PIL under fire over fuel deals

You may be paying more for fuel than you should because of the way Petroleum Importers Limited (PIL) has handled fuel supply bids, The Nation has learnt.

Documents we have seen show PIL giving most of its fuel supply contracts either to sister firms or its members—some of whom were not even the lowest bidders in some lots—or to companies that were more expensive.

PIL, a consortium of four oil marketing companies (OMCs)—Puma Energy (Malawi), Total Malawi, Petroda and Engen—in April 2016, issued an international tender for fuel supplies to the country.

Following bid evaluations, PIL offered fuel supply contracts to six companies—Glencore Energy UK Ltd, Trafigura PTE Limited, Total Trading SA, Petroleos de Mozambique SA, Oilcom Tanzania Limited and Addax Energy Limited.

Of the six, Trafigura PTE Limited, Total Trading SA and Oil Tanzania Limited have direct links to the shareholders of PIL and got the bulk of the deals.

Total Trading SA has shares in Total Malawi, Trafigura PTE Limited controls Puma Energy (Malawi) and Oilcom Tanzania has links to Petroda.

PIL’s move to award the bulk of the deals to its members and also picking bidders charging higher than others has attracted the wrath of a disgruntled bidder, a disillusioned potential supplier and a local fuel supply chain expert.

They all charge that the action smacks of favouritism, conflict of interest and an unfair expense to the Malawian economy that can benefit from lower costs of fuel imports.

The critics warn that PIL’s choice of high priced bidders could be contributing to higher prices at the pump in Malawi whose fuel prices are already 20 percent above other countries in the region.

But PIL—which imports around 90 percent of Malawi’s fuel needs, with the remainder brought in by State-run National Oil Company of Malawi (Nocma)—has dismissed the concerns, saying it is not obliged to pick the lowest priced bidder.

In their letters of protest, two international suppliers—Independent Petroleum Group (IPG) of Kuwait and Vitol Bahrain E.C of Bahrain—expressed discontent in the way PIL handled the tendering process for the 220 million litres of fuel products contracts operationalised on July 1 2016.

Grievances

In its letter to Malawi Energy Regulatory Authority (Mera), IPG—which rejected a less than 25 percent supply volume they were offered for a certain product when its price was the lowest—is seeking the regulator’s intervention.

“We believe the unfair manner in which PIL has dealt with this tender award might have a negative consequence on future participation and supply by many independent suppliers who are not linked with the shareholders of PIL.

“This may also result [in] more expensive or higher cost products landed into the country, leading to higher prices on the consumers or higher burden on Reserve Bank of Malawi,” reads a letter from IPG executive manager Khaled Al Ibraheem.

Adds Al Ibraheem in the letter dated May 11 2016: “We understand from the awarded split that probably the second and third bidder has been awarded more volume than the lowest bidder, which is not justified according to the general norms of the public bid.”

A review of PIL tender results as per summary of premiums quoted appear to show special consideration for Glencore Energy UK Ltd, which was getting contracts despite being more expensive.

A case in point is the supply bids of gasoil from Beira Port. Trafigura PTE Limited was clearly the lowest bidder in terms of credit premiums.

But it had to share the spoils equally with Glencore (50 percent), which came fourth on pricing.

The cheapest after Trafigura PTE Limited—Total Trading SA and IPG in that order—were completely left in the cold, although Total got its share in another lot.

The award of contract for unleaded mogas from Beira also raises questions. While IPG had the lowest prices for mogas among all bidders, PIL only offered the company less than 25 percent of the supply deal, forcing the firm to reject the offer.

Total Trading SA, which came second on pricing after IPG, got 50 percent of the supply deal. Glencore once again, despite emerging third on pricing, was awarded the other 50 percent in a deal IPG was offered 25 percent supply share, which it rejected.

For kerosene from Beira, IPG also lost out to Glencore, despite being cheaper by at least $15.

Another controversial award is on unleaded mogas from Dar es Salaam in which Oryx Energy was the cheapest followed by Sahara Energy. But it was third placed Oilcom Tanzania and Addax Energy SA, which is linked to Oryx, which shared equally the deal with the lowest bidder.

On its part, Vitol Bahrain E.C said it did not even bother to participate in the PIL tender, saying the process was botched from the start.

In a letter signed by Christine Atallah, the Bahrain company said it had problems with the “lack of transparency, of the clarification/addendum process for correcting the tender document, of the expected transfer of the right and obligation during the course of the contract to an unknown entity, and of the potential conflict of interest of the PIL board representative with their respective affiliated supplier-bidders. For the above reasons, we have decided to pass that PIL tender this time hoping to have a clearer procedure for the next,” reads the letter.

The criterion for selecting successful bidders was largely based on premium price offered, organisation responsiveness, and support infrastructure and credit terms.

In a separate interview, a local fuel supply chain expert—who did not want to be named because of his position in the public service—said it is important that public tenders of the kind that fuel importers handle on behalf of the entire nation ought to stand scrutiny.

“Ideally the process should follow all the principles of public buying, which include fairness. In a set-up where the shareholders participate directly or indirectly, as is the case with PIL, issues of conflict of interest are likely to surface. It is evident from the last tender that this appears to have happened where obvious winners of volume based on price were not awarded and those awarded had offered higher prices,” said the expert.

He added that the tendency to award volumes to associates—whether these were asked to match the lowest bidder or indeed asked to lower their prices, which has all the hallmarks of favouritism—could drive away potential bidders leaving only a few.

“This will mean killing competition and Malawi will suffer high prices going forward. What would stop the few to agree behind the scenes a bidding pattern under a cartel arrangement?” he wondered.

He also hit at PIL for splitting the awards to many suppliers as revealed by The Nation.

“Bidding prices are based on economies of scale. Splitting the order the way it was done brings in an additional risk to bidders as they have to bring small parcels at a time. In future they will factor this into their bids by adding a risk premium, thereby making our cost of importing products go up. There is an advantage in splitting in that one is not carrying one’s eggs in one basket—but that comes with a premium,” said the expert.

But in an interview, PIL general manager Enwell Kadango said he is aware of the complaints from the companies and he responded to them with copies to Mera as the regulator.

He added that price is not the only factor they look at in supply and rejected insinuations of underhand dealings in the tenders. (Read PIL’s Kadango’s full response on Page 16 of our Business News Section).

Regulators’ views

Asked whether Mera can intervene on the matter as regulator, spokesperson Fitina Khonje said the authority has no jurisdiction on a contractual matter between PIL and its bidders.

“Our interest, however, is to see to it that the premiums offered by the selected supplier are competitive and match those who offered the lowest premiums, that the supplier has capacity and a good track record so that we ensure security of supply,” she said.

Competition and Fair Trading Commission (CFTC)—when asked whether PIL has broken any competition laws—could only say that the arrangement in the liquid fuel market where OMCs are involved across the supply chain raises competition concerns.

CFTC director of consumer welfare and education Lewis Kulisewa said the allegations against PIL may be a symptomatic result of this market structure.

He promised an investigation to verify the allegation.

But mid last year, the commission also claimed it would investigate similar issues after Nation on Sunday broke the story of the war for the control of Malawi’s $150 million fuel market between Nocma and PIL over who should control fuel supplies, including imports.