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Thursday 21 April 2016


Re:  the Muskrat Falls Project – “TIME TO GET SOME GOOD ADVICE”

Dear Premier:

The release of the Interim Report from EY dated April 18, 2016 left me with many questions about your judgment and the decisions you have taken regarding the Muskrat Falls Project. 

I am a Professional Engineer who has spent many years engaged in the management of many large construction projects. My remarks are intended to assist your deliberations.

You are a Pharmacist, by training, and a successful entrepreneur. But, you know no one can be an expert in all things, and particularly on matters pertaining to a complex project, like Muskrat Falls.

However, you have been in the House of Assembly since 2007; you have had time to see how this Project was conceived and sanctioned by the former PC Government. You were there when the people of the province demanded additional information on the Project. You watched as project costs climbed and allegations swirled over how it is being managed.

To silence these concerns, the PC Government established the Oversight Committee made up of senior (busy) civil servants who also had no particular expertise, or training, in the construction of a multi-billion dollar hydroelectric project.

Following the General Election, I had expected that you might develop your own independent plan on how to assess the project.

The EY Interim Report having been released, I now have reason to be concerned about the type of advice that you have received from Nalcor, the Oversight Committee, and even the Finance Minister, who previously endorsed the Project, as a Member of Nalcor’s Board of Directors.

I saw the Election as your opportunity to reset this Project and to get it under control.

The fact that Nalcor cannot provide you with a firm completion date, or even proper estimates on the cost to complete, should have steered you to an independent path.

I understand and am sympathetic to the calls, from many quarters, for the cancellation of the project.  But like you, I believe we have gone too far with the capital investment to completely stop the project.  However, “a time out” or “reset” of the Project may have been prudent. But you chose otherwise. You seem to have heeded what Nalcor has asked.  That is unfortunate.

You are aware there is no immediate need for additional power in the province, and no delay claim can be made regarding the Nova Scotia Agreement, at least not according to the Chairman of Nalcor. 

Accordingly, this winter can only be regarded as a lost opportunity to reset the Project, readjust the cash flow, provide new management, and issue new completion dates, in line with the employment of a far more experienced and capable people than has led the project to date.

What did your Government do?

First, you supported the current project management group at Nalcor.

I am wondering on what basis this decision was made and what advice you received. 

I have taken notice of Ed Martin’s resignation, just hours ago, as CEO but his removal, alone, will not correct the enormous problems this project faces.

Second, rather than reorganize or disband the current Oversight Committee, you endorsed its composition, and excused its inability to provide TRUE oversight.

This Committee is made up of senior bureaucrats answering directly to Cabinet. They have no experience in oversight matters. In fact, they provide no real benefits to the project.

Based upon the Reports the Committee has issued to date, they have taken no proactive role to resolve the plethora of problems, evident to engineers and to others, who frequently report from the project.

Evidently, the Oversight Committee Members merely meet with Nalcor officials every few months to get a Project update and regurgitate the data in a politically friendly way. There is no evidence that they have conducted any independent investigation of the growing problem of cost or management; nor have they provided, or are competent enough to provide, solutions to the all-important project schedule, which is the priority of every competent management team.
Third, you hired EY at additional cost to taxpayers, to conduct a review of the project cost, schedule, and related risks.

While EY are recognized internationally, they are best known for project accounting skills, not for expertise within the fields of project management and engineering.

Indeed, I suggest, you ought to have had some insight into their performance, EY having been installed from the beginning, as a consultant to the Oversight Committee.

Again, this was a lost opportunity to get critical facts the Government, and the public, sorely needed.

The EY Interim Report, Paragraph 4.1, states:

“the Review has been based on data and information provided by Nalcor.  EY has not sought to independently verify this data. EY has had access to Nalcor’s team but did not have direct access to the contractors.  EY has not conducted any engineering review, physical inspection or validation of the construction process.”

Premier, you are receiving advice from a Firm which has conducted no engineering review or physical inspection of the works. This approach to review finds no resemblance to any standard of engineering practice.

The people of the province deserve a more substantive and more credible Review of a project in serious trouble; one Nalcor can no longer hide.

Even Nalcor’s formal reply to the EY Report was issued on the same day it was released. I will let you decide how that is perceived by us.

What could you have done?

It has been suggested numerous times by very knowledgeable and senior people in our community, an independent Board or group of people should be appointed to provide true oversight and commentary on Nalcor's management and the progress of the Project.

There are many Firms available that have actually worked in northern Canada on hydroelectric projects that can provide you advice, paths forward, and improvements to the Project. In fact, most of our offshore projects were reviewed by an in-house process called “Cold Eyes Review”, a group of partners' experts from other projects.

Sir, you had choices. But you have chosen not to get truly independent advice. That decision leaves me very concerned as to this project’s future.

Where are we now?

We seem to be waiting for Nalcor to negotiate some type of agreement with the contractor, Astaldi. You must know these talks are being headed by the same people that chose Astaldi in the first place. Nalcor negotiated a contract containing some very questionable and risky terms, for the province. They decided on a process that resulted in the award of some very large contracts, too. 

The Astaldi contract is one of the largest ever awarded on a Canadian hydroelectric project. It certainly does not follow the model that an experienced Quebec Hydro successfully uses. Indeed, the decision to award the contract to a non-Canadian Firm, one that has never worked in the Canadian north, is very suspect.

We have heard many versions of how the Astaldi contract is either a “unit price” or a “cost plus” contract. Based on personal experience, I can only conclude it is a mess.

This is not the first time, in Canada, that large concrete projects have been undertaken in a winter environment. To state that the contractor did not perform well in the first 15 months, as EY disclosed, indicates to me that Nalcor’s site management is not competent and that the Astaldi contract did not contain adequate terms and conditions to enforce performance or provide for the application of penalties.

Even now, we have not been told the whole truth regarding Nalcor's responsibility for this situation or if we can expect Astaldi will have to pay damages attributable to the delay of the powerhouse and related components.

Paragraph 2.2 of the EY Interim Report confirms that the Project is now being managed by an integrated project team of approximately 400 people. Those people are likely located in St. John’s; not on the construction site, where they need to be; a matter the EY Report ought to have commented upon.

Paragraph 2.2 also confirms that SNC Lavalin’s original contract was changed in November 2013, that they had lost direct control of the construction management, and are now part of an integrated team headed by Nalcor, SNC Lavalin, and third party consultants.

You need to inform us, Premier, as to this question: what was the original SNC Lavalin Contract value and what is the final estimated value of the contract, now that the construction management responsibility has been removed from SNC?

I also suggest you need to find out: how many of those management personnel are working directly on the various site locations? What is the day rates of the 400 people, and the overall cost to the project? I believe, Sir, you will be surprised.  Nalcor’s estimated cost is $775,000,000.

You will also note, there is no mention in the EY Report of the major cash flow reductions on the Muskrat Falls project published for January, 2016. In the period from September to December, the monthly cost incurred on site averaged approximately $85 million. In January, 2016 only $17 million was spent.

I can only surmise, based upon these expenditures that the Project, in Labrador, was virtually shut down. Again, it was a good opportunity to reset the Project.  But, that said, no explanation is offered as to how the project is being advanced and if any value is obtained for that expenditure.

As a Professional Engineer, I am forced to conclude the EY Review lacked not only essential independence. It did not answer any of the hard questions that inspire confidence among engineering professionals, or the public; nor does it confirm that Nalcor possesses the skills needed to get this megaproject on any trajectory, except to waste hundreds of millions of public money.

Some questions and observations:

-----      How many people of the 400 management integrated team have ever worked on a large hydroelectric project in a northern climate?

----       Work on the main dam cannot start until the river diversion is completed. River diversion necessitates a working spillway and a cross river coffer dam. What is the schedule for the construction of the main dam?

----       Why has Nalcor delayed the balance of the plant contract for over a year?
----       The same contractor, Vallard, was selected to construct the high voltage DC line as the high voltage AC line, connecting Muskrat Falls to Churchill Falls. Why was the larger contract awarded without a public tendering process?  Nalcor is exempt from the Public Tendering Act and seems to follow some very irregular tendering practices, in some cases. There is certainly no oversight from Government on this aspect of the project.

----       The site agreement for labour was negotiated directly by Nalcor, not by its contractors.  The terms were included in legislation enacted by the PC government and formed the legal basis of the special project agreement. This very expensive contract was    negotiated at a time of peak labour demand. Maybe it is time for Nalcor staff, and labour, to take a significant cut to wages, given the financial crisis and the excessive wages being paid to workers at all levels.

Finally, Premier, I am at a loss to understand how a higher level of governance, at the Board level of Nalcor, will provide substantial cost savings or project improvement, as the Minister of Natural Resources has proposed.

Successful Projects are ones with good contracts, quality materials, overseen by knowledgeable site managers who are given authority to build the project.

Adding another layer of bureaucracy, essentially what is proposed, will not improve Muskrat Falls, just as having the same people make the same mistakes, over and over again, will not do anything except give the people of the province the assurance the project will cost more, and suffer even more delays.

Premier, you also need reminding that all the main equipment for the powerhouse was manufactured in China. I am very dubious about Nalcor’s oversight of this manufacture; an earlier Oversight Committee gave the matter notice but indicated none of the standards of a “survey” and all of the aspects of a “tour”. When the project is completed, how reliable will power be? Who is overseeing those “quality assurance” issues? 

As you may know, New Brunswick Power is taking down a concrete dam 50 years early, as the concrete is falling apart. Could this be Muskrat Falls in a few years?

Mr. Premier, no resident of this Province wants Muskrat Falls to be a financial millstone; but you need to know this project has been managed poorly, from the very beginning.

Ed Martin’s departure constitutes a welcomed opportunity to get this project on track.  I suggest, if you are to avoid a legacy of profound mismanagement, financial as well as technical failure on the Muskrat Falls project, you need to reflect on your approach to those issues. 

Sound advice, from those with the technical skills to provide the highest calibre “Cold Eyes Review”, is the only antidote to a massive failure of this project.

With every best wish I remain,

A Concerned Newfoundlander and Professional Engineer