HOW INDEPENDENT IS THE "INDEPENDENT ENGINEER"?

Nalcor’s Ed Martin recently released a redacted Report of MWH Americas Inc., officially the Independent Engineer (IE) on the Muskrat Falls project.  The critical financial parts were blacked out.  While that is not the fault of the IE there are other reasons its claim to ‘independence’ is under strain.

That is not to diminish the idea of an “independent engineer”; such oversight is critically important and has been a frequent subject of this Blog.    

Unfortunately, the Report lacks the robustness one would expect from an overseer with MWH Americas' mandate. 

Possibly, the Firm attempted impartiality. It may have simply missed the mark. 

To be fair, the IE’s Report offers some solid information and analysis, but one cannot dismiss its considerable limitations.

The services of Independent Engineer (IE) services for LCP (Lower Churchill Project) according to Nalcor's Expression of Interest document are for the benefit of "rating agencies, lenders, guarantors, and other organizations that may be involved in providing financing for LCP rather than on behalf of Nalcor or its partners...". 

Still, MWH Americas Inc. was selected by Nalcor, its services are paid for by Nalcor, and it reports to Nalcor. 

That is at best an odd arrangement and the oddity is magnified by the absence of an arms-length relationship with its paymaster. 

Secondly, as in the case of any Report that puts claim to “independence”, whether that of Judge, Arbitrator or Professional Engineer, it is the level of rigorous analysis which it employs, and the conclusions which  follow, that constitute the best evidence of considered and impartial counsel.

On that basis, too, the Report is deficient.  

The initial concern was noted by an Energy Consultant, in a private email.  Perceptively, he wrote:  “The Independent Engineer (IE) swallows the whole story about how Nalcor, armed with the WMA (Water Management Agreement), will be able to take winter capacity from the Upper Churchill.”

The WMA represents one of the most critical issues threatening the viability of the MF Project. Yet, the IE relies solely upon Nalcor’s analysis rather than its own:  States the IE: 

"We requested further information from Nalcor pertaining to any dispatch constraints and where and why they may occur, since this issue was studied and risk assessments conducted. Nalcor reports that no constraints were identified." (p. 171)

The IE continues: “Long-term generation is assured by the WMA that provides storage at Churchill Falls and a means of operating the Churchill River to near-optimize the power production.” (p. 173)

Nowhere in the document does the IE offer the conclusions of its own independent legal counsel.  Nor does it discuss Nalcor’s thesis in the context of Hydro Quebec’s legal challenge in the Quebec Superior Court.

While it may not be politically correct to say so, that legal authority hardly constitutes a beacon of light for independent review of issues like this one.  

Yet, the Federal Government, as a key Party to the financing of the project, and the public are denied fair warning that the Loan Guarantee is at risk given the extreme uncertainty associated with Hydro Quebec’s legal action.

The Feds may hardly give a damn given that it was Peter McKay’s Nova Scotia that is assured the benefits of the Federal Loan Guarantee.  But we should care, as the real guarantors. The public of this Province will pay whether Muskrat Falls achieves its rated power capacity or not. 

A second major deficiency relates to the “quick clay” stability problem at the North Spur, an issue which former Government Advisor, Cabot Martin, has single handedly given public profile. 

The IE accepts what is at best a preliminary analysis of the problem and possible remediation measures, not by conducting its own thorough analysis, but again by relying upon Nalcor and its Consultant, Hatch & Associates. Hatch recommends “additional investigations and analyses…”

The IE adds, “the recommended work includes further investigations of the properties of the sensitive clays with respect to cyclic softening, more detailed stability analyses to assess the impact of earthquake ground motions and further seepage analyses….”(P.9)

Later in the Report the IE asks: “When available, Nalcor is requested to furnish to the IE for review the complete analysis of the North Spur including the laboratory test reports that determine the strength of the soils under the loadings that it will sustain during the life of the project.” (p.175) Emphasis Added

In essence, the IE is asking for information after it has rendered an opinion.  The phrase “when available” indicates that as of November 2013, Nalcor did not have its work done.

Ignoring the potential for mass destruction of the Project’s most important natural feature just seems cavalier.  Moreover, as engineers, the IE ought to have noted that any failure of the ‘North Spur’ might imperil the lives of residents living downstream, in Happy Valley-Goose Bay and Mud Lake. 

For both technical and economic reasons, as well as to acknowledge the fundamental matter of safety, the North Spur ought to have been a central feature of the IE’s Report.

It is noteworthy that the same type of unstable clay is thought to have caused forty-three residents of Washington's Snohomish County to lose their lives in April, 2014 following what was colloquially called a ‘mudslide’.

The third issue with the IE’s Report is the conclusion reached in this sentence:  “In our opinion, and based on past experience, the Integrated Project Team consisting of SNC-L (the borrower’s Engineer) and Nalcor (the borrower) are qualified to design, contract, manage, commission, operate and maintain the three projects currently under design and construction for the LCP (Lower Churchill Project).” Emphasis Added.

No one has questioned SNC’s ability to design the project though its contract with Nalcor ought to have been made public especially given the corruption allegations that swirl around the Company, the disbarment of an SNC Unit, by the World Bank, from bidding on contracts it finances and given, too, the charges pending against specific former Officers of that Company.  

As to management and construction, the IE comes to its conclusion, notwithstanding the fact that SNC-Lavalin’s capabilities are virtually non-existent on the project management team of Muskrat Falls, that neither the President nor the V-P of Nalcor have mega project expertise, that, according to one source knowledgeable of Nalcor's management, 19 of the 20 senior Nalcor hires possess no mega-construction expertise and the 20^th person has no experience at a senior project management level. 

Where is this “past experience” to which the IE refers and on what basis does the IE believe such a management deficiency is prudent or that the interests of all the Parties to the project are protected?

A fourth nugget is the IE’s concern over Nalcor’s Integrated Project Schedule prepared by Nalcor.  The IE finds “that it is generally complete as far as listing contracts, but it is a Gantt chart without activity linking, critical path(s), float time, etc., and is not suitable to the level of detail we require and had expected to view to allow us to form opinions…we cannot express an opinion as to the likelihood of the contracts being completed as scheduled.(P.174) Emphasis added.

A Gantt Chart, or bar chart, is a common tool used by Firms to illustrate a project’s schedule and the interdependence of certain activities, milestone targets and schedule status.

The IE is noting the lack of sophistication, employed by Nalcor, in the planning of this large project, one ostensibly quite far advanced.  Yet it "cannot express an opinion" on the project's status.  The finding ought to have constituted proof of inexperience and an additional signal of Nalcor's deficient project management team.

That the IE gives Nalcor 'two thumbs up' to proceed with the Project stretches credibility too far.
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RELATED STORY: DERRICK DALLEY UNMASKS SPENT GOVERNMENT

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Telegram Columnist Brian Jones wrote a very fine Article detailing some the IE’s comments relating to matters of scheduling, costs and other issues.  This is a key sentence:  “Here’s what Martin and Nalcor don’t want the public to know: the final cost of Muskrat Falls will exceed $10 billion”.  Jones item is well worth reading.

But all the issues he cites may just be secondary when weighed against those which could, single-handedly, undermine the project.  Afterall, what is magical about a forecast $10 billion price tag when pressed against losing the WMA case, collapse of the North Spur or collectively inexperienced construction management? The figure of $10 billion may not even come close!

More was expected from the Independent Engineer on Muskrat Falls. It is fine to possess the title “independent”.  But all we know from MWH Americas is that such an appellation is no assurance of either detached or skilful analysis. 

Perhaps its next Report will do better.