Last week, Transparency International (TI) reported that former President of Peru, Alejandro Toledo, was sentenced to 20 years in prison for collusion and money laundering. The authorities alleged that he accepted US$35 million in bribes from a Brazilian-based construction company, Odebrecht, for the grant of a highway contract. Toledo is also under investigation in relation to a Costa Rican company linked to him that allegedly used Odebrecht’s bribes to buy properties in Peru. According to TI, it has been over a decade since the Odebrecht case exposed one of the largest transnational grand corruption schemes in the world. The construction company admitted to paying millions in bribes to high-level officials in exchange for major contracts across ten Latin American countries and two in Africa.
On the climate change front, the World Meteorological Organization (WMO) stated that over the last two decades greenhouse gases have been accumulating in the atmosphere ‘faster than any time experienced during human existence’. Carbon dioxide concentrations in the atmosphere reached a new high of 420 parts per million (ppm) last year, up 2.3 ppm from a year earlier. In the last 20 years, they have risen by 11.4 percent. CO2 concentrations are now 51% higher than pre-industrial levels, while methane – another potent greenhouse gas – is 165% higher than in 1750. According to WMO Secretary General, ‘[t]hese are more than just statistics. Every part per million and every fraction of a degree temperature increase has a real impact on our lives and our planet’.
Three weeks ago, the National Procurement and Tender Administration Board (NPTAB) announced the award of the contract for the audit of ExxonMobil’s recoverable costs during the period 2021 to 2023. Three firms submitted bids in response to a public advertisement of 14 February 2024 for the submission of Requests for Proposals (RFPs) – VHE Consulting, Grant Thorton UK LLP and PKF Barcellos Narine & Company; and M. Sukhai & Company (local) in a joint venture with Info Works Solutions Ltd. VHE Consulting was awarded the contract in the sum of $312.642 million.
The need for a comprehensive audit to be undertaken
The absence of ring-fencing provisions is a key weakness in the 2016 Petroleum Sharing Agreement (PSA), according to the International Monetary Fund (IMF). A ring-fencing arrangement ensures that only costs attributable to a particular field are considered in the computation of profit oil for that field. Although the Agreement provides for the sharing of profit oil on a field-by-field basis, it also allows ExxonMobil’s subsidiaries to allocate cost oil to any field within the contract area, thereby defeating the main purpose of ring-fencing. The IMF had also stated that there are too many loopholes in the PSA, if not plugged, could result in Guyana losing significant amounts of revenue; and strong leadership in government is needed to ensure that the interest of the State is properly safeguarded.
Considering these and other concerns, a comprehensive audit of the post-contract recoverable costs is of utmost importance, requiring the knowledge, skills, and competence of experienced auditors. The audit is necessary to provide the reasonable assurance that expenditures incurred are legitimate recoverable costs in the context of the Agreement; and the amounts involved are reasonable and represent good value for money. This is especially so, considering the higher the recoverable costs, the less will be the amount of Guyana’s share of profit that will accrue to it.
Results of the two previous audits
The two previous audits were undertaken by IHS Markit covering the pre-contact period from 1999 to 2017, and VHE Consulting for the post-contract period 2018-2020. The first audit identified US$1.678 billion as recoverable costs of which amounts totalling US$214.4 million, or 12.8 percent, were considered disputed charges. The disputed costs are yet to be resolved between the Government of Guyana and Exxon. If these disputed charges are removed from Exxon’s cost statement, oil revenue accruing to Guyana will increase by US$107.2 million.
As regards the second audit, VHE identified amounts totalling US$7.435 billion as recoverable costs of which it had reservations in relation to amounts totalling US$54.471, representing less than one percent of the recoverable costs claimed by Exxon. In last September, the Minister of Natural Resources stated that VHE Consulting was to issue a final report before any action could be taken on the findings and recommendations. It is not clear whether such a report has since been issued.
Concerns about the quality and comprehensiveness of the second audit
Concerns have been expressed as regards the quality of the original report issued by VHE Consulting. Specifically, the report lacked basic structure. There is no table of contents to guide readers through the report; no executive summary; no list of abbreviations; no definition of the technical terms used; and no sections dealing with the terms of reference for the assignment, the scope and methodology used, the auditing standards that were followed in the conduct of the audit, and findings, conclusions, and recommendations, among others.
Additionally, in several parts of the report, VHE has stated that some of the issues would be further examined during the next audit, implying clearly that there is an expectation that it will be re-appointed auditors, or perhaps an assurance was given to this effect. These statements were also clearly an acknowledgement that the audit was incomplete and did not meet acceptable standards.
Terms of reference for the third audit
The terms of reference for the audit of post-contract recoverable costs for the period 2021-2023 requires the auditors to: (i) conduct a pre-audit analysis; (ii) devise an effective audit plan inclusive of an appropriate methodology; and (iii) execute the audit in adherence to the provisions of the Stabroek Block Petroleum Agreement and applicable local laws, regulations and procedures as well as international good practices and standards. The scope of the assignment also includes conducting verifications of the crude oil valuation pursuant to the provisions of the petroleum agreement for the audit period as well as verifying royalties remitted to the government for the said period. Additionally, the auditors are required to validate the accuracy of the total government share of petroleum for the period under review and assessing the impact of the audit on future profit oil revenues.
According to the advertisement, a key requirement is for the bidding firm, along with its partners (local and foreign) combined, to have completed at least three similar assignments during the past seven years. The Minister had also stated that it was the Government’s intention to have the contract go to a local consortium, in partnership with international firms, so as to build local capacity. This should have been a long-term goal since no auditing firm currently operating in Guyana, including VHE, would have met this requirement. It could not have been the intention for the overseas partner alone to have requisite experience.
Requirements of the Procurement Act
Section 44 of the Procurement Act requires a procuring entity (in this case the Ministry of Natural Resources) to request proposals for consulting services from firms that have been included in a short list. Short lists are to be prepared on the basis of expressions of interest received in response to an invitation to express interest published in the newspapers of wide circulation. Since only three firms submitted proposals, it was not possible for the bidders to be shortlisted. In the circumstances, it would have been more appropriate for the services to be retendered, with the terms appropriately amended, to ensure that more bidders submit proposals. In particular, the restriction referred to above should be removed to enable more firms to submit proposals, including overseas auditing firms, with the stipulation that they must partner with local auditing firms in order to build local capacity over the longer term.
By Section 47, where the consulting services are of an exceptionally complex nature, will have a considerate impact on future projects, or may lead to the submission of proposals, which are difficult to compare, the procuring entity may select the consultant based exclusively on the technical quality of the submitted proposal.
Contract award
Because only three firms submitted proposals, the NPTAB, through its Evaluation Committee, reviewed the three proposals for the purpose of selecting the consulting firm to undertake the audit. VHE Consulting was awarded the contract in the sum of $312.642 million against a bid price of $229 million, which is $83.642 million in excess of the bid price. It is not clear whether the scope of the assignment has changed. However, Section 51 of the Act allows for the procuring entity to negotiate the terms of the contract with the selected consultant, with the proviso that under no circumstances should there be negotiations with more than one candidate simultaneously. It is not clear whether this was the reason for the increase in the bid price and whether this procedure was followed.
Considering the above, it is apparent that the Authorities have decided to retain the services of VHE Consulting via sole sourcing disguised as the result to adherence to competitive bidding procedures.
Lack of involvement of the Auditor General
The Auditor General is the appointed auditor of the Natural Resource Fund (NRF). He has audited the financial statements of the Fund for the years 2020 to 2023 and has issued a “clean bill of health” on the financial statements for those years. However, in order to verify the amounts paid into the Fund as Guyana’s share of profit oil, it is necessary to review the basis under which the amounts are arrived at, which means examining the recoverable costs to assess their eligibility under the PSA as well as their reasonableness and value for money. The Auditor General has acknowledged this was not done, as his Office lacked capacity and competence to do so. As a result, the audits began on the assumption that the amounts paid into the NRF were the correct amounts, which is rather unfortunate.
The Minister’s statement about building local capacity should have been directed more towards the Audit Office since the law mandates that the Auditor General be the auditor of the NRF. Additionally, there is provision in the Audit Act 2004 for the Auditor General to contract the services of Chartered Accountants in public practice to assist him with any aspect of his mandate. He could also enlist the services of national audit offices overseas, especially Canada with which he enjoys a close relationship. It is unclear why the Auditor General was bypassed in preference to a consortium of local auditors in partnership with overseas audit firms, and the Guyana Revenue Authority (GRA).
Involvement of GRA
It is unfortunate that the GRA has been deemed the competent authority for reviewing the work of the auditors undertaking the audit of the recoverable costs and the related reports issued. This is not within the mandate of the GRA and appears to be a usurpation of the role of the Auditor General as the Auditor of the NRF. It has been suggested that since the Auditor General is the holder of a constitutional office, as opposed to the GRA which is part of the Executive, the Authorities prefer to treat with the latter. Besides, the results of the Auditor General’s review of the work of auditors undertaking the audit of the recoverable costs are likely to be reflected in the Auditor General’s report to the National Assembly and hence made available to the public, something which the Authorities do not appear to favour.
The GRA has set up a Petroleum Revenue Department with an approved staff complement of 67. As of September 2024, 39 officers were in place. There is also a Customs Petroleum Unit with an approved staff complement of 32 while the actual staffing as at the same date was 21. Considering that Article 15 of the Petroleum Sharing Agreement specifically states that ‘no tax, value added tax, excise tax, duty, fee, charge or other impost shall be levied… on the Contractor or its Affiliated Companies in respect of income derived from Petroleum Operations…’, one could legitimately question the need for a department or unit of such size.
The GRA’s responsibility is to examine the audited financial statements of Exxon’s subsidiaries for the purpose of determining their income and corporation tax liabilities, as is the case of other companies operating in Guyana. The GRA having done so, the Minister is required to pay to the GRA on behalf of the Contractor the amount of tax assessed. The payment is to be made out of Guyana’s share of profit oil, which in effect reduces Guyana’s share of profit oil. However, there was no evidence that the Minister made payments to the GRA. According to the Kaieteur News article of 13 September 2024, the tax liabilities of Exxon’s subsidiaries in respect of the financial year 2023 amounted to G$306 billion, while for the same period Guyana earned $336 billion from its oil.
The above implies that withdrawals are to be made from the NRF to meet the Contractor’s tax liabilities. However, there was no evidence that this was done. One would have thought that the appropriation accounts of the Ministry of Natural Resources would have reflected amounts to be paid over to the GRA to settle the Contractor’s tax liabilities. But this was not to be. Then, how were the Contractor’s tax liabilities settled? Both the Government and the GRA have been silent on the issue. If the GRA issues receipts for funds it has not received, how is it able to balance its books?
Finally, there are no shortcuts to accounting, especially government accounting, and the minimum amount of netting off is permitted but only in relation to minor items of revenue and expenditure. It has been argued that the end result would have been the same if there was actual movement of funds from the Ministry to the GRA since: (i) appropriations are made out of the Consolidated Fund; and (ii) the GRA, having received the amount appropriated to meet the tax liabilities of Exxon’s subsidiaries, must pay over the amount to the Consolidated Fund, as in the case of other forms of revenue. This is a misleading argument in that both the revenue and expenditure of the Government will be understated by the amount involved. Additionally, the balance on the NRF would have been overstated by the said amount.
