EY REPORT: BALL CAPITULATES TO NALCOR CLIQUE

Written by Cabot Martin and Des Sullivan

Yesterday, the Minister of Natural Resources, Siobhan Coady did not release the Review promised in January, on the Muskrat Falls project; one that was supposed to have been completed by March 31, 2016.

What we have, instead, is an INTERIM, or unfinished, flawed, and incomplete, Report from EY. 

While the Minister acknowledged, yesterday, the project is suffering major problems and is concerned about the situation, the Premier has given the project the green light anyway - a response that is completely inconsistent with the financial risk to the Province implicit in EY's findings. 

It seems Premier Ball and his Minister concluded, long ago, that whatever the Report contained, they would not put the project on hold and delay a restart - not even for 45 days - when the full EY Report would be finished. 

With timing one would only expect from Nalcor, Coady dropped the EY Report in our laps two days before the very day on which a painful Budget will be delivered by the Finance Minister.

The final Report will not be ready until May 31, 2016... exactly as this Blog predicted in Monday's Post.  

The timing deserves mention because this Liberal Administration is showing signs of the very same insidious characteristics exhibited by the Tories.

The approach speaks to the repetitious trickery of a Nalcor in full denial. Release the Report in advance of another real big event! One that will take attention away from its sordid contents.

The clash of the Interim EY Report and Thursday's Budget is every bit as critical, to the solvency of the Province, as any issue the Finance Minister will raise. Constructing a Budget without Muskrat Falls is to construct an illusion.

This Interim Report contains plenty to be disturbed about. But it doesn't matter. The Ball Liberals have chosen to take ownership of the decision and move forward with Muskrat Falls.

The CBC reports the Minister saying:

"Because of the numbers of contracts that are involved, because of our obligations under the loan guarantee, because of our obligations to Nova Scotia, it's not in the province's best interest [to cancel the project]".

How Premier Dwight Ball or Shiobhan Coady was able to jump to that conclusion is not stated.

Show us the Report, Minister, that brought you and the Premier to that outcome!

There is nothing in the EY Interim Report that supports that decision. On the contrary. If there is some other Report, let us see it!

Or is it the case that, like the Tories, the Liberals are determined to proceed 'come hell or high water'?

At the outset, EY admits its Report is not based on an independent field analysis and interviews conducted on the Muskrat Falls construction site, as one would expect of any "independent" and thorough job. EY 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 the Nalcor team; we have not had direct access to contractors. EY has not conducted any engineering review, physical inspection or validation of construction process." (p.7)

So, what value do we give EY's claim to independence, if it does not dig down to the underbelly of this project?  It is not as if Nalcor has a record of being forthright with the public.

In addition, the EY review did not conduct "a formal review of the Project's governance arrangements" on Muskrat Falls. "We have not met with the Board of Directors of Nalcor or its subsidiaries..." it says. Yet, its reviewers have observed that "elements of governance have not been effective "and that "there is a need to strengthen" it and "provide more effective oversight..."

As important as governance and oversight certainly, EY did not even assess the effectiveness of Nalcor management and the Project Management team.

The state of the project speaks to that issue.

One has only to read part 3.3 on page 6 of the Report and ask how tEY can draw from unfinished negotiations with Astaldi, the need to review the Muskrat Falls project only as of September 2015 and not up to the present?

Section 3.3 of the Report states:

During the Review, Nalcor advised EY that the commercial discussions in relation to the MFG civil works contract would not be completed within the time frame of the Review and that Nalcor would be engaging in risk assessment and re-baselining activities subsequent to the completion of those discussions.

Then, EY concludes, in the next Section:

3.4   As a result, this interim report will assess the reasonableness of the Project's most recent approved cost and schedule forecast – namely the September 2015 Forecast....

This is illogical; it makes no sense that EY would not insist on up-to-date numbers.

Yet, EY proceeds to describe several egregious examples of Nalcor incompetence, and deception, too.

How often, on this Blog, has Nalcor been challenged regarding the type of contract it awards and why it has asserted its risk was covered off even as it had difficulty explaining what it meant by "fixed price" or "unit priced" contracts.

Now, we have the answer. What Ed Martin was telling you was bullshit!

All you have to do is go to paragraph 5.8 of page 9 where E&Y talks about the contract structure it was using for Astaldi. E&Y states the contract:

"was designed to realize possible savings in construction labour productivity and also to protect Nalcor from any labour cost overruns that might be experienced by the contractor. It was intended that this would be achieved by including in the contract a maximum value for labour that Nalcor would have to pay to the contractor. However, the payment mechanism is based on person-hours expended rather than m3 of concrete poured. This mechanism did not capture the potential for poor contract management of labour and the consequent decoupling of labour paid for from work completed (measured by m3 of concrete poured). As at December 2015, the proportion of contract value paid to the contractor is significantly greater than the proportion of the concrete that has been placed". (emphasis added)

Renowned Canadian Hydro Engineer James Gordon was quick to telex this comment: 

" With payment based on hours worked instead of measured work (cubic meters of ??) the contract is in effect a cost plus contract instead of a unit price contract. This explains the cost over-runs. A hydro project should never be built with a cost plus contract."

E&Y places the blame squarely on Astaldi's "poor contract management"; but Milan may have other ideas.

For what it's worth, this is vindication for the engineers who have contributed to this Blog. It has been stated here, time and again, that Nalcor was engaging in "cost plus".  And, Nalcor has denied it!

Now, let's look closely at a few more of the Report's most salient disclosures which, taken together, add up to a condemnation of Nalcor's management.

"The overall conclusion...is that the September 2015 Forecast is not reasonable", EY states. 

The Report states the Muskrat Falls Generation ("MFG") contract "is significantly behind schedule"...the delay will have consequences , including "cost and schedule"....target dates related to....Generation facility will not be met..." (p.5)

On the subject of risk, EY states "...remaining Project scope mean that significant risk still exists", including to the generation contract, the transmission line contract, converter stations contract, and the cost contingency fund. (p.8)

But the poster Company for contract cost overruns is Astaldi. E&Y chronicles Astaldi's slow pace of ramp up, planning, and execution and notes this delay "will directly impact overall Project milestones (and) have a knock-on impact to Nalcor's Project costs and to costs of other impacted contracts (with an) ...aggregate cost impact excess of...contingency.."

At December 31, 2015 the amount of the contingency remaining was $173 million (p.10) - now potentially all absorbed by Astaldi - with more, undoubtedly, to come. 

Little wonder the President of Astaldi let it be known he still expected a profit to come out of last year!

Finally, the EY Report contains "Recommendations"; but they do not nearly reflect the conclusions just described, and the many others detailed within its short review. EY is weak given the failure of Nalcor management and the cost their incompetence has levied on the Newfoundland ratepayer.

Instead of hard hitting guidance, the recommendations include phrases like "project should revise its planning and forecasting processes...make appropriate allowances for all risks.....contingency should be reviewed....governance...should be re-evaluated...reporting should be enhanced..."

Totally bewildering, too, is the fact that nowhere in the discussion of project risks does it mention two of the biggest - the need for a Hydro Review Board for the North Spur or Hydro Quebec's challenge to the Water Management Agreement.

In taking this approach, one compounded by the Consultancy's failure to question or verify the information given it by Nalcor, EY has skewered any value its Final Report might offer.

EY even goes so far as to follow Nalcor in excluding "interest during construction" from the total project estimate of $7.6 billion when it should have been $9.05 billion.

And, in spite of all this, the Ball Government has made it clear that Muskrat Falls is proceeding anyway. It has attempted to uncouple Muskrat from the Budget process by engaging in the charade Siobhan Coady began yesterday.

But not even a fool will fall for that.

The Budget cuts and tax increases to be announced Thursday, will be crafted to leave lots for Astaldi. The Finance Minister has already scheduled a "Supplemental Budget" to look after all Nalcor's needs.

A final comment on the structure and tone of the EY Report is necessary.

Given the expected exclusion of Muskrat Falls from the Budget, and the flawed basis of the EY Report, the statements of Minister Siobhan Coady mark the full capitulation of the Ball Administration to Nalcor, and to the other forces behind the Muskrat Falls project. 

The Premier and the Minister leave the public service and the taxpayer to face the full fury of Minister Bennett's Budgetary ax.