According to some observers, John Mallam, P. Eng. ought to
have been — minimally — the Vice-President of Nalcor. He had served in senior
roles at Hydro for most of his engineering career and rose to the position of
Vice-President of the “regulated” subsidiary — utility speak for an entities under the control of the Public
Utilities Board. He now serves on the Nalcor Board of Directors.
not seem to fit the pliant mould that afforded cronyism to run rampant at
Nalcor’s senior level. Upon Nalcor’s creation, becoming the parent of Hydro and
other subsidiaries holding provincial assets including Bull Arm, some senior
executives were shown the door following Ed Martin’s arrival.
time for Mallam to go. Whatever the case, the long-time mechanical engineer
exhibited for the Commissioner a level of confidence, clarity and expertise
that spoke to why he had been given leadership roles in the Province’s once-esteemed
impact. Mallam came ready to drop a bombshell about how Nalcor had lowballed
the whole Risk Allocation for the Muskrat Falls project.
issue (unless, that is, you possess the iron ring of the engineering profession). Contingency allowances are added to estimates to take care of everything from lack of project definition, incomplete engineering
design, inflation, weather, labour scarcity, productivity — and everything in
between — especially the Project Schedule.
The Contingency Reserve was also an issue of concern for the Forensic Auditor.
decision to lowball the Contingency allowance resulted in the project Risks not
nearly being covered. An allowance for Risk — which manifests as overruns.
GT noted that Nalcor may have understated project costs of
about $1.3 billion and that the estimate at Sanction ought to have been $7.5
billion (plus financing costs).
been too low. He was a Member of the Independent Project Review (IPR) , a “Cold-Eyes” review team chaired by Derek Owen, an
experienced oil industry project manager.
to the IPR but believes that Nalcor had only allocated a 10% contingency, when
he suggested that the figure should have been much inflated – by “25-50% or higher.” He stated
that the cost at Sanction might have been over $8 billion. Concerned Citizens
Coalition Legal Counsel, Geoff Budden, doing the math with Mallam, suggested
that an even better figure might have been $8.4 billion. Mallam stated that was
the right place to start.
Mallam based his assertion on published studies conducted on
projects at a similar stage of development. Asked what the perfect P level is,
he replied that a P90 is not always realistic. He suggested P70 or even P50
could have been used for Muskrat, but only if the project was more developed
(including the engineering) to justify the lower contingency reserve.
harshest criticism for the Contingency allowance given the Construction
Schedule — which contained no “float” or period of time to allow for delays. Mallam
suggested that six months to two years was necessary for this purpose. The project
is now two years behind the original February, 2017 Schedule.
The Schedule was given a P1 — or a 1% probability of being
met. He noted that the amount of contingency applied to the Schedule was
“negligible”. As GT confirmed, Nalcor announced the 2017 target, knowing that it had
no chance of success.
the afternoon. Owen took some considerable time to explain when different P factors might be employed. But as to the Contingency Reserve for Muskrat, he left no doubt that the whole Committee had been
like-minded on the matter. He also
confirmed that CEO Ed Martin was informed of the observations of the IPR team and
that he seemed “surprised”.
of the warning, Contingency remained recklessly low at Sanction. He can also
inform us why $500 million Strategic Reserve never made it into the project
costs, got hidden as a management reserve, and was omitted from the calculation
that favoured the project.