This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its July 2020 report entitled An audit of matters relating to the concession awarded to Vitals Global Healthcare by Government, Malta’s Auditor General raised concerns over a long-term health facility privatization process that was compromised by inside collusion, weak strategic planning, a lack of proper approvals, the lack of a proper cost-savings assessment, and the flawed evaluation of the winning proponent’s financial viability.
As the National Audit Office (NAO) noted, prior to proceeding with the Request for Proposals (RFP) privatization process, the government entered into a secret arrangement with the winning proponent, the details of which were never released to the auditors, which gave rise to concerns that the RFP process was biased towards that winning proponent:
The first term of reference entailed the review of the method utilised for the award of the concession to the VGH. Drawing the Office’s immediate concern in this regard was the Agreement that Government reportedly entered into prior to the RFP 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.
As the report concluded, this secret side arrangement raised significant ethical concerns over the integrity of the RFP process:
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.
In fact, the NAO found that the winning proponent should have been disqualified from the RFP process due to the prior secret arrangement:
Another matter of note is the reference made to ethical considerations in the RFP document. The RFP document stipulated that bidders and their respective officers, directors, employees, agents and advisors were not to engage in any collusive tendering or anti-competitive or other similar conduct with any other bidder or person in relation to the preparation or submission of a proposal. It was further noted in the RFP document that bidders deemed in breach of this stipulation were to be disqualified. Additionally, bidders were not to canvass the Government or any employees or agents of the Government concerning the award. The preceding paragraphs of this section of the Report delve into the details surrounding an Agreement entered into between the Government and the eventual investors of the VGH prior to the issue of the RFP, to build, develop and manage a world class healthcare facility in Gozo. Although the NAO was not provided with this Agreement, the convergence between the Agreement and the RFP is all too evident. It is only through the full review of this Agreement that the NAO can strengthen its understanding and establish certainty; however, based on the information at hand and the severe reluctance by Government to disclose any information relating thereto, this Office cannot but conclude that the type of breach here is not one merely of canvassing but of collusion, necessitating the disqualification of the bid.
The report also raised concerns over the weak quality of the competing bidders, which reflected a lack of competitive tension, and undermined the government’s ability to engage in an effective comparative analysis of different options during the evaluation process:
Setting aside the bid received by the VGH, the NAO is of the opinion that the quality of the other bids received was extremely poor. The decision of the Evaluation Committee to deem the bids by Image Hospitals and BSP Investments Ltd as ineligible on grounds of administrative non-compliance and other serious shortcomings was considered as correct by the NAO. In both cases, the reasons cited by the Evaluation Committee were factually correct and a valid basis for their elimination.
Regarding the bid by the VGH, the Evaluation Committee considered this as administratively compliant in that a bid bond had been provided and the requisite submissions were generally made in line with the RFP. The NAO deemed the decision by the Evaluation Committee appropriate, in that the eligibility criteria set in the RFP were met. Nonetheless, the fact that only one bid was compliant is of grave concern to the NAO. Apart from being indicative of Government’s failure to establish competitive tension, this rendered any comparative analysis of bids impossible.
The NAO also raised concerns over the feasibility report prepared by the government to justify its outsourcing strategy, noting that there was a lack of clarity regarding when that report was actually prepared:
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.
The NAO also raised concerns over the lack of appropriate risk-transfer to the proponent, as well as a weak assessment of the value-for-money obtained by the government through the arrangement:
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. This Office contends that the contract may have been more appropriately classified as a public service contract rather than a concession, which classification establishes far more onerous obligations on the part of Government to proceed with this procurement.
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.
The report also noted that the RFP proceeded to market after an unclear approval process, which resulted in no clear accountability regarding project approval:
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 Minister for Energy and Health and to a lesser extent on the PS MEH-Energy.
As the report further elaborated, the government failed to provide adequate records regarding its internal approval process:
If one were to work with the understanding that the feasibility report was carried out prior to the RFP, then it is reasonable to assume that this report, once submitted to the MEH-Energy, should have triggered extensive internal review and further external consultation, presumably culminating in some form of endorsement by the Minister for Energy and Health and the mandating of Projects Malta Ltd to issue the RFP. Despite requests to this effect, the NAO was not provided with any information or documentation capturing these stages of the decision-making process.
Furthermore, the NAO identified significant flaws in the RFP evaluation process, noting weaknesses in the assessment of the term of the awarded contract:
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.
The report noted that the government failed to subject unrealistic objectives contained in the awardee’s proposal to a sufficient degree of scrutiny during the evaluation process:
In sum, the NAO maintains that the VGH submitted a bid that emphasised all the anticipated benefits of entry into this health concession with Government, irrespective of whether they were realistic or otherwise. These commitments included: the renovation of three public hospitals by December 2017; the construction of a medical college; significant improvement in service delivery; the lowering of costs incurred by Government; the strengthening of the hospitals’ management function; the development of a comprehensive staff training programme; and an investment of over €190,000,000 by the VGH into the project. The commitments of the VGH were deemed overly ambitious and unrealistic to achieve within the stipulated timeframe.
The final term of reference considered by the NAO entailed the analysis of the evaluation of submissions leading to the award of the concession. The bid by the VGH was assessed by the Evaluation Committee in terms of its commercial, technical and financial strength, and the degree to which it exceeded the minimum requirements specified in the RFP. In this Office’s opinion, 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. This Office noted that the assessment by the Evaluation Committee of this component of the bid was mainly a summary of the technical proposal put forward by the VGH.
Furthermore, the NAO raised concerns over an overall lack of due diligence in the government’s proposal evaluation process, which called into question the overall integrity of that process:
The Evaluation Committee undertook a comparison of rates that were to be charged per bed night by the VGH with the actual cost being incurred by Government across comparable services and concluded that the price offered was less than Government’s spend. While the NAO acknowledges that this analysis could provide a basis for cost comparison, this Office maintains certain reservations. Chief in this regard is that this comparison did not account for existing inefficiencies in the provision of public health services and failed to consider the efficiency gains that Government sought to obtain through this tender.
Although the shortcomings identified by the NAO in relation to the evaluation process remain, these must be acknowledged in terms of the broader and far more significant concerns relating to the integrity of the entire procurement process. 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 contends that certain evaluation criteria, in particular those related to fitness and probity of bidders, necessitated a thorough due diligence process. This Office maintains that, beyond the assertion of compliance to administrative requirements and the determination of whether the technical criteria set out in the RFP were met and to what extent, it is reasonable to expect that the process of evaluation would include an element of due diligence on any bidder, more so on that recommended as the preferred bidder. 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. This was considered a shortcoming in the procurement process, as comprehensive due diligence is critical in safeguarding Government’s interests, especially when considering the materiality and extensive timespan of the project.
The report also raised concerns over a lack of proper record-keeping in relation to the evaluation process, which raised further questions about the overall probity of the procurement process:
The shortcomings highlighted above serve to strengthen the argument for more robust background checks, heighten the need for rigorous due diligence screening, bring to the fore the importance of establishing evaluation criteria that are objective and truly assess the ability of the bidder to deliver that bid, and necessitate that evaluation committees verify submissions made with a critical mind.
The NAO bases its analysis on documentation made available to it by Government and its various subsidiaries. In the Office’s general experience, in this as well as in other audits, it is evident that where matters, decisions, procedures and operations are appropriately documented and corresponding records provided to this Office, the nature of the shortcomings identified can be readily defined and often do not elicit the NAO’s greatest concern. It is where no documentation is provided that the Office’s most serious concern gravitates towards. This audit is no different. The major flaws and failings of this service concession can readily be traced to Government’s prior Agreement with the VGH before the issue of the RFP, for which relevant documentation was not provided to this Office. Understanding the RFP process through the perspective of this Agreement changes everything, for the outcome of the RFP was known before 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.
As this audit illustrates, the integrity of a procurement process can be compromised by inside advantage, the lack of appropriate oversight, and weak due diligence during the evaluation of proposals. This case study serves as a useful reminder to all public sector institutions of the need to implement proper project governance safeguards to avoid undermining the integrity of their own major project awards.
