Commentary: Haste, politics and intrigue: The perfect B.C. storm

by Dermod Travis,

 

In 2009 – with the B.C. election fast approaching – the B.C. government went on a full-court press to get the Port Mann / Highway 1 improvement project deal signed and past the point of no return.

Their haste may have contributed to at least one bad judgment call that ended up costing taxpayers hundreds of millions of dollars (Table 3.6, pg 59).

Now, with the 2017 election on the horizon, history is repeating itself, but this time with two megaprojects: Site C and the Massey Tunnel replacement project and with many of the same Port Mann players in recurring roles.

Yet, one aspect to these multi-billion dollar projects remains shrouded in mystery for most British Columbians: who’s in charge?

Who calls the shots on virtually every decision – from design changes to cost overruns – once the shovel hits the ground? The taxpayers’ foreman, if you will.

Is it the minister responsible? A deputy or assistant deputy minister?

Not necessarily.

On major projects more often than not, the government assigns the job to someone in the private sector.

How did B.C. end up in the peculiar situation of having to rely on the private sector to oversee private sector construction companies working on public sector infrastructure projects, potentially signing off on billions of tax dollars in cost overruns along the way?

Public Safety Canada’s 2012 report “Economic Sectors Vulnerable to Organized Crime: Commercial Construction” offers a clue (pg 29).

“In 2001, public agencies in B.C. assumed responsibility for their own procurement.

Our sources in B.C. indicate that government officials responsible for procurement lack the requisite expertise in relation to commercial construction projects.

Many of those who formerly had the expertise have retired or moved on to the private sector.”

It’s one reason why the public doesn’t always get to hear about the backroom wheeling and dealing that comes with some of the projects.

Case in point: that mad dash to wrap up the Port Mann Bridge / Highway 1 deal before the 2009 election.

It was the perfect storm of haste, politics and intrigue.

Consider the 53-days from January 23 to March 17, 2009.

The we have a public-private partnership (P3) deal announcement cancelled with 18-minutes to spare. We really have a deal this time redux on January 28. We hold a pile-driving photo-op to show we mean it on February 4. P3 deal falls apart on February 24. We announce a new deal on February 27 and put it all to bed with everyone’s John Hancock on a design-build contract on March 17.

And all of it played out against the backdrop of the pending 2009 provincial election and the rapidly approaching deadline for the B.C. Liberal party’s campaign platform.

This wasn’t a toaster the government was buying.

The Port Mann project is called “the largest transportation infrastructure project in B.C. history.”

The $2.398 billion fixed-price contract with the construction team Kiewit & Sons/Flatiron General Partnership runs more than 1,000 pages and should be materially different than the intended P3 deal.

It would have required a little more legal effort than using the find function to replace ‘public-private partnership‘ with ‘design-build‘ throughout the contract.

One would have expected lawyers from the Crown corporation responsible for the bridge – the Transportation Investment Corporation (TIC) – and Keiwit/Flatiron – Nebraska and Colorado-based construction companies respectively – to pore over the details, clause by clause.

And it wasn’t just the contract that was of concern back then.

According to TIC’s 2008/09 audited financial statements – statements that are not posted to its website – the Crown corporation’s accounts payable stood at $104.2 million for the fiscal year ending March 31, 2009.

The bill for capital costs totalled $97.8 million – “mainly for work done under the design-build contract.”

It’s a hefty sum given that not much of anything had taken place over the previous 14-days.

While work was underway later in 2009, ground wasn’t broken on the site until February 2010, according to the 2013 third quarter edition (pg 14) of Kieways, a Kiewit corporate magazine.

By that point Kiewit/Flatiron had been paid close to $482.7 million (pg 26).

The 2009 payables also included a $6 million cancellation fee for the P3 team (Note 12), “when the P3 agreement was not reached.”

The team – Connect B.C. – was comprised of Kiewit, Flatiron, Transtoll and the Australia-based Macquarie Group.

Something about those 2009 statements set-off alarm bells for someone in government and that someone was in a position to demand an explanation.

According to B.C. Supreme court documents, TIC retained accounting firm KPMG in mid-2009 “to review a contractor’s invoicing process on a major British Columbia highway project.”

The project was the Port Mann and the contractor was Kiewit/Flatiron.

The matter before the courts included allegations of conspiracy, a cover up and misuse of funds, but details are protected by a gag order sought by TIC and KPMG on a potential whistleblower.

Gary Webster – a partner at KPMG – was charged with overseeing the review, which is odd given that only a few weeks before he had been largely responsible for setting up and approving those very same processes, as a senior vice-president at CH2M Hill, a global engineering firm headquartered in Denver, Colorado.

Webster had been retained by TIC as its representative on the Port Mann. He was the taxpayers’ foreman.

His responsibilities – spelled out in the Kiewit/Flatiron contract – included: “negotiate and make all consequential decisions on behalf of the Authority, audit and monitor the Constructor’s Quality Management System, perform all such functions as may be ascribed and perform such other functions in respect of this Agreement or any other.”

Lest there be any doubt as to his authority: “The Constructor and the Design Build Contractor are entitled to treat any act of the Authority’s Representative which is authorized by this Agreement or any other Authority Project Document as being expressly authorized by the Authority, and shall not be required to determine whether any express authority has in fact been given.”

For Webster to oversee KPMG’s review into what were many of his own decisions or decisions he had agreed to – and as a freshly-minted partner no less – might raise a few eyebrows in some circles.

Webster – an engineer by training – is not a chartered accountant, according to both his resumé (pg 333) and the registry of the Chartered Professional Accountants of B.C.

Engineers at KPMG are a rarity, even more so as partners. The firm employs 6,000 individuals across Canada, 700 as partners.

The engineer registries in Ontario, Manitoba and B.C. (three of the registries that offer searches by employer), identify a total of 32 KPMG employees as engineers in good standing, Webster and one other of the 32 are among the 700 partners.

According to Webster’s resumé (pg 333) – found in a 2014 Mackenzie County, Alberta council document – he was also the province’s representative on the Sea-to-Sky highway project and the procurement director for the entire Gateway program.

His responsibilities included: “guiding the identification, approval, risk review, development, implementation of the procurement process, and contract negotiations” for the Port Mann, the North and South Fraser Perimeter Roads and the Pitt River Bridge.

For much of that time he was at CH2M Hill, which was then part of the team building the Golden Ears bridge.

One word not found in his resumé? Overrun, as in cost.

Webster is familiar with the subject.

Sometimes a letter isn’t always as important for who signed it, or who it was addressed to, as it is for who was carbon-copied in it.

Such is the case with a letter dated October 9, 2007, from Garry Dawson, Project Director, Port Mann / Highway 1 project to Environment Canada.

Webster was carbon-copied, which means he was very much on the job when the government publicly recommitted to its $3 billion Gateway estimate – including a $300 million contingency fund – only four days before.

KPMG was still using the figure eight-years later, although it had been amended to read “over $3 billion.” Ever so slightly over.

The latest Gateway price tag totals $4.77 billion, nearly 63 per cent over the government’s first estimate.

The Port Mann alone was $3.3 billion, more than double its original estimate, enough to pay for two Coquihalla Highways in 2016 dollars.

How times change.

After assuming office in 1986, then-premier Bill Vander Zalm called a public inquiry to investigate cost overruns on the Coquihalla.

Commissioner Douglas MacKay found “the financial reporting of the project to be tainted with an atmosphere of deceit and prevarication by both politicians and public servants. The legislature was avoided, the legislature was misled by the documents presented to it, the true costs were not reported in a forthright manner.”

Not every MLA embraced the commission’s findings. Fellow Socred – and current B.C. Lottery Corporation chairman – Bud Smith accused the inquiry of having a case of “Watergate penis envy.”

Vander Zalm’s government responded – and not with half-measures – a major staff shakeup at the ministry, a new director for major projects responsible for cost control and an internal auditor.

Overshooting Port Mann’s original $1.5 billion estimate – despite internal warnings dating as far back as January 2005 – wasn’t TIC’s only miscue.

In 2009 – when the Kiewit/Flatiron contract was signed – TIC’s board was comprised of then-deputy health minister John Dyble, then-deputy transportation and infrastructure minister Peter Milburn and then-Partnerships B.C. (PBC) president and CEO Larry Blain.

At the time, TIC placed one of the most costly bets in recent B.C. political history.

From its financial statements for the fiscal year ending March 31, 2010 (Note 12): “TI Corp entered into a number of hedging transactions during the year, through advanced rate setting (ARS), also known as bond forwards and forward starting swap instruments.

“The corporation does not enter into derivative financial instruments for trading or speculative purposes and documentation to detail the risk management objectives and strategies for undertaking effectiveness testing of the hedge has been compiled.”

It wasn’t until August 2013 that the full magnitude of the wager was driven home in a B.C. government filing with the Securities and Exchange Commission in Washington, D.C.

TIC had lost $265 million on the bet (Table 3.6, pg 59).

Also missing from its website is the government’s 2012 letter of expectations sent by then-transportation and infrastructure minister Blair Lekstrom to TIC, and signed by its then-chair Grant Main.

In it the government stated: “TIC is to be in a positive net income position by 2017/18, four years after toll revenue collection commences.”

Not by a long shot.

In fact, one would be hard-pressed to find a single government forecast for the Sea-to-Sky highway project ($195 million over its first estimate), the Port Mann or the South Fraser Perimeter Road that has been met.

The government has since gone round the mulberry bush with many of the same players and seems poised to do so again.

Frank Margitan, a former vice-president at Kiewit & Sons and its point man on the Sea-to-Sky and Port Mann projects, was hand-picked by B.C. Hydro in 2014 to undertake an ‘independent’ review of the utility’s Site C cost estimates.

Who signed-off on Margitan’s review? KPMG’s Gary Webster.

Macquarie Group, involved with both Sea-to-Sky and Port Mann, is “participating in a team as developer and financial advisor” on the Massey project and is the owner of the Fraser Surrey Docks, a major cheerleader for a new bridge.

MMM Group, who also worked on Sea-to-Sky and Port Mann, is the government’s engineer on Massey.

Geoff Freer of Firth Group Consulting Services was Gateway’s executive director, the senior project advisor on the Evergreen Line and is now Massey’s executive project director. Firth Group has billed the government $1.35 million since 2009.

KPMG is the commercial advisor on Massey.

The accounting firm has done well all round. From its first invoice to TIC in 2012 to 2014/15, it billed the Crown corporation $16.2 million, a further $421,572 to PBC and $10.2 million to B.C. Hydro.

Kiewit/Flatiron have little to complain about. So far they’ve been paid $2.82 billion on their $2.398 billion fixed-price Port Mann contract.

TIC has been seconded by government to oversee the Massey project.

Two of the four key TIC players back in 2009 – Webster and Blain – now work at KPMG.

Dyble went on to become Premier Christy Clark’s deputy minister, before retiring earlier this year. Milburn was promoted to deputy finance minister, retiring in 2015.

The B.C. Liberal party hasn’t done too badly either with more than $500,000 in donations from the seven companies, including a cheque for $50,000 from Kiewit & Sons three days after the 2009 election.

 

Dermod Travis is the executive director of IntegrityBC.        www.integritybc.ca

 

September 22, 2016