The purchase of fuel between 2008 and 2011 bypassed “the most fundamental principles of good practice” and oil hedging strategy was influenced by ministerial interventions, the Auditor General says in a damning report published last night.
The report tears into the operations of the Enemalta committees responsible for procurement and hedging. It speaks of a “policy vacuum” and lack of record keeping about how decisions – some of them described as inexplicable – were taken and who took them.
The minutes of meetings of the Fuel Procurement Committee between 2008 and the end of 2010 “lacked the most rudimentary level of detail” and carried no information on discussions held and decisions taken, the National Audit Office says.
The poor record-keeping and documentation “rendered it impossible for the NAO to effectively audit the decision-making process”. In some instances the committee awarded tenders to bidders who did not submit the most favourable offer.
Another of the many identified shortcomings was the lack of proper testing for inferior quality fuel.
The fuel procurement committee hit the headlines last January following allegations in the media that between 2003 and 2004 a committee member had received kickbacks in return for awarding lucrative contracts to Trafigura Limited.
Enemalta under fire
In its report, the NAO says 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.
A series of contractual extensions directly conceded to an oil bunkering company represented, at best, “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.”
With regard to oil price hedging by the Risk Management Committee (RMC), the report says 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.”
The NAO also expresses concern over the RMC’s 10-month period of inactivity in 2009.
Ministerial interventions directly impacted on the setting of hedging strategies
It is further concerned by a number of currency hedging transactions that were undertaken by Enemalta during this period of RMC inactivity “without any clear indication provided as to who was responsible for authorising such deals”.
Yet more concern arises from the RMC’s governance structure and the mechanisms intended to ensure its accountability, in light of the absence of key documentation. This, the NAO says, is particularly so in cases of “discrepancies arising between hedged volumes and hedged prices vis-à-vis the Committee’s established targets.”
There were instances, says the report, when the RMC was informed of hedging-related decisions as a fait accompli by one of the Committee’s members.
On some occasions the RMC failed to capitalise on favourable market conditions.
The NAO questions the rationale employed in deciding not to hedge, “despite the near ideal market conditions” and especially in the light of recommendations put forward by its forex and fuel consultants.
The NAO complains about the limited information provided by Enemalta in noting that the corporation did not employ a systematic approach when getting quotations from investment banks and oil companies.
In the case of forex hedging, no quotations were made available by the corporation for the Office’s review.
In 2009 and 2011, Enemalta had a low hedge coverage, leaving it exposed to price surges in the crude oil market. But in 2010 it was effectively over-hedged, with the NAO saying such discrepancies were possibly linked to gaps in coordination between the 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.”
These audit report may be viewed at www.nao.gov.mt.