The US$2,7 million fuel deal between the Central Mechanical Engineering Department (CMED) and First Oil was executed with reckless non-compliance with procurement procedures amid fears the parastatal could have been fleeced with the help of its staffers.
CMED is entangled in a legal wrangle with First Oil after the latter failed to supply the 3 million litres of diesel it was paid to supply.
The matter is now before the courts and has drawn in two other state entities -- Petrotrade and the National Oil Infrastructure Company (Noic).
CMED accuses Petrotrade acting chief executive officer Tanaka Sikwila and Noic chief executive officer Wilfred Matukeni of allegedly misleading them to release the money since the two state entities were holding fuel meant for delivery to CMED.
A comprehensive report by the board of inquiry into the saga showed that the deal stank to high heaven. The board of inquiry was chaired by former Attorney General Sobusa Gula-Ndebele.
Sikwila told the board of inquiry that the March 5 2013 letter confirming product availability was originated or drafted by CMED and First Oil then asked Petrotrade to put the draft letter on their letterhead.
In the letter, Sikwila assured CMED fuels manager that Petrotrade had reserved 3 million litres of diesel "on behalf of Globe Investments/Orpsa and First Oil for onward released to CMED upon full confirmation of payment".
The board of inquiry said the person behind the drafting of the letter had an ulterior motive that should be investigated.
"The draft letter was delivered to Petrotrade by Sagambe of CMED and Nyamadzawo [Alois] of First Oil," it said.
The inquiry unearthed that the invitation to tender was done telephonically and no product specifications were given to bidders.
It noted that given the amount involved "and the fact that this was a cash upfront transaction, this procurement should have been covered by a performance bond or guarantee as provided for in section 27 of the Procurement Act".
The board of inquiry observed that the procurement of fuel was not done through a procurement committee as per procedures, thereby removing the checks and balances.
"The non-involvement of the procurement committee left this important, frequent and voluminous procurement at the mercy of a fairly junior manager, the fuels manager. The procurement of the fuel was left to be the responsibility of a single person, thereby eliminating checks and balances in the system," it said.
According to the report, the fuel supply arrangement was such that First Oil would procure the fuel from Petrotrade at a price of US$1,27 a litre for resale to CMED at a price of US$1,21.
This means that First Oil would make a loss of US$0,06 per litre and US$180 000 for the whole consignment, a huge amount in the highly competitive fuel industry where margins are small.
"The explanation for this strange arrangement was that First Oil had committed itself to take a knock on the sale price of this fuel consignment on the understanding that the loss incurred would be recouped from gains that were due to accrue from a long-term deal it had struck with its eternal supplier called Micro Petroleum," the board of inquiry said.
"In other words, First Oil anticipated making future deliveries to CMED once this trial run transaction had succeeded."
The board of inquiry said the assertion was buttressed by Sikwila who told the board that when he was approached by First Oil and CMED, "he got the impression that First Oil's external supplier had a vessel on the high seas with fuel meant for the long term supply to First Oil".
First Oil was not among the three companies invited to bid for the supply of fuel but won the tender nonetheless.
Six companies -- Engen, Extre-me Oil, Sakunda, Comoil, MAPS and Zuva -- were invited to bid for the contract.
Of the six companies, three --Zuva, Extreme Oil and Engen -- indicated that they would not respond as they were owed money for previous deliveries.
On tender adjudication, it was discovered that First Oil had made an unsolicited bid.
The board of inquiry said the awarding of a tender to First Oil "was a manifestation of the long established relationship between First Oil and staff in the fuels SBU [strategic business unit].
"In the final analysis, it appears the tendering process was manipulated to ensure that the preferred supplier won the tender," it said.
The investigations revealed that First Oil won the contract despite the fact that its licence had expired on December 31 2012 and was only renewed on May 27 2013 pointing to a lack of due diligence on the part of management.
"Technically speaking, this means that management awarded a tender to a company that was not registered in terms of the regulations governing the fuel industry," said the board.