Muskrat estimates did not meet 'any reasonable standards,' says Nalcor insider

A member of a team that was providing what's called a "cold eyes" review of the planning for Muskrat Falls delivered some highly critical testimony Wednesday during the public inquiry reviewing the project.

And more details about what appeared to be a fractious relationship between Nalcor and SNC-Lavalin also trickled out.

Construction delay allowances 'almost negligible'

It comes as the inquiry continues to probe the decision to build the Muskrat Falls hydroelectric station on the Lower Churchill River in Labrador, and find out why costs have increased by billions since construction began.

But it was the testimony of one of the province's leading experts in hydro development Wednesday that generated the most attention.

John Mallam said the level of cost contingency built into the 2012 cost estimates for Muskrat was extremely low considering the aggressive approach being taken by Nalcor.

And, he added, the "almost negligible" amount of time built into the schedule for construction delays was also woefully inadequate.

Mallam's blunt assessment was in line with earlier findings of a forensic and investigative audit by Grant Thornton, but in saying so, Mallam delivered one of the strongest criticisms yet against Nalcor's aggressive cost and schedule estimates for Muskrat Falls.

And it came from one of the people tasked to keep an eye on the project.

"Ten per cent is well below what any reasonable standard would suggest should be required," Mallam said of the contingency built into Nalcor estimates.

I would have expected to see a contingency of 25 per cent to 50 per cent, perhaps higher, depending on the risk analysis.- John Mallam

"I would have expected to see a contingency of 25 per cent to 50 per cent, perhaps higher, depending on the risk analysis," he added.

Mallam spent a long career with Newfoundland and Labrador Hydro and Nalcor, and was intimately involved in several hydro projects during his career.

He is now retired, and was recently appointed to the board of directors of Nalcor, the Crown-owned energy corporation that owns Muskrat Falls on behalf of the province.

Experts not directly involved

He was part of what's known as an independent project review team as the Muskrat project was moving through various decision steps, including the signing of a partnership between Nalcor and Nova Scotia's Emera in 2010, and official sanctioning in late 2012.

The team was comprised of specialists with various levels of expertise who were not directly involved with the project, and they were given full access to members of the Muskrat Falls project team and documents in order to provide an assessment of the readiness from one decision stage to the next.

The team's final assessment prior to sanctioning offered plenty of praise for Nalcor, saying the project team "exhibits a degree of readiness that meets or exceeds industry requirements."

But Mallam cast serious doubt on whether realistic cost and scheduling allowances were used by Nalcor.

The p-factorfactor

Muskrat was sanctioned at a construction cost of $6.2 billion in December 2012, and according to testimony, included a 10 per cent contingency to deal with possible cost overruns.

And that estimate was based on a p-factor of 50 per cent, which is a formula used in the construction industry that determines the probability that cost overruns or underruns will occur.

Mallam said past practices for hydro projects in Newfoundland and Labrador is a p-factor of between 70 and 90, which means a lower risk for overruns, but also a higher upfront costs for things like engineering and planning to ensure there are no surprises.

Mallam explained that "quite a few" specialized organizations throughout the world provide advice on how much contingency to include in a major project with a p-factor of 50, and 10 per cent is well below standard.

"Ideally, I would like the highest p-factor possible," said Mallam, while acknowledging "that's not always practical."

Lower risk means higher cost

A contingency reserve of 50 per cent instead of the 10 per cent used by Nalcor would have boosted the original estimate to roughly $8.4 billion, which would have raised bigger questions about whether Muskrat was the least-cost option for the province's future electricity needs.

But that's not the only concern raised by Mallam.

Nalcor's original schedule forecasted first power from Muskrat Falls in mid-2017, but testimony and evidence so far indicates that was never a realistic timeline.

Mallam said the problem was that Nalcor did not include any allowance for construction delays.

On a project of this magnitude, of this complexity, over such a large construction front, I would have expected to see a float of anything from six months to two years. And as I recall there was almost nothing in it.- John Mallam

"On a project of this magnitude, of this complexity, over such a large construction front, I would have expected to see a float of anything from six months to two years. And as I recall there was almost nothing in it."

Coincidentally, first power from Muskrat Falls is delayed by two years.

What's more, all-in costs have ballooned to nearly $13 billion.

Losing confidence in SNC-Lavalin

Meanwhile, more is being learned about the rocky relationship between Nalcor and SNC-Lavalin, the Quebec-based company that was awarded the critical engineering, procurement, construction and management (EPCM) contract.

Testimony indicates SNC was having difficulty filling key positions, and Nalcor was growing increasingly frustrated with the company's performance prior to and after project sanctioning.

This was unfolding as SNC-Lavalin was at the centre of an international corruption scandal that continues to make headlines.

The inquiry was told that Nalcor eventually decided to establish an integrated management team with SNC.

"Mitigation issues were taken to make sure we were well looked after," former Nalcor board member Ken Marshall said during testimony this week.

The lawyer for former Nalcor CEO Ed Martin, Harold Smith, also signalled there were problems with SNC-Lavalin during his cross-examination of Mallam.

Mallam expressed concern about the decision to establish a joint-management team between Nalcor and SNC-Lavalin, saying such a scenario often leads to problems.

But Smith asked Mallam: "What if they are under-performing and not doing the job (they) were contracted for?"

The role of SNC-Lavalinis expected to receivegreater attention when officials from the company testify before the inquiry on Oct. 31 and Nov. 1.

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