'Watershed moment for transparency and accountability'

'Watershed moment for transparency and accountability'

PM says Gov't will act on auditor general's Petrojam report

Thursday, December 06, 2018

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PRIME Minister Andrew Holness yesterday described the Auditor General's damning report on the operations at the State-owned Petrojam oil refinery as a “watershed moment for transparency and accountability in Jamaica”, and said that the Government will act on the recommendations.

Holness, admitting that he had not yet had a chance to thoroughly review the report, as he had just returned to the island from overseas assignments, said he managed to have a preliminary review of the more than 100-page document, which highlights widespread breaches of government procurement guidelines, wanton abuse of public money, corruption, and incompetent management of the refinery.

“There have been some matters highlighted for which we have already acted. We have already addressed some of the governance issues. There are still some issues which she has raised which I will obviously have to address. For example, what has caught my eye and is of great interest is the issue of the pricing. That is something that we will have to take a very serious look at. Issues to do with frugality in the use of public resources, that has to also be addressed,” Holness said during a visit to fire victims in his St Andrew West Central constituency.

Holness also thanked Auditor General Pamela Monroe Ellis for what he described as a “very comprehensive and well-done report”.

One of the highlights of the report, which goes back five years, shows that Petrojam has been unable to account for more than 600,000 barrels of oil loss, estimated at just over $5 billion.

Here are excerpts from the report.

Oil loss

While Petrojam struggles to implement its refinery upgrade project to create greater efficiency, high levels of oil losses became a major risk to its operations. Over the last five years, Petrojam reported that it used 1.5 million barrels of oil, valuing approximately $12.8 billion, during normal refinery production, but could not account for 600,684 barrels valuing $5.2 billion. The reported unaccountable losses increased over the period by 60 per cent to 184,951 barrels in 2017-18 from 115,793 barrels in 2013-14.

Petrojam's average annual unaccountable oil loss of 0.75 per cent was almost two times its own Key Performance Indicator (KPI) of 0.4 per cent.

Whereas Petrojam put in place security measures to reduce the levels of unaccountable oil losses, more decisive actions needed to be taken to address the problem. Petrojam indicated that inventory inaccuracies, underestimated flaring and fuel consumption, vapour losses from slopping, unreported/uncaptured shutdown, leaks, and losses between product transfers were some of the factors contributing to oil losses.

Petrojam further identified oil loss sources to include product transfers from ships at the docks and Kingston storage tanks, transfers between the Kingston refinery and Kingston loading rack, and loss on sales from the Montego Bay, New Port West, Asphalt Loading Rack (tank-meter).

Petrojam did not provide evidence that it analysed these factors and sources of the unaccountable oil loss with a view to better assess and address the problem. Our analysis of the data revealed that of the total unaccountable loss, Petrojam was unaware of the source for 226,470 barrels (37 per cent). The data also showed that losses, which occurred during processing accounted for 261,701 barrels (44 per cent), while 45,794 barrels (eight per cent) were attributable to leaks. The remaining losses of 66,719 barrels (11 per cent) occurred during product sales and transfers.

In August 2017, Petrojam appointed an internal oil loss task force mandated to spearhead the implementation of the oil loss reduction measures. The task force was to complete eight deliverables between October 2017 and February 2018; however, it achieved only one. Consequently, despite spending a total of US$990,811 on four of the loss reduction measures, Petrojam was not able to curtail the problem of oil loss.

Poor handling of four capital investment projects contributed to high cost overruns

We reviewed four major capital investment projects undertaken by Petrojam. These projects comprised the construction of a new petroleum testing laboratory, north perimeter fence replacement, rehabilitation of its main docking facility, and the F-2 furnace replacement.

Petrojam's poor planning and imprudent management decisions, contributed to significant delays in the commencement and execution of these projects with costs significantly exceeding the initial contract sums. The contract sums for the four projects amounted to $1.5 billion with cost overruns on three of the projects totalling $615.7 million.

For the other project, Petrojam made a bad decision, costing $67 million in excess of the original estimate, which brings the total loss in value on the four contracts to $682.7 million. We also observed instances in which the management of Petrojam disregarded the procurement laws in the selection and award of contracts, depriving itself from obtaining goods and services at the best price.

Frequent use of Direct Contracting (DC) and Direct Contracting Emergency (DC-E) procurement methodologies

Based on our analysis of 16 contracts awarded under the four projects, Petrojam awarded eight valuing $224.4 million using the Direct Contracting and Direct Contracting Emergency methodologies, which offer the least assurance that value for money was obtained.

No value obtain from $17.4 million paid to consultant

Petrojam included the implementation of the refinery upgrade as a strategic priority in its 2017-2022 Corporate Plan and appointed a task force to review the financing and economic consideration for Phase 1 of the project.

So far, Petrojam has only initiated due diligence to inform the Refinery Upgrade Project (RUP). However, in procuring the services of 10 consultants to provide consultancy services relating to the RUP and Vacuum Distillation Unit (VDU) at a total cost of $172 million, we found that Petrojam did not adhere to the procurement guidelines in order to maximise its opportunity to obtain value for money.

This included payments amounting to $17.4 million made to a consultant to undertake financial and market assessment and financial and future sustainability assessment of Petrojam from which there was no evidence that Petrojam received any value.

— See related stories on page 5

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