Buying two second-hand vessels: PPRA decides to recommend govt give exemption to PNSC

ISLAMABAD: The Board of Public Procurement Regulatory Authority (PPRA) headed by Secretary Finance, has quizzed Pakistan National Shipping Corporation (PNSC) for procurement of two second-hand ships from M/s Shell Singapore with cooperation of M/s Byco, well informed sources told Business Recorder.

During a recent meeting of PPRA Board, MD PPRA shared background that PNSC sought permission of the Authority for the procurement of second-hand/ used vessels, crafts, ships and associated equipment/ machinery through negotiated tendering under rule 42 (d)(ii) of Public Procurement Rules 2004.

He further explained that PPRA Board in its 68th meeting held on February 20, 2023 while recommending exemption decided to recommend to the federal government exemption under Section 21 of the PPRA Ordinance, 2002 from applicability of Public Procurement Rules, 2004 for the procurement of two second-hand vessels by PNSC.

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The Board further decided that PNSC shall forward a case through its line Ministry for insertion of a new rule defining mechanism for carrying out procurement of second hand vessels in future.

MD PPRA apprised the Board that recommendation of the PPRA Board was forwarded to the Cabinet Division on March 7, 2023. Subsequently, the federal cabinet on May 19, 2023 referred the matter back to the PPRA Board to give the reason for their recommendation, in writing, as stipulated in Section 21 of the PPRA Ordinance, 2002.

In pursuance of the decision of the Cabinet, the Authority requested PNSC to provide detailed justifications for the procurement of second-hand/ used vessels vide letter date June 01, 2023. Accordingly, PNSC provided the justifications on June 15, 2023. MD PPRA invited representative of PNSC who was a Special Invitee to the Board meeting to further explain the proposal.

The representative of PNSC explained that PNSC has been procuring second-hand vessels in accordance with Rule 42 (d) (ii) of Public Procurement Rules, 2004. However, PPRA on October 14, 2022 communicated ‘there exists no provision in Procurement Regulatory Authority framework which allows for the procurement of second-hand goods’ thus restricting procurement of used vessels.

He further explained that PPRA’s remarks restrict PNSC from acquisition of second-hand vessels to meet Pakistan’s requirements of carriage of cargoes by sea, especially for oil transportation and replacement of aging fleet.

The case was presented before federal cabinet on May 19, 2023 where federal cabinet in principle, concurred that PNSC should add vessels at earliest in compliance with Rules ensuring transparency.

He apprised the Board that federal cabinet “referred the matter back to the PPRA Board to give the reasons for their recommendation, in writing, as stipulated in Section 21 of the PPRA Ordinance, 2002”.

PNSC requested PPRA for grant of exemption from applicability of Public Procurement Rules, 2004 for procurement of second-hand vessels/ goods.

Secretary Finance/ Chairman PPRA Board inquired whether PNSC has been procuring second-hand vessels so far or otherwise. The representative of PNSC highlighted that new vessels were always preferred over used ships, but due to PNSC’s financial limitations, it has been procuring second-hand old vessels. However, mix of new and old is required to sustain PNSC’s growth.

MD (PPRA) highlighted that the procurement of second-hand used vessels made by PNSC under Rule 42(d () (ii) of Public Procurement Rules, 2004 is under investigation with Prime Minister’s Inspection Commission.

PNSC has provided the justifications for grant of exemption. PPRA Board may like to concur or otherwise with the said justifications of PNSC for forwarding the recommendation to the federal government under Section 21 of PPRA Ordinance, 2002.

Secretary Finance inquired from PPRA to explain whether second-hand procurement is explicitly prohibited under the Public Procurement Rules, 2004 or otherwise. MD PPRA explained that PPRA Regulatory Framework is silent on procurement of second-hand or used items or class of items.

On the contrary, the provision for procurement of second-hand item or class of items is explicitly provided in international procurement rules whereas in Public Procurement Rules it is not. He further stated that the in-house interpretation and justification for the absence of such provision is that the procurement of second-hand item or class of items does not ensure value for money, whole life cost, quality and economy in comparison with the procurement of a new item or class of items.

MD PPRA further explained that previously PPRA Board declined a similar case of Ministry of Energy (Petroleum Division), in the instant case PNSC is of the view that sea worthiness certificate is provided by a third party, which provides the expected life and quality of the second-hand/ used ship. Based on these justifications, PNSC has requested PPRA Board to allow them exemption to procure second-hand/ used vessels.

Secretary Finance/ Chairman PPRA Board inquired from PNSC to explain whether the same second-hand procurement practices are being adopted in other countries like Bangladesh and India, etc.

In response, representative of PNSC explained that the same second hand procurement practice is in place in most of the developed countries like USA, UK, Norway, Germany, etc., that are the major buyers procuring second-hand vessels.

He further apprised the Board that PNSC has entered into contract with Shell Singapore where one ship as already associated with them and they are asking for more ships. He further emphasised that PNSC is getting payment in US$(dollars) in this regard PNSC is also trying to venture with M/s Byco and other companies but faced with the challenge of shortage of vessels.

He further highlighted that the more vessels PNSC has the more it will contribute to the income stream of PNSC. He apprised the Board that there is no formal market for Sale & Purchase (S&P) of second-hand ships, for buying or selling of a ship (as in case of real estate property), and the interested party has to approach S&P broker for finding seller/ buyer.

One of the Board Members concurred that even if no market exists for the procurement of new ships, culture of negotiation exists in S&P of ship and owners (sellers/ buyers) are not used to quoting a firm price, even if a (firm price) competitive bidding tender is floated sellers incorporate price premium as they expect and anticipate negotiations.

Representative of PNSC agreed to the notion and further explained that it is difficult to achieve “value for money” through non-negotiated open competitive bidding as sellers may not participate due to conditions regarding: (i) bid security, (ii) bid validity, and (iii) submission of lengthy technical documents restricting competition. Baltic Exchange S&P brokers in their discursion/ feedback highlighted that open competitive bidding process/ tenders become cumbersome for sellers that may not lead to efficient outcomes or materialisation of a successful transaction at prevalent market price(s).

Representative of PNSC opined that PNSC’s negotiated tendering process provides equal opportunity and level playing field and complies with principles of procurement, i.e., transparency, fairness, value for money, efficiency and economy enshrined in Rule 4 of Public Procurement Rules, 2004.

Most aspects of competitive bidding such as advertisement, dissemination of tender, technical and financial evaluations, integrity pact, etc., are complied with the aim to achieve principles of procurement.

One of the Board Members inquired how PNSC is a profit-making SOE. Representative of PNSC responded that PNSC is one of the best profit-making SOE through efficient utilisation of second-hand procured vessels. In FY 2022-23 i.e., nine months PNSC has made net profit of Rs.23.95 billion and this will be significantly more by the end of audit of the said year.

One of the Board Members inquired whether PNSC is generating profit through sale of the existing vessels or otherwise.

The representative of PNSC responded that currently PNSC has 12 vessels. Some of them are being utilised for lifting the fuel of other companies like Shell Singapore, etc., for profit making in dollars. Considering PNSC’s potential of profit-making SOE, (45+8=53) second-hand vessels are required to be procured and included in PNSC’s fleet. Brand new vessels would cost around $ 3.457 million.

Pakistan has to pay around $ 7 billion to shipping lines in the absence of owned vessels. With regard to national interest, it may be noted that PNSC is the only flat carrier which can bring commodities like crude oil, etc., from abroad in case of war and emergency.

oreover, being nation’s flag carriers and one of the profitable SOEs PNSC has the potential to earn millions for the national exchequers.

Another Board Member requested PNSC to explain the price reasonability mechanism for procurement of second-hand/ used vessels. The representative of PNSC responded that inspection mechanism and fair price value mechanism is prevalent in the market for such kind of procurement, third party validator or surveyor provides validation and estimation of the used vessel.

The estimation/ validation of all the available used vessels are monitored by the Board of Directors of the PNSC which thereafter gives concurrence.

After thorough deliberations, the Board decided to recommend to the federal government exemption under Section 21 of the PPRA Ordinance, 2002 from applicability of Public Procurement Rules, 2004 for the procurement of two second-hand vessels by PNSC.

The Board further decided that PNSC shall forward a case through its line Ministry for insertion of a new rule defining mechanism for carrying out procurement of second-hand vessels in future.

Copyright Business Recorder, 2023