Ministry of Health bosses unilaterally abandoned an option for each county to pay Sh31 million annually for medical equipment and chose a procurement method that increased the annual cost to Sh200 million.
A Senate committee investigation states the Ministry of Health oversaw the conversion from a public private partnership (PPP) to a public procurement process for the Managed Equipment Services (MES) project, which Senators have branded a “criminal enterprise.”
The committee noted had PPP been pursued, the total project cost would have been Sh43 billion over 10 years, but the country is paying in excess of Sh63 billion — the exact cost can’t be ascertained yet — over seven years.
“This conversion was not in the public interest because under a PPP, the total cost of the project, including infrastructural support, was Sh43 billion over 10 years. This translated to roughly Sh31 million per county per year,” reads the report by the committee tabled in the Senate this week.
Based on submissions by the National Treasury and MoH, the annual project cost would have been Sh4.35 billion (Sh1.5billion for the counties), but under the MES arrangement, the equipment was ultimately supplied to counties at an annual cost that peaked at Sh9.5 billion in the 2019/2020 financial year.
The report explains the tenders awarded in 2015 after the conversion meant each county paid Sh95 million per year from 2015 to 2018 when the figure rose to Sh200 million.
The amount reduced to Sh131 million last year and this year each county will pay the same amount for the seven-year project.
Senators said the MES Project was varied from a PPP initiative to a public procurement process under unclear circumstances.
The committee said there were other actions that gave the impression the project, though noble for its objective to improve healthcare provision in the counties, was a gravy train for officials and businessmen.
Binding lease
The committee observed some of the equipment was either overpriced or substandard. In some cases the equipment was delivered late or not delivered at all. In other cases, counties were forced to receive equipment they already had, and which would be taken away to accommodate MES supplies.
Further, the MES contract was varied under unclear circumstances in 2018, leading to the annual payment rising to Sh9.4 billion from Sh4.5 billion yet the contracts were fixed term.
Senators also flagged lopsided provisions like binding lease terms that required quarterly payments despite equipment not being functional in many facilities.
Money was deducted at source and paid to MES contractors by MoH without being deposited to the respective County Revenue Fund as required by law.
According to the Office of Auditor General & Department of Justice, MoH and MES contractors executed additional contracts “designed to circumvent the Public Procurement and Disposal Act.”
This facilitated international contractors to tender for the MES project, but subsequently transferred the performance of the ensuing contract obligations to local companies that may not otherwise have qualified for the contracts.
The committee traced the genesis of the procurement policy shift to an advisory by Iseme, Kamau and Maema (IKM) Advocates — the legal transaction advisors to the MoH.
Senators noted the legal opinion that had “a consequential impact on the overall project” was given during an ‘informal’ engagement between the ministry and the law firm.
According to the report, the law firm advised the MoH that the Public Private Partnership Act, 2013 (PPP Act) would not be applicable to the proposed project, and that the project ought to be procured under the Public Procurement and Disposal Act, 2005 (PPDA 2005).
The committee observed the law firm gave the advice to MoH in May 2014, yet the parties only executed a service level agreement on January 16, 2015.
Legal opinion
That the legal opinion had a consequential impact on the overall project, the committee noted, was evident in that one month later, on June 9, 2014, MoH published an invitation to tender under a managed equipment service arrangement.
And in a letter dated June 22 , MoH terminated its engagement with the National Treasury for equipment lease and health infrastructural development under a PPP.
The report states IKM Advocates were paid Sh48.8 million (excluding tax) for their services and contrary to the law, according to submissions by the law firm, the payment covered services rendered during its ‘informal’ engagement with MoH between May 2014 and January 16, 2015.
Thereafter, then Health Cabinet Secretary James Macharia, in a letter dated February 27, 2015, sought the approval of the Attorney-General to extend the mandate of IKM Advocates.
The letter further sought the AG’s approval for MoH to accept funding in the form of a ‘donation’ from General Electric East Africa, a contractor in the MES Project, for the further engagement of IKM Advocates in the additional scope of services.
In a letter dated April 23, 2015, the then AG Githu Muigai granted his approval subject to the conclusion of a fresh service level agreement to be approved by his office.
The AG further approved the ‘donation’ by GE on the understanding that it was to be made gratis, without any expectations of preferential treatment in the MES Project.
A Special Audit of the MoH Accounts for the FY 2015/2016, the OAG raised queries regarding the unprocedural manner in which the MoH single advisory services from IKM Advocates under the MES Project.
With regard to the direct procurement of IKM Advocates for MES legal transaction advisory services, the Committee observed that the MoH failed to satisfy the legal requirements set out in section 74 of the PPDA Act 2005 (now repealed) by failing to demonstrate that IKM Advocates were the only persons capable of providing legal transaction advisory services under the MES Project, and that there lacked reasonable alternatives.
Contrary to the provisions of AGs’ circular dated 3rd May, 2010 (Ref.AG/1/2010) which required all client ministries to consult and seek a pproval of the AG before retaining the services of private advocates, the committee concluded that MoH irregularly engaged the services of IKM Advocates prior to the approval of the AG, or the execution of a service level agreement.
The Committee observed that IKM Advocates acted unethically by accepting ‘donations’ amounting to USD 945,000.00 (KShs. 95,445,000 at KShs. 101 to the USD) from parties that were supposed to be acting against i.e. the MES Contractors. Further to this, the Committee observed that the aforementioned ‘donations’ collected by IKM Advocates from the five MES contractors was almost double the KShs. 48,881,063.90 it had received from the MoH on whose behalf it was supposed to have been acting.
IKM Advocates testified that their extended mandate was funded as a ‘donation’ by the five MES contractors on a pro-rata basis, as follows:
a) Shenzen Mindray Biomedical Electronics Co (China): KShs. 7,575,000
b) Esteem Industries Inc. (India): KShs. 5,050,000
c) Bellco SRL(Italy): KShs. 5,050,000
d) Philips Medical Systems Nederland BV KShs. 17,170,000.
e) GE East Africa Services Ltd KShs. 60,600,000
The Committee observed that while IKM Advocates denied having had any relationship or contact with the successful bidders, by their own admission, GE and IKM Advocates had had a existing clientadvocate relationship from 2010 at the time of its engagement as legal transaction advisors to the MES Project. The Committee further observed that according to the testimony of IKM Advocates, at the time of their engagement, the MoH was aware that they were on GEs’ panel of lawyers. However, neither the firm, nor the MoH declared this conflict of interest to the OAG & DOJ.
The Committee further observed that according to the testimony of IKM Advocates, at the time of their engagement, the MoH was aware that they were on GEs’ panel of lawyers. However, neither the firm, nor the MoH declared this conflict of interest to the OAG & DOJ.
A conflict of interest between the two entities was subsequently demonstrated by the fact that IKM Advocates sub sequently went on to draft Government Letters of Support for GE East Africa Services Ltd (and Philips Medical Systems Nederland B.V.) that were manifestly different from the other MES contractors.
IKM Advocates further exhibited bias in favour of GE by pursuing the issuance of an enforceability opinion from the OAG & DOJ in the exclusive interests of the GE contract.
Further to the above, the Committee found that despite having participated in the preparation and drafting of the tender documents which expressly limited the eligibility of bidders to original equipment manufacturers, IKM Advocates omitted to advise the MoH that GE were not in fact original equipment manufacturers and that they therefore did not qualify to participate in the tender.
Based on the foregoing, the Committee came to the irresistible conclusion that, in fact, the very coming of IKM Advocates into the MES Project may have been solicited or otherwise influenced by GE.
Legal transaction advisors
The committee observed there had been a pre-existing client-advocate relationship between GE and IKM Advocates from 2010 and at the time of its engagement as legal transaction advisors to the MES Project. “However, neither the firm nor the MoH declared this conflict of interest to the OAG & DOJ. To note, GE was the biggest beneficiary in the MES project having been awarded at least 52 per cent of the total MES,” the report says.
The committee also noted that contrary to the express directive of the AG, it did not find evidence to suggest that MoH and IKM subsequently executed a new agreement for the additional scope of services.
By overseeing the variation of the project, the committee said MoH contravened article 227 of the Constitution, which provides that when a state organ or any other public entity contracts for goods or services, it shall do so in accordance with a system that is fair, equitable, transparent competitive and cost-effective.
The committee recommends that all state officers and public officers who presided over the project be investigated and if found culpable, they be barred from holding any state or public office.
The report says the Office of Auditor General was unable to find any evidence of a written policy to justify the shift from a PPP model to a MES project under public procurement process.
The committee noted MoH had secured approval from the Public Private Partnership Committee to implement the project as a PPP in October 2014, but the ministry unilaterally changed the mode of implementing the project.
It also emerged that a needs assessment by the ministry confirmed counties lacked adequate capacity to absorb the equipment, but officials ignored their own report and went on a buying spree for counties.
The needs assessment report also indicated the availability of various equipment varied from 60 to 90 per cent in the counties.
For the counties which already had medical equipment installed, it was carted away to make room for the MES supplies.
For example, Laikipia County reported that functional X-Ray and theatre equipment that had been procured by the national government prior to devolution, was removed to pave way for the new X-Ray and theatre equipment supplied under the MES project.
Violated Constitution
In Nyamira, renal equipment was installed and commissioned by MoH although the county had already procured functioning renal dialysis machines that were adequate for its needs.
“The committee concluded that the procurements were done to advance adverse private commercial interests that were supply driven rather than need driven at the expense of the Kenyan public,” the report observes.
The committee acknowledged that the MES project was intended to benefit the public by achieving the constitutional right to the highest attainable standard of health. “However, the persons involved in the conceptualisation and the implementation of the project from start to finish carried out the project in an irregular and illegal manner that completely violated the very Constitution and the sacred principles that the project was originally conceived under.”
“The Committee has established that the MES project was a criminal enterprise shrouded in opaque procurement processes and that the Ministry of Health relied on a faulty tool (public sector comparator) to justify a predetermined outcome in relation to the award of tenders that likely resulted in imprudent use of public finances contrary to Article 201 of the Constitution and section 197 of the Public Finance Management Act that forbids wasteful expenditure.”
The committee also found that equipment supplied under the MES project is locked to the specific reagents and consumables that are supplied by the contractor.
The Senate team found that the MES project also created a monopoly by select sub-contractors. For example, Angelica Medical Supplies Limited, which was identified as a subcontractor for Bellco SRL (Lot 5, Renal Equipment), became the sole supplier of consumables and reagents for renal and radiological equipment supplied under the MES project.
Purchasing consumables
However, from 2019, counties had started purchasing the consumables from Kemsa. Curiously, Kemsa was buying the consumables from Angelica Medical Supplies Ltd.
The Senate team said Lands PS Nicholas Muraguri intentionally misled the committee by stating that all the contractors were only supposed to supply starter kits for the consumables.
Dr Muraguri served as Health PS between 2015 and 2017. Prior he was the Director of Medical Services.
Dr Khadija Kasachoon who served as Health PS between 2014 and 2015 when the contracts were awarded, submitted that the government was not paying for the equipment per se.
She explained MES service providers were billing the government for services rendered using MES equipment based on the number of patients who accessed their services.
The committee said Memoranda of Understanding (MOUs) that were executed with MoH and the County Governments were generic and did not qualify as agreements as required by procurement/contract law.
Mr Macharia denied claims that governors had signed MoUs for MES equipment under duress. Pressed by Senators that MES equipment was delivered to Bomet County despite the lack of an MoU, the CS responded “..if a patient refuses to take medicine, there are ways of giving the patient medicine by force for the interest of the patient”.
The committee has recommended that the EACC and other investigatory and prosecution agencies are also urged to investigate the process of procuring the legal consultants entire conceptualization and implementation process.
Further, the EACC is urged to investigate who advised the MoH in the the circumstances under which contractors to the MES project made donations that went towards legal fees to IKM Advocates and further to investigate how contractors raised money to IKM Advocates who were advocates of MoH in the transaction and against whom was the money billed.
The EACC is further urged to investigate and established whether the consultancy fees were billed against the counties.
Additional reporting by Daily Nation.
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