FORENSIC AUDIT: NALCOR IGNORED BIG EARLY WARNING SIGNS

The Uncle Gnarley Blog has posted two commentaries on the second Forensic Audit Report of Grant Thornton released today by the Commission of Inquiry into the Muskrat Falls Project. Both articles were prepared by Ron Penney, David Vardy and Des Sullivan who have standing at the Inquiry on behalf of the Concerned Citizens Coalition. 


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.


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.

Des Sullivan
Des Sullivan
St. John's, Newfoundland and Labrador, Canada Uncle Gnarley is hosted by Des Sullivan, of St. John's. He is a businessman engaged over three decades in real estate management and development companies and in retail. He is currently a Director of Dorset Investments Limited and Donovan Holdings Limited. During his early career he served as Executive Assistant to Premier's Frank D. Moores (1975-1979) and Brian Peckford (1979-1985). He also served as a Part-Time Board Member on the Canada-Newfoundland Labrador Offshore Petroleum Board (C-NLOPB). Uncle Gnarley appears on the masthead representing serious and unambiguous positions on NL politics and public policy. Uncle Gnarley is a fiscal conservative possessing distinctly liberal values and a non-partisan persusasion. Those values and opinions underlie this writer's views on NL's politics, economy and society. Uncle Gnarley publishes Monday mornings and more often when events warrant.

TEN YEARS AFTER MUSKRAT FALLS SANCTION – We will have to think abandonment of the Labrador Island Link

Put simply, whether Muskrat Falls come online or not, it cannot be relied upon. Without admitting their gross negligence at the start, Hydro is essentially saying that that we should try to salvage Muskrat Falls at an undefined cost and for for however short the duration it might operate.

THE PROOF MUSKRAT FALLS IS NOVA SCOTIA’S PROJECT

The substance of Hydro’s mission is to satisfy the contracts with Emera to get large amounts of power flowing into Nova Scotia for the betterment of that province and its ratepayers.  The Island could easily live without the Muskrat Fals project and in fact, other than for the onerous Emera contracts, NL ratepayers would be best off if it was abandoned and left to rust.

FIRST YEAR OF OFFICIAL ENERGY DELIVERY NOT QUITE WHAT EMERA BARGAINED FOR

PlanetNL52: Happy Anniversary Emera on 1 Year of Official Energy Delivery Not Quite What Emera Bargained For Despite all the bad news related to Labrador Island...

10 COMMENTS

    • I think that link you found is a scam.

      The future is likely distributed generation, so rather than remote hydro dams, we will have wind farms, small hydro, gas turbines, solar PV and battery banks all working together. Power will be produced closer to where it is used so there will be less transmission loss. Huge remote power plants will be dinosaurs.

    • Actually there is some merit to the link. Several Dutch companies are adapting the technology and what it involves is a catalyst separating H2 an O molecules in water so they can be recombined in a Fuel Cell to produce electricity. This is not much different but more efficient than salt water and iron which also separate water into H2 and O but at a much slower rate. The production of the catalysts takes some energy and must be replenished over and over but is recyclable. It is this catalyst that remains a mystery. This technology if adapted in the Netherlands on a wide scale could result in a major disruption in the fuel and auto industry. It may be something to watch in the near future. Like so many things in the scientific community it is not what is already discovered but what is being discovered is what counts.

  1. From what we can surmise to date, the original Nalcor estimates were nothing more than a complete crap shoot!

    Neither the numbers, nor the time schedule were even remotely possible to achieve!

    In other words, a work of “fiction” to gain sanction!

    Mr. Martin is obviously still suffering from delusions of grandeur.

    When your credibility has been completely shredded, there is only one thing left to do?

    Deny, deny, deny……

  2. The Counsel Smith is having "some difficulty". His boy Ed wilfully took the plunge, awarded the Astaldi contract fully knowing they had jumped off the iceberg. Hello prudent management! The Board sat back, took a deep breath, smiled, waved, their boy saw more clearly the pilot's vision.