Audit of Gozo Channel Co. Ltd. : Public service obligation bid feasibility and operational considerations

On 23 December 2013, the Minister for Finance requested the National Audit Office (NAO) to report on whether due diligence was exercised in the Gozo Channel Company Limited’s (GCCL) bid, made jointly with the Gozo Ferries Company Limited (GFCL), for the provision of maritime transport between Malta and Gozo, awarded to the Joint Venture in 2011. The NAO was also requested to review the GCCL’s operations for 2010 to 2012. The Office selected fuel procurement, payroll costs and ticketing revenue on the basis of materiality and, where deemed necessary, extended the scope of review to include 2014.

The financial results registered were below the projected profits of the Public Service Obligation (PSO) bid, with adverse variances of €0.9 million in 2011 and €2.2 million in 2012. The factors contributing to these variances included the PSO payment, ticketing and other operating revenue, as well as payroll and vessel costs. Justifications cited by the GCCL were the drawing forward of the effective date of the PSO, the payment of a dividend, as well as roadworks and the construction of the Cirkewwa Terminal. Other explanations included lost ticket revenue arising from traffic-related discrepancies, salary increases resulting from new collective agreements and the inability to enter into fuel hedging agreements. According to the NAO, certain initiatives were not seen through due to insufficient action by the GCCL, such as the case of fuel hedging. Other results were not attained due to the overambitious targets set, with commercial space leasing as a case in point. Additional factors that limited the GCCL’s attainment of the PSO targets were beyond its control, such as the roadworks undertaken during the reviewed period. The NAO also noted that the GCCL incurred capital costs on behalf of the GFCL, with €8 million outstanding in 2014. As things stand, should the GFCL fail to settle these dues, the GCCL’s going concern status would be uncertain. Nevertheless, the GCCL registered a marginal profit of €59,000 in 2014.

The GCCL’s fuel expense for 2010 to 2012 amounted to €9.8 million, with the NAO noting multiple instances when the procurement of fuel was not regulated by any contractual agreement, the value of which exceeded €5.6 million. Other concerns related to difficulties in establishing the quantity and quality of fuel procured, with instances noted where the GCCL’s and Contractor’s meter readings were left empty and insufficient laboratory testing ascertaining compliance with specifications.

Payroll costs incurred by the GCCL amounted to €5.9 million, €5.8 million and €6 million between 2010 and 2012 with a staff complement of 249, 237 and 228, respectively. Shortcomings identified by the NAO with respect to overtime, which amounted to €1.8 million over the audit period, centred on the fact that no formal system of authorisation was in place. Further accentuating this concern were instances of excessive overtime, at times exceeding 1,000 hours during the year, with the highest registering over 1,300 hours. Other concerns related to the Company-wide inclusion of break periods as part of the working week as well as notable errors in the computation of salaries.

Ticketing revenue represents the GCCL’s main source of income, with over €30 million earned between 2010 and 2012. Inconsistencies in passenger and vehicle data registered at Cirkewwa and Mgarr raised the NAO’s concern, with potential loss of ticketing revenue estimated at an aggregate of €1.5 million. Passenger variances were highest in 2012, at 106,000, while that of vehicles stood at 21,000 in 2014. Another shortcoming related to the delays in the remittance of cash generated through ticket sales to bank. The balances unpaid to the GCCL were most pronounced in the case of a number of ticket sellers, who averaged daily undeposited sales for particular months as high as €27,394, €28,211 and €33,694.