The Court of Accounts of the Republic of Moldova (CoARM) examined on November 21, the Audit Report on compliance of expenses and capital investments at natural gas companies that were imposed with public service obligations, as well as within related companies, as defined within the Law no. 108/2016 regarding the natural gas, including those owned indirectly.
The external public audit was carried out at the initiative of the Parliament of the Republic of Moldova, in the context of the major importance of the natural gas field for the country's economy and citizens' well-being, as well as considering the fact that the lack of natural gas directly and immediately affects the security of the state and the citizens.
Based on the decisions of the National Agency for Energy Regulation (NAER), the holders of licenses for the supply of natural gas who were imposed public service obligations, existing on 31.12.2021, were: the JSC Moldovagaz and 7 companies that in 2021 supplied natural gas in the volume of 1151.2 million m3 and 23.9 million m3, respectively.
Thus, the JSC Moldovagaz provides the last option supply of approx. 98% of the total volume of natural gas for the consumers of the Republic of Moldova, therefore, the test area of the audit was focused on the activity of the JSC Moldovagaz and the group of companies related to it.
On 31.12.2021, the JSC Moldovagaz was the direct founder of 23 LLCs and the indirect founder of 3 LLCs founded by its affiliated companies, which operate in the field of natural gas.
As a result of the audit, it was found that some activities, processes and procedures, as well as transactions, conceived, created and carried out by the JSC Moldovagaz and the persons responsible for governance, did not fully meet the compliance criteria that govern this holding. The auditors, during the audit engagement, certified the lack of some documents as a result of their destruction according to the legislation in force, the lifting by the criminal investigation bodies, the lack of financial reports and primary documents related to the economic activities of the enterprises on the left side of Nistru, not controlled by the JSC Moldovagaz and verification documents between the JSC Moldovagaz, Gazsnabtranzit and the Concern Moldovagaz with the JSC Gazprom and Tiraspoltransgaz, for the periods 1994-1998 and 2005-2013, etc.
During 2011-2021, capital investments were made in the natural gas system totaling approximately 3.6 billion lei (without VAT), including 524.7 million lei made by the JSC Moldovagaz, the remaining 3.1 billion lei were made by the companies within the natural gas transmission and distribution system.
In the structure of capital investments made in the natural gas system in the period 2017-2021, the major share is held by capital repairs, which constituted 742.9 million lei (or 45.1%), being followed by the development of gas networks of 254.2 million lei (or 15.4%), new constructions of 235.7 million lei (or 14.3%), procurement of 223.7 million lei (or 13 .6%), reconstruction/modernization of 125.8 million lei (or 7.6%), intangible assets of 55.2 million lei (or 3.4%) and design of 9.8 million lei (or 0.6%).
At the same time, in terms of enterprises in the natural gas system, the major share is held by the capital investments made by the LLC Moldovatransgaz with 771.6 million lei (or 46.8%), being followed by the JSC Moldovagaz with 209.7 thousand lei (or 12.7%), the LLC Chisinau - gas for 199.9 thousand lei (or 12.1%), the LLC Ialoveni - gas with 99.8 million lei (or 6 .1%), the LLC Bălți - gas with 77.1 million lei (or 4.7%) and other enterprises.
The evidence collected by the audit reveals that of the total capital investments made by the companies in the natural gas system, during the reference period, only the investments totaling 2772.1 million lei or 77.3% were accepted by NAER for the purpose of recovery through tariff, and the investments in the amount of 815.8 million lei were considered and appreciated as unplanned, unfounded and unjustified accordingly, and fully, being applied not according to the evaluation criteria.
An eloquent example of the investments made in the absence of cost recovery sources is the capital investment for the construction of the office building of the JSC Moldovagaz from 64 Pușkin str., Chisinau municipality.
The funds planned to be used in the construction of this building were constantly increasing. Thus, in 2005, the Board of Directors of the JSC Moldovagaz planned to allocate up to 5 million euros or about 63 million lei for the design and construction works of the building. In 2006, based on the project documentation, was determined the indicative construction cost of 230.9 million lei with a total area of 12.7 thousand m2. In 2013, the project documentation was modified, by increasing the construction area up to 13.5 thousand m2. Finally, in 2018, the value of the investments incurred was 445.6 million lei.
As a result of the lack of original documents related to the tenders held in the period 2011-2015, the contracts and the minutes of the execution of the works for the period 2009-2015 regarding the construction works of the building, the external public audit was limited to verifying and reporting on the compliance of the capital investments made by the JSC Moldovagaz to the built objective.
The financing of the construction of the building in 2010, 2011 and 2013 was carried out by contracting 3 loans in the total amount of 138 million lei, with an interest of 13 million lei being paid, as well as commissions/taxes and other payments related to the issuance of loans of 1.4 million lei.
Likewise, the investments made in the total amount of 20.7 million lei in the administrative building in the city Ungheni with a total area of 963.9 m2 are also not justified. According to the project developed in 2011, the estimated value of the construction works amounted to 17.3 million lei, with the object being put into operation at the end of 2016. During the execution of the works, as a result of some changes in the project, the estimate value of the object was adjusted to 27.3 million lei, but on 21.03.2016 it was decided to preserve the object.
The procurements represent a substantial component in the activities carried out by the companies within the JSC Moldovagaz group. Thus, during 2017-2021, the JSC Moldovagaz group procured goods, works and services in the total amount of 36 billion lei, of which natural gas procurement amounted to 22.7 billion lei, gas transportation and distribution services – 7.6 billion lei, and other goods and services - 5.7 billion lei.
During 2011-2017 in the natural gas system there was no legislative-normative framework regarding the procurement of goods, works and services for the performance of regulated activities.
The failure to carry out studies on the competitiveness of the prices offered on the domestic and foreign markets conditioned the purchases through intermediaries with the payment of exaggerated commercial surcharges compared to the value of the goods declared in customs, as well as granting advances of over 50 percent of the value of procurement contracts.
The subsidiary entities of the JSC Moldovagaz, responsible for the transport and distribution of natural gas, do not have control activities regarding the study and monitoring of the market for the commercialization of the goods necessary to carry out the basic activity. The evidence collected by the audit reveals that some goods were purchased with a commercial markup that varied from 50% to 212, which is about 153.4 million lei, of which at least 32.9 million lei are inefficient expenses. The situation in question was also established during the previous years within the NAER's control acts.
The expenses of the JSC Moldovagaz group by types of activities in 2021 constituted: the cost of purchased natural gas – 6.6 billion lei or 80% from the operational expenses, expenses for gas transportation – 368.5 million lei or 4.4, expenses for gas distribution – 1.1 billion lei or 13%, gas supply expenses - 208.3 million lei or 2.5%.
During 2017-2021, the companies in the natural gas system, with the exception of natural gas procurement expenses, incurred expenses in the total amount of 7.9 billion lei, which are classified in:
- personnel expenses, which constituted 3.6 billion lei (44.9%),
- expenses regarding the depreciation of intangible and tangible assets of 1.8 billion lei (23.3%),
- expenses regarding mandatory medical and social insurance contributions of 839.1 million lei (10.6%),
- expenses related to services provided by third parties of 682.2 million lei (8.6%),
- material costs and expenses of 614.8 million lei (7.8%),
- other expenses of 188.4 million lei (2.4%) and other operational expenses of 185 million lei (2.3%).
The volume of gas imported from the right side of the river Nistru is not a measured value but a calculated one, based on the data presented by the transport and distribution operators from the Republic of Moldova, including the Transnistrian region and Ukraine.
The main gas pipelines through which the Republic of Moldova carries out the import or transit of natural gas, as a result of their construction during the USSR, when the administrative borders between the republics were not taken into account, are located segmentally both on the territory of the Republic of Moldova and on the territory of Ukraine. Moreover, a part of these networks on the left side of the river Nistru are not controlled by the JSC Moldovagaz.
According to the contractual provisions, the gas import into the Republic of Moldova is carried out through 2 points - the gas measuring stations (GMS) in Grebeniki and Alexeevka in Ukraine. Later, this volume is adjusted with data on the gas consumption of the localities Briceni (Moldova) and town Moghiliov-Podolisk (Ukraine) which are connected to the transmission/distribution networks in the respective territory of Ukraine and the Republic of Moldova. The village of Cairaclia is also connected to the Ukrainian distribution networks.
The volume of gas consumed on the left side of the river Nistru and from Ukraine is determined based on the data of 31 and 19 measuring points installed at the Gas Regulation Stations (GRS) and consumption ones located on their territory, respectively. The accumulated audit evidence shows that, in addition to the gas consumption data, taken from the meters installed at the GRSs, on some segments the data from the meters installed at natural gas consumers are used, as well as the calculations of the technological gas consumption.
Moreover, the localities of Copanca, Hagimus, Fîrlădeni, Hîrbovăț, Doroțcaia, Pîrîta, Coșnița, Pohrebea which are served by the Distribution System Operators (DSO) on the right side of the river Nistru are connected to the distribution and transport networks served by the DSOs on the left of the river Nistru. At the same time, the distribution and supply of natural gas on the territory of Cocieri commune and Molovata Nouă commune in Dubăsari region is carried out by the LLC Tiraspoltransgaz-Pridnestrovie.
According to the normative framework in force, the volume and value of losses and technological consumption of natural gas is determined as the difference between the volume and value of gas received for transport and, respectively, for distribution and the value of gas transmitted for distribution and supplied/billed to consumers.
These losses are recorded by the operators of the distribution systems, their value being paid by the JSC Moldovagaz based on the supply contract at the exit price from the natural gas transmission networks.
Commercial losses are conditioned by three main factors: the fraudulent consumption of gas, the low efficiency of measurements, the impossibility of ensuring at the current level perfect control over the process of gas use with the currently available methods.
From the total technological consumption and natural gas losses of 446.9 million m3 in the amount of 1940.1 million lei registered at DSOs, during 2011-2021, NAER approved 215.6 million m3 of gas worth 917.4 million lei as technological consumption and the normative technical losses of natural gas in the distribution networks, which constitutes only 48.2% of those actually recorded. Thus, the value of gas distribution losses accepted for tariff purposes was only 919.3 million lei, and the value of supra-normative losses was 1022.8 million lei.
According to the information presented by the JSC Moldovagaz in the period 2011-2021, the normative losses varied from 13.91 million m3 (year 2014) to 26.98 million m3 (year 2015), at the same time, the actual losses varied from 54.36 million m3 (year 2011) to 26.86 million m3 (year 2021).
So, the volume of actual losses in the distribution of natural gas in the period 2011-2021 exceeded 2 times the volume of normative losses accepted for tariff purposes, however, they had a downward trend from 347% (2014) to 126% (2021) of the value of the norms approved by the NAER.
During 2017-2021, labor remuneration expenses in natural gas companies amounted to 3.8 billion lei (including: 473.5 million lei for ensuring the natural gas supply activity, 2.8 billion lei for ensuring the natural gas distribution activity, 539.5 million lei for ensuring the natural gas transportation activity).
The structure of salary components in natural gas enterprises includes about 45 salary elements. Thus, of the total expenses regarding labor remuneration, the basic salary constitutes 48% (1.8 billion lei), the other 52% (1.97 billion lei) are increments and supplements paid to employees in the field.
The lack of appropriate and exhaustive justifications of work, time and production standards when establishing the number of personnel required to carry out the regulated activity of distribution, transport and supply of natural gas, generated the acceptance for the years 2017 - 2021 by NAER for recovery through the tariff of expenses regarding labor remuneration: i) for distribution - 100% or 2.8 billion lei, ii) for transport - 81.6% or in the amount of 440 million lei out of a total of 539.5 million lei and iii) for supply in a proportion of only 68.5 % or in the total amount of 324.3 million lei out of the total of 473.5 million lei. Thus, the labor remuneration expenses not accepted for recovery through the tariff amounted to 246.2 million lei.
For the remuneration of the management and control bodies of the JSC Moldovagaz and their advisors, during 2017-2021, expenses of 125.5 million lei were incurred, or about 26.5% of the total expenses regarding the remuneration of the work related to the supply of natural gas.
Transmission and distribution networks. According to the information provided by the JSC Moldovagaz, only part of the gas pipelines through which the natural gas transport and distribution companies of the JSC Moldovagaz provide these services are owned by the JSC Moldovagaz. Out of the total of 23,803.47 km of gas distribution pipelines, only 8,260.19 km (or 34.7%) belong to the JSC Moldovagaz, 6,091.75 km (or 25.6%) belong to local public administration authorities (LPAA), 8,274.7 km (or 34.8%) - to individuals and legal entities, and 1176.82 km (or 4.9%) - do not have property documents.
At the same time, out of 1,559.8 km of gas transport pipelines, only 1,299.37 km or 83.3% belong to the JSC Moldovagaz, 188.21 km (12.1%) belong to LPAA, 46.58 km (3%) - belong to the Ministry of Economy and 25.63 km (1.6 %) - to individuals and legal entities.
The natural gas transport and distribution networks built from the national public budget were handed over for technical servicing to the transport and distribution companies in the absence of the payment of royalties by them, as well as the lack of provisions for capital repair expenses.
According to the analyzes carried out by the audit, it was found that, during 2011-2021, the JSC Moldovagaz recorded losses from exchange rate differences in the amount of approximately 3148.3 million lei, mainly related to the debts for the procured gases. For example, during 2014-2021, the JSC Moldovagaz recorded expenses of 8,725.5 million lei and income of 6,183.0 million lei from the exchange rate differences of its debts to the JSC Gazprom and the LLC Factoring Finance, the financial result being a loss of 2542.5 million lei. It should be noted that the respective financial losses are directly dependent on the correctness of determining the value of the debts for the purchased natural gas.
In conclusion, the Court of Accounts emphasized the following.
According to the accounting records of the JSC Moldovagaz, from the debts recorded on 31.12.2021 for the procurement of natural gas in the amount of 590.8 million dollars, only debts in the amount of 14.6 million dollars were formed for gas deliveries made in the first half of 1999 - until the formation of the JSC Moldovagaz, the rest of the debts were formed during the period of activity of the JSC Moldovagaz, of which 144.8 million dollars for deliveries from 01.07.1999 - 31.12.2007, 394.1 million dollars for deliveries made in the years 2011-2015, and 37.3 million dollars represents current liabilities related to December 2021 deliveries.
The analysis of the data presented by the JSC Moldovagaz for the period 2011-2021 allowed the identification of the following main factors that influenced the non-payment of the current consumption of natural gas:
- lack of payment by consumers for the gas consumed, which totaled approximately 1519.878 million lei, of which 103.121 million lei represent settled compromised claims;
- tariff deviations related to the gas consumed (the difference between the price included in the tariff and the actual price paid) – approximately 1,876.8 million lei;
- tariff deviations related to the reduction of tariffs with the positive deviation of the gas value – 774.9 million lei;
- the amount of excessive natural gas losses, including suspected fraudulent consumption, not accepted by NAER for tariff purposes in the amount of 1022.8 million lei;
- investments not substantiated by the JSC Moldovagaz and not accepted by NAER for tariff purposes - 815.8 million lei, of which investments in the JSC Moldovagaz building - 445.6 million lei, as well as in the administrative building in Ungheni municipality - 20.7 million lei;
- expenses not related to the activity of an entrepreneur, adjusted for fiscal purposes according to the VEN declarations of the companies in the JSC Moldovagaz system - 1,000.2 million lei;
- expenses related to the difference between the currency exchange rate and the official NBM rate – 102.7 million lei, not accepted for tariff purposes in the period 2011-2014;
- interest and commissions related to loans not accepted in the tariff – 64.1 million lei;
- expenses for the remuneration of work not accepted for recovery through the tariff in the period 2017-2021 in the amount of 246.2 million lei, etc.
Although in the last three years there is evidence of an efficiency of expenses and investments made by the JSC Moldovagaz group, they are not able to eliminate the effects of the non-compliant and ineffective management of the company's assets carried out between 1999-2018.