PF spent K6.7bn on fuel subsidies in 2 years, reveals AG report

THE Special Audit Report of the Auditor General on the procurement of petroleum products has revealed that the PF government spent K6.7 billion on fuel subsidies between 2019 and 2021.

And the report revealed that the PF government awarded a contract for the construction of Fuel Depots in seven provinces to a company without experience.

The Report indicated that the Ministry of Finance and National Planning paid K6.7 billion in subsidies to the Ministry of Energy to offset the losses resulting from price differentials and exchange rate fluctuations.

“Since January 2008, the pricing of petroleum products in the country followed the Cost-Plus Pricing Model (CPM). The CPM was used to determine the wholesale prices by considering all expenses related to procurement, transportation, processing, storage and distribution of petroleum products. The total cost was converted into the Kwacha using a projected exchange rate between US dollar and kwacha, assumed to be the rate applicable when the Ministry needed to buy US dollars to pay suppliers and service providers. Through the CPM, all procurement costs for petroleum products were intended to be covered by the sales revenue generated from the sale to the Oil Marketing Companies (OMCs). However, during the period under review, losses were incurred because the wholesale prices that were set by the ERB were lower than the supplier’s landing costs (price differentials) and there were also losses due to exchange rate fluctuations,” the report read.

“In order to address this issue, the MoFNP intervened by providing subsidies to the Ministry of Energy to offset the losses resulting from price differentials and exchange rate fluctuations. The MoFNP also allocated funds to the Ministry of Energy to settle outstanding payments and interest charges incurred due to delays in payment to suppliers. In this regard, during the period from 2019 to 2021, the Ministry of Energy was funded amounts totalling K6,709,903,894”.

And the report revealed that the PF government awarded a contract for the construction of fuel depots in seven provinces to a company without “construction” on its profile.

Dalbit International Limited, the company in question, was awarded a contract for refurbishment and construction of Provincial Depots in Lusaka, North-Western, Western, Southern, Eastern, Northern, Luapula provinces without background of construction on its profile.

“Construction of Strategic Fuel Reserve Depots On 24th November 2010, the government through the Ministry of Energy entered into a contract with Dalbit International Limited for the refurbishment and construction of Provincial depots in Lusaka, North-Western, Western, Southern, Eastern, Northern and Luapula provinces. The following were observed:
Questionable Awarding of the Construction Contract to Dalbit International Limited, A review of the company profile for Dalbit International Limited revealed that the business of the company was procurement, trading, transportation and management of petroleum products. Although ZPPA authority was obtained to direct bid Dalbit International Limited, it was questionable how the Ministry identified the contractor, as construction was not part of the company’s profile,” the report read.

The report revealed that the Chipata Depot was also not operationalised during the period Dalbit International Limited was engaged for construction.

“Failure to operationlise the Chipata Depot during the period from 2018 to 2022, Dalbit International Limited was engaged for the construction of a depot in Chipata at a contract sum of US$37,591,347.48. As at 15th February 2024, the contractor had been paid amounts totalling US$33,682,013.84 leaving a balance of US$3,909,333.64. A review of records revealed that the depot was handed over to the Ministry and commissioned in August 2022. However, as at 15th February 2024, the depot had not been utilised 18 months after it was commissioned,” the report read.

“Failure to Secure Title Deeds – Mansa and Chipata Depots. Section 41 (4) of the Public Finance Management Act No. 1 of 2018 states that ‘ a controlling officer shall ensure that all public properties under the controlling officer’s charge are secured with title deeds’. Contrary to the Act, as at 31st January 2024, the Ministry had not secured title deeds for the land on which Mansa and Chipata Fuel Depots were constructed”.

The report revealed that the Ministry of Energy incurred $123,925,000 charges due to delayed payments for the construction of a fuel depot in Lusaka.

“Construction of fuel depot in Lusaka. On 13th March 2019, the ministry entered into a contract with Gulf Stream International FZC for the design and construction of a 120,000m3 capacity Fuel Depot in Lusaka District, at a contract sum of US$123,925,000 (inclusive of US$1,525,000 – cost of land), with an initial completion date of 31st October 2020 which was later revised to 31st October 2023. According to addendum No. 6, the Ministry had incurred amounts totalling US$190,716,894.21, including variations and interest charges due to delayed payments. As at 30th November 2023, the project was 99 percent complete with the remaining works being the laying of pavers around truck packing areas,” the report read.

“As at 30th November 2023, amounts totalling US$103,991,166 had been paid to the contractor, leaving a balance of US$86,725,728 which had been outstanding for over 12 months. However, the following were observed:
Irregular Direct Bidding Section 32 (2) (a) of the Public Procurement Act No. 12 of 2008 states, Contrary to the Act, although the Ministry was granted a ‘No objection’ by ZPPA to direct bid on the justification that the contractor was the only one who had a piece of land in the area suitable for the construction of a storage facility with a capacity of more than 100 million litres, the Ministry did not carry out a survey to establish that the land was only available from the contractor and there was no reasonable alternative or substitute that existed. In addition, there was no valuation report to support the amount of US$1,525,000 paid for the land”.