The Competition Commission of Pakistan (CCP) through an order has held the entire process of procurement undertaken by the Oil Companies Advisory Council (OCAC) for procurement of Fuel Marking Company in violation of Section 4 of the Competition Act, 2010, declared it illegal, and annulled the invitation of Expression of Interest for Kerosene Marker Programme for Pakistan.
In its order, the CCP also issued broad guidelines to all the stakeholders, ie, the OCAC, Ministry of Energy (Petroleum Division), Ogra and Hydrocarbon Development Regulatory Institute of Pakistan (HDIP), to ensure compliance with the provisions of the Competition Act, 2010 while drafting their future tenders as uncompetitive bidding process can hamper the competition in the relevant market.
The CCP took notice of this matter after Transparency International issued a letter to the chairperson of Oil and Gas Regulatory Authority (Ogra) and alleged that the OCAC awarded Fuel Marking Contract for kerosene without any competitive bidding process. The following assertions were made in the aforesaid letter: (a) The tender notice was not floated in any national newspaper; (b) The whole process was managed by OCAC; (c) The OCAC identified six (6) companies which were given the prequalification and Expression of Interests (EOI); (d) Third party consultant was hired to develop instructions to bidders; (e) Only two companies responded to instruction to bidders; (f) Final bid was only submitted by one firm and; (g) The contract was awarded without a tender process.
After considering the preliminary probe, the CCP on the concerns raised by the Transparency International, initiated an enquiry under Section 37 (1) of the Act. The CCP enquiry report into the matter said whether the selection of the Fuel Marking Contract, procurement methodology adopted, and determination of price can be considered as 'decisions' by the OCAC and if so whether these conditions were a prima facie violation of Section 4 of the Act.
On the recommendations of the enquiry report, a show cause notice was issued to the OCAC and hearings were held in the matter. The CCP Bench also heard other relevant authorities ie. Ministry of Energy (Petroleum), Oil and Gas Regulatory Authority, Hydrocarbon Development Regulatory Institute of Pakistan (hereinafter the 'HDIP') and M/s Authentix (successful bidder).
The OCAC took the state compulsion test in the matter that it was a decision taken by the federal government which they have implemented. Hence, they cannot be held liable. The CCP in its order observed that the purpose behind introducing the Fuel Marker Programme is to avoid the loss to the public exchequer in lieu of tax collection due to adulteration in different categories of petroleum products and in the instant matter, SKO and HSD. The governments around the world adopt fuel marking scheme as a tax administration measure to prevent fuel fraud and smuggling due to unequal tax rates imposed on different kinds of fuels.
It is intended to monitor the correct payment of taxes and prevent revenue loss arising from illicit transfer of fuel. According to the Asian Development Bank (the 'ADB'), all countries are susceptible to fuel fraud; but for developing economies in which every dollar counts, fuel fraud can substantially reduce a government's total revenues. It also noted that the Philippine foregoes revenue amounting to USD 750 million annually due to fuel adulteration and smuggling.
While the OCAC has mainly stressed that they have not undertaken any activity on their own and all the decisions taken by them are subject to the approval of the federal government; however, the CCP observed that OCAC has violated the first condition of the decision taken by the Ministry of Energy and other stakeholders ie. open competitive bidding. From the documents available on the record, the CCP observed that no competitive bidding process was undertaken; rather, a select circulation was carried out and that too without the consent and approval of other Technical Committee Members.
The CCP in its Order has held that the decision of OCAC to carry out the selective procurement process without following the instructions/ directions has the object of preventing, restricting or reducing competition within the market of procurement of Fuel Marker Services for SKO in Pakistan, in violation of Section 4 of the Act. This also has the effect of influencing the prices of SKO, the higher the price of Fuel Marking Services the higher the price of SKO will be. Ultimately it will not achieve the results for which the fuel marking programme is proposed in the first place ie. fuel adulteration and loss to public exchequer in terms of lost revenue in the form of tax.
Regarding the state compulsion defence taken by the OCAC, the CCP applied the test and analysed the conduct of OCAC. The CCP in its Order observed the first condition ie. the state must have made certain conduct compulsory: mere persuasion is insufficient that bare perusal of the above clearly shows that in the meeting held on 13th December 2016 a consultative approach (emphasis added) was taken and rather an effort was made to reach a consensus (emphasis added) and in this regard all the refineries were requested to participate in the Fuel Marker Programme. Further, the decision in itself was conditional, as the FMC was to be selected after following agreed procedure as detailed in Para 6(i) & (ii) of the Decision. However, modification in the said directions was made by the OCAC on its own. Accordingly, the conduct under review failed to meet the first condition of the state compulsion test.
Regarding the second condition ie. legal basis for the compulsion, the CCP observed the Fuel Marker Programme was not introduced as a result of any legislative measure. "Further, we fail to understand why OCAC excluded HDIP during the bidding stage, whereas the decision categorically states that HDIP is included in the Technical Committee for its technical competence. No plausible reasoning has been forwarded in order to justify the exclusion of HDIP. We are also cognizant of the fact that OGRA termed the entire activity as a commercial activity and recused itself from participation in the bidding process.
At best the OCAC should have informed the MP&NR that the process cannot be carried out as the Technical Committee Members ie. OGRA and HDIP have not participated in the process. No correspondence has been placed on record by OCAC intimating the aforesaid anomaly to the concerned ministry ie. MP&NR. Rather, the OCAC on its own started the entire process in patent violation of the Decision. Hence, we are of the considered view that OCAC has also failed to satisfy the second condition of the state compulsion test," said the order.
Regarding the third condition ie. there must be no latitude at all for individual choice as to the implementation of the governmental policy, since, the first two conditions of the state compulsion test are not met, even if the third condition is met the defence cannot be made applicable in the instant matter. "However, we note that even if it is assumed that the directions in meeting dated 13th December 2016 were issued by State representatives, the same were not complied with. Most importantly, the condition of open competitive bidding was done away by the OCAC on its own.
Here we cannot ignore that the decision in the meeting dated 13th December 2016 was rather a consensus of the Downstream Oil Industry with other government officials from Ministry of Petroleum and Natural Resources, OGRA & HDIP. This in itself cannot be termed as a legally issued directive by the state representatives." Further, it is clear from the record that the directions issued were not complied with.
In fact the Technical Committee never convened any meeting to comply with the condition of open competitive bidding as provided in Para 6(ii) of the minutes of the meeting. "Hence, we are constrained to hold that the third condition is also not met in the instant matter," said the order.
In its previous order in Utility Stores Corporation RFP case, the CCP bench has already declared that "the technical specifications by procuring agencies must allow widest possible competition in the bidding process."
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