What you need to know:
- A forensic audit reveals missteps in procurement and use of fuel in electricity generation by thermal power plants with consumers ultimately shouldering the heavy burden.
On July 20,2022, accounting firm Ronalds LLP formally took up an outsourced special assignment by the Auditor-General’s office.
The brief was to conduct a forensic audit on procurement and use of Heavy Fuel Oils (HFOs) in electricity generation by thermal power plants for the three financial years from July 2018 to June 2021 amid public concerns over high electricity bills.
For weeks, auditors switched between interviewing persons of interest and digging through Power Purchase Agreements (PPAs) and related contracts between Kenya Power and Lighting Company (KPLC) and various Independent Power Producers (IPPs).
The assessment unearthed anomalies with the Auditor-General Nancy Gathungu recommending to Parliament a number of drastic actions including reprimand of some KPLC staff and demand for refund of over Sh1.26 billion in excess billing by three IPPs.
A review of the forensic audit report handed to Parliament showed flaws in procurement and use of HFOs in electricity generation by thermal power plants. From lack of guidelines and pricing benchmarks for procurement of fuel, to irregular Fuel Supply Agreements (FSAs), the audit unearthed massive but avoidable inflation of costs that are passed on to consumers.
For instance, consumers had to shoulder a $2.92 million (Sh402.27 million) bill after a diesel supply tender was handed to the highest bidder in 2014 and now Ms Gathungu wants the amount recovered.
In this saga an IPP, Gulf Power on January 17,2014 invited bids for HFO for plant that would supply KPLC under a PPA. Five bidders, Gulf Energy, Vivo Kenya, Kenol Kobil, Gapco Kenya and Total Limited purchased the tender document with only three; Vivo Gulf Energy and Kenol Kobil responding by the bid submission deadline on February 4,2014.
Kenol Kobil, which had the lowest bid price, was however curiously dropped at the technical stage on the basis of lack of proof of availability of two percent sulphur HFO since it was supplying another IPP with 2.5 percent stocks. This was a subjective criterion since HFO is sourced from the same suppliers and the supply of two percent sulphur is easily achievable through blending.
“We also noted that there was an unfair attempt to discredit the financial strength of Kenol Kobil through financial ration analysis by the evaluation team yet this was not an evaluation criteria stipulated in the tender document” the audit report said in part.
“This is despite Kenol Kobil having higher revenue for the three years assessed than both Gulf Energy and Vivo Kenya” it added.
Kenol Kobil quoted the lowest price at $818.8 (Sh112,588.77) compared to Gulf Energy’s $867.55 (Sh119,292.12) and Vivo Kenya’s $877.97 (Sh120,724). But with Kenol Kobil out of the way, Gulf Energy which at the time oddly held an 80percent stake in Gulf Power was handed the HFO supply contract on grounds that its quoted price was lowest.
The audit flagged the award of the tender to Gulf Energy instead of Kenol Kobil as a potential loss incurred by consumers.
“We recommend that action be taken against Gulf Power for the estimated loss of $2,926,713.56 (Sh402.41 million) including recovery measures. Action should be taken against KPLC staff tasted with oversight of the procurement process for failure to protect interest of electricity consumer in the irregular award of the HFO apply tender to Gulf Energy” the Auditor-General recommends.
In another case of unwarranted cost inflation, an IPP Thika Power on July 1, 2013 issued a contract to Gulf Energy for HFO supplies that were priced above other suppliers. The contract was also later extended irregularly—piling cost pressures on consumers.
Under the FSA between Thika Power and Gulf Energy in 2013, the contract would run for 24 months. Thereafter the deal would be automatically renewed on the same terms and conditions for two additional one-year terms.
The contract started on July 2013 and was renewed twice in 2015 and 2016. However, on March 23,2017, Thika Power wrote to KPLC seeking an additional four-year extension of the contract sighting low dispatch of the power plant in 2015 and 2016 due to additional renewable energy added to the national grid. The firm claimed that due the shift, the plant had only consumed 154,666.72 tonnes of HFO against a projected 366,386.97 had the plant been dispatched at 70percent which was the agreed rate at the time of the deal.
A review of the FSA between Thika Power and Gulf Energy however showed that the deliveries of fuel would be dependent on estimates to meet power plant requirements based on dispatch instructions from KPLC. The deal also said such estimates would not be a warranty by Thika Power for its fuel needs.
“In our view this negated the argument made by Thika Power that there was a quota required to be met by the fuel supplier. In any case, we found it to be irregular for the power plant to be making a case to enhance the fuel supplier’s business outside the scope of the FSA. It is also notable that there was no evidence provided by Thika Power in its letter to KPLC showing that market prices were unfavorable” Ms Gathungu said in the report tabled in Parliament.
KPLC on March 28,2017 wrote to Thika Power declining its request prompting and appeal by the IPP on April 28,2017. In the appeal Thika Power cited financial loses to Gulf Energy due to additional storage and accrued interest for fuel stocks held for long due to low dispatch.
On May 5,2017 KPLC responded and maintained there was no provision in the FSA to support the request but granted a two-year extension of the Gulf Energy deal for two years to avoid a scenario where the IPP would run out of HFO supplies.
“In our view, this extension of the FSA was irregular as it had no basis in the FSA. It was also unclear why Thika Power needed two years to carry out a procurement process while the initial process in 2013 was concluded within seven months,” said the audit.
To further disapprove of Thika Power’s claim that HFO prices would have been uncompetitive had it floated the tender, the auditor used a simulation for with the costs of a rival IPP Tsavo Power on fixed costs such supplier premium, storage costs and management fees.
The audit established that Tsavo Power’s lowest fuel supplier bidder was Kenol Kobil with a quote of $50.5 (Sh6,944.31) compared to the $112.97 (Sh15,534.65) quoted by Gulf Energy for the Thika Power HFO tender in 2013. This meant the difference between Gulf Energy fixed costs and the lowest bidder Kenol Kobil was $62.47 (Sh8,590.32).
“From the above it is clear that there was no truth in the claim that Thika Power would have been unable to get favourable market prices had they floated a tender in 2017. It is also notable that Gulf Energy’s quote to Tsavo Power was cheaper by $44.17 (Sh6,073.56),” the auditor said.
Ms Gathungu said the scenario meant potential losses to electricity consumers from the use of expensive fuel by Gulf Energy following the irregular two-year extension of the HFO supply contract.
“We recommend that action be taken against Thika Power for the estimated loss of $4,439,625.46 (Sh610.22 million) including recovery measures” the Auditor-General said in the report to Parliament adding action should also be taken against KPLC staff tasked with oversight of the procurement process for failure to protect the interests of electricity consumers.
In another case of unwarranted cost pressure on consumers, the audit flagged a tender award to Gulf Energy by Thika Power in 2019. In the deal Thika Power ignored a lower bid by R.H.Devani resulting in a cost difference of $25.02(Sh3,440.35).
KPLC on August 7,2019 objected the award of the tender to a more expensive bidder and sought an annulment of the process. Thika Power then wrote two letters to KPLC dated August 8,2019 and August 19,2019 seeking an extension of the 2013 FSA with Gulf Power to allow for retendering. KPLC declined the plea and urged Thika Power to seek spot purchases during the retendering period.
Thika Power wrote back to KPLC and requested an approval for an extension of the FSA with Gulf Power for six months. KPLC gave a nod to this extension deal that was signed November 18,2019—a development that meant a cost load on consumers.
“We recommend that action be taken against Thika Power for the estimated loss of $74,860.34 (Sh10.28 million) including recovery measures. Action should be taken against KPLC staff tasked with oversight of the procurement process for failure to protect interests of electricity consumers in the irregular award of the HFO supply tender to Gulf Energy,” the Auditor-General said.
In another incident, Triumph Power in 2013 irregularly awarded a HFO supply deal to Gulf Energy despite other bidders Kenol Kobil and Hass Petroleum quoting lower prices resulting in inflated costs passed on to consumers.
The difference between the Gulf Energy bid with Kenol Kobil and Hass Petroleum bids was $36.58 (Sh5,029.65) and $43.99 (Sh6,048.50) respectively. KPLC initially disapproved of the decision to award the deal to Gulf Energy later gave a nod leading to signing of an FSA pact between Triumph and Gulf Energy on March 4,2014 for two years with an extension of two years with Ms Gathungu now seeking action.
“We recommend that action be taken against Triumph Power for the estimated loss of $1,810,481.01 (Sh248.85 million) including recovery measures” she said in a report to Parliament addig that the KPLC staff involved in the deal be reprimanded.