Guest Post by the "Anonymous Engineer"
EDITOR'S NOTE: The author of today's article is the whistleblower, dubbed the "Anonymous Engineer", who disclosed – on this Blog - falsification of the estimates for the Muskrat Falls project. That was January 30, 2017 . His comments were recorded in a post entitled Muskrat Cost Estimates "A Complete Falsification". A second post called Muskrat: Allegations of Phony Cost Estimates provided significant additional details of low-balling which ultimately were used to justify the Sanction of a project. His assertions have been confirmed by Forensic Auditor, Grant Thornton and by various Witnesses who gave testimony at the Commission of Inquiry. — Des Sullivan
Nalcor - A Documented History of Deceit
Now that the Inquiry is reaching a conclusion – after almost 130 days of hearings and at least 125 witnesses of all stripes – left exposed is an unmistakable narrative, a trail of deceit and misinformation that is beyond belief.
Let’s look at this trail from the very beginning:
Estimate preparation – January to October 2012
It is almost two and a half years since the Anonymous Engineer (AE) first made the allegation that the Project Sanction Estimate was falsified, to keep the estimate low, purely for the purpose of project approval.
Ten months of Inquiry and six million documents later, it is confirmed beyond doubt that it is absolutely the case.
The Inquiry has exposed a litany of deficiencies.
There is no record of a formal Executive Review of the estimate with an official signoff. The estimate was not reviewed in depth by any competent agency, be it Governmental or a private company such as MHI, Validation Estimating. Consultants charged with reviewing the estimate were not provided access to information needed to perform their work. Validation Estimating, whose review was strongly critical of the estimate, were not allowed to complete their work. Risks were not properly assessed and often understated. Risks were claimed to be mitigated when they were not.
The Independent Engineer (IE), on whom most agencies depended to validate the estimate, was for the most part a figurehead, and did not do an in depth analysis. He depended on the information provided by Nalcor. This proves the IE was not independent at all. In fact he was just another extension of Nalcor.
The unit prices used were way too low and wholly inappropriate to a harsh sub-Arctic climate. The contingencies were ridiculously low for a project of this magnitude and complexity. How could any organization with a knowledge of Estimating and Project Management approve such a low and fundamentally flawed estimate?
Westney Consulting, a world authority on Risk Management, said in their review that the project had only a one to three percent chance of successful completion – the now famous P1 & P3. The Westney analysis was not made public until the Forensic Audit and this Inquiry.
Right from the start the Nalcor Project Management Team knew that the estimate was short by a few billion dollars, yet made a business decision to keep it secret.
From the early days of the Project I feared that the estimate had one and only one purpose: to secure project approval. Thus Sanction was secured at $6.2 billion, which the then CEO Ed Martin said was “solid.” At the time of project sanction there was no in depth review of the estimate at all. Any organization that attempted to do so was prevented by Nalcor from doing so.
There is no recorded evidence of protests or discontent by the Project Director or the Project Management Team about the $6.2B estimate or the near impossible schedule of first power by December 2017. The Estimate and the Schedule obviously had their tacit approval.
The protests and the statement by Paul Harrington that the “Cost and Schedule was imposed on them by Ed Martin” came a full three years later, when the wheels had fallen off the project, Ed Martin having been ejected and Stan Marshall in charge. How can we not conclude that Paul Harrington’s primary responsibility was to ensure that no one, absolutely no one, got close to the estimate?
Project implementation with bogus estimate – January 2013 to December 2015.
The estimate thus approved now moved into the implementation phase. By mid-2013 the project had received bids from contractors for specified work packages, which were far higher than the corresponding budgets in the approved ($6.2B) estimate. By the time of Financial Close – around November 2013, the overrun on the estimate was $600 million, and all the contingency was depleted.
In truth, the contingency was depleted even before construction began. It’s just that no one was informed including the Ministry of Natural Resources, the Ministry of Finance, the Independent Engineer, Oversight Committee, Nalcor Board of Directors, and Nalcor’s own VP of Finance and the Premier’s Office. Ed Martin would inform us through the media that the project was doing just fine. It is quite remarkable that despite all who knew inside Nalcor he never experienced a word of challenge.
Understandably, when it was revealed at the Inquiry that the overruns were kept hidden from so many officials who ought to have known, including an array of Ministers and Deputy Ministers, the sense of betrayal was palpable.
How did Nalcor get away with such falsification when the Corporation’s policy requires that there must be sufficient budget before a contract is awarded?
As the project grew critically short of funds, the budgets were artificially increased by transferring funds from work not yet awarded – “creative accounting” - until in time, the project was totally out of funds.
The forecast was increased from $6.2B to $6.99B to $7.65B though even those forecasts were utterly fictitious; the true forecasts were much higher. This mindset of falsification, now deeply engrained in the Nalcor work practices, persisted until the change of Government in December 2015, when it became no longer possible.
Change of Government December 2015 and engagement of EY
Soon after the new Government was installed, December of 2015, EY already had quite a story to relate to the Ball Administration, notwithstanding the fact that Nalcor did their utmost to keep EY at bay. Little wonder that the Premier did not give Ed Martin the free-hand he sought in negotiations with Astaldi either. Rightfully, he was soon gone.
In early January the Premier mandated EY with its array of highly skilled staff to do an in-depth review of the project. This was the first time in three years that any organization had done a deep dive into the numbers and work processes. The resistance from Nalcor was fierce, despite the directive issued by the Premier. Nalcor continued to be difficult and uncooperative, as they had been for the past three years. Finally, the privilege of falsification was over.
EY very quickly rejected all forecasts made by Nalcor as fictitious and came up with their own analysis of the forecasts – at $ 11.7billion!! The project cost had increased by $4billion in six months. Such was the magnitude of falsification by Nalcor.
Nalcor had all the data with which to do a proper analysis, but simply choose not to.
As expected, EY discovered the work practices used by Nalcor were abysmal. Ed Martin’s claim to a “World Class Project Management Team” now has a ring of patent silliness.
It is unfortunate that a project originally priced at $6.2 billion - $7.4B with financing will now end up costing $12.7 billion (or more). The Inquiry, in my view, exposed many of the practices that occurred in the absence of oversight – by a group not just loose with the truth but willingly flagrant of the public trust. It has not explicitly pointed out who is responsible but the public are not that blind.
Hopefully, Government and the public have learned from this debacle. Excessive trust, without verification and competent oversight, is simply irresponsible. NL will have a long time to remember this unfortunate truth - 50 years, in fact. That is the greatest tragedy of all.
I can only say that I am glad that I was able to bring to public attention the issues with which I had come face to face. It is hard to imagine that Muskrat could have had a worse outcome except the evidence suggests that without a change of leadership it might have.