EXPLAINER | Auditor General’s report on Enemalta fuel procurement

Facts: background information

• In 2012, Enemalta's overall fuel procurement amounted to €578 million.
• 27 June 2011: Labour MP Leo Brincat asks the Auditor General to investigate the procurement of fuel undertaken by Enemalta Corporation throughout the eleventh legislature.
• Report focuses on fuel procurement between 2008 and 2011.
• Between 2003 and early 2010, the political responsibility for Enemalta fell to Austin Gatt.
• Following a Cabinet reshuffle in early 2010, Enemalta was transferred to Finance Minister Tonio Fenech.
• Between 2008 and March 2010, Enemalta Chairman Alex Tranter chaired the Fuel Procurement Committee (FPC), which had been established in the 1980s.
• The first fuel procurement policy was published on 26 January 2011.
• Hedging-related results in 2010 locked in prices under an established tariff and resulted in losses in eight of 12 months.
• 10-month lull in RMC activity in 2009, with no justification given. Moreover, transactions were undertaken without any clear indication as to who was responsible for authorising them.
• "Unachievable and impossible task": The NAO could not establish the persons involved in particular decisions taken by the RMS due to the lack of appropriately maintained minutes.
• "Fait accompli": an RMC meeting on 29 July 2008 saw the Chief Financial Officer concluding deals without the involvement of the risk management committee.

Of 29 contracts awarded, Totsa gets 15

Between February 2008 and December 2011, 29 contracts were awarded. A prima facie analysis shows the FPC chose to negotiate and eventually award the tender to the bidder submitting the most favourable premium. The report - based on the limited information available on the decision-making process - notes this was the case with 25 out of 30 tenders reviewed.

The majority of the tenders were awarded to Totsa and BB Energy, with the latter getting seven, while Totsa was awarded 15.

The NAO found instances in which Totsa or BB Energy where chosen, even though theirs wouldn't have been the most preferable bid. Explanations given to NAO by Enemalta pointed towards product specifications or the type of pricing that the bidders responded to.

Extension of Island Bunker Oils Ltd contract raises questions

When it came to the administration of the diesel barge transfer contract, the NAO found "poor contract management practices". In January 2008, Island Bunker Oils Ltd (IBOL) was awarded a diesel barge transfer contract for a period of six months, with a further six-month option.

The contract was subsequently extended for an additional 26 months, while the rate for fuel transportation increased as well.

The contract effectively covered the period between January 2008 and March 2011, with only a four-month disruption in 2010 and a second interruption of just 84 hours. This was a one-off contract awarded to Bunker Supplies Malta Ltd ("merely an interim agreement").

According to Enemalta, the decision to extend the IBOL contract was made due to the "imminent privatisation" of the barge transfer services. The corporation reportedly "considered it to be more appropriate to extend the existing contract rather than issue a new tender".

The Auditor General has now recommended ensuring that these contract management shortcomings not be repeated.

"Enemalta's failure to ensure adherence to the principles of good governance, and its ineffective management with respect to the sourcing of barge transfer services [from 2008 to mid-2011] is of grave concern."

The NAO also recommends that it be the FPC, and not Enemalta, managing this process.

'Unwarranted' ministerial interventions

The absence of documentation, this time related to the corporation's hedging strategies, continued, with the NAO failing to receive a decisive answer respecting who was ultimately responsible for setting Enemalta's hedging policy and strategy.

As apparent as the overlap between the ministry and the government was, it was also clear that the ministry was directly involved in hedging-related decisions.

In an email dated 10 November 2009 sent to Enemalta Chairman Alex Tranter and copied to a number of individuals, including Finance Minister Tonio Fenech, Austin Gatt wrote, "I would like to make clear that the direction to go for tariff stability in 2010 is a ministerial direction and therefore I assume responsibility for any variances between the actual market price and the SWAP price in 2010."

Gatt's intervention continued in the setting of electricity tariffs, which according to the NAO impacted upon Enemalta's hedging strategy.

Before the electricity tariffs were established, Enemalta operated with a fuel surcharge mechanism, whereby surcharge calculations were based on fluctuations of fuel and gasoil prices.

Between 2008 and 2009 a number of reports were commissioned as Enemalta and the Malta Resources Authority discussed and reviewed the electricity tariffs.

The NAO reported, however, that while Enemalta was still awaiting MRA approval on the setting of the tariffs, Austin Gatt "had already established the corporation's hedging targets based on these same tariffs that were as yet unapproved".

The former minister went on to indicate the parameters within which the RMC was to operate.

Justifying the RMC's 10-month inactivity, Enemalta said this could also have been the result of advice by the corporation's board and "outright ministerial discretion".

The Auditor General was unequivocal in his statement that ministerial intervention at a strategic level - such as the RMC's hedging deals - was "unwarranted and should be averted".

Highlights of the Auditor General's conclusions

• No policy framework regulating FPC's operations from 2008 up to end of 2010: before a fuel procurement policy was developed in January 2011, Enemalta's fuel procurement function "was effectively operating in a vacuum".
• FPC meeting minutes 2008-2009 "lacked the most rudimentary level of detail and bore no information relating to meeting discussions and decision taken".
• From mid-2011 onwards, real and tangible progress was noted, with revised and improved quality of records and documents, including a clear list of the committee members in attendance.
• The poor record keeping and documentation of the FPC operations before May 2011 made it "impossible" for the NAO to effectively audit its decision-making process for adjudicated tender bids received and evaluated.
• Island Bunker Oils Ltd: NAO reports shortcomings through the series of contractual extensions directly conceded to Island Bunker Oils Ltd. The upward revision of rate payable to contractor "bypasses the most fundamental principles of good practice with respect to procurement". (Note: Appropriate action was taken after mid-2011.)

Highlights of the Auditor General's recommendations

• FPC should consider exploring the possibility of investing in a specific, tailor-made electronic bidding system.
• Telephone conversations between FPC members and tendering parties should be recorded, in view of negotiating submitted tender bids.
• Enemalta should "give serious consideration" to the publication of tender results.
• More comprehensive documentation relating to the appointment and confirmation of independent inspectors be recorded on file; Enemalta must be involved in the appointment of such inspectors tasked with the quality certification of purchased fuel.

Fuel hedging

(Note: This is used to reduce or eliminate a company's exposure to fluctuating fuel costs. It is a contractual tool allowing a company to fix or cap a fuel price at a certain level and period of time.)

• Hedging deals were not regulated by an established hedging policy.
• NAO was not provided with the formal description of the roles that members of the Risk Management Committee (RMC) filled. (Note: The RMC manages hedging undertaken by Enemalta.)
• Lack of accountability on decisions and actions taken by the RMC in its management of Enemalta's hedging function was found.
• An apparent overlap between the ministry's and corporation's input led to inconsistencies in eliciting who was ultimately responsible for the setting of Enemalta's hedging policy and strategy.