This piece contains the key findings of the Forensic Audit. Also posted is a lengthier and more thorough examination of the Report entitled “Evidence of Malfeasance?: A Review of the Forensic Audit Report into the Muskrat Falls Project (Phase II)”. It is available now at the Link. - Des Sullivan
HIGHLIGHTS OF SECOND FORENSIC AUDIT REPORT
As was the case with Phase One of the Muskrat Falls Inquiry, the construction phase of the Inquiry has commenced with the release today of the forensic audit conducted by Grant Thornton.
The
audit sets the stage for the examination of witnesses crucial to the
understanding of how the project went so badly wrong.
EARLY
WARNING SIGNS
The
key finding of the forensic audit is that between the decision to sanction the
project on December 17th, 2012 and the financial close of the project several
months later, “bids were received from
contractors whom ultimately were hired which collectively, exceeded the the DG3
budget by approximately $600 million, a 25% overage.”
The
result was that the contingency set aside at that point of $368 million “was
exhausted.”
When
the project manager, Paul Harrington, was asked why Nalcor did not reexamine
the cumulative present net worth (CPW) of the project given those facts, he responded “not my call.” When asked to
clarify whose call it was he said “senior management [Ed and Gilbert] ...and
Government.”
This
is crucial because up to the point of financial close it was still possible to
have given sober second thought to the wisdom of continuing with the project
without incurring financial penalties other than the costs of some early
contract awards. Once financial close occurred we were locked into completing
the project.
This
was an early warning that the project was going sour and we need to know who
knew and why they didn’t exercise the due diligence which was owed to the
taxpayers and ratepayers of the province. The key questions are:
1.
When did Mr. Martin and Mr. Bennett know about
this issue?
2.
Was this communicated to the Chair of the Board,
Mr. Ken Marshall, and if so, what did he do about it.
3.
Was it communicated to the government and to
whom and what analysis was done to determine whether it was wise to continue
with the project given the early warning signs that the project was getting
badly out of control at its inception. We look forward to hearing from former
Premier Dunderdale and senior government officials and on this issue.
We
expressed concern at a very early stage about the award of the main contract to
Astaldi given the fact that this would be their first contract in North America
and that they had never done a project in the north. As we now know our
concerns were well placed. Their bid was an outlier, well below two bids from
experienced Canadian contractors. And that contract accounted for almost one
third of the cost-overruns, $1.2 billion.
In addition, the estimate of labour hours in the Astaldi bid was 6.82 million hours as compared to Nalcor’s DG3 estimate of 3.66 million hours, a difference of over 3 million hours.
In addition, the estimate of labour hours in the Astaldi bid was 6.82 million hours as compared to Nalcor’s DG3 estimate of 3.66 million hours, a difference of over 3 million hours.
1.
We look forward to hearing from Mr. Martin, Mr.
Bennett and Mr. Ken Marshall as to why those early warning signs were also
ignored?
2.
What role did then Premier Dunderdale and other
senior government officials play in the award of the contract to Astaldi and
what knowledge did they possess about the bid and the company?
THE
TRANSMISSION LINE
The
next largest overruns came from the transmission line contract with Valard ,
20%, or $649 million. The original
tendering strategy was to divide the project into four separate contracts,
consistent with the approach used by Hydro Quebec. The forensic audit has
revealed that no geotechnical work was done to support the estimate which in
turn led to the use of an “open book negotiation” rather than the normal
competitive tender process.
We
look forward to hearing from the managers responsible for this project as to
why there was only one contract and why the normal competitive bidding process
wasn’t used.
ENGINEERING,
PROCUREMENT, CONTRACTING AND MANAGEMENT (EPCM)
Originally
it was planned to use SNC Lavalin as the EPCM contractor, but as we know from
the first phase of the Public Inquiry that approach was abandoned in favor of
an “integrated management team”, composed of the Nalcor Management Team and SNC
Lavalin. The increased costs of the change amounted to another $406 million.
CORE
MANAGEMENT TEAM
The
forensic audit notes that “the core management team, with the exception of Ron
Power, did not have any hydro experience.”
DETAILED ANALYSIS
The detailed analysis of the Grant Thornton Report referred to at in the Editor's comment, at the beginning of this article is also available on this Link. The Full Report is available here.
The detailed analysis of the Grant Thornton Report referred to at in the Editor's comment, at the beginning of this article is also available on this Link. The Full Report is available here.