‘Significant concern’ over due diligence in Electrogas tender – Auditor General

HIGHLIGHTS

• Last-minute inclusion of Security of Supply agreement “significantly reduced” risk for final two bidders
• The bank guarantee provided by the government to Electrogas was irregular in terms of the guidelines applicable at the time 
• Interconnector prices were far cheaper than those from the Electrogas power plant
• The NAO had no evidence that project was a done deal

A government decision late in the gas power station tendering process to include a security of supply agreement gave the final two bidders an advantage, the National Audit Office has found. 

The agreement “significantly reduced” the risk for the final two bidders, effectively changing the ball game.

Another change contemplated late in the day was the condition to have the LNG supplier as a shareholder in the company.

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“Although the documentation made available to this Office [NAO] did not indicate that the conditions were created specifically for the Electrogas Consortium, the NAO notes that it was the consortium that ultimately benefitted from their introduction,” the Auditor General concluded.

The NAO this evening tabled in Parliament a voluminous audit of the gas power station tender, which was awarded to Electrogas in December 2013.

The investigation was requested by members of the Opposition more than three years ago.

In its reply to the NAO’s queries, the government said the inclusion of the LNG supplier as part of the project equity was meant to transfer the risk of the project to the operator.

The ministry flagged Enemalta’s adverse financial position at the time, which precluded it from raising the required finance to be able to handle LNG supplies.

Security of supply agreement

The security of supply agreement ensured that government would step in if Enemalta could not honour its obligations with the chosen bidder.

The NAO noted that there was no mention of a security of supply agreement in the initial call for expressions of interest and the subsequent request for proposals.

The agreement was mentioned in a conference call with bidders seeking clarifications but only concretised late in the day when only two bidders were in the running for the multi-million-euro contract.

The contract was eventually awarded to Electrogas Consortium.

The NAO insisted the late inclusion of the security of supply agreement was “a substantial change” from the expression of interest and request for proposals.

The security of supply agreement greatly reduced the risk to revenue for the selected bidder by transferring the risk to Enemalta and government.

Under the agreement, which formed part of the final award, government and Enemalta were obliged to purchase 85% of the annual contract quantity, be it power and gas, irrelevant of requirements.

The NAO said the security of supply agreement should have been brought up as part of the process from the outset.

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Inadequate due diligence

And although the NAO commented positively on the structured tendering process adopted, it expressed “significant concern” at the lack of appropriate due diligence at the final evaluation stage.

The NAO noted that issues flagged by the evaluation committee with Gasol, the lead partner in the Electrogas Consortium, were dismissed.

The evaluation committee ruled Electrogas admissible because Gasol was not deemed to be important to the commercial and technical aspects of the bid. Furthermore, the Azerbaijani State company Socar Trading had provided a letter of commitment to cover the equity contribution of Gasol.

Socar Trading’s willingness to mitigate the risk “raises further doubt as to the utility of Gasol plc as the lead member of the Electrogas Consortium”, the NAO noted.

Gasol eventually pulled out of the consortium in July 2015 with its shareholding being bought up by the other three partners – Socar, Siemens and the Maltese outfit GEM Holdings.

The NAO said the share transfer at this stage of the power station development was in breach of the tender award agreement.

The government and Enemalta had consented to the share transfer, a decision criticised by the NAO.

While the review of the technical aspects of the bid was comprehensive, “the financial aspect of the due diligence process was not sufficiently robust and thereby deemed inadequate”, the NAO said.

It noted that checks relating to fraud, bribery and corruption, internal controls, risk management considerations, ethical conduct and other governance issues were not part of the due diligence carried out.

Irregular bank guarantee

The NAO also looked into the massive bank guarantee the government gave to help Electrogas secure financing until the European Commission cleared the security of supply agreement.

The audit office said the bank guarantee to the tune of €432 million was deemed to be a massive risk.

“Although the NAO acknowledges that the guarantee was intended to support a project that was in the national interest, in the NAO’s understanding, the guarantee provided by the government to Electrogas was irregular in terms of the guidelines applicable at the time, since the guidelines did not contemplate assistance provided directly to private enterprises by way of security,” the NAO said.

The government guarantee was eventually lifted in December 2017 when Enemalta, the government and Electrogas signed the security of supply agreement that had been cleared by the European Commission.

Brian Tonna’s alleged conflict

The NAO also probed the possible conflict of interest that Brian Tonna of Nexia BT had as team leader on one of the evaluation boards.

Nexia BT was the auditor of GEM Holdings, a shareholder in the Electrogas Consortium.

As a selection board member, Tonna had signed a declaration of impartiality on 23 September 2013. Had his firm been the auditor of GEM Holdings at the time, Tonna would have fallen foul of the declaration.

But when the NAO queried this, it was provided an engagement letter showing that Nexia BT was engaged as auditor by GEM on 25 April 2014.

This meant that at the time of selection process several months earlier, Tonna did not have a conflict of interest.

Cheap interconnector

In its evaluation of the prices paid for electricity purchased by Enemalta, the NAO found that interconnector prices were far cheaper than those from the Electrogas power plant. 

Interconnector electricity rates between June 2017 and August 2018 came at an average of €61.75/MWh. This contrasts with the €112.39/MWh paid for electricity bought from the Electrogas power plant during the same period.

The price differential was described as a “conservative figure” by the NAO.

Allegations that gas project was done deal

Some of the investors in Electrogas had proposed a similar project to the previous Nationalist government and the Labour Party when in Opposition.

This raised concerns that the project undertaken after the election was a done deal between the investors and the PL.

The matter was referred to the NAO by then Opposition leader Simon Busuttil.

In its findings, the NAO said that although the similarities between the concept presented before the 2013 election and the eventual project did lend credence to the allegations made by the Opposition leader, the Auditor General could not comment on whether prior agreement had been reached with the PL.

The NAO could not say whether technical specifications for the construction of the power station set by Enemalta were influenced by parties who had a direct interest in this contract.

“The NAO does not have evidence that supports claims made and is further limited by its mandate, which does not extend to review political parties,” the NAO concluded.