The Auditor General today published a damning report on Enemalta's fuel procurement practices and hedging between 2008 and 2010, raising serious questions about lack of record keeping, lack of proper testing for inferior quality fuel, inexplicable decisions and lack of proper records on who took the decisions.
The auditor said said his office's primary concern centred on the fact that no policy framework was in place during the period 2008 up to end 2010.
The minutes of meetings of the Fuel Procurement Committee at the time lacked the most rudimentary level of detail and bore no information relating to meeting discussions and decisions.
Poor record-keeping and documentation characterised the operations of the FPC prior to May 2011, rendering it impossible for the Nation Audit Office (NAO) to effectively audit the decision-making process.
However there were 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.
"Although NAO has no major concerns relating to the reconciliation of fuel procured in terms of quantity, quality-related concerns have emerged," it said.
There were also discrepancies between contract specifications and test methods.
NAO said its principal concern was over the transfer of diesel, during the period 2008 up to mid 2011, in view of poor contract management practices exhibited by Enemalta.
"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. 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."
HEDGING
With regard to oil price hedging by the Risk Management Committee
(RMC) said that, here again, there was an absence of an appropriate policy framework against which the Corporation could set its strategic orientation.
"NAO’s concern in this respect further intensifies with regard to instances when Ministerial interventions directly impacted on the setting of the RMC’s hedging strategies.
"In NAO’s opinion, Enemalta’s adopted hedging strategy relating to the defence of the set tariff is a contentious position. The Office supports the notion that working at securing hedges below the established tariff effectively constitutes working towards a false target. NAO considers it the ultimate responsibility of the RMC to seek to profit from all market scenarios, irrespective of their
relative relation to the established tariff."
NAO said it was also concerned that the RMC had a 10-month period of inactivity in 2009.
"NAO’s concern further intensifies with respect to a number of forex hedging transactions that were undertaken by Enemalta during this ten-month period of RMC 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, centres 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."
It said it was also concerned at instances where RMC was informed of
hedging-related decisions as a fait accompli by one of the Committee’s members.
"Attention is also directed towards 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.
"The Office considers the 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 considers 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.
"NAO’s primary concern with regard to forex exposure relates to shortcomings identified in relation to the completeness and organisation of data. NAO considers the noted discrepancies and variations in hedged volume percentages as possibly linked to gaps in coordination between the Corporation’s fuel procurement arm and its hedging function.
"Notwithstanding the above, 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."