The Pakistan State Oil (PSO) inter-departmental committee has failed to take action against those in its Supply Department that it accused of extending undue favour to one base oil importer by violating prescribed criteria as well as implicating two companies of collusive behaviour, according to official documents exclusively obtained by Business Recorder.
The committee, headed by General Manager, LA & Chemicals, comprised General Manager, Corporate Planning/member, General Manager Finance/member, General Manager Internal Audit/member and Manager Legal Affairs/Secretary.
The inquiry had been ordered by then Minister for Petroleum and Natural Resources (now Prime Minister's Advisor on Petroleum) Dr Asim Hussain and Chairman PSO, Suhail Wajahat on a complaint by H&H Trading House which also participated in the tender to supply base oil of SN 150 and SN 500.
Business Recorder had reported a $3 million loss to the national exchequer. Official documents say that the Supply Department termed it a typographical error. The committee had sought answers to 10 questions from the concerned department of PSO. However, the replies to most of the questions were termed unsatisfactory.
The first question was: 'whether the typo error in the tender enquiry Group II base oils, being stated as SN 150 and SN 500 instead of 150N and 500N was ever rectified in writing?' Supply Department's reply was termed unsatisfactory by the committee. The committee observed: "although this error was never rectified in writing, however, according to the Supply Department there was no significant impact of this typo error. Keeping in view the historical background, the committee agreed with the justification given by the Supply Department. The committee also noted that none of the bidders raised any objection to this effect during the public opening of the tender".
As per the tender enquiry, clause 12, separate pay orders were required as security deposit to be provided by the bidder for each product. Simpexco only provided one for both products (150 N and 500N). Why was its bid not rejected to the extent of one product, whereas Faran chemicals bid was rejected for not furnishing the security deposit? The response given by the Supply Department was termed unsatisfactory in light of the fact that two different products in the form of two different grades of Group II base oils were being procured in different quantities. The tender enquiry also clearly mentioned the words of "each product" in different clauses.
All bidders were required as per tender enquiry, clause 5, to give 5 working days' price validity. Meshe, H&H and Commerce international gave 5 working days as validity. However, Simpexco only gave validity of a day (till 2 pm 11 October 2011). The committee queried as to why this deviation from the terms and conditions of the tender was accepted? The response given by the Supply Department was termed unsatisfactory. It was a serious deviation and should have been 'highlighted to the Management.
Unlike other bidders, who had disclosed the supplier's name, Simpexco never disclosed the name of ICC Chemicals as its supplier. However, at a later stage it submitted pro forma invoice from ICC, which is deviation from the terms and conditions of the tender. The response given by the Supply Department was unsatisfactory as it was a non-compliance of the tender enquiry.
Another question was: why was technical evaluation carried out after financial bid had been opened and evaluated? The Supply Department accepted the fact that procurement should have been undertaken on the basis of two-envelope-single stage bidding as per PPRA rule 36 (b).
Faran Chemicals was evaluated as technically the best on the basis of specifications despite the fact that Faran Chemicals did not furnish the requisite security deposit and did not specify exactly the manufacturer's name in its bid and origin. On the other hand, the specifications of H&H were not considered on the basis of its origin and the non-disclosure of the manufacturer. The committee agreed with the clarification given by the Supply Department and Lubricants Department to the extent of disclosure of manufacturer's name and origin of the product. However, as regards the non-furnishing of security deposit, the response given by the Supply Department was considered unsatisfactory.
Question seven was if Group I base oil was technically evaluated. If procurement of Group I base oil was never intended then why was it technically evaluated? The committee observed that explanation given by Supply Department and Lubricants Department was plausible.
Question 8 was: why technical requirements like American Petroleum Instituted (API) certifications were not specified beforehand as required by PPRA Rule 30? During discussion with the committee, GM supply clarified that base oils themselves are not API certified; the additive supplier recommends, on the basis of the recipe, certain base oils and using those base oils enables PSO to manufacture lubricants as per API standards. This view was also shared by the Lubricants Department. However, the committee maintained that the tender enquiry should have specified the manufacturers of base oils recommended by the additive suppliers.
Question 9 asked: if L/C has been opened to ICC chemicals despite the fact that Simpexco never disclosed ICC as its supplier. The response given by the Supply Department was deemed unsatisfactory as the name of the supplier was not disclosed as per tender enquiry. Therefore, the process adopted was incorrect.
Question 10 was: why wasn't the market trend taken into account during evaluation of tender and awarding it? Feedco's letter of October 27, 2011 has reports of ICISLOR and Argus attached showing the price trend and prices of Formosa for Group II base oils which was also not entertained while awarding tender. The committee reviewed the historical trend emerging through bids obtained in December 2008, December 2009 and January 2011. From the historical data it was apparent that ICISLOR prices used to be taken into account as an indicator of international base oil price trend. However, in the base oil tender, after the technical disqualification of H&H anti-commercial disqualification of Faran, remaining 3 of the participants offered products from the same manufacturer ie. Formosa which was an unprecedented situation. Furthermore, it was noted that GM (Lubricants & Retail Business) elaborated before Special ManCom meeting no. 503 of October 13, 2011 that "API endorsement can only be achieved by fulfilling certain recipe requirements by additive manufacturers and by submitting annual fee. Additive manufacturers advise the use of certain base oil products for each offered additive for the requisite API level and guarantee the certification until the recipe ingredients are maintained same on which their testing, trials and application results have been established." The same views were expressed 'by GM (Lubricants & Retail Business) during his discussion with the committee which were subsequently confirmed in an e-mail of December 7, 2011.
The documents further state that a perusal of relevant extracts from minutes of the special ManCom meeting No 503 of October 13, 2011 further showed that the technical evaluation given by Manager (Lubricants Technology), on the specifications sheets provided, approved EHC (Exxon) and Formosa. However, Exxon could not be selected as Faran failed to submit the security and was thus disqualified.
Therefore, in order to ascertain which supplier, out of the three, was authorised to offer Formosa product, a decision was taken by Supply Department to ask the suppliers to produce back to back letters from the manufacturer to support their product origin. Accordingly, Simpexco was the only supplier able to produce the authority/back to back letter from Formosa and its distributor Winson, whereas the other two suppliers who had offered Formosa product could not satisfy the requirement of back to back support from manufacturer. However, it was observed by the committee that this requirement was fulfilled by Simpexco through Formosa 's letter of October 11, 2011 to Winson and the other suppliers were also asked to submit a similar letter accordingly. In the same letter, Formosa mentioned that it did not and will not offer support and allow other channels to bid for the PSO tender in Q4 of 2011.
The committee also observed a strange trend which led it to suggest 'a possible attempt of collusion between some of the bidders'.
This observation ws based on the following facts:
In the last tender for Group II Base Oil, which was opened on January 25, 2011, Faran and Simpexco quoted their bids as follows:
-- Supplier
-- Manufacturer
-- Price for 15 N
-- Price for 500 N
-- Pay Orders
-- Faran
-- Formosa
-- 1695
-- 1748
-- Yes
-- Simpexco
Exxon
--1765
-- 1820
--No
In the tender under review for Group II Base Oil, which was opened on January 10, 2011, Faran and Simpexco quoted their bids as follows:
-- Supplier
-- Manufacturer
-- Price for 150 N
-- Price for 500 N
-- Pay Orders
-- Faran
-- Exxon
-- 2185
-- 2285
-- No
-- Simpexco
-- Formosa
-- 2080
-- 2150
-- Yes
A comparison of the two tables shows that in the last tender, Faran had quoted Formosa 's product whereas Simpexco quoted Exxon. However, Faran attached the requisite security pay orders but Simpexco did not and thus stood disqualified. The tender was finally awarded to Faran accordingly.
In the tender under review, Simpexco quoted Formosa's product whereas Faran quoted Exxon. Despite the fact that Faran was successful bidder in the last tender, this time Faran did not attach the requisite security pay orders and thus stood disqualified.
Moreover, in both above tenders, there was delta in the prices of ICISLOR and the quoted prices.
The committee concluded that H&H was not the lowest bidder for the required Group II base oil. In fact, it was the third lowest.
Contrary to the claim by H&H in its complaint that it had offered Group II base oil GS Caltex Korea manufacturer/origin, it, in fact, did not indicate this manufacturer/origin in their bid; rather it offered the product of Russian and CIS origin and did not disclose the name of any manufacturer. Therefore, this claim by H&H is baseless and this view is further confirmed from the fact that this was not even highlighted by H&H during the public opening of the tender.
PSO has been handling the product tendering for other products also and it is observable that l/c is always opened in favour of the principal/supplier mentioned in the tender. Thus, due diligence was absent in the tender under review.
The relaxation allowed to Simpexco in the context of validity of their bid is in deviation of the terms of the tender enquiry. Ideally, their bid should have been rejected.
The process was reviewed in detail along with its probable implications. The committee observed that historically all tenders had the benchmarking criteria vis-à-vis price economy and the quality which was always followed as a result of which prices were compared/negotiated with the successful bidder. 'Consequently,' this practice had direct reflection on the product cost and the marketability of the product and as such was' important. But this pattern was not considered in the tender under review which could have possibly' saved some value to PSO. It seems that in the tender under review the requirement of quality overshadowed the requirement of economical purchase.
Keeping in view Section 10 of PSO the committee suggested that during the process review, the committee identify certain errors and omissions in the procurement process as mentioned in Section 8 of the report which need corrective measures to avoid reoccurrence of the same in future.
The committee stated that single stage tender process (techno-financial) should be considered for such cases in future as per PPRA rule 36 (b). In case, it is identified that a particular origin of the product is required to meet the quality, such procurement must be handled through proprietary process after due formalities. The indenting department should undertake a complete technical pre-qualification to secure the product requirement.
During the scrutiny of the documents and data pertaining to this tender, the committee observed that Group II Base Oils of 150 and 500 grades had been described with different prefixes, eg F, J, EHC and N, etc. The procurement function, it directed , should ensure use of the correct prefix to avoid complications and exposure of the company.
After a month-long inquiry the committee recommended to the management to scrap base oil tender after examining the business needs of the organisation and impacts of any consequential action.