Investigation: Bulk Fuel Installation Project

Investigation: Bulk Fuel Installation Project

 

The attached report investigates the historical and current issues faced by the ongoing project to construct an integrated multi-fuel storage system for St Helena, centred on a new bulk fuel installation (BFI) in upper Rupert’s Valley that would hold diesel, petrol and aviation fuel (Jet A-1). The new BFI is linked to the other parts of a comprehensive and continuous fuel system via several important new-build components, such as a shore-side gantry at Rupert’s Beach to receive fuel from tankers, pipelines to pump it up the valley to the BFI and Jet A-1 storage at the Airport Fuel Facility (AFF) for aircraft refuelling. This system is an integral part of the contract awarded to Basil Read (‘the contractor’) to deliver the St Helena Airport Project. Full funding for the project, including the new fuel system, was provided by the UK Department for International Development [1] (‘the funder’). While the airport was completed in May 2016 and scheduled commercial service began in October of the following year, the fuel system – which was intended to be commissioned before the airport opened – is not yet finished.

 

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Conclusions

Experts deemed the BFI’s original design concept appropriate given what was known in the mid to late 2000s when it was prepared. With fuel demand expected to increase due mainly to airport-enabled tourism, the limiting factor preventing St Helena from achieving economies of scale through larger, less frequent fuel tanker shipments was the volume of available ground fuel storage. In addition to tanks that can accommodate Jet A-1, the new storage facility can hold about 2.5 times the volume of diesel and petrol as the existing BFI that is approaching the end of its lifecycle.

 

Several key developments over more than a decade have led to fuel system design changes and other disruptions. A new fuel management contractor in 2014 recommended costly changes to the design, in part to conform to evolving standards for handling aviation fuel. Secondly, expected future energy needs that underpin BFI design assumptions have changed. For example, SHG’s official energy strategy targets April 2022 as the date by which renewable energy will supply 100% of electricity demand for all consumers connected to the island’s power grid, and in May 2020 Connect Saint Helena Ltd signed a power purchase agreement to meet this target. In addition, uncertainty persists regarding the continued use of portable ‘tank containers’, which began in late 2015 as a contingency arrangement for importing Jet A-1 before the BFI was finished so the contractor could divert resources from that site to focus on completing the airport. Another significant development was the main contractor’s departure after entering business rescue and ultimately having its contract terminated in October 2018. Finally, recent independent reviews have generated proposals for significant changes, such as dismantling the Jet A-1 storage tanks at the BFI, the new fuel gantry at Bay Side and the pipelines linking the two.

 

The report finds that these design changes and disruptions prolonged the fuel system work and increased its cost. Neither the BFI nor the AFF have been commissioned as of October 2020, 106 months after work on the airport project began and 64 months after the fuel system’s completion date in the original construction programme. According to the Airport Directorate, a total of £78.3 million has been spent on the fuel facilities through May 2020 (the latest month for which actual expenditure was available), which is £46.9 million more than the Project Management Unit’s (PMU’s) estimate of construction and overhead costs for a completed system in the airport contract (£31.4 million). [2]

 

[1] Now part of the Foreign, Commonwealth and Development Office. [2] At the 26 June 2020 meeting of Legislative Council, the Financial Secretary stated that the total funding spent to date on the design, construction and testing of the new fuel system amounted to £83 million. That figure was based largely on an earlier PMU estimate that the PMU later revised downward. Note that this PMU, staffed by Halcrow (later acquired by Jacobs), should not be confused with SHG’s Programme Management Unit located in the Castle.

 

The report discusses weaknesses in procurement, contract management and project oversight that have hampered the fuel system project. Project managers attempted to reduce costs through contract provisions and other means, but this sometimes complicated oversight on the ground. For example, the contractor reached an agreement with the funder whereby the contractor would be paid up front on a rolling basis for completed monthly milestones. Because of this pre-payment arrangement, milestones in the agreed payment schedule could not be matched up with the funder’s actual payments, frustrating accountability. Further, this arrangement incentivised the contractor to prioritise milestones outside of the order specified in the project plan, and to move resources from one part of the project to another to secure payment for a specific milestone, delaying progress on the fuel system.

 

The report observes that ground fuel prices could rise due to lost economies of scale, provisions for asset replacement and the increased cost of fuel handling. For example, an independent reviewer’s proposal to begin importing ground fuels in tank containers, as now happens with Jet A-1, threatens to erase the economies of scale expected from the larger, less frequent bulk deliveries that were the foundation of the new BFI’s design.

 

The report concludes that much of what has gone wrong with the fuel system project has been outside of SHG’s direct control, and SHG has been granted all the necessary components of a new ground fuel BFI to replace its ageing diesel and petrol storage facility, which has a high value for the island. However, whether the new fuel system’s value in use will ever equate to the £78 million spent – with millions more to come – is highly questionable and indicates that value for money will not be secured from this significant investment of public funds.

 

Chief Auditor Phil Sharman said today:

“The construction of the Bulk Fuel Installation is one of St Helena’s largest and costliest pieces of infrastructure – but also risks being St Helena’s biggest waste of public funds. As well as learning lessons from the weaknesses in the project highlighted in today’s report, and given the state of much of St Helena’s ageing public infrastructure, officials need to consider what else could have been done with those millions expended above the lowest cost alternative to the current fuel system. That sunk cost represents the real lost opportunity to St Helena and the UK taxpayer.”

 

Contacts

For more information, please contact Damian Burns, Principal Analyst or David Brown, Senior Analyst by email or telephone on +290 22111.

 

Press release, 16 October 2020

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