The Malta Independent 14 April 2021, Wednesday

Updated - Electrogas: NAO flags shortcomings in due diligence, says interconnector 'cheaper option'

Kevin Schembri Orland Wednesday, 28 November 2018, 16:23 Last update: about 3 years ago

The National Audit Office has concluded its investigation of matters relating to the contracts awarded to ElectroGas Malta Ltd by Enemalta Corporation, and has found that energy purchased through the interconnector was cheaper, and that the departure of Gasol plc was in breach of the contractual obligations in force at the time.

Firstly, the report highlights that, during a reviewed period, Malta was paying around €50/MWh more for energy from Electrogas, than it did for energy from the interconnector.

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The NAO was requested to establish whether the rate at which Enemalta purchased electricity from ElectroGas Ltd was more favourable than that procured through the interconnector between Malta and Sicily. To this end, the period April 2017 to June 2018 was reviewed.

The NAO found, in terms of energy purchased through the interconnector, that the average adjusted rate for electricity procured in this respect, amounted to €61.75/MWh.

During the corresponding period, energy delivery charges implied an average rate of €78.96/MWh for electricity delivered from Electrogas. “Energy delivery payments account for only one element of the expense incurred by Enemalta in obtaining energy from Delimara 4, as for every unit of energy delivered, Enemalta incurs an energy availability fee, which during the period under review amounted to an average rate of €33.43/MWh.” 

The NAO said: “Immediately apparent is the difference in rates, with Delimara 4 costing, on average, €50.64/MWh more (€78.96/MWh + €33.43/MWh, which is €50.64/MWh more) than the interconnector when excluding capital costs for the latter. In addition, the NAO identified scope for improvement in terms of when Enemalta decides to effect purchases through the interconnector and to what extent. These improvements effectively reduce the cost of purchases made through the interconnector allowing for increased cost efficiency.”

The report also includes analysed Gasol’s exit from the Electrogas consortium. Gasol exited the Maltese consortium in July 2015.  Upon its exit, Gasol transferred its 3,000 shares – equivalent to a 30 per cent stake in the total share capital of Electrogas - to the other consortium parties, namely Siemens Project Ventures, GEM Holdings and Socar Trading.”

Gasol

On the Gasol issue, the NAO  is of the understanding that this transfer was not in line with the prevailing contractual arrangements in force at the time of the transfer, that is 22 July 2015. In the NAO’s opinion, the consent provided by the Ministry for Energy and Health and Enemalta was in breach of the provisions of the Implementation Agreement.”

It highlights that the parties did try to regularise this matter through the Pre-Financial Closing Share Transfer Restriction Agreement, however the application of this agreement was only valid and binding between the parties from the date of its execution, that is, 27 July 2015.

The NAO noted that while the position adopted by Enemalta was in line with applicable legislation, the legal framework that regulates the procurement of electricity and gas does not specifically address circumstances involving changes in the composition of the winning bidder. “This lacuna provides for different interpretations as to what actually constitutes a change in bidders/contractors. Case law cited in this respect is ambivalent, largely determined by the specific circumstances of each case, which varied according to whether the change was considered as the internal re-organisation of a contractual partner or an actual change of the contract partner. Although it is not the NAO’s intention or remit to pronounce itself on the legal implications of the change in shareholding of ElectroGas Ltd, it is this Office’s understanding that the departure of Gasol plc was in breach of the contractual obligations in force at the time.”

In terms of Gasol's ability to financially contribute to the whole project, the NAO said that concern regarding the ability of Gasol plc to contribute towards the financing of the project should have been raised.

State guaranteed bank loan

In terms of the state guaranteed bank loan, The NAO established that no reference was made to a possible security of supply agreement or any other form of state guarantee by Enemalta in the Expression of Interest and Capability and the Request for Proposals. "Notwithstanding this, it was evident that discussions were held by the Programme Review Board relating to the possible issuance of a government guarantee in July 2013, with the Request for Proposals already published."

The NAO's opinion is that favourable conditions were created for bidders still involved in the tender process at its latter stages through the introduction of provisions that substantially altered the nature of the tender, rendering it more advantageous to the bidders.

"Although the documentation made available to this Office 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 NAO also sought to establish whether the Government Guarantee was in line with applicable financial regulations. The Office noted that, at the time under review, no specific legislation regulated the issue and management of government guarantees.

"Having reviewed the Guidelines applicable at the time of issue of the Government Guarantees to ElectroGas Ltd, the NAO noted that no reference was made to the provision of this form of security to private entities. In fact, the Guidelines solely referred to a scenario where a government entity required financial security, through a government guarantee, to secure a bank loan.

Although the Government Guarantee was not called and was released in December 2017, when ElectroGas Ltd repaid the bridge loan facility and secured long-term financing... "the NAO maintains serious reservations regarding the risk that Government was exposed to when the guarantees were in effect. The Office is of the opinion that such a situation could have been avoided through appropriate planning, with referral to the s European Commission undertaken at the earliest, possibly prior to the issuance of the Expression of Interest and Capability and the Request for Proposals. It is in view of the serious repercussions that could have materialised had the guarantees been called that the NAO advocates that any measure that could have mitigated the issuance of the Government Guarantees and the duration within which they were in effect should have been considered."

Selection process

In terms of the selection process, the main concern identified by the NAO in its review of the EoIC Expression of Interest and Capability evaluation process was the inconsistent approach adopted by the Expression of Interest and Capability Evaluation Committee in its assessment of submissions.

Although the NAO considered the Request for Proposals document as well structured and appropriately defining the intended project, the Office identified various shortcomings mainly in terms of major changes effected during the clarification process. "These changes were not considered as clarifications by the Office but the introduction of new concepts, or substantial revisions to existing provisions, particularly in relation to the take-or-pay obligation, which effectively shifted risk from the selected bidder to Enemalta and/or Government. While all bidders were informed of these developments, the significance of these changes and their timing drew the NAO's concern, as the nature of the contractual relationship that was to be entered into was intrinsically revised, drastically reducing the risk to revenue for the selected bidder. Instead, this risk was transferred to Enemalta and Government, now required to purchase 85 per cent of the annual contract quantity, be it power and gas, irrelevant of requirements."

"A significant concern noted by the NAO with respect to the Request for Proposals evaluation process related to the lack of appropriate due diligence undertaken. This Office is of the understanding that the due diligence undertaken was insufficient and only partially addressed the risks associated with a project of this magnitude. While the consideration of technical-related matters was adequate, other aspects of the due diligence process were lacking. The financial aspect of the due diligence process was not sufficiently robust and deemed inadequate by the Office given the materiality of the project. Verifications relating to fraud, bribery and corruption, internal controls, risk management considerations, ethical conduct and other governance issues did not form part of the due diligence carried out. In terms of the actual Request for Proposals evaluation process, the NAO is of the opinion that the exclusion of the Yildirim Consortium was justified. "

"Moreover, despite instances of inconsistencies noted in the allocation of marks and changes to submissions made during the evaluation process, this Office concluded that these bore no significant impact on the outcome of the selection process."

NAO Statement

The key concern that emerged from the NAO’s review of the evaluation process of contracts awarded to ElectroGas Malta Ltd by Enemalta Corporation was the inconsistent approach at times adopted in the assessment of submissions. While the NAO acknowledges that certain submissions were eliminated on sufficient and justifiable grounds, others proceeded to the Request for Proposals (RfP) despite similar shortcomings, the NAO said in a statement.

The NAO report, which was submitted to Parliament this afternoon, also says that the Malta-Sicily interconnector was a cheaper option.

Notwithstanding the positive aspects noted with respect to the RfP, the NAO’s attention was drawn to major changes effected during the bidding process, such as revisions to take or pay obligations and the concept of security of supply, which shifted risk from the bidders to Enemalta and Government. In terms of Requests for proposals (RfP) evaluation, although the NAO identified points of divergence in the allocation of marks, these bore no effect on the outcome.

However, of concern were shortcomings related to due diligence, with checks undertaken deemed insufficient. Also of concern was the lack of evidence of Enemalta’s consideration of alternative procurement models and it is in this context that reservations regarding the design of the project emerge, the NAO said.

From May 2014 onwards, ElectroGas Malta Ltd, Government and Enemalta, as well as other parties, entered into various contracts, including the Power Purchase Agreement, the Gas Supply Agreement
and the Implementation Agreement. The term of these Agreements was for 18 years from achievement of the first phase of construction of the energy facilities. Although the project was to be completed by 14 April 2017, this target was not achieved until 28 September 2017.

Delay charges, capped at €18,000,000, were levied by Enemalta on ElectroGas Ltd. In terms of supply, Enemalta was to pay for energy and gas made available, thereby compensating ElectroGas Ltd for capacity, and amounts delivered. Fixed rates were to apply for the first five years of the term, following which indexed pricing was to come into effect. Energy was to be sourced from the new plant, Delimara 4, while gas was to supply Enemalta’s converted Delimara 3 plant.

Shortly after the signing of the supply agreements, Gasol plc, the lead member of the ElectroGas Consortium, withdrew from ElectroGas Ltd, transferring its shareholding to the remaining members.
Although the change in shareholding was authorised by the Ministry for Energy and Health, and Enemalta, the NAO established that this was not in line with the prevailing contracts in force at the time and specifically breached provisions stipulated in the Implementation Agreement.

Government’s involvement in assisting ElectroGas Ltd secure financing for the project first emerged in mid-2014, when it became evident that for ElectroGas Ltd to obtain funding, the Security of Supply Agreement (SSA), whereby Government would assume Enemalta’s role in the supply agreements in particular circumstances, was to be in effect. Until the European Commission’s clearance of the SSA in terms of state aid, Government consented to provide a guarantee to assist ElectroGas Ltd.

Government guarantees were entered into with respect to the €110,000,000 bridge loan facility, later revised to €450,000,000. Fees charged by Government exceeded €11,000,000.
Following the Commission’s clearance, the SSA was entered into, which led to financial closing in January 2018, repayment of the bridge loan by ElectroGas Ltd and the release of Government from guarantees issued.

From April 2017 to June 2018, ElectroGas Ltd invoiced Enemalta €13,800,000 for gas availability and €45,900,000 for gas delivered. In terms of energy made available and energy delivered, invoiced amounts were €53,600,000 and €111,500,000, respectively.

In excess of 1,410,000MWh were delivered through Delimara 4, which resulted in a rate of €78.96/MWh. During the same period, Enemalta sourced over 930,000MWh from the interconnector for a total cost of €57,400,000 which, when adjusted for other costs, implied a rate of €61.75/MWh. In addition, the NAO identified ample scope for improvement in purchasing decisions when sourcing energy through the interconnector.

Background:

On 11 April 2013, Enemalta published a call for Expressions of Interest and Capability (EoIC) for the supply and delivery of natural gas and electricity. Following the shortlisting of candidates, Enemalta issued a Request for Proposals (RfP) on 6 July 2013.

The ElectroGas Malta Consortium was selected as the preferred bidder on 12 October 2013. Subsequently, ElectroGas Malta Ltd entered into a series of contracts with Government and Enemalta. On 30 July 2015, the National Audit Office (NAO) was requested to investigate the process leading to award and the contracts entered into.

The issues raised in the press release (above) only present the essence of the complexities that characterised this audit. This review covered all aspects of the project, from conceptualisation to its eventual execution, its financing, state aid implications and comparison to rates charged for electricity sourced through the interconnector. A far more comprehensive account of all these aspects, and others, is provided in the full report that is being published. In order to make the report more accessible, an abridged version is also being issued.

This may be found here

 

 

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