Damning report finds collusion between Vitals and government on hospitals deal

Vitals was done deal: damning NAO report finds collusion in hospitals concession • Pins lack of governance on Konrad Mizzi, flags lack of due diligence and superficial feasibility study

The Vitals hospitals deal was 'predetermined', NAO concludes
The Vitals hospitals deal was 'predetermined', NAO concludes

A multi-million euro deal to transfer three State hospitals to an obscure private company was “predetermined”, the National Audit Office said.

In a damning report published on Tuesday, the NAO pointed an accusing finger at an agreement signed between the government and some of the investors involved in Vitals Global Healthcare before even the request for proposal was published.

The NAO said government was reluctant to provide it with a copy of the pre-tender agreement, reinforcing concerns over the “integrity of the eventual concession”.

The audit office was referred from one ministry to another when it asked for the pre-tender agreement, with none being able to trace the original or a copy.

“This casts a dark shadow on the validity of the concession awarded by government, for in effect, all appears to have been predetermined to ensure an already agreed outcome,” the NAO said.

The NAO said that a letter issued by the Bank of India sanctioning funding for the ‘Malta Healthcare Projects’ and included in VGH’s bid was dated 13 March 2015, well before the publication of the RfP on 27 March 2015.

“This office deemed this document as definite evidence of the VGH’s prior knowledge of the planned project and proof of collusion with government, or its representatives,” the NAO said.

The 200-page report was tabled in parliament and is only one of three audits concerning the VGH hospitals deal. The first report is a review of the tender process up to the point that VGH was selected as preferred bidder.

The other two reports will be released at a later date.

The deal struck with VGH saw the transfer of Gozo General Hospital, St Luke’s Hospital and Karen Grech Rehabilitation Hospital to the private company that had no prior experience in healthcare projects. VGH eventually went belly up before the concession was transferred to American outfit Steward Health Care.

“The evidence indicating collusive action between the parties acting on behalf of government with the investors of the VGH renders the entire process dubious, irrespective of whether the process was in adherence with procedural and regulatory requirements,” the NAO said.

It laid the responsibility on then energy and health minister Konrad Mizzi, and to a lesser extent, the permanent secretary for energy.

The NAO said it remained unclear how Projects Malta Ltd was mandated to issue the request for proposal for the hospitals concession.

Projects Malta was a government entity created after the 2013 election by the incoming Labour government and placed under Mizzi’s remit.

The audit office expressed concern over the governance of the hospitals concession process since “no ministerial authorisation” was sought.

“[This] resulted in the anomalous scenario where three public hospitals were conceded for operation by third parties without anyone actually assuming responsibility for this decision. This failure in governance rests squarely on the Energy and Health Minister [Konrad Mizzi] and to a lesser extent on the permanent secretary for energy,” the NAO said.

No thorough due diligence

However, the NAO also lambasted the evaluation criteria and process used to determine, which of the bidders should win the concession.

It said no thorough due diligence process was undertaken despite the complexity, size and timespan of the concession.

“This Office maintains that the due diligence carried out by government to verify matters relating to the VGH in its capacity and relationship to it as the preferred bidder to run three public hospitals was grossly inadequate,” the NAO said.

It insisted that the “major flaws and failings” of the concession agreement can be traced to “government’s prior agreement with the VGH before the issue of the RfP”.

The NAO said that on the basis of the obscure agreement, the outcome of the tendering process was known “before the feasibility of the concession was determined, before the RfP was drafted and issued, and before the evaluation committee was constituted and commenced its consideration of the submissions”.

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EXCERPTS FROM NAO REPORT

1. A predetermined outcome

“Drawing the office’s immediate concern in this regard was the agreement that government reportedly entered into prior to the request for proposals with a subset of the investors of the VGH. The overlap between this agreement and the concession was clear and created major doubt and concern regarding the integrity of the eventual concession. The NAO’s concerns are heightened in light of government’s reluctance to provide this office with a copy of the agreement, which failure serves as further confirmation of its contentious relation to the concession eventually entered into by government with the VGH. This casts a dark shadow on the validity of the concession awarded by government, for in effect, all appears to have been predetermined to ensure an already agreed outcome.”

2. No explanation why three hospitals were included in the deal

“In terms of the identification of needs, government failed to appropriately explain the bases of the inclusion of the Gozo General Hospital, the St Lukes Hospital and the Karen Grech Rehabilitation Hospital as part of one project. No specific assessment of whether the grouping of these three public hospitals presented any benefit to government was undertaken, with their amalgamation under one project an inexplicable uncontested given. Confounding matters was that the Health Ministry was not meaningfully involved in the determination of government’s requirements relating to this concession and in the establishment of feasibility thereof. Instead, the process that was in essence a health services concession was driven by the Energy Ministry. Of concern was that the Energy Ministry also failed to involve the Finance Ministry despite the substantial disbursement in public funds that this concession was to entail. Of even greater concern to this office was the fact that Cabinet was not appropriately informed of the project prior to the issue of the RfP.”

3. Superficial feasibility report

“Aside from concerns relating to the integrity of the commissioned feasibility report, the NAO’s overall opinion of this report was that it constituted a preliminary and superficial analysis of the possible concession of three of Malta’s public hospitals. The feasibility report was bereft of any form of independent analysis or critical thought. Further concerns relating to the integrity of this process emerged from the review of the minutes of the Projects Malta Ltd board of directors, wherein reference was made to this project. Although these minutes preceded the feasibility report by several months, reference was already made to government’s commitment to issue the concession and the form that it was to assume.”

4. Nobody assuming responsibility

“Despite this office’s efforts, it remained unclear how Projects Malta Ltd were mandated to issue the RfP. Of greater concern in terms of the governance of the process was that no ministerial authorisation was sought or provided in relation to this concession, resulting in the anomalous scenario where three public hospitals were conceded for operation by third parties without anyone actually assuming responsibility for this decision. This failure in governance rests squarely on the Energy and Health Minister [Konrad Mizzi] and to a lesser extent on the Permanent Secretary.”

5. Subjective evaluation criteria

“The NAO noted several shortcomings in the design of the RfP. Most evident in this respect were the evaluation criteria, which were deemed subjective, allowing for considerable interpretation in the allocation of marks. Another notable shortcoming was the term set for the concession. Good practice dictates that the term be determined by allowing a sufficient period for the concessionaire to recover the investment made and register a reasonable profit. In this case, no such analysis was undertaken, with the term, and its subsequent option to extend, set arbitrarily.”

6. VGH should have been disqualified

“This office is of the opinion that the ethical safeguards established in the RfP were breached by the investors of the VGH through the agreement reached with government prior to the issue of the RfP. This breach necessitated the disqualification of the VGH as a bidder.”

7. Risk skewed against government

“The NAO maintains that a critical element of what defines a services concession is the transfer of risk. Significant concern is registered in this respect as, in this office’s opinion, the balance of risk remained drastically skewed against government, with the concessionaire guaranteed revenue by government irrespective of market fluctuations and actual use, thereby further reducing the risk allocated to the concessionaire.”

8. Business model flawed in substance

“Another term of reference addressed by the NAO was to determine whether the business model to be employed by the concessionaire was feasible and whether it represented value for money. Although the bid submitted by the VGH satisfied all the requirements set by government, this office is of the opinion that the bid was essentially robust in form but flawed in substance.”

9. Proof of collusion

“Of grave concern to the NAO was documentation submitted by the VGH as proof of access to finance. A letter issued by the Bank of India sanctioning funding for the “Malta Healthcare Projects” and put forward by the VGH in respect of the bid was dated 13 March 2015, that is, well before the publication of the RfP on 27 March 2015. This office deemed this document as definite evidence of the VGH’s prior knowledge of the planned project and proof of collusion with government, or its representatives.”

10. VGH rested on soundness of holding companies

“The NAO established that the VGH was registered in Malta only a few months prior to the RfP. According to these records, the VGH was wholly owned by Bluestone Special Situation 4 Ltd, which formed part of Oxley Group. In terms of financial soundness, the NAO noted that the VGH submitted a description of the value of the holding companies cited in its bid, which submission was deemed as not fully addressing the requirements of the RfP.”

11. No business experience

“Other notable shortcomings identified by the NAO related to the professional and technical elements of the bid by the VGH. This office noted that the business experience cited by the VGH was not attributable to it, but to the Oxley Group or its strategic partners, or to partners that the VGH had involved in the project. Of note was that the experience cited for Oxley Group mainly related to real estate investment trusts and funds, asset management and financing.”

12. Ambitious and unrealistic timeframes

“Evident was that the timeframes committed by the VGH for the redevelopment of the SLH, the GGH and the KGRH were overly ambitious and unrealistic. The NAO’s opinion is based on the consideration of the extensive works required, the fact that works were to be simultaneously undertaken on all sites, and that the VGH lacked an established set up.

Similarly, overly ambitious were the projections made with respect to medical tourism… This concern assumes greater relevance when one considers that, according to the bid, it was the revenue forecasted from this source that was to render the project feasible.”

13. 99-year term taken for granted

“While the possibility to extend the original concession period of 30 years by a further 69 years was envisaged in the RfP, this office contends that it was imprudent for the VGH to assume that this would be a given and proceed to base its financial strategy on the full 99-year term. Moreover, credit sought for the financing of the project was conditional on the granting of a 99-year lease.”

14. Evaluation marks not entirely merited

“The evaluation carried out was lacking in terms of critical analysis, with several parts of the evaluation report merely a restatement of the bid by the VGH. Furthermore, the NAO maintains that the marks assigned in relation to the technical and operational component of evaluation were not entirely merited.”

15. Weak financial evaluation

“Concerns emerge in the evaluation committee’s assessment of the financial soundness of the VGH. In fulfilment of these requirements, the VGH submitted a description of the value of the holding companies cited in its bid. While the evaluation committee considered this adequate in that it did not delve into the matter any further, the NAO considered the information provided in this regard as not fully addressing the requirements of the RfP. This office’s concern intensifies in that the evaluation committee did not identify the gross anomalies evident in the letter of financial support sourced through the Bank of India.”

16. Financial assumptions unchallenged

“Key financial assumptions, such as that the project was not viable without medical tourism and that the VGH’s financial strategy was based on the granting by government of a 99-year temporary emphyteutical title over the sites, were not adequately challenged, scrutinised or assessed by the evaluation committee. These aspects of the bid had a direct and fundamental bearing on the feasibility of the project, yet scant evidence was provided that these elements were comprehensively considered by the evaluation committee.”

CORRECTION: A previous version of this report erroneously indicated parliamentary secretary Chris Fearne as partially responsible. The reference in the NAO report was to the permanent secretary for energy and not the parliamentary secretary.

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