• National Audit Office points to lack of transparency
• New procurement despite initial supplier selection
• Lack of clarity in OQ Trading’s prepaid conditions

Amidst the economic crisis, Sri Lanka has incurred a substantial additional expenditure of $ 3.146 million, equivalent to Rs. 1.139 billion, due to the cancellation of the term tender initially awarded to Siam Gas Trading Ltd. for the procurement of Liquefied Petroleum Gas (LPG).

The recently-issued Special Report on LPG procurement by Litro Gas Lanka Ltd. (LGLL) for the year 2022/2023, by the National Audit Office (NAO), reveals that this unexpected financial setback has led to the purchase of gas from OQ Trading Ltd. at a higher cost.

The report issued on 11 December 2023 reveals that Siam Gas Trading, the lowest bidder, had been recommended by the Technical Evaluation Committee (TEC) on 26 April 2022 as the qualified supplier for 2022-2023. 

The Procurement Committee had approved this recommendation on 28 April 2022.

Additionally, Cabinet approval had been granted on 4 May 2022 to select Siam Gas Trading as the supplier. 

Despite the Board of Appeal’s consent on 28 May 2022 to award the procurement to OQ Trading as outlined in the report, it was revealed by the NAO that a new procurement process had been initiated following a Cabinet decision on 13 June 2022. 

This decision had been made despite gas being purchased from OQ Trading at a price exceeding that of Siam Gas Trading (CP+$ 96).

Notably, this had occurred without a formal methodology for Sri Lanka to purchase gas from March 2022.

As a result, the term procurement had been cancelled, even though Siam Gas Trading had been selected. Gas had then been purchased from OQ Trading at a higher price.

According to the report, OQ Trading had stipulated that payments should be prepared based on prepaid conditions, involving the value of $ 20 million or a certified Standby Letter of Credit (SBLC) for at least 100,000 MT, as per Section 3.2 (ii) of the Cabinet Memorandum presented by the Prime Minister on 8 June 2022.

However, the NAO has questioned the omission of these conditions when seeking approval.

Additionally, Litro Gas Lanka had sought Cabinet approval to make payments without a bank guarantee, claiming that was its existing procedure. 

However, the NAO stated that it had found no evidence of a consistent methodology for making such payments, except for one instance during the economic crisis.

The NAO questioned the Cabinet Memorandum’s explanation, considering the lack of observed consistency.

While the Procurement Committee had initially approved the procurement with the condition of reducing the value in the SBLC to the monthly supply value, a new procurement had eventually been chosen due to the failure to obtain the necessary Letter of Credit.

Notably, Litro Gas Lanka had agreed to purchase 100,000 MT under spot contracts from OQ Trading, subject to SBLC conditions or prepayments totaling $ 20 million.

Despite Siam Gas Trading’s willingness to supply gas at lower prices and an offer to supply on a prepayment basis if SBLC could not be provided for spot contracts, the decision-makers had ignored this option. Consequently, only one company had proceeded with the procurement at higher prices under the same conditions.

The NAO in its report has expressed dissatisfaction with the lack of transparency and prudence in the procurement process.

Moreover, the NAO has noted that these concerns had not been addressed in the letter sent by Litro Gas Lanka to the Secretary to the Prime Minister on 2 June 2022.

Litro, the primary player in the LPG industry in Sri Lanka, holds a dominant market position with a share exceeding 87% as of 2022. The Ceylon Petroleum Corporation (CPC) contributes around 10% of Litro Gas Company’s LPG needs, while the remaining 90% is sourced through imports at the prevailing global market price, specifically the Saudi contract price, on a monthly basis.

The awarded term procurement agreement for LP Gas from 2020 to 2022 had to end by 28 February 2022. However, the selection of a new supplier for 2022-2023 and the procurement award should have been completed before 1 March 2022, according to the NAO.

Although procurement activities for 2022-2023 were supposed to begin in September 2021, they had been delayed until January 2022 for various reasons. The report has indicated that Siam Gas Trading – Singapore had been chosen as the supplier for 2022-2023 through the procurement process that began on 9 January 2022.

Despite objections from the previous supplier, OQ Trading Ltd. Dubai, UAE and its appeal, the Appeal Committee had recommended Siam Gas Trading Company as the supplier with the lowest price.

The report has highlighted that Litro Gas Company, in the bid documents, had committed to providing an SBLC. However, due to Litro Gas Company’s failure to provide the agreed SBLC within the prevailing economic situation, the Cabinet of Ministers had approved a new procurement on 13 June 2022.

Despite approvals from the Procurement and Evaluation Committees to award the relevant procurement of one metric tonne of LP Gas to Siam Gas Trading at CP+$ 96 and the subsequent selection of Siam Gas Trading after the appeal on 28 May 2022, the Sri Lankan Government had to bear an additional cost of $ 3,145,960 (Rs. 1,138,837,430) due to the cancellation of the term procurement and the purchase of gas at a higher price.

Furthermore, Siam Gas Trading had expressed willingness to supply gas at CP+$ 102 for the months of May and June 2022. Despite Litro Gas Company’s indication of insufficient time, the Government of Sri Lanka had to pay an extra amount of $ 56,256 (Rs. 20,196,047) for the purchase of 16,546 MT of gas at CP+$ 105.40 from OQ Trading during the economic crisis.

Additionally, the Government had taken action to purchase 100,000 MT of gas for four months from June 2022 using the $ 70 million received as World Bank loan assistance at a price of CP+$ 129 from OQ Trading.

The report has stated that the loss incurred by the Government could have been reduced by at least Rs. 608,943,730 if Litro Gas had agreed to obtain gas from Siam Gas Trading at a price of CP+$ 110 USD.

The report has further noted that action had not been taken to utilise the agreed $ 120 million grant to Litro Gas out of the $ 1 billion received under the Indian credit scheme. 

Litro Gas had paid $ 713,556 (Rs. 210,498,890), sufficient to purchase approximately 785 MT of gas, as demurrage from 22 October 2021 to 18 March 2022 due to ordering gas ships without a proper cash flow estimate, confirmation of funding, or other reasons.

Moreover, despite the Head of the Procurement Division of Litro retiring on 11 February 2022 upon reaching the age of 60, the officer had received service extensions and had been appointed as the Director (Procurement) on a Fixed Term Contract from 17 October 2022 until 31 December 2023 without being replaced by any adequately qualified and experienced officer internally or externally, as per the NAO’s findings.