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Profiting from sickness in PNG: The dark economy of public health

MedsSTAFF REPORTERS | PNGi Central | Extract

Read Part 1 of the complete and detailed PNGi investigation here

BORNEO Pacific Pharmaceuticals Ltd is yet again the subject of controversy, after the company was contracted this year, at a premium price, to supply medical kits to health centres and aid posts.

Media reports indicate that Borneo Pacific has been given a one year contract worth, K57,738,982.91, to provide medical supplies to health centres and aid posts throughout the country. The alleged value of the contract is substantially higher than the three-year, K71 million contract awarded to Borneo in 2013.

Oro Governor, Gary Juffa, has questioned the award, describing it as “controversial and suspicious”.

It ought to be kept in mind that in addition to being a member of the Public Accounts Committee, Juffa was deputy chair of the parliamentary committee which recently conducted a review of health sector management, which uncovered worrying evidence on Borneo Pacific’s merchandise.

Governor Juffa claims the new contract was signed by the government against the advice of the solicitor general’s office.

Echoing concerns raised by The Global Fund’s inspector general, the solicitor general is said to have rejected the draft contract because it was awarded via an unjustifiable certificate of inexpediency, and did not meet procurement procedures set out under part seven of the Public Finance Management Act and part 13 of the Financial Instructions.

This new contract awarded to Borneo Pacific also comes despite an allegation aired in March that a two-year review by the Health Department into the three-year contract granted to Borneo Pacific in 2013, “showed that the quality of service had dropped”.

This is an especially concerning indictment given that the goods supplied by Borneo Pacific back in 2013 were already viewed as poor.

The allegations made against Borneo Pacific presented thus far come from a range of credible authorities, including the PNG Medical Association, The Global Fund’s Inspector General, the Australian Department of Foreign Affairs and Trade, the PNG Solicitor General’s Office, the National Doctor’s Association, Professor Glen Mola, Governor Juffa and Sir Mekere Morauta, to name key authorities.

The general pattern common to these allegations, is that Borneo Pacific benefits from rigged or flawed tender processes, which come at a significant cost to donors and the public.

In all examples cited above, Borneo Pacific was the successful tenderer, despite quoting a price far in excess of other qualified bidders, and in one notable example lacking a prerequisite quality-assurance requirement, until this requirement was waived mid-tender.

Furthermore, the goods being provided through these flawed tenders, it is claimed, have been found wanting.

All of which, it has been argued, is seeing Borneo Pacific make engorged profits at the public’s financial and physical expense.

Because Borneo Pacific does not publicly release detailed accounts – indeed IPA records indicate it has not submitted an Annual Return since 2011, in violation of the Companies Act 1997 – it is impossible to verify whether it is making significant profits from these deals.

However, if we assumed hypothetically that Borneo Pacific is providing goods to the Department of Health, with an average degree of efficiency, we can approximate – but not confirm – the type of profits that are potentially accruing to the company.

For instance, if a competitive medical supplies procurement contract has an inbuilt rate of profit of approx. 10-20%, and if we assume Borneo Pacific is an efficient outfit employing competitive commercial techniques, it would appear that the awards made to Borneo Pacific are potentially up to 75%-100%, or 4-5 times the competitive market rate. Assuming of course, the above evidence presented by various medical and auditing authorities is indeed accurate.

Take the controversial 2013 award. Borneo Pacific won the tender with a quote of K71 million, compared to City Pharmacy Limited’s K48 million.

If we assume City Pharmacy Limited had an approximate profit rate of 15%, this would indicate the cost of providing the goods was about K40.8 million.

It is not clear whether Borneo Pacific’s operations are as efficient as City Pharmacy Limited. However, given that Borneo Pacific was principally using a Chinese manufacturer providing substandard merchandise, it would seem reasonable to suggest this choice was made to reduce the costs associated with acquiring the requisite medical materials.

In light of the fact Borneo Pacific  won the tender at a price of K71 million, this suggests a possible profit of K30 million, or a profit rate of 74%.

Similarly, if we look at the Department of Health’s selective tender for Rapid Diagnostic Test Kits detailed in The Global Fund Inspector General’s report, we know Borneo Pacific supplied 500 kits at a price of K470 per kit, or K235,000 for the entire shipment, in contrast to Boucher Muir which tended to supply kits at K216.38 per unit, or K108,190 in total.

If we again assume a market regulated profit rate of 15%, we can approximate that the cost price of supplying these kits was around K91,961. If broadly accurate this suggests a profit of around K142,000 for Borneo Pacific (equivalent to over 150%) – unless, that is, the company was so inefficient its operational costs were significantly higher than that of Boucher Muir.

Professor Mola and the PNG Medical Association have contended that these significant rates of profit likely earned by Borneo Pacific – although it is impossible to confirm they do realise engorged profits owing to lack of public data – are in part used to purchase ‘gifts’ for public officials, involved in the health procurement system.

Borneo Pacific has not directly denied these allegations, though their principal has strongly maintained his company is above board.

Given these would be highly secretive and opaque transactions, unfortunately without a criminal investigation or a leaked smoking gun, it is impossible to confirm allegations that part of these profits are being reserved as a slush fund to pay kick-backs to public officials.

But it can be said with a higher degree of certainty, owing to evidence on the public record, that Borneo Pacific has in the past provided uncompetitive, substandard services, secured through flawed public procurement processes.

There are also cases pointed to above which suggest some of these goods procured from Borneo Pacific are not even needed by rural health centres.

All of which turns the economics of public health on its head.


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