The Site C dam project faces “significant schedule and cost pressures” that could inflate its final price tag to more than $12.5 billion, according to a new report by one of Canada’s leading auditing firms.
The report, by Deloitte LLP, was commissioned by the B.C. Utilities Commission as part of an independent review of the BC Hydro project on the Peace River ordered by the new B.C. government.
The report substantiates statements from many prominent critics of the project, including former BC Hydro CEO Marc Eliesen, that the $8.8 billion project faces serious risks of major cost overruns.
Deloitte was instructed to examine the options of suspending, cancelling or continuing with Site C, to assist the B.C. government in making a final decision about the project’s future, a verdict that will be heavily influenced by Site C’s finances.
Cancelling Site C Would Cost $1.2B: Report
The Deloitte report concludes that it would be cheaper to cancel Site C than to suspend the project.
Cancelling Site C would cost approximately $1.2 billion, according to Deloitte’s analysis, while suspending construction until 2025 would cost $1.4 billion.
The report provides a striking alternative to BC Hydro’s own estimate submitted to the Utilities Commission that found cancelling the project would cost approximately $3 billion.
For the first time, the 110-page Deloitte report provides British Columbians with detailed information about Site C’s top budget and scheduling risks and other challenges that were kept secret by the previous B.C. government despite a request DeSmog Canada made more than a year ago under B.C.’s Freedom of Information Act.
“The Site C project faces major risks including performance issues of contractor(s), unforeseen geotechnical conditions, and cost risks associated with major contracts that have not been awarded yet,” notes the report.
Deloitte says Site C’s success hinges on the project’s ability to meet a critical milestone that is now at “considerable risk” — diverting the Peace River through tunnels in September 2019 in order to allow construction of the 60-metre high earthfill dam.
Both BC Hydro and the Peace River Hydro Partnership (PRHP) — the consortium responsible for building diversion tunnels and constructing the dam as part of a $1.75 billion civil works contract — recognize that this milestone is in jeopardy, says the report.
“Deloitte notes that PRHP’s ability to meet the critical milestones poses a major risk to the Project.”
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Site C at Risk of Missing Construction Milestones
Highlighting the risk of missing the milestone is a recent Site C report from B.C.’s Environmental Assessment Office, which concluded that BC Hydro cannot proceed with a bridge related to the river diversion until it develops acceptable mitigation measures for an aboriginal sweat lodge and suspected burial site.
According to the Deloitte report, the Peace River Hydro Partnership told BC Hydro that it would miss the river diversion milestone, but BC Hydro rejected the partnership’s revised schedule.
BC Hydro is now working directly with the partnership on a review whose main purpose is “to develop a plan to mitigate the potential delay,” says Deloitte.
Notably, Deloitte says it does not have the necessary information or mandate to assess the likelihood of success of the mitigation plan or its potential costs.
Diversion of the Peace River must take place in the early fall, a narrow window sandwiched between potential spring and summer flooding and winter conditions that thwart some construction activities.
Even a one-year delay in diverting the river through tunnels will increase Site C’s $8.8 billion cost by ten to 20 per cent, says the report.
A delay of more than one year will boost the project’s price tag by 20 to 50 per cent, concludes Deloitte.
The report reveals troubling financial and scheduling issues BC Hydro has experienced with the Peace River Hydro Partnership (PRHP), a consortium that includes ACCIONA Infrastructure Canada Inc., a wholly owned subsidiary of a Spanish company, and Korean-owned Samsung C&T Canada Ltd.
Calgary-based Petrowest Corporation, the Canadian partner in the consortium, was fired from the Site C project in August when it went into receivership.
Credibility of Site C Forecasts Questioned
The report details how the Peace River Hydro Partnership has fallen behind schedule, noting that it mobilized two months late to the dam site, was delayed in obtaining permits and submitting documents, and has made “slow work progress,” on important tasks such as earth moving and concrete placement.
The partnership, Deloitte notes, has also “consistently excavated lower volumes” of earth than its forecasts.
“The poor correlation between forecast and actual performance…raises concerns about PRHP’s ability to forecast,” cautions Deloitte.
The consortium has claimed additional costs from BC Hydro, but that amount is redacted in the Deloitte document on the grounds that revealing the information could cause harm to BC Hydro.
Deloitte says assessing the PRHP’s claim for additional costs is beyond the scope of its review and would require significant time and resources.
The PRHP’s claim for additional costs, coupled with the sudden loss of indebted Petrowest Corporation from the consortium, pose “additional considerations in the schedule and cost risks,” says Deloitte.
“While according to BC Hydro this [Petrowest] termination will not have ‘a significant impact,’ Deloitte is of the view that this termination will create a period of instability that may impact PRHP’s ability to meet its planned work schedule in the short to medium term.”
Reviewing bid evaluation reports for the major civil works contract, Deloitte found that PRHP’s proposal was ranked second out of four bids for its technical credits, but first for its bid price.
“PHRP may have significantly underbid the Project,” surmises the report. “This may explain the claims that PRHP has submitted to the Project to date to recuperate some of its losses. Deloitte believes that PRHP may continue this trend as long as it cannot recover its losses.”
Accuracy of Site C Budget Under Scrutiny
Deloitte also warns that the accuracy of Site C’s budgeted major civil works contract compared to its actual value “raises concerns about BC Hydro’s ability to accurately estimate large contracts,” noting that other major contracts have yet to be awarded.
“Should these contracts have similar discrepancies between planned versus actual values, the Project contingency funds may be insufficient to cover them.”
Deloitte notes that none of the other Canadian hydroelectric and transmission line projects it examined were delivered on budget. Hydroelectric projects, including the Muskrat Falls dam in Labrador, were 55 to 90 per cent over budget, according to the report.
Should the Peace River diversion proceed as originally scheduled in September 2019, Site C will either fall within budget or experience less than a ten per cent cost overrun, concludes Deloitte.
A one-year delay in the river diversion will boost Site C’s cost by ten to 20 per cent, for a final price tag of between $9.2 and $10 billion, prior to any draws on the project’s contingency fund.
Deloitte points out that more than $500 million out of Site C’s $1.2 million in contingency funds had been released as of June 2017, suggesting that new financial pressures could emerge if the fund is spent too quickly during the eight or nine year project.
The report found that a river diversion delay of more than one year will inflate Site C’s cost by up to 50 percent, for a final price tag as high as $12.5 billion.
When budgeted contingency funds are added to that price tag, the project’s final cost could reach over $13 billion under that scenario.
Deloitte also says that lower than planned Site C expenditures noted by BC Hydro can be explained by delays in starting some activities, slower than anticipated progress excavating materials and placing concrete, delays in highways, transmission and clearing work, and shifting of expenditures into future periods.
Image: Site C construction 2016. Photo: Garth Lenz | DeSmog Canada