Malta Shipyards' productivity on the job to convert the Fairmount Fjord from a semi-submerged barge to a semi-submerged vessel was very high at first, in cases up to 120-130 per cent, but the initial enthusiasm eventually gave out and productivity slid to 47 per cent efficiency, with an eight-hour day effectively reduced to four to five hours.
Infrastructure Minister Austin Gatt said this yesterday at a second meeting of the House Public Accounts Committee to investigate what went wrong to make Malta Shipyards lose several millions of euros on a double contract that had first been expected to yield a small profit.
Dr Gatt said that the productivity had been measured against a base of 100 per cent. The dockyard had had to exacerbate losses by paying €2 million in overtime and importing casual labour to make up for the inefficiency. There had also been considerable rework by sub-contractors, especially at the final stage - all this while the tender had been based on high productivity.
PAC chairman Charles Mangion (PL) noted that the original estimate of 265 working days had been reduced to 160. The situation had not been helped by the fact that besides the Fairmount contract more work had been ongoing at the shipyards, probably bringing productivity down because workers had had to be deployed to other tasks. He asked senior executives of PriceWaterhouseCoopers (PWC), who were hired to carry out an audit into the disastrous contract, how much the lack of detailed drawings due to constant changes had further impacted on productivity.
Mr Michel Ganado for PWC said that the original plan for work on the Fairmount Fjord, the first vessel, had undergone some eight revisions due to continuous changes that had altered the original scope of the job. Work on the Fairmount Fjord had been supposed to start in March 2007, but in fact had started in June after the dockyard had had to wait until May for the changed drawings.
Confirming that initial enthusiasm on the job had been high, he said the distribution of manpower to other ongoing shiprepair works at the time had not really had an impact on efficiency.
John Zarb, also of PWC, said the contract had been signed in the absence of a definition of product by the client, with obvious effects on productivity.
Robert Arrigo (PN) said the Fairmount contract was a commercial decision that had gone wrong when it had been intended to yield a profit. The key phrase about the profit had been "depending on performance". He asked how and why productivity at the shipyards had gone so low and why overtime had been decided on in spite of this. How had industrial action contributed to the delay in delivery, and how costly had it been?
Had the option to take on the second Fairmount contract, on the Fjell, been taken to reduce losses? If the Fjell had been better managed than the Fjord, why had this not been seen from the outset?
Dr Mangion asked if a three-month delay by the government to give a bank guarantee, together with the accrued delay for the drawings, had not constituted an important part of the €2.4 million paid by the dockyard in penalties for late delivery.
Mr Ganado said there had been many factors to bear. A typical work-day of eight hours was effectively 6.25 hours, but the actual productivity had gone down to between four and five hours.
Although the nature of the work had been new, it did not call for new individual skills. Finance Minister Tonio Fenech said Malta Drydocks and Malta Shipyards had a history of under-quoting, to the tune of having needed several millions of euros in subsidies to survive. Did PWC think this used to be done in order to get work?
Mr Zarb said there had been jobs for which the quotations had been halved, but project profits had been kept the same. Dr Gatt said that if all the docks were full, the shipyards would still make losses.
Mr Ganado said the shipyards' strategy was that shiprepair was their core activity, but other work was welcome in order to attract such offshore conversion projects as the Fairmount. Overtime on the Fjord had peaked in July-October 2008 because after many changes delivery had been rescheduled for August, then it had decreased.
Many sub-contractors had caused between two and four per cent of re-work with poor quality of work. Then privatisation and the voluntary retirement scheme had been announced, and industrial action had lost between 20 and 25 days on the project.
Mr Zarb said that in August 2007 the board had been acquainted with the situation, and sought to take tighter control. Legal counsel it had been given was that the dockyard would lose more by reneging on the contract than by trying to get the job done as quickly as possible - between €13 million and €19 million.
Helena Dalli (PL) asked if the board had been aware of what was happening with sub-contracts, and if it had taken any action if informed. Ms Anna Anastasi of PWC said the contract for sub-contractor MSC had never come up before the board.
In answer to another question by Dr Dalli, Mr Zarb said PWC had never thought to ask if any member of senior management had ever worked for any of the sub-contractors.
At its first meeting on Monday, the PAC heard that Malta Shipyards' original estimate for the Fairmount Fjord job was €46.8 million, later reviewed to €33 million. The Marsa shipbuilding yard was engaged to do the final drawings, but there was never any back-to-back contract and the barge owners did not guarantee that those drawings would really be the final ones.
Dr Mangion asked why the estimate had been so drastically reviewed, and what impact that revision had had on the final outcome. He also asked if there was any justification for the revision, in spite of the fact that the dockyard had never done that sort of work before. At the time of signing the contract Malta Shipyards did not know what drawings would be available.
Joe Muscat of PWC replied that the very first estimate had been for €58 million, but it had not been a detailed costing.
Dr Mangion also noted that the penalties for late delivery would amount to €20,000 daily, up to a maximum of 20 per cent of the contract value. The Finance Ministry had kept to the original contract, with penalties to be paid by Malta Shipyards, even if the work schedule was delayed by sub-contractors.
The original estimate of 265 working days had been reduced to 160 days in the tender. Fairmount knew that the deadline would never be met, but was comfortable with the €20,000 daily penalty for late delivery.
Mr Muscat said that even the original estimate of 265 days had been extended repeatedly, but this had never been questioned.
Questioned by Dr Gatt, he agreed that the shipyards board members, individually and collectively, were well respected and experienced, and there was good two-way communication with the management. The board was always very conscious of the commercial risks involved, the workings and the complexities of the job. There had been keen monitoring of progress with a view to finishing the job as soon as possible. The problems had really started when sub-contractor MSC had gone bankrupt, but there had been a number of issues with other contractors.
There were various reasons for the delays on the job. The first serious delays had started appearing in May 2006, with delivery scheduled for November that year, but the board had first been informed of creeping losses in August 2007.
Asked by Dr Mangion if the government was always aware of what was going on, and how bank guarantees requested by Malta Shipyards had been approved, Ministry of Infrastructure Permanent Secretary John Gatt said no permanent secretary had any say on technical details. Government subventions were given according to a pre-determined plan. The Fairmount contract had not been seen before the bank guarantees were given.
Mr Muscat said the PWC audit had started in April 2008 and subsequently extended in May to cover more background. The audit team had met about 15 Shipyards management personnel for face-to-face desk research, but had never talked to any members of the board or ministry because their terms of reference had been to report back to the board on procedures followed. The team had relied heavily on the project server data.
Labour MP Alfred Sant asked if PWC had ever been involved in any other audit at Malta Shipyards. He quoted from a letter written by Prime Minister Lawrence Gonzi in May 2008 to GWU secretary-general Tony Zarb, which said that the ministry had asked PWC to investigate in December 2007.
Mr Muscat said PWC had been asked to prepare some proposals for the board, but the terms of reference had then been changed.
Dr Sant said this meant that the Prime Minister had asked the ministry which had then asked the board to engage PWC. He asked Mr Muscat to explain the chain of command and who was deciding on things.
Mr Muscat said the management was continually informing the board of its decisions.
Dr Sant was of the opinion that the contract had been signed in limbo with the involvement of just three people in management. PWC did not even seem to have any comment on how the original estimate of €49 million had finally been brought down to €19.8 million. A senior official had said that the three management executives running the tendering process were "making a big mess, the prices have no bearing on actual costs, but the client is interested".
Finance Minister Tonio Fenech asked if the final bid had been approved by the board before the signing of the contract or later. Mr Muscat said the board had been informed before the signing.
The PAC will meet again on April 11.