit. Also posted is a lengthier and more thorough examination of the Report entitled “Evidence of Malfeasance?: A Review of the Forensic Audit Report into the Muskrat Falls Project (Phase II)”.  It is available now at the Link.  - Des Sullivan

HIGHLIGHTS OF SECOND FORENSIC AUDIT REPORT

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.

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:

1.      When did Mr. Martin and Mr. Bennett know about this issue?
2.     Was this communicated to the Chair of the Board, Mr. Ken Marshall, and if so, what did he do about it.
3.     Was it communicated to the government and to whom and what analysis was done to determine whether it was wise to continue with the project given the early warning signs that the project was getting badly out of control at its inception. We look forward to hearing from former Premier Dunderdale and senior government officials and on this issue.

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 3 million hours.


1.      We look forward to hearing from Mr. Martin, Mr. Bennett and Mr. Ken Marshall as to why those early warning signs were also ignored?
2.     What role did then Premier Dunderdale and other senior government officials play in the award of the contract to Astaldi and what knowledge did they possess about the bid and the company?

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.”

DETAILED ANALYSIS
The detailed analysis of the Grant Thornton Report referred to at in the Editor's comment, at the beginning of this article is also available on this Link. The Full Report is available here.