Performance Audit: Procuring the Public Transportation Service

Auditor General Charles Deguara has presented the performance audit report in caption to the Speaker of the House of Representatives Anglu Farrugia. This audit reviewed the procurement of the Scheduled Public Bus Service in Malta and Gozo to determine whether the resulting agreement was secured in a manner which conformed with the principles of good governance and transparency.

In January 2014, Government and the service operator of the scheduled bus services in Malta and Gozo reached an agreement where it was decided that the latter desists from operating this concession agreement and that the former would acquire 100% of the shares of the then operating company (Arriva Malta Ltd.). Within the same month of this agreement, Transport Malta issued an Expression Of Interest (EOI) calling for the submission of offers from parties who were interested in acquiring the operating company (in full or part thereof) as well as the exclusive concession rights to operate the Scheduled Bus Service in Malta and Gozo. A new agreement between Transport Malta and the current operator was signed on the 8 January 2015 and covers the provision of the service in question up to the 7th January 2030. This contractual service is expected to cost Government more than €430 million over the contract’s 15-year duration.

In this review, NAO noted that the scoped procurement process was conducted with a sense of urgency which generated obvious and otherwise avoidable risks to a sector that carries significant social and financial materiality. It was also noted that, while it was commendable that Government had a set preferred direction to favour any bidders who offered to acquire the operating company in full (that is, with all its assets and liabilities), this review shows that the weighting mechanism stipulated in the EOI was not designed to include reasonable quantification of this favourability but rather opted for absolute preference.

This review also showed that prospective bidders were provided with draft financial statements of the operating company they were invited to procure rather than audited accounts, and that these drafts were presented halfway during the bidding phase. Considering that TM refused to extend the EOI submission deadline when asked to do so by prospective bidders in view of this delay, it is noted that this resulted in a drastic reduction in the time during which the latter could formalise the financial element of their bids. This Office is also concerned with the lack of clarity in Government’s intention to deal with major line items in the operating company’s balance sheet at EOI stage, which items could have significantly affected the company’s capital. These shortcomings may have negatively influenced the attractiveness of this acquisition and possibly hindered the Authority from receiving additional (possibly advantageous) offers.

Documentation reviewed by this Office also suggests that the negotiation phase with the preferred bidder started before the latter was formally confirmed by the evaluation committee. Though the singularity of the bidder under the preferred option (that is, to acquire the operating company in full) mitigates NAO’s concern in this respect, it still believes that the specific requirement stipulated in the EOI for negotiations to be initiated after the selection of the bidder, should have been followed.

While acknowledging the that the related evaluation report and forwarded ancillary documents present a general view of the main considerations of this process, NAO is however concerned by the significant gaps in the forwarded documentary evidence relating to the Committee’s review of the submitted bids. Amongst others, NAO was provided with practically no documentation related to the negotiation phase of this process. While this Office could not pinpoint any significantly concerning outcomes from this process, it is still concerned with the fact that it was not forwarded with a complete documented audit trail. NAO believes that such a situation impeded it from assessing whether these negotiations were conducted thoroughly in accordance with the principles of good governance or otherwise and whether Government could have achieved a better deal with the selected bidder.

These issues, along with others, are comprehensively presented in the audit report together with this Office’s recommendations.