Huge Muskrat Falls cost overruns obvious soon after megaproject got underway, audit shows
HAPPY VALLEY-GOOSE BAY, N.L.—An audit has found executives overseeing the Muskrat Falls megaproject should have been aware that it would be almost impossible to meet cost and schedule targets.
The forensic audit into Muskrat Falls construction was presented to the inquiry into cost overruns Feb. 18 by accounting firm Grant Thornton.
The cost of the Muskrat Falls dam has essentially doubled to more than $12.7 billion since it was sanctioned in 2012, with first power expected later this year.
The report found that Nalcor Energy, the provincial Crown corporation overseeing the project, should have known months after Muskrat Falls was sanctioned — when there was still time to back out — that work was six months behind schedule and project contingency was already exhausted.
At the same time, bids for construction contracts were exceeding Nalcor’s estimate, with bids ranging from 60 per cent to 160 per cent more expensive than Nalcor’s estimates.
Grant Thornton auditor Scott Shaffer testified the findings from this period in 2013 raised significant red flags, and Nalcor executives appear to have ignored the increasingly dire writing on the wall.
They appear to have been briefed on these trends but there was no evidence that Nalcor adjusted contingency figures or cost estimates before the government of Newfoundland and Labrador finalized the federal loan guarantee in late November 2013.
That deal with Ottawa effectively locked the province into completing the Labrador project no matter how high costs became.
“You knew by April that contingency was basically exhausted, and you had another seven months from April until November to do something about it. You also knew as more bids were coming in there (were) also problems in terms of the bids exceeding the budget amount,” Shaffer said.
“I looked at it and said, well, there’s an issue here.”
The audit also looked at Nalcor’s contract management, finding that Astaldi, the Italian company hired to do much of the construction, was selected largely because it had one of the lowest-cost contract bids.
The audit attributes $1.2 billion in cost overruns to Astaldi, mainly due to performance issues with speed and work standards that did not align with its initial bid.
An email from a high-ranking Nalcor risk assessment officer cited in the report shows a hesitancy among Nalcor’s own staff toward Astaldi.
Rob Hull’s email suggests he considered Astaldi the lesser of two risky options that were mostly being considered for their proposed cost-effectiveness.
“While I am not overly enthusiastic about the outlook for Italy … and hence exposure to an Italian firm for such a substantial contract, I understand there are commercial reasons as to why these two players comprise the short-list,” Rob Hull wrote in August 2013.
“Astaldi is better (less risk) but risks above should be communicated to the decision makers.”
Grant Thornton found Nalcor’s lacklustre oversight of Astaldi’s work contributed to the overruns.
The report found Nalcor was aware for two years that Astaldi was not hitting its performance targets but did not look into replacing the contract until 2016, when it was advised to be a poor financial move.
Experts quoted in the audit said Astaldi’s unusual expenditures should have been more heavily scrutinized, like the firm’s proposal to enclose work in the winter to make it easier.
“An enclosure strategy is not uncommon in cold climates, however attempting to enclose an area as large as the dam structure combined with an overhead crane, material movement system is not common and warranted detailed scrutiny,” the audit read.
The audit cited instances when Nalcor executives knew costs had risen months before its board of directors approved a budget increase.
The audit also found that Nalcor executives were made aware in spring 2013 of a report by engineering firm SNC-Lavalin assessing Muskrat Falls project risks — but executives chose not to look at it, and emails indicate one official asked for the report to be kept in draft form.
The former CEO of SNC-Lavalin told auditors that he discussed the risk report with former Nalcor CEO Ed Martin, but Martin said he had no recollection of the conversation.
SNC’s assessment added a possible $2.4 billion price tag to Nalcor’s risk calculations.
Full power from Muskrat Falls is expected late next year. The dam on the lower Churchill River will send power to Newfoundland and later Nova Scotia through subsea cables.
The second phase of the inquiry’s hearings into Muskrat Falls’ construction period will continue this week in Happy Valley-Goose Bay.