Harry Greaves Compares Two LPRC Contracts

COMPARISON OF MEG CONTRACT AND ZAKHEM CONTRACT

On October 13, 2005, then-Managing Director Edwin M. Snowe Jr. signed a US$12 million contract with Mechanical Engineering Group for certain renovation work to the Bushrod Island Product Storage Terminal (the MEG contract).
On April 18, 2006, Managing Director Harry A. Greaves Jr. notified MEG that the LPRC Board of Directors, having reviewed the matter, had declared the MEG contract to be null and void because the contract had never been approved by the LPRC Board and the contract had numerous substantive and procedural deficiencies.

On May 1, 2009, following a two-year international competitive bidding process, LPRC entered into a US$24.8 million contract with Zakhem International Construction Ltd for the renovation of the Product Storage Terminal (the Zakhem contract). MEG was one of five companies pre-qualified to bid but withdrew at the last minute because they were unable to meet our stringent “stipulated terms and conditions and in particular those pertaining to advance payment, performance security, bid bond and timing of (contract) payment terms” (direct quote from September 10, 2008 email message from MEG general manager).

The Zakhem contract price tag of US$24.8 million includes US$13.7 million of improve-ments over the MEG contract necessary to bring the terminal up to international standards. When inflation is factored in for cost changes between 2005 and 2009, the Zakhem contract is actually US$1.9 million cheaper than the MEG contract on an “apples-to-apples” basis.
Mr. Snowe's public statements that the two contracts cover the same amount of work are not true. This report compares the most significant differences between the MEG contract and the Zakhem contract.

Concrete foundations Of Existing tanks
The concrete foundations on which the existing tanks sit are all in severely deteriorated condition and need to be replaced. This is a major part of the terminal renovations.
Under the Zakhem contract the existing tanks will be jacked up, the existing foundations will be removed, and new concrete foundations will be installed. The MEG contract provided for only partial repairs, without using a lifting procedure for the tanks to be rehabilitated, including Texaco tanks 5, 6 and 8, and Mobil tanks 402, 403, 404, 405, 406, 407 and 408.
Under the MEG contract, no repairs were prescribed for the foundations of tank numbers 1, 2, 7 and 401.

No quantification of the magnitude of repair work is specified in the MEG contract. But it is clear that the very small amounts budgeted by MEG indicate that the intent was to perform superficial patch work only.
This difference alone rendered the MEG specification unacceptable for LPRC’s needs. In contrast, the Zakhem contract provides for a full replacement of all the foundations.

API TESTING OF TANKS:
The repair procedures on existing tanks and the construction of new tanks require a testing procedure according to American Petroleum Institute (API) standards. These tests include filling the tanks completely with water and inspecting and testing them to insure structural integrity and to prevent leakage.
The MEG contract did not provide for these tests to be performed on any of the tanks. Under the Zakhem contract, each tank will be API tested.

Bottom Material Disposal
The rehabilitation work to be conducted on existing tanks, including the repair or renewal of tank bottoms, will require the removal of accumulations of scale, water and oily material. The removal and disposal of this material and other debris represents a costly procedure.
The MEG contract did not include costs to perform this operation on any tank. The Zakhem contract provides for this work.

TANK FLOOR RENEWAL OF EXISTING TANKS
It is expected that all the existing tank floors will require full renewal of the floor plates due to the age of the terminal and occasional inspections of several tanks in the past.
This is provided for in the Zakhem contract. The MEG contract only covered costs for sand blasting and coating of the tank floors.

FLOATING INTERIOR COVERS FOR GASOLINE TANKS
Floating covers are required on the existing gasoline tanks to reduce ongoing costly evaporation losses. Installations of these covers are included in the Zakhem contract. The MEG contract does not include floating covers for gasoline tanks 403, 404 and 407.

NEW ROOFS FOR EXISTING TANKS
All of the existing tank roofs require full renewal due to the age of the terminal and occasional past inspections of several tanks. The Zakhem contract provides for full roof replacement. The MEG contract included costs for only partial replacement of individual damaged roof plates, without quantifying the extent of plate replacement.

NEW STORAGE TANKS
Three new tanks with a total capacity of 25,400 cubic meters are required to insure security of supply for the country, as demand increases over the years.
The Zakhem contract budgeted for this necessary extra capacity. The MEG contract included costs for only two new storage tanks (nos 3 and 4), with a total capacity of only 15, 400 cubic meters.

Tank field PIPES, VALVES AND ACCESSORIES
A full renewal of the entire piping network is required in both the Mobil and the Texaco tank fields, due to damaged conditions and inefficient operational procedures. The Zakhem contract provides for this new piping. The MEG contract has included costs for only partial refurbishment.”
The quantity discrepancies are as follows:
q 4 inch lines: 350 meters by MEG versus 700 meters by Zakhem
q 6 inch lines: 1250 meters by MEG versus 1000 meters by Zakhem
q 8 inch lines: 450 meters by MEG versus 800 meters by Zakhem
Further, unlike the Zakhem contract, the MEG contract did not include any costs for the required pipe racks, gate valves and flanges or the essential pressure testing procedures for the piping. The MEG contract also failed to include necessary sand blasting and epoxy coatings of the pipes.

SUPPLY PIPELINES FROM THE JETTY
Three separate 700 meter long pipelines with 8, 10 and 12 inch diameters are needed to carry jet/kerosene, gasoline and diesel products, respectively, from the end of the jetty into the terminal. The MEG contract covered the costs for 4500 meters of 8 inch pipe for three pipelines running from the tank farm to the jetty platform, including the length of lines on the jetty itself. This is greater in scope than is required. The 2,100 meters of 8, 10, and 12 inch pipe included in the Zakhem contract is roughly equivalent in installed cost to 2,400 meters of 8 inch pipe.
Extra costs for 4,500 meters minus 2,100m = 2,400m of 8 inch line at an average cost of $420 per meter (calculated in accordance to MEG bid cost) were estimated. MEG has also included pipeline walkway protection amounting to $ 270,000, together with $55,000 for marine hoses.

Adjustments for unnecessary costs in the MEG contract were estimated at $1,498,000 and are deducted from the total MEG bid value for comparison purposes. Supplemental costs for larger pipe diameter in the Zakhem contract were added to the extra cost associated with the 2008 scope of work.

FIRE PROTECTION
A completely new fire water distribution piping network equivalent to 1300 meters is required, accompanied by a fire water tank and adequate pumping capacity.
The MEG contract included a fire water tank capacity of 1,400 cubic meters, compared to a required capacity of 2,158 cubic meters, as is provided for in the Zakhem contract.
The Zakhem contract provides for a 1600 meter 8 inch fire water line to the jetty platform. The MEG contract provided nothing for this.

ENVIRONMENTAL PROTECTION
Environmental protection measures were never considered in the MEG contract.
The Zakhem contract responds fully to important soil and water environmental considerations, providing for concrete pads, concrete dykes around tanks, soil preparation and protection within the tank dyke areas, and an API oil-water separator.
None of these protections were in the MEG contract.

SECURITY AND SAFETY
Security and safety devices and equipment were not provided for in the MEG contract.
The Zakhem contract provides extensive floodlighting, including all the electricals and cabling for these, as well as extensive remote surveillance cameras and monitors.

TESTING LABORATORY BUILDING
A new product testing laboratory building is not provided for in the MEG contract. Only the cost of testing equipment is covered.
In contrast, the Zakhem contract provides for the construction of a new 1,000 sq ft laboratory building.

DAMAGES FOR DELAY IN COMPLETION
Notwithstanding the consensus that time is important to this work, the MEG contract provision covering liquidated damages in the event of delay by the contractor in completing the work provided very little protection to LPRC. The MEG contract specified that the liquidated damages to be imposed against the contractor would be at a flat rate of $500 per day: Using a six-day work week, this would have limited the maximum liquidated damages to $3,000 per week. Consequently, under the MEG contract, even a delay as long as an entire year would have entitled LPRC to liquidated damages from MEG of only $156,000.

In contrast, the Zakhem contract creates a strong incentive for the contractor to stay on the completion schedule, with a penalty of US$10,000 per tank for each day of delay.
PAYMENT SCHEDULE AND WORK PROGRESS
The payment terms under the two contracts are very different.

The Zakhem contract provides for a series of progress payments based upon work completed and invoices submitted to and certified as acceptable by LPRC.

In contrast, the MEG contract required LPRC to make a 10% down payment to MEG followed by thirty-three (33) equal monthly installments of US$ 290,779.37 to MEG irrespective of the amount of work completed at each installment due date.

PAYMENT LIEN
The MEG contract established an elaborate mechanism to guarantee payments to MEG that essentially placed payments to MEG as LPRC’s highest priority, ahead of all other creditors and LPRC’s essential operations requirements. Under the MEG contract, anticipated income from LPRC’s top two importers would have been diverted to a special account dedicated for payments to MEG.

The MEG contract required that LPRC issue instructions to West Oil Incorporated and Mobil Oil Liberia Limited (now TOTAL), to deposit into a restricted account at Ecobank Liberia 60% of all sums due to LPRC for maintenance and storage fees for the period of the contract. This restricted account was to be automatically debited in favor of a MEG account at Ecobank for the monthly installments due to MEG under the MEG contract.

There was no cap on the amount of the deposits into this restricted account and thus, it would have been impossible to determine if the sums deposited were proportional to the sums that became due under the MEG Contract.

The MEG contract even provided that Ecobank could create an “overdraft” in the restricted account to insure monthly payments to MEG.

No such provisions are in the Zakhem contract. LPRC will pay Zakhem upon receipt and approval of invoices for work completed.

CONFLICT OF INTEREST
As part of its review of the MEG contract, the new LPRC management discovered that when the MEG contract was signed, 70% of the shares of MEG were owned by Jamal and Ghassan Basma of West Oil, then LPRC’s largest importer of petroleum products. As is noted above, the owners of West Oil were to in effect guarantee to themselves (as owners of MEG) payments on the MEG contract by obtaining a lien against LRPC’s future storage and handling fees from West Oil.

This conflict of interest was never disclosed to LPRC’s Board of Directors, nor to the technical and financial committees established by LPRC to evaluate the bids, nor to the Contracts & Monopolies Commission.

PROFIT GUARANTEE
The MEG contract added a substantial guaranteed contractor’s profit in the event of termination of the contract by LPRC. The MEG contract stated:

“13.5 In the event that the Agreement is terminated by the Contractor because of the default of the Owner, the Contractor shall be entitled to damages that equal the amount outstanding for the cost and value of all works completed and the materials and workmanship furnished plus lost profit of at least 10% of the total Contract price.”

No such provision exists in the Zakhem contract.

AFFORDABILITY OF CONTRACT
The MEG contract was for US$12 million, payable in equal monthly installments over three years after an initial downpayment of US$1.2 million. Before the contract was signed by the then-Managing Director, no cash flow projections were performed to determine whether LPRC could afford such a payment schedule, in addition to paying salaries and operating expenses and meeting its obligations to the government,

A few days before the current Liberian government took office, two payments totaling US$550,000.00 were made by LPRC to MEG. These payment left only US$50,000 in LPRC’s bank account. As consequence of these payments, LPRC was left with insufficient funds to meet its January 2006 payroll. LPRC was required to obtain advances on storage fees from importers in order to fund the January 2006 payroll.

It is abundantly clear that LPRC could not afford the MEG contract when it was signed by the then-Managing Director. Perhaps that is why the MEG contract was never approved by the LPRC Board of Directors.

Since coming into office, the current administration of LPRC has put LPRC on a sound financial footing. Additionally, LPRC has developed a precise plan for funding the Zakhem contract. On March 20, 2009, LPRC’s funding plan was approved by the Minister of Commerce & Industry.

PERMITS
The Zakhem contract provides that the contractor is responsible for obtaining all necessary permits for completing the contracted work. On the other hand, the MEG contract provides that LPRC is responsible for obtaining such permits.

PERFORMANCE SECURITY
The Zakhem contract requires the contractor to secure a performance security equal to 25% of the total contract price (i.e. approximately US$6,000,000).

The MEG contract only required the contractor to secure a performance security equal to 10% of the total contract price (i.e. approximately US$1,200,000). Additionally, this performance bond was discharged upon presentation by MEG and acceptance by LPRC of an invoice in an amount of at least 10% of the contract price, at which point in time there would be no performance security.

COST COMPARISON
The following table summarizes the comparison of costs between the two contracts. Extra costs associated with items covered by the Zakhem contract, but not included under the MEG contract, amount to US$13.758 million in 2009 dollars. Put another way, if the scope of work in the Zakhem contract had been the same as the scope of work in the MEG contract, the cost of the Zakhem contract would have amounted to US$11.058 million in 2009 dollars.

Adjusting this US$11.058 million for the effects of inflation, using construction material cost indices averaging a 29% escalation from mid-2005 to late 2008, results in an estimated cost of US$8.572 million in 2005 dollars for the Zakhem work. Further, adjusting for items covered in the MEG contract but not covered by Zakhem (comprising the jetty/supply pipelines) increases the hypothetical Zakhem contract amount to some US$10.947 million in 2005 dollars or US$1.924 million lower than MEG’s contract amount of US$11.995 million in 2005 dollars.
The bottom line on price is that 1) for the items included in the MEG contract, Zakhem’s price is US$1,924,000 lower than the MEG price for those items and 2) the Zakhem contract provides an additional US$13,757,547 of necessary improvements that were not covered under the MEG contract.

Prepared by Harry A. Greaves, Managing Director, with assistance from legal counsel and technical consultants --- June 15, 2009