The €4 billion debacle: how the government mismanaged the VGH concession

The National Audit Office’s (NAO) comprehensive investigation of the agreements between the government and Vitals Global Healthcare (VGH) has revealed a pattern of mismanagement and secretive negotiations which led to agreements which repeatedly favoured the concessionaire over the taxpayer.

In this article, The Shift analyses three of the main agreements that outlined the concessionaire’s obligations and highlight the way in which these deals were manipulated to favour VGH at the expense of the public.

Yesterday, The Shift reported that the NAO slammed the government’s consistent mismanagement of the €4 billion concession, outlining how the government assumed a “disproportionate and self-defeating” level of risk.

Specifically, the NAO’s second published report outlined how the government’s multiple deviations from the original request for proposals in the various contracts signed with VGH, many of which were signed by disgraced former Health Minister Konrad Mizzi before seeking approval from Cabinet, led to this high level of risk being imposed on government.

Besides highlighting these deviations, the NAO report is also highly critical of how the government’s failure to draw up an adequate framework for the concession led to a subsequent failure to hold VGH accountable for its multiple failures in terms of adhering to project milestone deadlines.

The NAO also repeatedly points out that the multiple changes along the way which were sanctioned by government meant that the concession itself contrasted greatly with the original request for proposals, to the point were it jeopardised other potential bidders’ ability to fairly outline financial projections for their bids as well as adequately arouse interest in more reliable investors.

During the NAO’s review of the 2015 – 2018 period, VGH’s compensation from the government in terms of annual concession fees amounted to a total of €87.3 million, in spite of VGH’s demonstrable failure to fulfill its concession obligations. An analysis of the deviations stemming from closed-door negotiations with VGH details the established pattern through which the government repeatedly allowed VGH to obtain conditions which were far more favourable.

VGH was eventually ‘rescued’ from its predicament when its concession was bought by Steward Healthcare. The Shift’s past investigations have shown how Steward Healthcare was closely linked to the same individuals behind VGH, including Steward Healthcare’s CEO (formerly, VGH’s CEO), Armin Ernst. On Tuesday, the government’s MPs voted unanimously in favour of increasing Steward Healthcare’s annual fee to a total of €69 million, in spite of all the NAO’s efforts to highlight its grave concerns over the concession.

https://www.facebook.com/100044481034332/posts/464991181660246/

The services concession agreement

The services concession agreement, signed on 30 November 2015, an agreement between Mizzi’s ministry for health and energy and VGH as represented by its former CEO, Sri Ram Tumuluri, was for the granting of the concession itself to VGH Ltd and VGH Management.

Overall, the services concession agreement supposedly obliged VGH to redevelop, maintain, manage and operate St Luke’s hospital, Karin Grech Rehabilitation Hospital, and the Gozo general hospital, as well as the construction of a medical school, a university-level educational institution offering teaching and qualifications in nursing, a research and development facility and a health centre in Gozo’s hospital.

One major point from the original request for proposals stated that the successful bidder would be obliged to commit to a €150 million investment in infrastructure, medical equipment and maintenance. The services concession agreement actually signed with VGH, however, did not reflect this or indeed oblige the concessionaire to provide any minimum investment.

Two other major waivers modified the original terms that were meant to shape the services concession agreement.

The first of these waivers related to financing. Under the services concession agreement, the concession wasn’t meant to start until and unless, among other things, VGH secured external financing (for the promised investment) from lenders. This clear condition was, however, curiously waived by Konrad Mizzi through a side-letter dated 19 May, 2016 and turned into an ever extending deadline.  The first side-letter set a deadline of 19 February, 2017 for VGH to secure financing which deadline was extended twice again by Mizzi, first to 30 June 2017, and then again to 31 December through yet other side letters. In the end, VGH never actually raised the required financing and sold its concession to Steward.

Another major change to the services concession agreement occurred through an Addendum signed by Mizzi and Tumuluri in relation to obligations on the completion of the refurbishment works promised by VGH.

While the original agreement stipulated that the concessionaire was supposed to fulfill its refurbishment obligations by 15 February 2016 for St Luke’s and 30 May 2016 for Gozo’s hospital, the Addendum allowed the concessionaires a wider window of finishing works by not later than 36 months after construction permits are issued.

Consent from Cabinet was not sought for any of these changes made to the services concession agreement.

Health services delivery agreement

The health services delivery agreement was signed on 30 November, 2015, an agreement between Mizzi’s ministry for energy and health and VGH as represented by Tumuluri. The agreement was effective on 1 June, 2016, and essentially was meant to enforce all rights and obligations arising from the deal for a period of 30 years.

The agreement focused on healthcare and the ancillary non-clinical services which VGH was supposed to assume responsibility for, including the implementation, maintenance and development of services to be offered.

Through just one Addendum related to the amount of additional hospital beds which the government was paying VGH to provide, the minimum number of beds was increased by 25 acute beds and 25 geriatric care beds at Gozo’s hospital and 25 geriatric care beds at Karin Grech.

This change alone amounted to an extra €10.4 million being handed to VGH for the provision of services which it was clearly ill-equipped to provide, given the NAO’s condemnation of VGH’s financing plans for the project.

The concession fees which were to be paid out to VGH were originally meant to be paid monthly in arrears. An Addendum to the health services delivery agreement dated 7 December, 2015, changed that condition to payments being made in advance every three months. Certain key points in relation to the original request for proposals for the delivery agreement were omitted altogether from the final version, including details related to an information management system and the use of St Luke’s as a teaching hospital.

The information management system promised by VGH was meant to collect information on payroll data in relation to the labour services agreement. The system never materialised, leading to multiple instances in which fees on multiple invoices issued by VGH were contested by the government.

Similarly, provisions to ensure that the successful bidder would invest in St Luke’s to be used as a teaching hospital were excluded from the concession awarded to VGH.

“It was considered essential for the concession contracts to indicate that St Luke’s would be a teaching hospital, and that faculty members and students were to be given access for their practical training, as this requirement had operational and cost implications. In this respect, the NAO considers this omission significant,” the report states.

Labour supply agreement

The labour supply agreement was signed on 8 January, 2016, another agreement signed between Mizzi and Tumuluri. The agreement stipulated that the government would supply VGH with employees so that the group of companies could meet its obligations for the 30 year concession.

While the original labour supply agreement stated that the government would keep paying VGH’s employees only to be reimbursed by VGH to the tune of €32,234,637 a year. However, this yet again differs from the original request for proposals, which stated that staff costs would amount to €39,700,000, meaning that the final labour services agreement signed with VGH shaved off €7.5 million in costs for the concessionaire.

Another inconsistency between the original request and the final agreement occurred in relation to the government’s control over collective bargaining rights for VGH employees. The original request outlined this specific point, whereas the final agreement excluded it altogether.

“Instead, in the Addendum to the agreement it was clearly stated that in the event of increases in wages (ordinarily the result of a new collective agreement) the VGH would only cover an annual two per cent of that increase,” the report reads.