Scathing NAO report on fuel procurement finds committee operated ‘in policy vacuum’

In a scathing report of Enemalta's Fuel Procurement Committee, especially between 2008 and mid-2011, the National Audit Office flagged the lack of a policy framework by which the committee operated between 2008 and 2010.

Prior to the formulation of the Corporation's Fuel Procurement Policy in January 2011, Enemalta's fuel procurement function "was effectively operating in a policy vacuum".

The purchase of fuel by Enemalta represents one of the Corporation's key business processes. During 2012, Enemalta's overall fuel procurement amounted to €578 million, accounting for 910,645 metric tonnes of assorted fuels imported to support and service various economic functions.

The NAO's primary concern with respect to the operations of the Fuel Procurement Committee centres on the fact that no policy framework was in place during the period 2008 up to end 2010.

 "The implications of such a shortcoming are, in NAO's opinion, immediately apparent, undermining the fundamental principles of good governance," the report states.

Flagged for the concern they spark, the NAO found "instances of poor record-keeping, manifested by one of Enemalta's key strategic Committees".

"Once again, NAO considers this situation as indicative of the significant shortcomings in terms of the Corporation's adherence to the principles of good governance, accountability and transparency," the NAO said.

The situation persisted throughout the period 2008 up to May 2011, as the identification of members forming part of the FPC was later rendered a straightforward endeavour through the appropriate methods of documenting such matters.

According to the report, the "notable improvement" in terms of record-keeping and documentation of decisions taken occurred closely with the commencement of the audit.

NAO's concerns relating to the operations of the FPC intensified over meetings held in 2008 and 2009.

"Corresponding FPC meeting minutes reviewed by NAO lacked the most rudimentary level of detail and bore no information relating to meeting discussions and decisions taken. Besides being handwritten and mostly undecipherable, these minutes also lacked a basic record of Committee members present," the audit office stated in the report.

"NAO fails to comprehend how decisions worth hundreds of millions of Euro could have been subject to this abysmal level of record-keeping and documentation, in blatant violation of the principles of management, good governance, accountability and transparency."

An element of improvement with respect to record-keeping practices and documentation-retention procedures employed by the Committee were later noted. These improvements were implemented in a stage-based manner, with the first minor amelioration taking place from mid-2009 up to mid-2011.

"Despite the above termed improvement, weaknesses in terms of records kept, prevailed at this stage, as these minutes still lacked the necessary details accounting for the basis upon which decisions were taken, as well as difficulties in reconciling which Committee members were present during such meetings."

Things however slowly improved and real and tangible progress was subsequently registered from mid-2011 onwards. This, the NAO said, represented a positive sense of progress.

"NAO deems positive the much revised and improved quality of records and documents maintained in this respect, which clearly listed the Committee members in attendance, quotations received and decisions taken, among other notable areas of improvement."

The NAO however found it a problem to effectively audit the decision-making process due to the systems of poor record-keeping and documentation that "characterized and pervaded" the operations of the FPC prior to May 2011.

"This situation rendered it impossible for the NAO to effectively audit the decision-making process employed by the Committee in adjudicated tender bids received and evaluated. The implications of such severe limitations in the availability of records documenting the FPC's decision-making process are brought to the fore in those instances when the Committee awarded tenders to bidders who (based on severely limited information at the NAO's disposal) did not submit the most favourable offer.

"The lack of any information justifying such decisions render the proper audit of this process an impossible task, thereby fundamentally undermining the principles of good governance, accountability and transparency that are meant to characterise the operations of such a Committee."

'Poor contract management practices' in diesel transfer

During the period 2008 up to mid 2011, in relation to the transfer of diesel, NAO found "poor contract management practices" exhibited by Enemalta. It said that such shortcomings were rendered amply evident through the series of contractual extensions directly conceded to an oil bunkering company, "which at best, may be considered as representing an affront to the principles of good governance".

According to the NAO, this already "highly tenuous situation is further exacerbated by the considerable increase in the rate payable to the contractor".

"The revision in rate, irrespective of excuses regarding the cleansing of barges put forward by Enemalta on behalf of Island Bunker Oils Ltd is, in NAO's view, unacceptable justification for bypassing the most fundamental principles of good practice with respect to procurement."

'Quality-related concerns' flagged

Although NAO had no major concerns relating to the reconciliation of fuel procured in terms of quantity, quality-related concerns emerged.

Specifically, the NAO referred to instances of incongruence between employed standards and test methods, where it found no documentation indicating equivalency checks.

"On the other hand, other instances of incongruence between test methods established as per contractual specifications, and those presented in the various analysis reports reviewed by the Office, were not in fact addressing the same parameter," the report said.

"Such occurrences are clearly indicative of a system fraught with gaps and weaknesses in terms of quality control, attributable to Enemalta, and its various suppliers.  NAO is also concerned with whether Enemalta is instituting the necessary corrective action when missing property test results are received, and what corrective action is taken in instances of out-of-spec results."

Hedging lacks 'appropriate policy framework'

Enemalta Corporation undertakes hedging with respect to its fuel and foreign currency (forex) requirements and entrusts this task to the Risk Management Committee (RMC). NAO's on the hedging policy is "the absence of an appropriate policy framework" against which the Corporation may subsequently set its strategic orientation.

The NAO argued that an overlap between hedging policy and hedging strategy was counterproductive in terms of the Corporation's governance structures. Inconsistencies were noted in eliciting who was ultimately responsible for the setting of Enemalta's hedging policy and strategy, with the apparent overlap between the Ministry's and Corporation';s input on the matters obfuscating an already complex state of affairs.

"NAO's concern further intensifies with regard to instances when Ministerial interventions directly impacted on the setting of the RMC's hedging strategies."

Debatable, the NAO said, was Enemalta adopting a hedging strategy related to the defence of the set tariff .

"The Office supports the notion that working at securing hedges below the established tariff effectively constitutes working towards a false target. However, it is the RMC's ultimate responsibility to seek to profit from all market scenarios, irrespective of their relative relation to the established tariff."

'Ten-month lull' registered in Risk Management Committee

Even though a number of forex hedging transactions were undertaken by Enemalta in 2009 - for which the RMC was responsible - yet the NAO did not find any activity registered by the risk management committee.

"No documentation, meeting minute, email or record was provided to the NAO justifying the ten-month lull in RMC activity," the NAO said. "Our concern intensifies as a number of forex hedging transactions were undertaken by Enemalta during this ten-month period of inactivity without any clear indication provided as to who was responsible for authorising such deals."

The Office's concern with respect to the RMC's governance structure, as well as the mechanisms intended at ensuring its accountability, centred on the absence of key documentation, particularly so in cases of discrepancies arising between hedged volumes and hedged prices vis-à-vis the Committee's established targets.

"An equally important issue of concern identified by NAO with respect to governance and accountability relates to instances when the RMC was informed of hedging-related decisions as a fait accompli by one of the Committee's members."

Attention was also directed towards other instances when the RMC failed to capitalise on favourable market conditions. 

"NAO's contention in this regard is with respect to the rationale employed by the RMC in deciding not to hedge, despite the near ideal market conditions, and further accentuated when seen in light of the respective recommendations put forward by its forex and fuel consultants."

 'Limited information', poor evidence of actual quotations

The Office found limited information provided as poor evidence of the actual quotations sourced by the RMC. With regard to crude oil hedging, quotations that were provided narrowly and exclusively corresponded to Committee activity registered in 2008, with no evidence put forward in relation to the other years under audit review.

In its review of the limited information made available by Enemalta in this respect, NAO noted that the Corporation did not employ a systematic approach in its endeavours at sourcing quotations from investment banks/oil companies. NAO's concern further intensifies with regard to forex hedging, in which case no quotations were made available by the Corporation for the Office's review.

Concern with respect to the Corporation's hedge coverage is twofold. Barring 2008, when Enemalta's hedged volume percentage was adequate and well-aligned with its requirements, the years 2009, 2010 and 2011, provide a somewhat contrasting scenario. 

The Office's first concern in this respect relates to instances when the Corporation had a low hedge coverage, most notably in 2009, yet also the case in 2011.  NAO considered such periods as inconsistent with Enemalta's stated risk-averse approach towards hedging, leaving the Corporation exposed to price surges in the crude oil market. The second concern emerging in this regard relates to 2010, in which case Enemalta was effectively over-hedged.

Enemalta's crude oil hedging activity with respect to the period 2008 up to 2011 resulted in a net gain of approximately €744,000, while corresponding forex hedging activity similarly resulted in a gain of approximately €18.6 million.