ACKNOWLEDGEMENTS... 1 LIST OF ABBREVIATIONS... 2 EXECUTIVE SUMMARY SUMMARY OF KEY FINDINGS SUMMARY OF SEVEN KEY RECOMMENDATIONS...

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2 Table of Contents ACKNOWLEDGEMENTS... 1 LIST OF ABBREVIATIONS... 2 EXECUTIVE SUMMARY SUMMARY OF KEY FINDINGS SUMMARY OF SEVEN KEY RECOMMENDATIONS... 3 THE PROMISE OF INTEGRITY AND VALUE FOR MONEY IN PROCUREMENT... 4 THE REALITY OF INTEGRITY AND VALUE FOR MONEY IN HEALTH PROCUREMENT PROCUREMENT SYSTEM VIOLATIONS AND FRAUD GROSSLY INFLATED COSTS OF MEDICINES AND EQUIPMENTS DIVERSION OF FUNDS FROM BUDGETED PURPOSE DUPLICATED PROCUREMENT BETWEEN DONOR FUNDS AND GOK FUNDS ABUSE OF SUPPLEMENTARY BUDGETS LAST MINUTE UNSUPPORTED REQUESTS TENDERPRENEUR CAPTURE USE OF UNDERQUALIFIED FIRMS... 9 CONCLUSION... 9 APPENDIX 1: METHODOLOGICAL NOTE APPENDIX 2: REFERENCES APPENDIX 3: PUBLIC NOTICE ON THE ESTABLISHMENT OF AUDIT COMMITTEES IN NATIONAL GOVERNMENT MINISTRIES ACKNOWLEDGEMENTS This policy brief demonstrates how the violation of procurement systems, constitutional and legal provisions facilitate the capture of public health financing by tenderpreneurs. This brief was written to respond to the request by the Ethics and Anti-Corruption Commission for their review of health systems, policies, procedures and practices in the pricing of pharmaceutical and non-pharmaceutical supplies launched on March 20, This brief follows our 2016 policy brief that demonstrated legal violations by the Public Procurement Oversight Authority and maintained a Market Prices Index with highly inflated pricing standards for medical equipment and essential medicines. 1 At the EACC health systems review launch, held on March 20, 2017, the EACC publicly acknowledged our 2016 policy brief as having contributed to the ongoing review exercise. This policy brief is published in the public interest by the Society for International Development, Transparency International Kenya, Kenya Medical Women s Association and the Kenya Treatment Access Movement. It was coauthored by Jane Mugo and Mirriam Nthenge. The organisations acknowledge the inputs of James Kamau, Sam Kimeu, Jackline Were, Morris Maina, Dr. Christine Sadia, Orwa Michael and Irungu Houghton. Our special thanks to the participants at the expert meeting held on 16 th May 2017 whose contribution enriched this policy brief. Again, we are grateful for the insights and work of National and County Government executives, health and procurement officers, anti-corruption campaigners and PBO health experts. We hope this publication supports their patriotic efforts to bring integrity to this area of governance. All rights reserved. No part of this publication may be produced, stored in a retrieval system or transmitted in any form, or by any means electronic, mechanical, photocopying, recording or otherwise, without the prior express and written permission of the publishers. Any part of this publication may be freely reviewed or quoted provided the source is duly acknowledged. 1 Sealing Corruption Loopholes in Kenya s Health Procurement Systems. Policy Brief #2, April 24th SID, KELIN and TI-Kenya Tenderpreneur Capture - Sealing Corruption Loopholes in Kenya s Health Procurement Systems 2 1

3 Any recommendation which will help us reach universal health coverage with affordable commodities will find a place in the change of policy within the Ministry of Health and indeed, across Government. I ask every one of us to participate effectively with an open mind and provide information to the review team which will allow them to come up with recommendations which are implementable and best suited to our vision. Health Cabinet Secretary Dr. Cleophas Maillu, launch of EACC Health Procurement Systems Review, 20 th March 2017 (Jubilee) will achieve free, quality primary healthcare expand the free maternity health-care programme, NHIF coverage and reduce the cost of healthcare. JUBILEE Continuing Kenya s Transformation Together (2017) NASA is committed to implementing a universal health service scheme ensure all Kenyans can access a defined package of quality health services and bring down the cost of drugs. NASA Road to the Kenyan Dream (2017) LIST OF ABBREVIATIONS EACC GAVI GoK IFMIS KELIN KEMSA KRA MES MoH MPI NASCOP ODPP PFM PPDA PPRB PPARB TI-K UNICEF WFP Ethics and Anti-Corruption Commission Global Alliance for Vaccines and Immunizations Government of Kenya Integrated Financial Management Information System Kenya Legal & Ethical Issues Network Kenya Medical Supplies Agency Kenya Revenue Authority Management Equipment Supplies Ministry of Health Market Price Index National Aids & STI Control Programme Office of the Director of Public Prosecutions Public Finance Management Act Public Procurement and Disposal Act Public Procurement Regulatory Board Public Procurement Administrative Review Board Transparency International-Kenya United Nations Children s Fund World Food Program KENYA TREATMENT ACCESS MOVEMENT Tenderpreneur Capture - Sealing Corruption Loopholes in Kenya s Health Procurement Systems 2 2

4 EXECUTIVE SUMMARY The right to the highest attainable standard of healthcare is enshrined in our constitution and the newly assented Health Act. Manifestos of key political parties including Jubilee and NASA place health-care at the centre of their promise to the Kenyan people. They also make promises and offer strategies how, if elected in the August 2017 elections, they will fight corruption and abuse of public office. These promises are significant in the context of the last four years. The public health sector has been crippled by persistent procurement based corruption and accountability challenges. The exposure of procurement violations in what is commonly described as the Mafya House scandal followed our first brief on Corruption Loopholes in the health procurement system. The 100-day doctors strike revealed the dysfunctionality of the public health facilities and services. More recently, the withdrawal of development partner financing has deepened the crisis. The current Ethics and Anti-Corruption Commission review into the system, policies, procedures and practices in the pricing of pharmaceutical and nonpharmaceutical supplies is critical to restoring integrity in our health-care system. Done well, it should offer governance and managerial insights for the next National and 47 County administrations on how to seal the corruption loopholes. A robust constitutional and legal framework exist for good governance, transparency, accountability and value for money. Despite this, inflated, unnecessary and corruption-driven procurement practices and actions allow large sums of money to be stolen or unaccounted for. Corruption leads to unnecessary suffering, increased morbidity and death for thousands. It also undermines the constitutional promise to citizens to enjoy the highest possible standard of health. This policy brief argues that procurement system violations, unconstitutional budget approvals and tenderpreneur capture of our Health Ministry are at the centre of the crisis. Using three case-studies, we demonstrate that billions of shillings have been, and will continue to be wasted unless measures are taken to strengthen accountability and seal vulnerabilities. 1. Summary of key findings There are five major findings. They are; 1. A strong legal and institutional framework for public procurement exist. This includes the Public Procurement and Disposal of Asset Act 2015, the Public Procurement and Regulatory Authority, the Parliamentary Budget Committee and the National Treasury; 2. This robust legal and institutional framework and the Integrated Finance Management Information System (IFMIS) is overwhelmed by the lack of oversight vigilance and integrity of Ministry of Health officials and oversight institutions including the Public Procurement and Regulatory Authority, the National Treasury and the Parliamentary Budget Committee and Senate Health Committee; 3. Deliberate violations of procurement policy and systems, abuse of supplementary budgets and the awarding of bids to unqualified suppliers and tenderpreneurs are the leading avenues for procurement-related corruption; 4. Lack of political will, failure to implement recommendations of fact-finding institutions and dismissal of evidence-based research findings escalates corruption in health procurement and emboldens tenderpreneurs and accomplices in public offices; 5. The delay by the EACC in concluding investigations prevents the National Government to conclusively identify and prosecute those that are criminally liable and dismantle the health corruption cartel networks within and around Afya House. 2. Summary of seven key recommendations To seal existing corruption loopholes and mitigate against procurement risks in health procurement, we recommend that: 1. The EACC immediately makes public the results of investigations into the Kshs. 5 billion Afya House scandal in the public interest; 2. The Director of Public Prosecutions immediately commences proceedings against public officials that were involved in the awarding of contracts as well as the Directors of the companies identified by the GAVI Audit and the Health Ministry Internal Audit reports. Prosecution should seek to surcharge Public Health Officials and recover the assets lost to the Kenyan tax-payer. Former Health Cabinet Secretary James Macharia and Principal Secretary Dr. Nicholas Muraguri must be absolved or prosecuted for their responsibility for the loss or unaccounted for Kshs 160 million; Tenderpreneur Capture - Sealing Corruption Loopholes in Kenya s Health Procurement Systems 2 3

5 3. The Ministry of Health fast tracks the establishment of an independent audit committee in line with Gazette notice CXVIII No.40 of 15 th April 2016, to provide management oversight on the design and implementation of effective controls, promotion of a culture of integrity as well as ensuring efficient use of public resources; 4. The Ministry of Health develops and implements an effective internal controls system integrated with anti-fraud framework within its entire procurement process; 5. The Ministry of Health create and publicise measures undertaken to restore and ensure integrity in the light of the recommendations by GAVI audit report and other significant fact-finding institutions; 6. In accordance with the law, the Public Procurement Regulatory Authority should make public and publicise the names of all companies and entities that have been debarred from conducting business with the government; 7. The National Treasury should build the capacity of all actors in the procurement system (internal auditors, investigators and the parliamentary budget committee) to enable them to meaningfully assess risks, identify fraud prevention gaps, design of effective controls and conduct effective investigations; THE PROMISE OF INTEGRITY AND VALUE FOR MONEY IN PROCUREMENT Value for money in public spending implies compliance with three Es namely economy, efficiency and effectiveness. 2 All the three Es require any public agency spending tax-payers money to ensure cost minimisation, output maximisation and the full attainment of the intended results. Integrity and value for money reinforce each other. Lack of integrity and non-compliance results in financial wastage and is an economic burden to taxpayers as it often leads to unjustified requests for additional budgets. Value for money (VFM) in public procurement is reaffirmed under the Constitution of Kenya 2010 and other subsidiary laws. 3 The Constitutional Article 10 on national values states that all State officers and public officers shall exercise good governance, integrity, transparency and accountability in the implementation of the public policy decisions. 4 VFM is further solidified under Article 201 on principles of public finance and Article 227(1) on public procurement of goods and services. Openness, accountability and the use of public resources in a prudent and responsible manner underpins effective public finance management. 5 Article 227 (1) further provides that a state organ or any other public entity while contracting for goods and services shall do so in accordance with the system that is fair, equitable, transparent, competitive and cost-effective. This provision is further operationalized through the Public Procurement and Asset Disposal Act (PPAD) 2015 and the draft public procurement policy. The PPAD recognises among others national values, principles of integrity, principles of public finance, values and principles of public service and maximisation of value for money as guiding principles for public procurement and disposal. 6 Oversight agencies and citizens are critical to the enforcement of PPAD. They include the National Treasury, the Public Procurement Regulatory Authority, the Public Procurement Regulatory Board (PPRB) and The Public Procurement Administrative Review Board (PPARB). The Ethics and Anti-Corruption Act of 2011 in addition, mandates the EACC to monitor the practices and procedures of public bodies to detect corrupt practices and to ensure the revision of methods of work or procedures that may be susceptible t to corrupt and unethical practices. 7 These governance structures have a primary obligation to ensure enforcement of the constitutional promise of value for money and integrity. 2 Penny Jackson (2012), Value for Money and International 3 The Public Finance Management Act 2012; The Public Development: Deconstructing myths to promote a more Procurement Act constructive discussion available on 4 Article 10 (1), Constitution of Kenya 2010 < 5 Article 201 (a); (d). 41.pdf.>; see also Australian Council for International 6 Chapter 6 of the Constitution; Leadership and Integrity Act Development (2012), ACFID and Value for Money, 2012 Discussion Paper. Available on 7 Section 11 (1) (i), Ethics and Anti-Corruption Act 2011 < ent/acfid-value-for-money-discussion-paper.pdf> Tenderpreneur Capture - Sealing Corruption Loopholes in Kenya s Health Procurement Systems 2 4

6 THE REALITY OF INTEGRITY AND VALUE FOR MONEY IN HEALTH PROCUREMENT The Auditor General Report of 2014/2015 establishes that Kshs. 14,435,690,489 spent across National Government could not be verified as having been spent within a value for money framework. 8 The report further identified that much of the wastage occurred during procurement by ministries, departments, commissions and funds. With Kshs. 402,025,962 of unsupported expenditure, the Ministry of Health (MoH) is the 4 th worst ranked Ministry across the 18 ministries, departments and commissions audited in this period. In 2016, several reports revealed misappropriation of money and procurement irregularities at the Ministry of Health. This included the Internal Audit report that revealed that Afya House could not account for up to Kshs. 5 billion. Christened #MAfyaHouse scandal by Kenyans on Twitter, the internal audit revealed that the scandal involved diversion of funds, double payment for goods, manipulation of the Integrated Financial Management Information System (IFMIS) as well as payments in the millions of shillings to phoney and unqualified suppliers in the financial year 2015/2016. Prior to the breaking of the #MAfyaHouse scandal, the Global Alliance for Vaccines and Immunisations (GAVI) audit report of May 2016 had concluded that procurement-related internal controls at the Ministry of Health were ineffective and could not provide assurance on transparency and value for money. The Ministry received an unsatisfactory audit rating. 9 Subsequently, the GAVI demanded and the GoK accepted to refund Kshs. 160 million stolen from the donor funded vaccine initiative. One month earlier, our April 2016 policy brief on procurement systems issued revealed that the prices on the market price index (MPI) was on average percent higher than the market price. 10 In real terms, this means that provision of health services could be percent cheaper if Public Procurement and Regulatory Authority exercised transparency in establishing the optimum prices for procurement of pharmaceuticals and non-pharmaceutical supplies. Timeline of key events ( ) April 2016: SID and partners release a policy brief on sealing corruption loopholes in Health Procurement May 2016: GAVI Audit Report is released and MoH receives an 'unsatisfactory ' Audit Rating October 2016: MoH Internal Audit Report reveals theft of upto Kshs. 5 billion in the #MAfiaHouse Scandal December 2016: Doctors commence 100-day Strike agitating for better pay, equipment & working conditions March 2017: EACC launches a full systems review on pricing of pharmaceutical and nonpharmaceutical supplies April 2017: Reshuffling of Principal Secretaries including Health PS who moves to Lands May 2017: USAID suspends funding to MoH citing massive wastage and theft of funds at Afya House 8 Republic of Kenya, Summary of the Report of the Auditor- General on the Financial statements for National Government for the Year 2014, 2015, pg. 24 available on < 2-reports/9-national-government-and-statecorporations/69-government-ministries> accessed on 9 May GAVI Secretariat (2016), Final memorandum on Kenya Programme Audit Report: Final Audit Report-02 May Society for International Development (2016), KELIN and TI-Kenya Sealing Corruption Loopholes in Kenya s Health Procurement Systems. Tenderpreneur Capture - Sealing Corruption Loopholes in Kenya s Health Procurement Systems 2 5

7 These various exposes indicated that key oversight institutions are not ensuring compliance with laid down procedures and systems. Secondly, the Ministry of Health has not taken its duty to put in place internal controls to ensure integrity and value for money in health procurement seriously. It was clear to observers of the 100-day long strike by the Kenya Medical Practitioners and Dentists Union that the Ministry s ability to negotiate with the doctors was weakened in the face of their rallying cry to Lipa kama tender (pay like a tender). Without integrity, nothing works. 1. Procurement System Violations and Fraud 1.1 Grossly Inflated Costs of Medicines and Equipments Case Study 1 Loopholes Procurement of portable Procurement System violations and Fraud container clinics and supply of Unconstitutional Supplementary budget food supplements to people Tenderpreneur capture living with HIV and AIDs Yes Yes The much-publicised internal audit report on the Kshs. 5 billion scandal attracted very sharp public criticism in The procurement of 100 portable container clinics at a contract price of Kshs 10 million each totalling Kshs. 1 Billion illustrates graphically how contract sums are inflated. Media investigations revealed that the declared value for purposes of customs duty was only Kshs. 1.4 Million per container. 12 The 100 containers unnecessarily cost Kenyan tax-payers Kshs. 860 Million therefore. This blatant theft of public resources was approved by public officials. It translates into a violation of basic principles in public finance management. It has probably ultimately resulted in the denial of maternity and under-five clinical services to lowincome communities. The internal audit also revealed significant overpricing of items including food supplements for people living with HIV and AIDs. As we saw in our first policy brief, huge price variances continue to persist. Despite having the same suppliers for RUTIF therapeutic foodstuffs, the Health Ministry paid two and half times more than UNICEF. The Health Ministry also paid almost five times as much for Fort Corn Soya Blend than the World Food Programme. Table 1: People living with HIV and AIDs food supplements DESCRIPTION BUYER UNIT PRICE (Kshs.) MoH Therapeutic food (RUTIF) 500 KCAL/92 2. Fort Corn Soya Blend (Unimix) 25kg Global Fund UNICEF MoH 5,125 WFP 1,340 The huge loss of public funds can be attributed to policy non-compliance and governance failure. The PPDA provides clear guidelines on annual procurement plans 13 and management of bids above market prices. 14 The Accounting Officers chose not to utilise these legal instruments and therefore failed to safeguard public funds in this case. The Accounting Officers together with the relevant management committees also contracted suppliers without prior planning. In so doing, they have contravened section 53(2) and (3) of PPDA Act, The Act requires that before any procurement activity, the activity must first be included in the annual procurement plan. 11 Ministry of Health (2016), Interim Audit Report on the End of Year procurement and payments for 2015/16 financial year for the Ministry of Health -MOH/FIN/1/A Vol.1 (73) (27 th October, 2016) 12 Mohammed Ahmed, Firm paid Kshs 33m taxes for mobile clinics (Daily Nation 1 November 2016) 13 Section 53 (2); (3) 14 Section 63 provides: An accounting officer of a procuring entity may at any time prior to notification of tender award, terminate or cancel procurement or asset disposal proceedings without entering in to a contract where (d) there is evidence that prices of the bids are above market prices. Tenderpreneur Capture - Sealing Corruption Loopholes in Kenya s Health Procurement Systems 2 6

8 Secondly, sufficient funds to meet the obligations of the contract must be included in the approved budget estimates. Neither of these provisions was observed in this procurement contract. It should further be noted that if prices quoted in the bids are higher than the market price, the Act further provides authorisation to cancel such bids. Though available, this legal opportunity was never invoked during the entire procurement process for the purchase of portable clinics and people living with HIV and AIDs supplements. 1.2 Diversion of Funds from Budgeted Purpose The procurement of the containers was also not reflected in the annual procurement plan nor was funds set aside in the approved budget estimates to procure the same. To facilitate payments of the containers, funds were diverted from budgetary allocations for free maternity and Managed Equipment Services (MES) at Kshs. 200 Million Kshs. 600 Million respectively. The impact of no demand from the counties, procurement plan or resources to ensure the items procured were delivered to the end users explains why several months on, the containers remain at the National Youth Service (NYS) Mombasa warehouses. Secondly, the diversion of funds has created unnecessary pending bills in respect of free maternity service. At the time, Ministry of Health justified the diversion of funds from free maternity as the only available resources in FY 2015/2016. The very justification raises more questions about the effectiveness and capacity of the Ministry to execute and monitor its own budgets. The Ministry should have effectively monitored its activities to ensure that only planned activities within approved budget lines were executed. 1.3 Duplicated Procurement between Donor Funds and GOK Funds The procurement of the food supplements offers a clear case of duplicated procurements. In the original budget, the Global Fund, UNICEF and WFP had committed to meet the costs of the food supplements. For this reason, no public financing was allocated to NASCOP in 2015/2016 and 2016/2017 financial years. The funds budgeted under the development partners were sufficient to cater for the national needs. The Internal Audit found no compelling justification of unforeseen and unavoidable circumstances to warrant a separate supplementary budget vote-head of Kshs. 515 Million. It should be noted that if funds under development partners are insufficient, the procedure requires that supplementary expenditures should be incurred under the original budget vote-head, not a different one. The Ministry of Health paying back GAVI suggests their acceptance of management and system failure. What are the consequences of losing the initial sum of 160 million and then a further payment of citizen s taxes? 2. Abuse of Supplementary Budgets 2.1 Last Minute Unsupported Requests The Constitution of Kenya, the Public Finance Management Act of 2012 and the Public Finance Regulations of 2015 permits the passing of supplementary budgets to address unforeseen and unavoidable circumstances. Unforeseen and unavoidable circumstances are situations where no monies had been appropriated for those specific items and needs. 15 However, this provision is capped at a maximum of 10% of the total appropriated amount per program. Evidence from the Ministry of Health indicates that, despite these legal safeguards, supplementary budgets continue to be abused. Case Study 2 Kshs. 515 Million for people living with HIV and AIDs food supplements and Kshs. 350 Million for Consultancy services for the construction/rehabilitation of Nanyuki Hospital Loopholes Violation of procurement system Unconstitutional supplementary budget Tenderpreneur capture YES YES YES The 2016 Internal Audit report highlighted the inclusion of approximately Kshs. 515 Million for the purchase of food supplements for people living with HIV and AIDs and a further Kshs. 350 Million for consultancy services for the construction and 15 Article 223 (1) (a) (b), Section 44, Public Finance 2015, Section 21, PFM Act 2012, section 26 (6) PPDA, 2005, Management Act 2012, Regulation 40, PFM Regulations, Section 53 (8) & (9) PPAD Tenderpreneur Capture - Sealing Corruption Loopholes in Kenya s Health Procurement Systems 2 7

9 rehabilitation of the Nanyuki Hospital in two separate Supplementary Budgets. Approved in April 2015, the first Supplementary Budget allocated Kshs. 250 Million for people living with HIV and AIDs food supplements. The second Supplementary Budget approved Kshs. 265 Million for people living with HIV and AIDs food supplements a few days before the close of the financial year on 30 th June Passing a Supplementary Budget less than a week to the closure of a financial year raises huge questions as to the urgency and need for the approval. Secondly, would the Ministry have had the time and capacity to effectively execute the project in only a few days? The Controller of Budget has consistently flagged the dangers of last-minute requests for supplementary budget approvals and the effective implementation of activities by Ministries, Departments and Agencies (MDAs). The timing of Supplementary Budgets should allow sufficient time for implementation of activities. When supplementary budgets are approved towards the end of the financial year, implementation of activities by the MDAs may be hampered Controller of Budget Last minute submission of supplementary budgets and the lack of structured procurement plan are major loopholes to make unbudgeted procurements. The 2016 Internal Audit also reveals that payments are being made that are neither budgeted or planned for. Kshs. 350 Million was paid to consultants on the Nanyuki Hospital construction project. This payment was neither in the original budget nor in any of the two supplementary budgets. 17 Despite, the funds having not been appropriated by the National Assembly and therefore unauthorised, the National Treasury proceeded to upload these funds into the IFMIS vote book. In effect, the National Treasury created funds for the Health Ministry to pay consultants without due parliamentary process. No records indicate that due diligence took place to analyse and establish the legitimacy of paying consultants in the first instance and then, the second payment of Kshs. 200 Million consultancy fees for rehabilitation of Nanyuki Hospital. If we extrapolate the consultancy fees as 5 percent of the contract sum, the total project could amount to approximately Kshs. 4 Billion. If such a huge sum was expended to rehabilitate Nanyuki Hospital, then the hospital should be in the class of level five hospital. In this instance, the Health Ministry, the National Treasury and the Parliamentary Budget Committee failed to protect the prudent use of resources as provided for in the constitution and relevant legislation. The scheme to procure the supply of people living with HIV and AIDs food supplements commenced on 4 th November The Ministry had developed an original budget and annual procurement plan for food supplements for people living with HIV and AIDs and the Global Fund had approved Kshs 269 Million towards the budget. The procurement process, however, commenced without approved budget estimates under the National Aids and STI Control Programme (NASCOP) budget line. This directly contravenes sections 26(6),53(8) and (9) of the PPAD Act, Essentially this means that the contracts were first awarded and then funding was sought. The funds would later be availed under Supplementary Budget I and II in April 2015 and June 2016 respectively. Under these circumstances, the supplementary budgets could not meet the requirements set out in the Constitution, the PFM Act of 2012 and the PFM Regulations of Since the food supplements had already been budgeted for, the request for the supplementary funding could not qualify as unforeseen and unavoidable circumstances. The inclusion of a request for Kshs. 515 Million in the supplementary budgets appears to be an intentional misrepresentation that seeks to subvert the supplementary budget process 16 Ibid. 17 Ministry of Health (2016), Interim Audit Report on the End of Year procurement and payments for 2015/16 financial year for the Ministry of Health -MOH/FIN/1/A Vol.1 (73) (27th October, 2016) Tenderpreneur Capture - Sealing Corruption Loopholes in Kenya s Health Procurement Systems 2 8

10 3. Tenderpreneur Capture 3.1 Use of Underqualified Firms Case Study 3 Supply of people living with HIV and AIDs foodstuffs supplements and portable clinics Loopholes Violation of procurement system Unconstitutional Supplementary Budget Tenderpreneur capture YES YES YES The PPDA (Public Procurement and Disposal Act) requires that awarding of any procurement bid must go through three stages namely preliminary, technical and commercial. These stages allow fair competition and the most affordable and technically qualified bids to emerge for the eventual contract award. An analysis of the prices for the portable containers and the people living with HIV and AIDs drugs demonstrates a lack of transparency and experience in the award of bids. In the case of the supply of food supplements, the firms awarded the contract had no evidence of prior experience dealing with the commodity. While this case specifically addresses the procurement of people living with HIV and AIDs food supplements, a similar practice was identified in the execution of GAVI project. The GAVI audit report identified that the tendering process was non-transparent and noncompliant with the PPDA. 18 Issues of contention included the submission of non-credible bid documents, application of restricted tendering criteria even when such tenders did not qualify and awarding of contracts to bidders that did not meet evaluation criteria. In the case of the portable containers, the bidding firms were neither dealers nor technically qualified to supply the same. Due diligence was not done to assess the technical and financial qualifications and capacity of the contracted firm. The evaluation committee failed to carry out a very basic market survey to establish the optimum price for the container clinics. Further, there is no evidence of attempts to seek guidance from the Public Procurement and Regulatory Authority or any State agency on the cost for the containers. It is in the public domain that the contracted firm was not tax compliant. This is confirmed by KRA through the lawsuit filed in court. It is unclear why a firm that has defaulted on its tax obligation should qualify for the award of government contract. It is perplexing why the Acceptance Committee accepted the non-existent containers clinics before delivery and installation at their respective sites. Further, why was payment made to the contracted firm before the inspection and transfer of ownership of containers to MoH. All these circumstances, flaws and loopholes in the procurement process indicate collusion between the public officers involved in the procurement process and the contracted firm. By ignoring obvious red flags in a clearly fraudulent procurement process and providing public funds to pay for unwanted container clinics that were not in the approved budget, the National Treasury failed in its role of ensuring proper management, control and accountability for government finances. 19 By its acts of omission and commission, the National Treasury facilitated a loss of Kshs. 1 billion in one single project. Public Procurement and Regulatory Authority has a legal mandate to monitor the procurement processes in all government entities and advice thereof. By law, procuring entities are required to submit procurement proceedings of the contracts entered with suppliers on a quarterly basis to the Public Procurement and Regulatory Authority within fourteen days of the following quarter. 20 Armed with the procurement proceedings, it was not possible for Public Procurement and Regulatory Authority not to have noticed that the container clinics were illegally contracted, prices highly inflated and hence intervene to safeguard public resources. Was the lack of action by the Public Procurement and Regulatory Authority, an obvious act of conscious avoidance? CONCLUSION 18 GAVI Audit Report. 20 Public Procurement and Regulatory Authority Circular No. 19 Section 12 (2), Public Finance Management Act /2016 dated 16 th December, 2016 Tenderpreneur Capture - Sealing Corruption Loopholes in Kenya s Health Procurement Systems 2 9

11 Following examination of these three case-studies, health procurement system violations, unconstitutional use of supplementary budgets and tenderpreneur capture are the three most dangerous threats to the Ministry of Health. The absence of an effective internal anti-fraud and corruption control system within the Ministry undermines an environment of ethical values and integrity. This continues to be compounded by the failure to establish the Audit Committee as contained in the PFM Act of 2012 and Regulations of It allows the lack of effective oversight persists. The leadership of the Ministry of Health have yet to implement the recommendations of GAVI audit report and make public their progress. The delay by the EACC to fast-track the investigation into the findings of the Internal Auditor undermines the public right to information has stalled prosecution and denies interested public officers the opportunity to strengthen the procurement systems and seal loopholes. The Integrated Financial Management Information System (IFMIS) continues to be undermined to a point that it is unable to protect public funds from fraudsters and their allies in public office. The failure to implement the reports of fact-finding institutions such as the Office of the Auditor General tragically emboldens corruption networks within and circling Government. So too, does the consistent lack of compliance with procurement regulations and inaction by oversight bodies including the Public Procurement Regulatory Authority, the National Treasury, Parliamentary Budget Committee and Office of the Controller of Budget. The policy brief finds that despite the existence of strong legal framework on integrity, value for money guidelines and technological innovations, procurement-based corruption continues undeterred within the public health sector. The lack of vigilance and in some cases, the lack of integrity of public officials involved in the entire procurement cycle continue to be major risks. Human agency rather systems failure is at the source of the problem facing the Health Ministry. The lack of effective oversight by the National Treasury, the Public Procurement Regulatory Authority and Parliamentary Committees and effective investigations and prosecutions by our law enforcement agencies is a key corruption accelerator. We trust the Ethics and Anti-Corruption Commission shall consider and include these findings and recommendations in their systems review. APPENDIX 1: METHODOLOGICAL NOTE The objectives of this policy brief are: To identify the core weaknesses that prevent the Ministry of Health from achieving value of money in health procurement; To identify and propose legal and procedural reforms to address these core weaknesses The findings of this policy brief were compiled by reviewing legal and policy frameworks pertinent to the constitutional promise of value for money and integrity including the Constitution of Kenya 2010, the Public Finance Management Act 2012, Public Finance Management Regulations 2015, the Public Procurement and Asset Disposal Act 2015 among others. Other resource materials include reports of fact-finding institutions including the Office of the Auditor General, the Office of the Controller of Budget, donor reports and media reports ( ). The findings were enriched by a Focus Group Discussion held with representatives of health NGOs. The policy brief utilises case studies to demonstrate missed opportunities and key loopholes in achieving the constitutional promise of integrity and value for money in health procurement. Tenderpreneur Capture - Sealing Corruption Loopholes in Kenya s Health Procurement Systems 2 10

12 APPENDIX 2: REFERENCES 1. Australian Council for International Development (2012), ACFID and Value for Money, Discussion Paper. 2. GAVI Secretariat (2016), Final memorandum on Kenya Programme Audit Report: Final Audit Report-02 May Ministry of Health (2016), Interim Audit Report on the End of Year procurement and payments for 2015/16 financial year for the Ministry of Health -MOH/FIN/1/A Vol.1 (73). 4. Mohammed Ahmed, Firm paid Sh 33m taxes for mobile clinics (Daily Nation 1 November 2016) 5. Office of the Controller of Budget, Annual National Government Budget Implementation Review, Report FY 2015/16 (August, 2016). 6. Penny Jackson (2012), Value for Money and International Development: Deconstructing myths to promote a more constructive discussion. 7. Society for International Development (2016), Sealing Corruption Loopholes in Kenya s Health Procurement System. 8. Republic of Kenya, Summary of the Report of the Auditor- General on the Financial statements for National Government for the Year 2014, The Constitution of Kenya, The Public Finance Management Act The Public Finance Management Regulations, The Public Procurement and Asset Disposal Act APPENDIX 3: PUBLIC NOTICE ON THE ESTABLISHMENT OF AUDIT COMMITTEES IN NATIONAL GOVERNMENT MINISTRIES Tenderpreneur Capture - Sealing Corruption Loopholes in Kenya s Health Procurement Systems 2 11