MUSKRAT: ALLEGATIONS OF PHONY COST ESTIMATES

This is one engineer's story of how Nalcor "low-balled" the cost estimates for the Muskrat Falls project, paving the way for huge cost overruns. The alleged phony estimates led to an inadequate budget for the project, and indiscriminate contract awards — Astaldi a classic example. The engineer states that Nalcor failed to perform adequate due diligence — ignoring well-established processes designed to confirm valid estimates such as those used by SNC-Lavalin. The post also discusses the implications of those allegations for the integrity of our political process.

Muskrat Falls — A History of Misinformation — 2010 to 2015

In 2010, Nalcor hired SNC Lavalin (SNC) to conduct the engineering, procurement and construction management (EPC) for the MF project. A key aspect of the Company's role — essential to any decision to proceed — was the preparation of a cost estimate.

The $5 billion investment Premier Williams announced at that time quickly became $6.2 billion ($7.4 billion, including the cost of borrowing) as Nalcor sought sanction from the Dunderdale Government, in 2012. $6.2 billion was the cost figure Nalcor used in its Application to the PUB and the claim that the Muskrat Falls option exceeded the “isolated island” option by $2 billion.

But soon after the provincial government gave its blessing to the much-heralded legacy project — given boost amidst fanfare, hyperbole, the pillorying of “naysayers” and embellishments that included the promise of green power, profits in the billions of dollars, and an end run around an avaricious neighbour to the export market — sceptics soon learned that the hype could not be sustained.

The truth about this project began to trickle into the public domain. While the ugly facts ought to have unfolded as a flood, it seems they were held back by bureaucrats unworthy of the power to which they had been entrusted.

Was the lid kept on the "real" price tag of Muskrat Falls in the interest of re-electing a Tory Government? Did the exigencies of party politics outweigh consideration of the public's right to know? Was it the case that Nalcor and the government couldn't care less that the project was a bust before it got started?

Now, left for digestion is the source of the falsification of the original project estimates in consequence of an $11.7 billion price tag — heading for $15 billion, according to many expert engineers.

But this digestive process is important. It may be beyond the public's capacity to stop the madness, but we have a right to assess the ethical standards of those who contrived it.

Last week, in a post entitled Muskrat Cost Estimates: A Complete Falsification a well-placed former Professional Engineer with Nalcor made this comment:

“I could not put up with falsifying information anymore.

To begin with, the original cost of $6.2 billion on which the project was approved was a complete falsification. The estimate was deliberately kept low — below $7 billion, so as to appear favourable relative to the cost of thermal power generation.

The likely costs were known about three years ago, but Nalcor Management kept it a secret, steadfastly denying that there were major schedule delays and cost overruns, until it was no longer possible to hide the true status with the election of a new Provincial Government.”

The engineer’s claim of falsification of the estimates mirrored those made by other professional engineers who played key roles in the project. But this professional gave details of a level of deception that exceeded that heard from any other quarter.

Following additional interviews, more details have emerged alleging that the early project estimates were phony.

The evidence disputes the assertion by the new Nalcor CEO, Stan Marshall, who appraised the project this way:  “It was a gamble. And it has gone against us.” Obviously Marshall was trying to invoke a “risk” metaphor. He could simply have said that the sanction decision was the equivalent of going for broke.

Fictitious project estimate met pre-determined project cost

Many engineers who are specialists in their field possess specific knowledge of the processes which their profession has developed to ensure that owners do not walk blindly into foolish investments. Some of them now ask: who signed off on the "Approved for Implementation" cost estimate? Did SNC “sign off”? Was proper due diligence exercised?

The evidence surrounding those questions, and the alarming acceleration of cost overruns, is disturbingly inconsistent with what they consider to be due diligent practices.

The Uncle Gnarley Blog’s engineering source has now confirmed that SNC-Lavalin was engaged in the preparation of cost estimates for the project, but that the company did not issue one “Approved for Implementation”.

Within SNC-Lavalin, an "Approved for Implementation" cost estimate necessarily follows an “Executive Review” of the numbers. These are rigid processes essential to concluding a project’s viability — which conclusion, of necessity, must be matched by an “implementable” budget estimate.

Engineers state that an Executive Review is an essential and integral part of SNC’s "Estimate Validation Process."

For a multi-billion dollar project, the executive review panel — whether of SNC or of any organization — typically consists of the VP of Project Management, VP of Construction, VP of Design Engineering, VP of Finance, and VP of Risk Management.

This engineer explains that the group’s knowledge and experience coalesces in an effort to dissect the estimate, and requires that the team charged with preparing it is faced with the highest level of scrutiny. They are expected to defend the source and validity of the information, the integrity of the unit prices, the construction methodology, the project schedule, the risk analysis, and the proposed contingency allocation.

The process could take a week to ten days for a multi-billion dollar project.

Upon completion of the review, any errors and omissions are corrected — and only then does the "Executive Panel" endorse the estimate.

In the absence of such a review, major errors can (and do) creep into an estimate with catastrophic consequences.

In the case of the Muskrat Falls project, the problem of the budget dated back to 2012 when Nalcor learned that the cost estimates — prepared by SNC — were not compatible with the “Scope” of the project. Said the engineer: “we were satisfied on three levels:

1. Scope of the project — well defined,
2. Engineering — major parameters completed,
3. Quantities changes — minimal.

But the fourth — the budget process — was a catastrophe.

And this was not due to a lack of knowledge.”

“Nalcor knew”, he said, “that there was a major gap in the project scope vs. the estimates. Nalcor simply took a policy decision to understate the project costs.” As a result, the budget allocation for the project was also inadequate.

Low Project Estimate led to low (wrong) Budget estimate which led to…

With the project estimate wrong, the budgets associated with the work contracts were also wrong. “They were,” noted the engineer, “almost always too low.”

He states that, from the moment project construction implementation began, the bids received were so much higher than the project budgets approved by Nalcor that the crown corporation was forced into "creative accounting on a massive scale”.

The contrived low budgets inevitably meant that the bids for the contracts far exceeded the budgets. This was an immediate cause of major project cost overruns.

It appears that no “Executive Review” was ever done; if it was, he stated, how such errors could go undetected remains a mystery.

Having low-balled the estimates, Nalcor staff soon had to deal with the bids for various pieces of the work.

The engineer states that "the sufficiency of the budget appeared to be the only criterion when awarding a contract."

“Contractor suitability”, he said, “took a spot that was a distant second.”

The engineer’s comments provide readers with a glimpse into why diligently prepared and tested (defended) cost estimates for the Muskrat Falls project were so critical. They partly explain the project’s current cost estimate of $11.7 billion; the other part relates to the project team’s inexperience and incompetence. The massive figure also provides insight into Nalcor’s settlement with Astaldi of a $700 million claim for “extra” costs.

The Astaldi Fiasco

The engineer noted that the Astaldi contract  was a classic example of how Nalcor dealt with the insufficient budget and the low-balled estimate.

Demolition of the "Dome"

Said he: “Here was a contractor who had never worked in Canada, had no experience working in a harsh environment like Central Labrador — its senior management never having seen a snow storm. The Company had no idea about low productivity winter work, no knowledge of managing labour under the kind of labour contract Nalcor had entered into with the trade unions. Yet, it was awarded the most critical contract of the whole project simply because the bid fit Nalcor's budget for the work.”

As if to underscore the point, he continued: “The Unit costs were so wrong… it did not even include consideration of our cold weather environment… such estimates should be in a class by itself… you could see from going through it the bid was so wrong… because it had so many things left out. The Canadian contractors knew what they were doing. They were hundreds of millions of dollars higher than the Astaldi bid.”

The short list — some bidders had joint venture partners including Canadian firms — contained four bids for the powerhouse, spillway, and transition dams. The highest bidder was the Salini joint venture $1.9B, followed by IKC-ONE partnership $1.7B, Aecon partnership $1.55B and Astaldi $1.0B.

The three highest bidders might be expected to be close given their prior experience on heavy civil projects. And in the context of the size and nature of the tender, they were within striking distance of each other’s bid — that is, except for Astaldi.

Our current engineering counsel gave the Astaldi problem additional context.

Normally, he stated, when such a gap occurs in the bid prices received, a prudent owner will ask why the big difference. Did the lowest bidder fully understand the project? What, if anything, was missed? In particular, the owner might ask: why were the three experienced bidders so much higher than the lowest — the latter having the least to bring to the table?

Said the engineer: "If Nalcor noticed it, they ignored it. The evaluation and award was done behind closed doors with the highest secrecy. Every contract functioned this way, to a greater or lesser degree."

The Executive Management of SNC left the project in late 2012. SNC’s continuing involvement was principally associated with the project’s engineering design.

Nalcor, in spite of being complete novices (virtually all the management team had come from the oil industry) brought down the “curtain” on SNC’s substantial hydro project expertise and did not find it elsewhere. Nalcor took not just the enormously complex job of procurement and project management in-house, it took full control over the entire estimating exercise. Nalcor proceeded with what it perceived was a “saleable” $6.2 billion figure — even though, the engineer noted, "everyone knew" it was completely unsustainable. 

In that way, Nalcor kept control of the project cost estimates and the assumptions on which they were based, allowing aggressive “unit pricing”, a low contingency, and other tricks of the trade to low-ball the estimate and maintain the fiction that Muskrat was “the lowest cost option”.

Falsified Forecasts Hidden for Three Years

Nalcor controlled the public narrative — choosing what the public was allowed to learn and when — until the low-balled figures could no longer stay hidden beneath the lie amid fast-rising project costs.

Stated the engineer: “Obvious was the chronic shortage of the amounts budgeted for each contract — hence the compelling need to falsify the forecasts — until the Provincial Government changed."

Finally

Since 2012, costs have risen on the Muskrat Falls project by $4 billion. In announcing that project costs had ballooned to $11.4 billion in June 2016, the CBC attributed this comment to the current Nalcor CEO: "I'm not at all surprised that the cost is where it is," said Marshall, adding the "original estimates were low."

CEO Stan Marshall

Was Mr. Marshall telling all that he knew? Is he still content with that explanation? Or, is it just standard industry to falsify project estimates to get the project approved even at the risk of getting the owner in trouble?He might wish to address his remarks again.

This blogger is not in a position to verify the allegations made here. I can say that the informant was forthright in answering my questions and that his integrity seems unassailable. This is a case of one of Nalcor’s own, now no longer in its employ, explaining to a concerned public why a project on which their hopes and expectations were raised to a high level has crashed to earth. By any measure, what he has to say has major implications for the public, for the public purse, and for the integrity of government.

But there is more.

This engineer’s allegations also have enormous implications for politics at the highest level of this province. Readers are reminded of the comment that the falsification of the project estimates persisted “until it was no longer possible to hide the true status with the election of a new Provincial Government.”

If nothing else, the engineer’s comments place a major cloud over the integrity of our political system and of our political leaders.

Perhaps the mainstream media will ask some of the disturbing questions this story evokes.

Perhaps they won’t.

Premier Dwight Ball

But if the allegations are true, the public deserves to know if former Premiers were party to, and aided in, the deception. Did successive Progressive Conservative Administrations play a role in suppressing low-balled project estimates and huge project cost overruns in an attempt to secure the election of 2015?

Government at all levels — bureaucratic and political — must be held accountable. We need to know if this engineer’s allegations are correct.

Premier Ball, CEO Stan Marshall: the people of Newfoundland and Labrador deserve those answers right away.