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• Investigation of Global Fund Grants to Papua New Guinea
  National Department of Health

  GF-OIG-14-002
  31 January 2014

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health

  A. Table of Contents
  A. Table of Contents ……………………………………………………………………………………………….. 1
  B. Acronyms ………………………………………………………………………………………………………….. 2
  C. Executive Summary ……………………………………………………………………………………………. 3
  C.1. Procurement Irregularities ………………………………………………………………………………………….. 4
  C.2. Irregular and Unacquitted Cash Advances ……………………………………………………………………. 5
  C.3. Response to Audit Findings and Continuation of Grant Programs in PNG ………………………. 5
  C.4. Due Process ………………………………………………………………………………………………………………… 6
  C.5. Recommendations ………………………………………………………………………………………………………. 6
  D. Message from the Executive Director of the Global Fund ………………………………………… 7
  E. Background ……………………………………………………………………………………………………….. 9
  E.1. Global Fund grants to NDoH ……………………………………………………………………………………….. 9
  E.1.1. Specific Program Activities …………………………………………………………………………………… 9
  E.2. OIG Audit of Grants Managed by NDoH …………………………………………………………………….. 10
  E.3. Procurement Rules Applicable to NDoH ……………………………………………………………………… 11
  E.3.1. Global Fund Procurement Requirements ……………………………………………………………… 11
  E.3.2. PNG Government Procurement Requirements ………………………………………………………13
  F. OIG Investigation ……………………………………………………………………………………………… 16
  F.1. OIG Investigations Unit …………………………………………………………………………………………….. 16
  F.2. Applicable Concepts of Fraud and Abuse …………………………………………………………………….. 16
  F.3. Origin and Scope of the Investigation …………………………………………………………………………. 16
  F.3.1. Due Process ………………………………………………………………………………………………………. 16
  F.3.2. Exchange Rate …………………………………………………………………………………………………… 16
  G. Investigation Findings ………………………………………………………………………………………. 18
  G.1. Overview…………………………………………………………………………………………………………………… 18
  G.1.1. NDoH Staff Engaged in Irregular Procurement Procedures ………………………………….. 18
  G.1.2. NDoH Staff Engaged in Irregular Cash Advance Procedures and Failed to Recover
  Unacquitted Amounts ……………………………………………………………………………………………………….. 18
  G.2. Purchase of Pharmaceuticals and Health Products ………………………………………………………. 18
  G.2.1. Borneo Pacific Pharmaceuticals ………………………………………………………………………….. 18
  G.2.2. City Pharmacy …………………………………………………………………………………………………… 24
  G.2.3. North West Scientific …………………………………………………………………………………………. 32
  G.3. Purchase of Non-Health Products ………………………………………………………………………………. 33
  G.3.1. Pengco Pacific Limited ……………………………………………………………………………………….. 33
  G.4. NDoH Cash Advances ……………………………………………………………………………………………….. 34
  H. Expenditures Not Compliant with the Grant Agreements ……………………………………… 37
  H.1. Determination of compliance …………………………………………………………………………………….. 37
  H.2. Reimbursements or Sanctions ……………………………………………………………………………………. 38
  H.2.1. Round 3 Malaria Grant: PNG-3-4-G01-M (Phase 1), and Round 4 HIV Grant: PNG-405-
  G02-H (Phase 1) ……………………………………………………………………………………………………………….. 38
  H.2.2. Round 3 Malaria Grant: PNG-304-G01-M (Phase 2); Round 4 HIV Grant: PNG-405-
  G02-H (Phase 2); Round 6 TB Grant: PNG-607-G03-T (Phase 1 and 2) ……………………………….. 39
  H.3. Summary of Expenditures Identified as Non-Compliant ……………………………………………… 40
  I. Recommendations ……………………………………………………………………………………………. 41

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health

  B. Acronyms

  AAP Annual Activity Plan
  ACSM Advocacy, Communication and Social Mobilization
  ACTs Artemisinin-based Combination Therapy
  ARVs Anti-retroviral medicines
  ASP Additional Safeguards Policy
  AusAID Australian Agency for International Development
  CCM Country Coordinating Mechanism
  CKG Charles Kendall Group
  COI Certificate of Inexpediency
  CPL City Pharmacy Limited
  CSTB Central Supply and Tenders Board
  DOTS Directly Observed Treatment, Short Course
  GDF Global Drug Facility
  GFATM The Global Fund to fight AIDS, Tuberculosis and Malaria
  GPRM Global Price Reporting Mechanism
  HSIP Health Sector Improvement Program
  ILPOC Integrated Local Purchase Order and Claim form
  LFA Local Fund Agent
  MSB Medical Standards Board
  MSH Management Sciences for Health
  NDoH National Department of Health
  NGO Non-governmental organizations
  OIG Office of the Inspector General
  PGK Papua New Guinea Kina
  PLHA People Living With HIV and AIDS
  PMCT Prevention of Mother to Child Transmission (of HIV)
  PNG Independent State of Papua New Guinea
  POM Port Moresby
  PQR Price and Quality Reporting
  PR Principal Recipient
  PSM Procurement and Supply Management
  PSTB Pharmaceutical Supplies and Tenders Board
  PwC PricewaterhouseCoopers
  RDTs Rapid Diagnostic Test Kits
  RPNGC Royal Papua New Guinea Constabulary
  SRs Sub-Recipients
  TRIPS Trade-related aspects of intellectual property rights
  UNICEF United Nations Children’s Fund
  USD United States Dollar
  VCT Voluntary Counselling and Testing
  WHO World Health Organization

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health

  C. Executive Summary
  1. This report presents the findings of the Office of the Inspector General’s (OIG)
  investigation into allegations of procurement and cash advance irregularities affecting Global
  Fund grant funds disbursed to the National Department of Health (NDoH), one of the
  Principal Recipients (PR) of Global Fund Grants to the Independent State of Papua New
  Guinea (PNG). Indications of potential irregularities arose primarily during an OIG audit of
  NDoH in November 2010.1 OIG’s audit identified: (i) overall issues of insufficient staff
  capacity and capability, (ii) unacquitted cash advances, (iii) lack of supporting documentation
  for purchases, and (iv) procurement processes not delivering value for money and susceptible
  to fraud.
  2. This investigation identified sufficient credible and substantive evidence that:

  (a) NDoH staff engaged in irregular procurement procedures. The irregular
  procurement procedures included: chosing higher bidders over more competitive
  bidders to provide health products or pharmaceuticals, single source procurement
  of pharmaceuticals and health products and brand specification. These practices
  resulted in excessive prices being paid contrary to the PNG Government’s main
  procurement objective to obtain value for money and the Global Fund’s
  requirement that grant funds be managed prudently and that no more than a
  reasonable price is paid to obtain goods and services.

  (b) NDoH saff engaged in the improper management of cash advances to staff. Staff
  with outstanding accountabilities or unaccounted for advances were advanced
  more funds before previous advances were retired. Funds advanced to staff
  included money to pay for accommodation and training at hotels and other venues,
  contrary to PNG Government policy which requires accommodation expenses to be
  paid using an Integrated Local Purchase Order and Claim (ILPOC) form.

  (c) NDoH’s failure to follow procurement and cash advance requirements resulted in
  additional and unwarranted costs to the relevant Global Fund grants of USD
  1,352,696 as per the table overleaf:

  1Audit of Global Fund Grants to the Independent State of Papua New Guinea – 5 July 2012 – Report No: GF-OIG-
  10-004.

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  Figure 1: Non-compliance categories and amounts

  Non-Compliant Expenditure
  Categories – Report Section
  PGK USD
  Procurement Irregularities
  Borneo Pacific
  F.3.1.1 107,021 40,809
  F.3.1.2 39,600 14,062
  F.3.1.3 152,262 50,208
  Sub total (A) 298,883 105,079
  City Pharmacy
  F.3.2.1 228,691 88,373
  F.3.2.2 2,351 835
  F.3.2.3 14,113 5,011
  F.3.2.4 13,336 4,735
  F.3.2.5 64,362 22,856
  F.3.2.6 163,134 63,039
  F.3.2.7 64,563 24,949
  F.3.2.8 26,976 9,579
  F.3.2.9 46,350 17,910
  Sub total (B) 623,876 237,287
  Pengco Pacific
  F.3.3.1 31,569 12,037
  Sub total (C) 31,569 12,037
  North West Scientific
  F.3.4.1 298,800 113,937
  Sub total (D) 298,800 113,937
  Cash Advance Irregularities
  Unjustified & Un-acquitted Cash Advances (for accommodation only)
  F.4 (2009) 1,150,182 444,463
  F.4 (2010) 1,136,202 439,893
  Sub total (E ) 2,286,384 884,356
  Grand Total (A+B+C+D+E) 3,539,512 1,352,696

  C.1. Procurement Irregularities
  3. Four irregular procurement transactions involving the procurement of USD 624,800 of
  malaria test kits and pharmaceuticals from Borneo Pacific Pharmaceuticals in PNG, between
  2005 and 2009 were identified. The investigation found that procurement rules were
  disregarded resulting in single source procurements, lowest bids being ignored and brand
  specification, resulting in ‘Value for Money’ (the Government’s need at the lowest total cost)
  not being achieved. The four procurements resulted in additional and unwarranted costs to
  Global Fund grants of USD 105,079.
  4. Twenty three irregular procurement transactions involving the procurement of USD
  309,502 of pharmaceuticals from City Pharmacy in PNG, between 2007 and 2008 were
  identified. The investigation found that procurement rules were disregarded resulting in
  single source procurements and also lowest bids being ignored. The twenty three
  procurements resulted in additional and unwarranted costs to Global Fund grants of USD
  237,287.
  5. In addition to the suspect procurements from Borneo Pacific and City Pharmacy, this
  investigation found that NDoH also procured USD 12,037 (PGK 31,569) of office supplies and
  stationery for its Disease Control Branch under the guise of training materials for the Global
  Fund program and USD 113,937 (PGK 298,800) worth of Rapid Syphillis Test Kits via single
  source procurement.

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  6. NDoH’s irregular procurement practices associated with the procurement of
  pharmaceuticals and other products under the three Global Fund grants investigated, resulted
  in total additional and unwarranted costs of USD 468,340 (PGK 1,253,128).

  C.2. Irregular and Unacquitted Cash Advances
  7. This investigation found that the NDoH did not manage advances in accordance with
  relevant government requirements. Staff with outstanding accountabilities or unaccounted for
  advances were given further cash advances and there were many instances of long
  outstanding advances that were not followed up for acquittal or reimbursement.
  8. OIG’s review of NDoH’s cash advances found that in 2009, USD 924,844 in Global
  Fund grant funds was advanced to NDoH staff with USD 533,447 remaining unacquitted at
  the end of that year. In 2010, USD 1,205,035 in Global Fund grant funds was advanced to
  NDoH Staff with USD 808,058 remaining unacquitted at the end of that year. NDoH was
  unable to provide any documentation regarding cash advances made before 2009.
  9. An age analysis of the advances found that for 2009 and 2010, about 42% and 25%
  respectively, were outstanding for more that 180 days. For 2009, 35% of the advances were
  outstanding for more that 365 days.
  10. OIG’s review of the cash advances also found that of the advances acquitted either
  completely or partially during the year 2009 and 2010, no documentation was provided for
  USD 46,922 equating to 12%, and USD 248,580 equating to 63 %, respectively.

  C.3. Response to Audit Findings and Continuation of Grant
  Programs in PNG
  11. Immediately after the OIG audit, the Global Fund Secretariat wrote to the NDoH, CCM
  and in country partners to inform them of the decision to invoke the Global Fund’s Additional
  Safeguard Policy (ASP) to migigate the risks in grant management as a temporary solution.
  The main additional safeguard measures included a detailed review of NDoH’s procurement
  practices prior to commitment of any funds for procurement.
  12. In addition to the additional safeguard measures, the Secretariat in consultation with
  the OIG immediately implemented a number of actions, including: replacement of the LFA,
  immediate cessation of all local procurement, and suspension of disbursements to NDoH
  except for life saving and related critical activities.
  13. In April 2011, the NDoH relinquished its role as PR, acknowledging: “that its
  procurement systems and processes needed major overhaul and strengthening to meet good
  and transparent procurement practices” and that the department’s weaknesses were causing:
  “great burden to the implementation and administration of Global Fund grants.” Following
  NDoH’s withdrawal as PR, the Country Co-Ordinating Committee (CCM) approved the Oil
  Search Health Foundation as PR for the Round 8 Malaria grant and World Vision
  International as PR for the Round 6 TB Grant.2
  14. In addition to the measures above, on 5 November 2013, the Global Fund announced
  the establishment of a new framework to systematically organize the purchase of mosquito
  nets, anti-HIV drugs and other products that will improve delivery and make significant
  savings. Long-term contracts in the new framework will improve visibility, production,
  capacity planning, and competitive pricing.3

  2Meeting of CCM’s New PR Core Working Group at NDoH on 31 May 2011.
  3http://www.theglobalfund.org/en/mediacenter/newsreleases/2013-11-
  05 Breakthrough on Procurement to Save USD 140 Million/

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  C.4. Due Process
  15. On 10th December, 2013, OIG provided the PNG Ministry of Health and CCM with a
  draft of this investigation report for review and comment.4 In consultation with the CCM, the
  OIG extended the deadline for comments to 10 January, 2014.5

  16. No comments to the report were received by the 10th of January. Subsequently, the
  OIG communicated directly with the Minister of Health, requesting provision of comments to
  the report6 and the Minister of Health replied that the NDoH’s acting secretary would be
  asked to ensure that this is done.7 However, to date, the OIG has not received any comments
  from in country regarding this report.

  C.5. Recommendations
  17. Based on the evidence and analysis summarized in this report, the OIG provides the
  following recommendations to the Secretariat of the Global Fund:

  (a) The Secretariat should seek to recover from the Prinicipal Recipient (NDoH),
  expenditures of Global Fund grant funds that were not made in compliance with
  the terms of the relevant grant agreements, in accordance with the applicable legal
  rights and obligations, based on its determination of legal breach of the grant
  agreements and associated determination of recoverability.

  (b) The Secretariat should ensure that all core health products for grants in PNG be
  procured through the Voluntary Pooled Procurement (VPP), or equivalent,
  mechanism to ensure a cost-effective and cost-efficient procurement process. Local
  procurement of health products should be avoided, except in emergencies, due to
  excessive mark-ups.

  (c) The Secretariat should ensure that cash advances to be subject to strict approval
  limits. Large transactions should be undertaken directly by the PR or SR, via a
  purchase order or invoice. Acquittal of cash advances should be reported to the
  LFA on a quarterly basis.

  4 Email from OIG (Inspector General) to CCM Chair and PNG Secretary of Health, dated Dec 10, 2013.
  5 Email from OIG (Inspector General) to CCM Chair, dated Dec 13, 2013.
  6 Email from OIG (Inspector General) to CCM Chair, dated Jan 22, 2014.
  7 Email from PNG Minister of Health, to OIG (Inspector General) dated Jan 22, 2014.

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  D. Message from the Executive Director of the Global Fund

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  E. Background

  E.1. Global Fund grants to NDoH
  18. NDoH via its Health Sector Improvement Program (HSIP) has been the PR of four
  Global Fund supported programs. This investigation focused on the Round 3 Malaria grant8,
  Round 4 HIV grant9 and the Round 6 TB grant10 managed by NDoH. Under these three
  rounds, a total of USD 45 million was awarded to the NDoH in order to fund various Malaria,
  HIV and TB programs.
  Figure 2: – Global Fund Grants to PNG’s NDoH Investigated by OIG.

  Grant Number Status Grant Disbursements
  Amount
  (USD)

  PNG-304-G01-M Closed 16,217,351 16,217,351

  PNG-405-G02-H Closed 17,552,150 14,157,579

  PNG-607-G03-T Closed 11,402,921 11,345,277

  E.1.1. Specific Program Activities
  E.1.1.1. Malaria Round 3
  19. The Global Fund’s first grant to NDoH was malaria Round 3,11 which started on August
  1, 2004. The grant supported community-based malaria prevention and control in PNG –
  Nationwide Insecticide-Treated Nets (ITN) distribution and expansion of confirmed diagnosis
  and appropriate treatment of malaria.
  20. NDoH’s planned activities for Round 3, translated into expenditure on: (i) purchase and
  delivery of LLINs, (ii) Training of staff in microscopy and use of RDTs, (iii) Purchase and
  delivery of microscopes and RDTs, (iv) Diagnosis of patients, and (v) Purchase and delivery of
  ACTs.

  E.1.1.2. HIV Round 4
  21. The Global Fund’s second grant to NDoH was HIV/AIDS Round 412, which started on
  August 1, 2005. The grant supported the scaling up of HIV/AIDS prevention, care and
  treatment through an intensified multi-sectorial community based programme.
  22. NDoH’s planned activities for Round 4, translated into expenditures on: (i) Training of
  teachers and peer educators, (ii) Establishment of youth friendly centers, (iii) Training in
  delivery of Prevention of Mother to Child Transmission of HIV – PMCT, (iv) Support of service
  points delivering PMCT, (v) Training in delivery of post exposure prophylaxis, (vi) Training in
  blood screening, (vii) Training in delivery of voluntary counseling and testing – VCT, (viii)
  Support of service points delivering VCT, (ix) Support of service points delivering advanced
  interventions for prevention and treatment of HIV, (x) Training in ARV treatment, and (xi)
  Strengthening of civil society organizations to provide education, VCT, ARV treatment
  adherence and support.

  8 Global Fund Grant PNG-304-G01-M
  9 Global Fund Grant PNG-405-G02-H
  10 Global Fund Grant PNG-607-G03-T
  11 Global Fund Malaria Grant: PNG-304-G01-M
  12 Global Fund HIV Grant: PNG-405-G02-H

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  E.1.1.3. TB Round 6
  23. The Global Fund’s third grant to NDoH was TB Round 613, which started on October 1,
  2007. The grant supported the expansion and implementation of the Stop TB strategy in PNG.
  24. NDoH’s planned activities for Round 6 translated into expenditures on: (i) Provision of
  microscopes, consumables and training to laboratories, (ii) Testing and counseling, (iii)
  Training, and (iv) Strengthening the procurement and supply chain management of first line
  drugs.

  E.2. OIG Audit of Grants Managed by NDoH
  25. In November 2010, the OIG undertook an audit of all Global Fund grants to PNG,
  including grants managed by the NDoH. The audit of NDoH identified a number of non-
  compliant grant expenditures totalling USD 5.1 million resulting in a total of 13 ‘high priority’
  and ‘significant priority’ recommendations.14 The NDoH faced challenges in the areas of:
  general management; finance; monitoring and evaluation; procurement; and supply chain
  management.
  26. The audit findings resulted in:
  (a) the replacement of Cardno EM by PricewaterhouseCoopers (PwC) as the Local
  Fund Agent (LFA);
  (b) significant reduction in the amount of SRs managed by NDoH;
  (c) immediate cessation of all local procurement of pharmaceuticals and health
  products by NDoH;
  (d) procurement and distribution of long lasting insecticide treated bed nets (LLINs)
  related to Round 8 malaria grant to be undertaken by Rotary Against Malaria;
  (e) procurement related to HIV core health products to be undertaken by UNICEF;
  and
  (f) suspension of disbursements to NDoH, except for life-saving activities.
  27. In order to mitigate identified risks, the Global Fund invoked the Additional Safeguards
  Policy (ASP) as a temporary solution.15 The main additional safeguards included:
  (a) Sub-Recipient (SR) capacity assessments by the LFA;
  (b) quarterly reporting and disbursements; and
  (c) detailed review of PRs procurement practices by the LFA prior to commitment of
  funds for procurement.
  28. In response to the audit findings the NDoH relinquished its role as PR, acknowledging:
  “that its procurement systems and processes needed major overhaul and strengthening to
  meet good and transparent procurement practices’’ and that the department’s weaknesses
  were causing “great burden to the implementation and administration of Global Fund
  Grants”.16
  29. Following NDoH’s withdrawal as PR, the Country Co-Coordinating Mechanism (CCM)
  issued a call for expressions of interest resulting in the Oil Search Health Foundation being
  approved by the CCM as PR for the Round 8 malaria and Round 10 HIV grants, and World
  Vision International as PR for the Round 6 TB grant.

  13 Global Fund TB Grant: PNG-607-G03-T
  14 Audit of Global Fund Grants to the Independent State of Papua New Guinea – 5 July 2012 – Report No: GF-OIG-
  10-004.
  15 Letter from Unit Director – Asia Unit, to PNG CCM Chair dated 3 December 2010 (Global Fund ref:

  OPC/EAP/PNG/1249/QC/alf)
  16 Letter dated 15/04/2011 from NDoH (Dr Clement Malau) to The Global Fund (Dr Michel Kazatchkine)

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  E.3. Procurement Rules Applicable to NDoH
  E.3.1. Global Fund Procurement Requirements
  30. Article 18 of the Round 317 and Round 4 Grant Agreements18 and Article 19 of the Round
  6 Grant Agreement19 between the Global Fund and NDoH outline the procurement
  requirements for pharmaceuticals and other health related products.
  31. Article 18 (f) of the Round 3 and Round 4 Grant Agreements states:
  “The Principal Recipient must use good procurement practices, including competitive
  purchasing from qualified manufacturers and suppliers to attain the lowest prices of
  products, consistent with quality assurance’’.
  32. Article 19(g) of the Round 6 Grant Agreement states:
  “The Principal Recipient shall use good procurement practices when procuring
  Health Products, including competitive purchasing from qualified manufacturers and
  suppliers to attain the lowest price of products consistent with quality assurance. With
  respect to durable products, the lowest possible price shall take into account the total
  cost of ownership, including the cost of reagents and other consumables as well as costs
  for annual maintenance’’.
  33. After a grant proposal has been approved, the PR describes how it will adhere to the
  Global Fund procurement requirements through a basic Procurement and Supply
  Management (PSM) plan.
  34. The PSM plans submitted by the NDoH in respect of all the Global Fund Grants 20
  provide that:
  (a) funds are used to access the appropriate products at the lowest possible overall
  price, procured in compliance with the PNG Government’s Finance Management
  Act; and
  (b) procurement shall be effected in the largest possible quantities in order to achieve
  economies of scale. All procurement will be based on competitive procurement
  methods.
  Round 4 HIV Grant
  35. The PSM plans for the Global Fund R4 HIV Grant21 provide that:
  (a) The Procurement Centre of the Department of Health – the HSIP – will manage the
  procurement process of goods, medical supplies and associated peripherals locally
  procured and required by the proposed activities. The focus of all the HSIP activities
  is value for money – lowest prices of products of acceptable quality.
  (b) Procurement procedures are transparent with all steps in the procurement process
  clearly described. Explicit criteria are used to award contracts, according to the PNG
  Government’s Finance Management Act.
  (c) The assessment of the tenders (called for any purchase above PGK 100,000) shall be
  according to the PNG Government’s Finance Management Act, and use the
  Pharmaceutical Supplies and Tenders Board (PSTB) for contracts up to the value of

  17 Global Fund Grant PNG-304-G01-M
  18 Global Fund Grant PNG-405-G02-H
  19 Global Fund Grant PNG-607-G03-T
  20 Procurement and Supply Management Systems Plan for Global Fund Grant PNG-304-G01-M (revised version)

  February 2005; Procurement and Supply Management Systems Plan for Global Fund Grant PNG-404-G02-H
  (Phase 1) dated 8 March 2005; Procurement and Supply Management Systems Plan for Global Fund Grant PNG-
  404-G02-H (Phase 2) dated November 2008; and Procurement and Supply Management Systems plan for Global
  Fund Grant PNG-607-G03-T dated 1 August 2006.
  21 Procurement and Supply Management Systems Plan for Global Fund Grant PNG-304-G01-M (revised version)

  February 2005; Procurement and Supply Management Systems Plan for Global Fund Grant PNG-404-G02-H
  (Phase 1) dated 8 March 2005

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  PGK 1,000,000 and the Central Supplies and Tenders Board (CSTB) for contracts
  greater than PGK 1,000,000. Under the PNG Government’s Finance Management
  Act, if there is only one supplier able to provide the product required, a Certificate of
  Inexpediency (COI) can be applied for.
  (d) Procurement shall be effected in the largest possible quantities in order to achieve
  economies of scale. All procurement will be based on competitive procurement
  methods, and the contracted supplier shall be the only supplier of the goods
  described in that contract.

  36. For purchases of drugs and health products during Phase 1 of the grant, the grant
  required that NDoH sign a procurement agreement with WHO as the nominated procurement
  agent for health and non-health products.22 In addition, the PSM plan for phase 1, stated that
  all health related commodities (drugs and health products) would be purchased using WHO
  processes for the first two years of the grant (Aug 2005 – July 2007).
  37. For purchases of health supplies during Phase 2 of the grant, NDoH entered into an
  agreement with UNICEF to procure NDoH’s health supplies. Products to be procured through
  UNICEF included all ARV’s and opportunistic infection drugs, and HIV Rapid Diagnostic Test
  Kits.
  Round 3 Malaria Grant
  38. The PSM plan for the Global Fund R3 malaria Grant23 includes:
  (a) NDoH, using HSIP, will be the PR for the Global Fund Grant.
  (b) The funds are used to access the appropriate products, at the lowest possible overall
  price, procured in compliance with the PNG Government’s Finance Management
  Act.
  (c) The following health related commodities shall be purchased using the GFATM
  funds: Drugs – Artemisinin in capsules, tablets and injection form; Products – Long
  Life Insecticide Treated Nets, Rapid Diagnostic Test Kits and microscopes
  (d) The microscopes and spare parts will be procured for the HSIP through a special
  arrangement held by Western Pacific Region, WHO which has a special bulk
  purchase cost of USD 1,000 per unit rather than the best rate available through
  competitive bidding of USD 2,000 per unit. WHO will order the microscopes and
  upon delivery the HSIP shall reimburse WHO for the costs and service fee.
  (e) Other items to be procured through WHO include the Rapid Diagnostic Test kits
  (RDT). The current best price bought through WHO will be USD 1.10 per test.
  39. Annex 9 of the R3 malaria Grant PSM plan states that according to Section 40 of the
  Public Finances (Management) Act 1995, tenders are to be publicly invited for purchases of
  stores or supply of works and services or disposal of stores if the estimated cost exceeds PGK
  100,000, subject to certain exemptions. Such purchases and disposals over PGK 100,000 are
  controlled and regulated by the Supplies and Tenders boards established by the Minister
  under Section 39 of the aforementioned Act. One of these is the PSTB, which is mandated for
  purchase and disposal of medical supplies and equipment, supply of works and services
  peculiar to the operations of the NDoH. The PSTB has the authority to approve tenders up to
  PGK 1,000,000 and if the value of the tenders is over these limits, they should forward their
  recommendations along with supporting documentation to the CSTB.
  40. Annex 9 also states that ‘Invitations to bid will be sent to all internationally recognized
  suppliers, each of which had been identified as capable of supplying the product to meet WHO
  and NDoH (PNG) specifications’.

  22Global Fund grant PNG-405-G02-H Annex A – Programme Implementation Abstract
  23Procurement and Supply Management Systems Plan for Global Fund Grant PNG-304-G01-M (revised version)
  February 2005

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  Round 6 TB Grant
  41. The NDoH PSM plan for the Global Fund Round 6 TB Grant24 includes:
  (a) NDoH, using HSIP, will be the PR for the Global Fund Grant.
  (b) The PR will execute its daily functions through the Disease Control Branch.
  (c) The PR will use the procurement mechanisms of the WHO to procure health and
  non-health products, using the R6 grant. The PR will only procure stationery for
  training (other than training modules) on a need basis, based on written and
  detailed regulations mentioned in the Financial Management Manual. This manual
  emphasizes the need for transparency and competitiveness.
  (d) As far as the TB grant is concerned, WHO will use the direct procurement
  mechanism of the Global Drug Facility (GDF) for the patient drug kits and
  laboratory kits.
  (e) WHO will procure most of the items for the grant. Procurement will be in large
  quantities whenever possible, in order to achieve economies of scale. WHO will
  procure all items based on competitive procurement methods.

  E.3.2. PNG Government Procurement Requirements
  42. Procurement of works, goods and services by National Departments, Provincial
  Administrations, Public Bodies (collectively known as Agencies) and Supply and Tenders
  Boards is governed by the Good Procurement Manual25 developed by the CSTB to help
  agencies achieve ‘Value for Money’ outcomes in the contracts that they establish; the
  Financial Management Manual26 for instruction and guidance regarding procurement; and
  the Public Finances (Management) Act 199527 which governs State tenders and contracts.
  43. The procurement framework and principles are found in part 11 of the Financial
  Management Manual28. Part 11 of the manual identifies the following five fundamental
  procurement principles:
  (a) value for money,
  (b) transparency,
  (c) effective competition,
  (d) fair and ethical dealing, and
  (e) efficiency and effectiveness.
  44. The main objective of PNG Government procurement is to obtain “value for money’’ in
  the acquisition of goods and services using ethical and transparent processes whilst
  promoting open and effective competition.

  E.3.2.1. Major and Minor Procurement
  45. The PNG Government’s Financial Management Manual29 states that the procurement
  processes to be used are determined by the value (in PGK) of the procurement. This is
  summarized in the table below.

  24 Procurement and Supply Management Systems plan for Global Fund Grant PNG-607-G03-T dated 1 August
  2006.
  25 PNG Central Supply & Tenders Board Good Procurement Manual Version 4 – 15 January 2005. Available at:

  http://www.cstb.gov.pg/good-procurement-manual.php
  26 PNG Department of Finance Financial Management Manual printed in January 2006. Available at:

  http://www.pcabii.org/resources.jsp
  27 Available at: http://www.pcabii.org/resources.jsp
  28 PNG Government – Department of Finance Financial Management Manual Volume 2. Part 11 – Procurement –

  Framework and Principles. P.11-1. May 2005.
  29 Ibid. P. 11-2

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  Figure 3: PNG Government Procurement Process Requirements by Value

  Procurement Value Classification Process Detailed Reference

  < PGK 100,000 Minor Quotes Part 12 >= PGK 100,000 Major Public Tender Part 13

  46. According to the Public Finance (Management) Act30, there are only two available
  processes that Departments and other government agencies can use to establish major
  contracts:
  (a) Public Tender, or
  (b) Certificate of Inexpediency.
  47. The processes are set down in law and are not negotiable. Other contracting processes
  such as direct price negotiation, pre-qualification, selective tendering, etc. are illegal and not
  acceptable.
  Public Tenders
  48. Part 13, Division 2 of the Financial Management Manual requires that all
  procurements of PGK 100,000 or more are to be conducted through the relevant Supply and
  Tenders board. Division 2 of the Financial Management Manual requires that public tenders
  are to be used for procurements of goods, works and services with a value greater than PGK
  100,000 and that selective tenders are not allowed. Division 3 of the Financial Management
  Manual requires that for goods and services where the tender is valued at greater than PGK
  100,000 it must be advertised in a national newspaper with large circulation.
  Certificates of Inexpediency
  49. The PNG government’s Financial Management Manual states that a Certificate of
  Inexpediency may only be issued in exceptional circumstances which are: Natural Disaster,
  Defence Emergency; Health Emergency or Situation of Civil Unrest.31
  International Financing Arrangements
  50. In circumstances where the terms of an agreement with an international organisation
  under which the Government of Papua New Guinea is to receive monies, make specific
  provision for the manner in which tenders will be invited for contracts performed as a result
  of the agreement, other procurement processes may be used.32 This enables NDoH to procure
  from WHO and UNICEF vide the Global Fund grants, as long as the over riding principle of
  ‘value for money is obtained’.

  E.3.2.2. Cash Advances

  51. The management of advances is governed by the PNG Government’s Financial
  Management Manual. Part 20 of the manual states that advances are only allowed for:
  (a) Maintenance and operations of a cash office,
  (b) Travelling expenses,
  (c) Payment of salaries, wages and allowances,
  (d) Recreation leave or furlough leave due to the officer,
  (e) Payments that cannot conveniently be made at a cash office,
  (f) Any other matter approved by the Secretary for Finance

  30 PNG Government Public Finances (Management) Act 1995.
  31 PNG Government Department of Finance Financial Management Manual – Division 4 – Certificate of
  Inexpediency – 13-9
  32 PNG Government Public Finances (Management) Act 1995. S.40 (3) (d)

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  52. The Financial Management Manual states that:
  (a) For International travel, all officers will acquit travelling advances within 14 days of
  return to their home station.
  (b) For domestic travel, within seven days of return from duty travel, the officer will
  acquit the advance by submitting an acquittal form. Any refund due will be paid by
  the advance holder direct to the Cash Office and the original receipt attached to the
  acquittal form supporting this payment.
  (c) No advance is to be made for accommodation costs (accommodation costs are paid
  by way of an Integrated Local Purchase Order and Claim – ILPOC).
  (d) No second advance is to be made when the first advance is outstanding.
  (e) Payment of the advance is subject to the condition that should the officer fail to
  acquit an advance within the prescribed time or fail to refund any balance due, the
  amount due will be recoverable from the salary of the officer in not more than three
  consecutive installments or any other payments due to him.
  (f) Should any advance prove to be excessive, the surplus must be repaid to the issuing
  office immediately the surplus becomes apparent.

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health

  F. OIG Investigation

  F.1. OIG Investigations Unit
  53. See Annex 1.

  F.2. Applicable Concepts of Fraud and Abuse
  54. See Annex 1A.

  F.3. Origin and Scope of the Investigation
  55. This investigation was triggered by the recommendations that followed from the OIG’s
  country audit of PNG grants in November 2010.33 OIG’s investigation focused on NDoH’s
  procurement of pharmaceuticals and health products during the Global Fund R3 (malaria),
  R4 (HIV) and R6 (TB) grants.
  56. In April 2011, the OIG launched an investigation of NDoH’s procurement procedures
  and practices in order to ascertain: that NDoH procurement processes complied with relevant
  policies and procedures (both those of the PNG government and Global Fund); that the
  procurements delivered value for money; and if any fraudulent activity tainted the
  procurement process.
  57. This investigation also focused on NDoH’s management of cash advances in order to
  ascertain if NDoH’s management of cash advances complied with relevant policies and
  procedures and the extent and amount of any unacquitted advances.
  58. The OIG has not sought independent legal advice regarding specific issues relating to
  the national procurement regulations; it relied on a plain reading of the statute as well as
  representations made by the LFA and individuals with a professional knowledge of national
  public procurement activities interviewed in the course of the investigations.
  F.3.1. Due Process
  59. The OIG provided the Global Fund Secretariat, the CCM and the PR (NDoH) an
  opportunity to review and comment on the OIG’s findings prior to the finalization of this
  report. The Global Fund Secretariat provided its comments to the OIG’s findings on 2 October
  2013. These comments have been considered and incorporated where deemed appropriate.
  60. On the 10th of December 2013, the OIG requested the NDoH and CCM to review this
  investigation report and provide comments by 24th of December.34 In consultation with the
  CCM, the OIG extended this deadline to the 10th of January 2014, however no comments to
  the report were received. Subsequently, the OIG wrote to the Minster of Health, requesting
  comments to this report.35 The Minister replied that the Acting Secretary of NDoH would be
  asked to ensure that this was done.36 As at 31st January, no comments have been received
  from in country.

  F.3.2. Exchange Rate
  61. This report describes amounts in United States Dollars (USD) and Papua New Guinea
  Kina (PGK). For the purposes of this report, an annual average exchange rate from PGK to
  USD was calculated for each of the years 2005 to 2010, the years of transactions covered in
  this report37 with the applicable year’s average exchange rate being applied to the
  corresponding year of any NDoH transaction.

  33 Audit of Global Fund Grants to the Independent State of Papua New Guinea – 5 July 2012 – Report No: GF-
  OIG-10-004. Copy of the audit report is available at: http://www.theglobalfund.org/en/oig/reports/
  34 Email from OIG to PNG CCM and NDoH, dated Dec 10, 2013.
  35 Email from OIG to PNG Minister of Health, dated Jan 20, 2013.
  36 Email from the PNG Minister of Health to OIG, dated Jan 21, 2013.
  37 Based on historical exchange rates at: /www.oanda.com/currency/historical-rates/.

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  Figure 4: – Year by Year PGK / USD
  Year USD PGK
  2005 1.00 3.0326
  2006 1.00 2.8630
  2007 1.00 2.8159
  2008 1.00 2.5878
  2009 1.00 2.6225
  2010 1.00 2.5829

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  G. Investigation Findings

  G.1. Overview
  G.1.1. NDoH Staff Engaged in Irregular Procurement
  Procedures
  62. This investigation found sufficient credible and substantive evidence that officials
  within NDoH engaged in irregular procurement procedures that did not comply with either
  PNG Government or Global Fund procurement requirements.
  63. NDoH’s irregular procurements resulted in unwarranted and additional costs to the
  Global Fund grants of USD 105,079 due to the following PNG Government procurement
  principles38 not being respected:
  (a) Value for money;
  (b) Transparency; and
  (c) Effective competition.

  G.1.2. NDoH Staff Engaged in Irregular Cash Advance
  Procedures and Failed to Recover Unacquitted Amounts
  64. During this investigation, OIG examined NDoH’s Global Fund related cash advances.
  The investigation found sufficient credible and substantive evidence that NDoH’s HSIP did
  not manage advances in accordance with the requirements of the PNG Government’s
  Financial Management Manual39 with cash advances being unacquitted and NDoH failing to
  take any action to recover unacquitted amounts. Verification of cash advances found that
  NDoH frequently made further advances to officials despite previous advances remaining
  unacquitted contrary to PNG Government policy.
  65. It was also found that contrary to the Financial Management Manual40, which states
  that no advance is to be provided for accommodation costs and that accommodation expenses
  are to be paid using an Integrated Local Purchase Order and Claim (ILPOC) form, advances
  were made for accommodation costs and unspent balances were outstanding with a number
  of hotels.

  G.2. Purchase of Pharmaceuticals and Health Products
  G.2.1. Borneo Pacific Pharmaceuticals
  66. Borneo Pacific Pharmaceuticals Limited (Borneo Pacific) was incorporated and
  registered in PNG on 17 December 1996. Its principal business is listed as the supply of
  pharmaceutical products.41
  67. This investigation identified four suspect procurement transactions involving Borneo
  Pacific, between September 2005 and December 2009, totalling PGK 1,726,200 (USD
  624,800) where procurement rules were disregarded resulting in “single source’’
  procurement, lowest bids being ignored and ultimately “Value for Money’’ (the Government’s
  need at the lowest total cost) not being achieved.

  38 PNG Department of Finance Financial Management Manual printed in January 2006. Available at:
  http://www.pcabii.org/resources.jsp
  39 Ibid.
  40 Financial Management Manual – Part 20 ‘Advances Management’
  41 Current Extract for Borneo Pacific Pharmaceuticals Limited as at 27 May, 2011.

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  Figure 5: – Table of Suspect NDoH Procurements from Borneo Pacific

  Ref Date Amount Service
  PGK
  15565 Malaria 21/11/07 235 000 ICT Malaria Test Kits
  500 units @ PGK 470 each
  7835 TB 12/09/07 95 000 Supply of 10 microscopes
  3078 Malaria 26/09/05 480 600 ART Injections
  80mg X 20,000 (PGK 57 000)
  40mg X 20,000 (PGK 39 600)

  Artemether tablets
  50mg X 12 – 80 000 pkts (PGK 384 000)
  16730 Malaria 23/12/09 915 600 Procurement and distribution of RDTs to all
  health facilities.
  ART injection -80mg X 80,000 units (PGK
  137 600)
  Artesunate or Artemether tablets – 200,000
  pkts (50mg X 12) (PGK 778 000)
  TOTAL 1,726,200

  G.2.1.1. Malaria – 15565
  68. This procurement relates to NDoH’s purchase of ICT malaria test kits from Borneo
  Pacific in 2009 funded with Global Fund R3 malaria grant42 funds (Annex 3).
  69. A review of the procurement documentation found that on 2 June 2009, Borneo Pacific
  sent NDoH an invoice for delivery of 500 ICT malaria test kits (Annex 4) at a unit cost of PGK
  470 (USD 179.21) and a total cost of PGK 235,000 (USD 89,609). The kits were received into
  store by NDoH on 4 June 2009 (Annex 5).
  70. The file included a document showing that three companies bid to supply 2,000 RDT
  test kits to NDoH (Annex 6): Boucher Muir (PNG), North West Medical, and Borneo Pacific.
  There was a total price difference of PGK 534,787 (USD 203,922) between the winning
  bidder, Borneo Pacific, and the lowest bidder, Boucher Muir (PNG). This translates to a price
  of PGK 483.78 per kit (Borneo Pacific) versus PGK 216.38 per kit (Boucher Muir) or PGK 4.84
  per test (USD 1.84) versus PGK 2.16 (USD 0.82) per test as each kit contains 100 tests.
  Figure 6: – NDoH Quotations Received for RDT Test Kits.

  71. Despite Borneo Pacific actually delivering test kits (500) at a price of PGK 470 (USD
  179), PGK 0.14 less per kit than the quoted price, the decision to specify “ICT Combo Kits’’ and
  award Borneo Pacific the contract, rather than obtain an equally suitable kit from Boucher
  and Muir cost the grant an additional PGK 126,809 (USD 48,354).
  72. NDoH’s specification of the ICT Malaria Combo Cassette Test (Annex 7) stated that
  “although there were many brands on the market today, PNG had been using a specific brand
  recommended and supplied by WHO’’. NDoH’s RDT specification also stated that “the

  42 Global Fund grant PNG-304-G01-M

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  malaria control program will continue to use the same test being introduced now specifically
  because:
  (a) training has been conducted widely using the current test;
  (b) health workers have been introduced to this specific test and they have been able to
  recognize the test quickly;
  (c) there is no need to confuse health workers with different tests;
  (d) all tests are slightly different;
  (e) storage conditions are different;
  (f) length of time is variable; and
  (g) packaging is different.”
  73. This procurement used a “Certificate of Inexpediency” (COI) issued by the Supply and
  Tenders Board on 19/2/2008 that circumvented the requirement to use the public tender
  process and engage a selective tender process.
  74. Documents contained within the procurement file indicate that this procurement, based
  on a COI approved on 19 February 2008, was ordered on 25 April 2009 and delivered into
  store on 4 June 2009. The COI was not issued on the basis of: Natural Disaster, Defence
  Emergency; Health Emergency or Situation of Civil Unrest, which are the only situations for
  the issue of a COI according to the Financial Management Manual.43
  75. The fact that this order was not placed until 14 months after the issue of the certificate
  negates any claim that the “reasons considered inexpedient to invite tenders are: malaria test
  kits are urgently required to complete the current malaria program in each province’’.
  76. The PSM plan submitted by NDoH in respect of this grant states that: “other items to be
  procured through WHO include the Rapid Diagnostic Test Kits. For the RDT we will again be
  using the best value for money and the wide experience WHO has with RDTs from the many
  different manufacturers worldwide. The current best price bought through WHO will be USD
  1.10 per test.’’44 This procurement was not undertaken through WHO and each test kit
  purchased from Borneo Pacific in this procurement cost USD 1.84 per test kit.
  77. The conduct of this procurement was improper, as it relied on an invalid COI and there
  appears to be no reason as to why a public tender process could not have been engaged in.
  78. The Financial Management Manual45 states that COIs “have enabled Departments and
  agencies to avoid the public tendering process and that certificates have generally been issued
  on the basis that there is only one suitable supplier or the department has run out of time to
  conduct a proper tendering process’’. It also states that “closer examination of the former
  justification (there is only one suitable supplier) generally means that the specification for the
  goods or services is biased in some way and the second justification (lack of forward planning
  by departments) is no longer acceptable’’.
  79. This investigation finds that this procurement relied on an outdated COI to avoid the
  public tendering process and involved a specification for goods that was biased. This
  investigation also finds that this procurement was not consistent with the “value for money’’
  and “effective competition’’ fundamentals of the PNG Government’s procurement system,
  resulting in an additional and unwarranted cost to the program of at least USD 40,809 (PGK
  107,021) if ICT Combo malaria RDT kits were sourced from another supplier, and up to USD
  48,354 (PGK 126,808) if an equally or more suitable RDT kit such as CareStart or Parascreen
  was purchased from one of the other bidders.

  43 PNG Government Department of Finance Financial Management Manual – Division 4 – Certificate of
  Inexpediency – 13-9
  44 Global Fund Grant: PNG-304-G01-M Procurement And Supply Management Systems Plan. Revised February

  2005. P.12.
  45 PNG Government Department of Finance Financial Management Manual – Division 4 – Certificate of

  Inexpediency – 13-10

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  G.2.1.2. TB – 7835
  80. This procurement relates to NDoH’s purchase of ten “Olympus’’ brand microscopes
  valued at PGK 95,000 (USD 33,736) from Borneo Pacific in 2007, funded via a Global Fund
  R6 TB grant (Annex 8).
  81. On 28 August 2007, the NDoH faxed tender specifications to three local suppliers:
  Borneo Pacific, Supreme and EBOS for the supply of ten microscopes. NDoH specified
  “Olympus’’ brand microscopes and received quotes of PGK 95,000 (USD 33,736) from Borneo
  Pacific, PGK 99,756 (USD 35,425) from Supreme for “Olympus’’ brand microscopes and PGK
  55,400 (USD 19,673) from EBOS to supply “Leica CME’’ microscopes.
  82. The PSM plan submitted by NDoH in respect of this grant stated that the PR will use the
  procurement mechanisms of WHO to procure health and non-health products, using the
  Round 6 grant. Fifteen Binocular microscopes at an estimated cost of USD 1,659.52 (PGK
  4,673) each would be procured by WHO from the Global Drug Facility (GDF).46
  83. This procurement did not comply with the PSM plan in that the microscopes were not
  procured through WHO and were procured directly from Borneo Pacific. The price per
  microscope from Borneo Pacific was USD 3,318 (PGK 9,343), double the estimated price in
  the PSM plan.
  84. NDoH’s procurement of “Olympus’’ microscopes from Borneo Pacific unnecessarily cost
  the grant at least PGK 39,600 (USD 14,062) and as much as PGK 48,285 (USD 17,147).

  G.2.1.3. Malaria – 3078
  85. This procurement relates to the July 2005 purchase of: 80,000 packets of 50 mg
  Artemether tablets at a cost of PGK 384,000 (USD 126,624); 20,000 80mg artemether
  ampoules at a cost of PGK 57,000 (USD 18,795); and 20,000 40mg artemether ampoules at a
  cost of PGK 39,600 (USD 13,058) from Borneo Pacific (Annex 9). Total cost of this
  procurement was PGK 480,600 (USD 158,477). The procurement file included delivery notes
  indicating that the artemether tablets were received by NDoH on 11 August 2005 (Annex 10)
  and the artemether ampoules were received by NDoH on 22 July 2005 (Annex 11).
  86. Examination of the procurement file found that with regard to the Artemether tablets,
  quotes were received as follows (Annex 12): Borneo Pacific PGK 384,000 (USD 126,624);
  Multichem PGK 242,345 (USD 79,913) and PGK 580,260.59 (USD 191,340); Boucher & Muir
  PGK 380,456 (USD 125,455) and PGK 276,221 (USD 91,083); and City Pharmacy PGK 27,200
  (USD 8,969). Borneo Pacific’s bid was approved on 20 July 2005.

  46 Ibid.

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  Figure 7: – Quotations Received by NDoH re Supply of Artemether Tablets
  Supplier (non City Multichem Boucher & Boucher & Borneo Multichem
  manufacturer) Pharmacy Lab Muir Muir Pacific Lab
  Classification (L)= L L L L L L
  Local (O)= Overseas
  Offer No: 4 1 2C 2 3 2B
  Qualified PNG MSB Y Y Y Y Y Y
  Manufacturer (name Sino NambaPharm Medopharm Microlabs/In KPC/China Microlabs/India
  or code) pharm/Chin a/Vietnam /India dia
  a
  Qualified PNG MSB N Y Y Y Y N

  Product qualified N Y N N Y N
  PNG MSB
  Pharmacopeia (name
  and year)
  Shelf life (in months)
  Commercial
  Delivery lead time 2-3 (ex-stock 4 8-10 8-10 Ex-stock 8-10
  (weeks) pom)
  Incoterms FIS FIS FIS FIS FIS FIS
  Unit price on offer 0.3400 0.9300 1.0600 1.4600 4.800 2.1500
  Currency on offer PGK USD USD USD PGK USD
  Exchange rate 1.0000 0.3070 0.3070 0.3070 1.0000 0.3070
  Unit price in PGK 0.34 3.03 3.45 4.76 4.80 7.00
  Total value of offer 27,200 242,345.28 276,221.50 380,456.03 384,000.00 580,260.59
  Local preference –
  20%
  Variation vs lowest

  87. If there was an NDoH requirement that both the manufacturer and the product be
  qualified by PNG’s Medical Standards Board (MSB), Multichem should still have won the
  tender based on price with a quote of PGK 242,345 (USD 79,913) versus Borneo Pacific’s
  quote of PGK 384,000 (USD 126,624), a difference of PGK 141,655 (USD 46,710).
  88. Examination of the same procurement file found that with regard to the purchase of
  20,000 Artemether Injections (80mg), quotes were received as follows (Annex 13): City
  Pharmacy PGK 40,400 (USD 13,321); Multichem PGK 41,585 (USD 13,712); Boucher & Muir
  PGK 41,693.81 (USD 13,748) and PGK 49,511.40 (USD 16,326); and Borneo Pacific PGK
  57,000 (USD 18,795). Borneo Pacific’s bid (the highest bid) was approved on 20th July 2005.

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  Figure 8: – Quotations Received by NDoH re Supply of Artemether Ampoules (80 mg)
  Supplier (non City Multichem Boucher & Boucher & Borneo
  manufacturer) Pharmacy Lab Muir Muir Pacific
  Classification (L)= Local L L L L L
  (O)= Overseas
  Offer No: 4 2 1B 1 3
  Qualified PNG MSB Y Y Y Y Y
  Manufacturer (name or Sino China Kaiwai Ipca lab/India KPC/China
  code) pharm/China Yanzhou Pharma/China
  Xier/China
  Qualified PNG MSB N Y N Y Y
  Product qualified PNG N N N Y Y
  MSB
  Pharmacopeia (name and
  year)
  Shelf life (in months)
  Commercial
  Delivery lead time 2-3 8-10 4 4 Ex-stock
  (weeks)
  Incoterms FIS FIS FIS FIS FIS
  Unit price on offer 2.0200 0.6383 0.6400 0.7600 2.8500
  Currency on offer PGK USD USD USD PGK
  Exchange rate 1.0000 0.3070 0.3070 0.3070 1.0000
  Unit price in PGK 2.02 2.08 2.08 2 48 2 85
  Total value of offer 40,400.00 41,585.23 41,693.81 49,511.40 57,000.00
  Local preference – 20%
  Variation vs lowest

  89. Again, if there was an NDoH requirement that both the manufacturer and the product
  be qualified by the PNG MSB, Boucher & Muir would still have won the tender based on price
  with a quote of PGK 49,511 (USD 16,326) versus Borneo Pacific’s quote of PGK 57,000 (USD
  18,795), a difference of PGK 7,488 (USD 2,469).
  90. Examination of the same procurement file found that with regard to the purchase of
  20,000 Artemether injections (40 mg), quotes were received as follows (Annex 14):
  Multichem PGK 25,515.74 (USD 8,413); City Pharmacy PGK 30,000.00 (USD 9,892);
  Boucher & Muir PGK 34,527.69 (USD 11,385) and PGK 36,482.08 (USD 12,029); and Borneo
  Pacific PGK 39,600.00 (USD 13,058). Borneo Pacific’s bid (the highest) was approved on 20
  July 2005.

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  Figure 9: – Quotations Received by NDoH re Artemether Ampoules (40 mg)

  Supplier (non Multichem City Pharmacy Boucher & Boucher & Borneo
  manufacturer) Lab Muir Muir Pacific
  Classification (L)= L L L L L
  Local (O)= Overseas
  Offer No: 2 4 1B 1 3
  Qualified PNG MSB Y Y Y Y Y
  Manufacturer (name or China Sino Kaiwai Ipca KPC/China
  code) Yanzhou pharm/China Pharma/China lab/India
  Xier/China
  Qualified PNG MSB Y N N Y Y
  Product qualified PNG N N N Y Y
  MSB
  Pharmacopeia (name and
  year)
  Shelf life (in months)
  Commercial
  Delivery lead time 8-10 2-3 (ex-stock 4 4 Ex-stock
  (weeks) pom)
  Incoterms FIS FIS FIS FIS FIS
  Unit price on offer 0.3917 1.5400 0.5300 0.5600 1.9800
  Currency on offer USD PGK USD USD PGK
  Exchange rate 0.3070 1.0000 0.3070 0.3070 1.0000
  Unit price in PGK 1.28 1.54 1.73 1 82 1 98
  Total value of offer 25,515.74 30,800 34,527.69 36,482.08 39,600.00
  Local preference – 20%
  Variation vs lowest

  91. Again, if there was an NDoH requirement that both the manufacturer and the product
  be qualified by PNG’s MSB, Boucher & Muir should still have won the tender based on price
  with a quote of PGK 36,482.08 (USD 12,029) versus Borneo Pacific’s quote of PGK 39,600
  (USD 13,058), a difference of PGK 3,117.92 (USD 1,027).
  92. Borneo Pacific’s three winning bids (Artemether Tablets – 80,000 / Artemether
  Injection (40 mg) – 20,000 / Artemether Injection (80 mg) – 20,000) were included in a
  contract between the PSTB on behalf of NDoH and Borneo Pacific signed on 20th day of July
  2003 for a total contract price of PGK 854,454.55 (USD 281,756). The contract also included
  the supply of non-Global Fund Grant related medical products.
  93. OIG’s investigation found that two other qualified suppliers were able to provide the
  items at a total saving of PGK 152,262 (USD 50,208) and that this procurement did not
  comply with NDoH procurement policy as it did not represent “value for money’’, which is
  described as “obtaining goods and services that best meet the governments need at the lowest
  cost’’.
  94. This procurement also did not comply with Article 18 (f) of the relevant grant
  agreement47 which requires purchasers to “use good procurement practices including
  competitive purchasing from qualified manufacturers and supplies to attain the lowest price
  of products, consistent with quality assurance’’.

  G.2.2. City Pharmacy
  95. City Pharmacy Limited (CPL) is PNG’s largest retailer, owning and operating the City
  Pharmacy and Stop’n’Shop retail chains with 23 pharmacy outlets throughout the country and
  9 supermarket outlets in Kiunga and Port Moresby.
  96. OIG identified 23 suspect procurement transactions involving City Pharmacy, between
  May 2007 and December 2008, totalling PGK 1,001,074 (USD 309,502).

  47 Global Fund Grant: PNG-304-G01-M

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  Figure 10: – Suspect Procurements from City Pharmacy
  Ref Date Amount Service
  PGK
  13439 19/12/08 299,200 2720 packets of Efavirenz (Estiva) 600mg tablets (30 tabs per pack)
  HIV
  7027 08/06/07 4,250 100 packets of Nevirapine tablets (Nevivir) 200mg (60 tabs per pack)
  HIV
  7184 29/06/07 25,000 600 packets of Nevirapine tablets (Nevivir) 200mg (60 tabs per pack)
  HIV
  6485 24/04/07 850.00 20 bottles of Nevirapine tablets (Nevivir) 200mg (60 tabs per bottle)
  HIV 22/05/07 16,660 392 bottles of Nevirapine (Nevivir) tablets 200mg (60 tabs per bottle)
  10/05/07 1,065.60 6 bottles of Efavirenz (Estiva) tablets 600mg (20 tabs per bottle)
  127.50 3 bottles of Nevirapine (Nevivir) tablets 200mg (60 tabs per bottle)
  17/05/07 85.00 2 bottles of Nevirapine (Nevivir) tablets 200mg (60 tabs per bottle)
  2,469.60 20 bottles of Lamivudine 150mg + Nevirapine (Zidolam) tablets (60 tabs per
  bottle)
  6955 12/06/07 99,840 600 bottles of Efavirenz (Estiva) tablets 600 mg (30 tabs per bottle)
  HIV
  9621 17/05/08 132,000 1,200 bottles of Efavirenz (Estiva) tablets 600mg (30 tabs per bottle)
  HIV 122,400 2,400 bottles of Nevilast 30 (6o tabs per bottle)
  34,030 900 packs of Lamistar 30 (60 tabs per pack)
  11634 31/10/08 21,600 80 bottles of Abacavir tablets 300mg (60 tabs per bottle)
  HIV 47,496 100 packs of Lopinavir/Ritonavir (Ritocom) tablets 200/50 mg (120 tablets per
  pack
  24,750 150 packs of Tenofovir tablets 300 mg (30 tablets per pack)
  17,700 30 packs of Saquinavir tablets 500mg (120 tabs per pack)
  1,200 20 packs of Aciclovir tablets 200 mg (10 X 10 tabs per pack)
  30,000 500 packs of Fluconzzole tablets 200mg (10 X 10 tabs per pack)
  40,000 400 packs of Azithromycin tablets 500mg (10 X 10 tabs per pack)
  7947 27/09/07 34,000 800 bottles of Nevirapine (Nevivir) tablets 200mg (60 tabs per bottle)
  HIV
  13415 18/12/08 16,350 3270 packs of Cotrimozazole tablets 400 + 80 mg (100 tabs per pack)
  HIV 30,000 1000 packs of Ciproflocaxin tablets 500 mg (100 tabs per pack)

  G.2.2.1. HIV – 13439
  97. This procurement relates to a NDoH HIV R4 (Phase I) PGK 299,200 (USD 115,619)
  purchase of 2,720 bottles (30 tablets per bottle) of 600mg Efavirenz tablets from City
  Pharmacy in December 2008. This equates to USD 42.50 per pack.
  98. According to documentation in the relevant procurement file provided by NDoH, on 19
  December 2008, the NDoH’s acting director of disease control sent a memo to the director of
  NDoH’s HSIP requesting the reprogramming of funds to procure ARV and drugs for the
  treatment of opportunistic infections for patients living with HIV and AIDS, as funds from the
  Global Fund were delayed until January 2009 (Annex 15).
  99. This procurement appears to be a single source procurement as the relevant
  procurement file only contained one quotation, being that from City Pharmacy, dated 18
  December 2008, and addressed to NDOH’s HIV technical advisor (Annex 16).
  100. PNG Government regulations require all major procurements (procurements of PGK
  100,000 and above) to be conducted via a public tender process and through the relevant
  Supply and Tenders Board. Selective tenders are not allowed as they restrict competition.
  101. Global Price Reporting Mechanism (GPRM) data shows that the 2008 medium
  transaction price for Efavirenz 600 mg tablets manufactured by Hetero Drugs Ltd (India) was
  USD 10.01 (PGK 25.90) for 30 tablets.48
  102. The PSM plan submitted by NDoH in respect of this grant49 states that “NDoH through
  the HSIP MB50 can purchase from sole suppliers, in the circumstances where the approved

  48Based on pricing for lower middle-income countries with WHO defined daily dose (DDD) of 1 X 600 mg tablet
  per day (365 tablets per year) and an annual treatment cost of USD 121.87 per year (USD o.333 per tablet). WHO
  GPRM database can be found at: http://apps.who.int/hiv/amds/price/hdd/

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  ARV suppliers are the sole suppliers, using the Certificate of Inexpediency (COI) process,
  described in the PNG Government’s Finance Management Act’’. This procurement was not
  undertaken via a COI.
  103. The PSM plan in respect of this grant also requires a tender for any purchase above PGK
  100,000 and indicates a price of USD 13.71 per pack from WHO approved suppliers.
  104. Given that this procurement did not comply with PNG Government procurement
  policies and procedures and that it is evident from WHO GPRM data that an exorbitant price
  was paid -PGK 110.00 (USD 42.50) per packet, versus an average price PGK 25.90 (USD
  10.01) per pack, this procurement resulted in additional and unwarranted costs to the Global
  Fund grant of an additional PGK 228,691 (USD 88,373).

  G.2.2.2. HIV – 7027
  105. This procurement relates to a NDoH HIV R4 (Phase I) PGK 4,250 (USD 1,509) purchase
  of 100 bottles of Nevirapine 200 Mg (Nevivir) tablets from City Pharmacy via a direct
  procurement process in June 2007. This equates to USD 15.09 per bottle.
  106. According to documents in the relevant procurement file provided to OIG by NDoH, the
  procurement was effected via an Inter Office Memorandum from the acting director of
  NDoH’s Disease Control Branch to the director of the HSIP Program Management Branch
  (Annex 17).
  107. The file contains a single quote from City Pharmacy (Annex 18) that appears to have
  been faxed to the NDoH on 12 June 2007. PNG Government policy requires three quotations
  for purchases valued at less than PGK 5,000 (USD 1,775).
  108. WHO GPRM data shows that the 2007 medium transaction price for Nevirapine 200
  mg tablets manufactured by Hetero Drugs Ltd (India) was USD 6.74 (PGK 18.97) for 30
  tablets.51
  109. The PSM plan submitted by the NDoH in respect of this grant states that “NDoH
  through the HSIP MB can purchase from sole suppliers, in the circumstances where the
  approved ARV suppliers are the sole suppliers, using the Certificate of Inexpediency (COI)
  process, described in the PNG Government’s Finance Management Act.’’ This procurement
  was not undertaken via a COI.
  110. The same PSM plan indicates that this product will be purchased from a WHO approved
  supplier at an approximate estimated cost of USD 9.31 per bottle. The price paid by NDoH
  regarding this procurement from City Pharmacy was USD 15.09 per pack, over USD 6.00 per
  bottle more.
  111. Given that this procurement did not comply with PNG Government procurement policy
  and that it is evident (from WHO GPRM data) that an exorbitant price was paid, USD 15.09
  per pack, versus a medium transaction price of USD 6.74 per bottle, NDoH’s actions resulted
  in additional and unwarranted costs to the grant corresponding to the difference between the
  price paid to City Pharmacy and the medium transaction price price which is PGK 23.51 (USD
  8.35) per bottle, which totals PGK 2,351 (USD 835).

  G.2.2.3. HIV – 7184
  112. This procurement relates to an NDoH HIV R4 (Phase I) PGK 25,500 (USD 9,055)
  purchase of 600 bottles of Nevirapine 200 Mg (Nevivir) tablets from City Pharmacy via a
  direct procurement process in June 2007 in contravention of PNG government procurement
  requirements. This equates to PGK 42.50 (USD 15.09) per bottle.

  49 PNG Government Procurement and Supply Management Systems Plan for Global Fund Grant PNG-404-G02-H.
  8 March 2005.
  50 Program Management Branch
  51 Based on pricing for lower middle-income countries with WHO DDD of 1 X 200mg tablet per day and an annula

  treatment cost of USD 41.04 (USD 0.1124 cents per tablet).

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  113. According to documents in the relevant procurement file provided to OIG by NDoH, the
  procurement was effected via an Inter Office Memorandum from the acting director of
  NDoH’s Disease Control Branch to the director of the HSIP Program Management Branch
  (Annex 19).
  114. The relevant procurement file provided to OIG by NDoH contains a single quote from
  City Pharmacy, dated June 19, 2007 (Annex 20).
  115. PNG Government policy requires that three written quotations are to be obtained for
  purchases valued between PGK 5000 and under PGK 100,000.
  116. WHO GPRM data shows that the 2007 medium transaction price for Nevirapine 200
  mg tablets manufactured by Hetero Drugs Ltd (India) was USD 6.74 (PGK 18.97) for 30
  tablets.52
  117. The PSM plan submitted by the NDoH in respect of this grant states that “NDoH
  through the HSIP MB can purchase from sole suppliers, in the circumstances where the
  approved ARV suppliers are the sole suppliers, using the Certificate of Inexpediency (COI)
  process, described in the PNG Government’s Finance Management Act.’’ This procurement
  was not undertaken via a COI.
  118. The same PSM plan indicates that this product will be purchased from a WHO approved
  supplier at an approximate estimated cost of USD 9.31 per pack. The price paid by NDoH
  regarding this procurement from City Pharmacy was USD 15.09 per pack.
  119. Given that this procurement did not comply with PNG Government policies and
  procedures and that it is evident (from WHO GPRM data) that an exorbitant price was paid,
  PGK 42.49 (USD 15.09 per bottle), versus a medium transaction price per bottle of PGK 18.97
  (USD 6.74), NDoH’s actions resulted in an additional and unwarranted cost to the grant
  corresponding to the difference, which totals PGK 14,113 (USD 5,011).

  G.2.2.4. HIV – 6485
  120. This procurement relates to an NDoH HIV R4 (Phase I) PGK 21,250 (USD 7,546) single
  source procurement of 417 bottles of Nevirapine53 (Nevivir) 200mg tablets from City
  Pharmacy via a direct procurement process in April 2007, in contravention of PNG
  Government procurement requirements.
  121. According to documents in the relevant procurement file provided to OIG by NDoH, this
  procurement was based on an Inter Office Memorandum from the acting director of the
  NDoH’s Disease Control Branch to the director of the HSIP Program Management Branch,
  dated 13 April 2007, requesting funding for urgent procurement of antiretrovirals (Annex 21).
  122. The procurement file provided did not contain a COI as required under PNG
  procurement regulations and procedures and the procurement file only contained one
  quotation, that from City Pharmacy (Annex 22).
  123. Despite the claimed urgency, City Pharmacy delivered 417 bottles of Nevirapine
  (Nevivir) 200mg tablets costing a total of PGK 16,872.50 (PGK 40.46 / USD 14.36 per bottle)
  over a period of 28 days via four deliveries (Annex 23):
  Figure 11: – Delivery Dates of City Pharmacy Procurement
  Delivery Date Product Quantity
  25/04/07 Nevivir-200mg (Nevirapine) 60 20 bottles (of 60 tablets)
  10/05/07 Nevivir – 200mg (Nevirapine) 60 3 bottles (of 60 tablets)

  17/05/07 Nevivir-200mg (Nevirapine)60 2 bottles (of 60 tablets)

  22/05/07 Nevivir-200mg (Nevirapine) 60 392 bottles (of 60 tablets)

  52 Ibid.
  53 Original order was for 500 bottles with City Pharmacy delivering 417 bottles. NDoH only invoiced for 417 bottles.

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  124. WHO GPRM data shows that the 2007 median transaction price for Nevirapine 200 mg
  tablets manufactured by Hetero Drugs Ltd (India) was USD 6.74 (PGK 18.97) for 30 tablets.54
  125. The PSM plan submitted by NDoH in respect of this grant states that “NDoH through
  the HSIP MB can purchase from sole suppliers, in the circumstances where the approved ARV
  suppliers are the sole suppliers, using the Certificate of Inexpediency (COI) process, described
  in the PNG Government’s Finance Management Act’’. This procurement was not undertaken
  via a COI.
  126. The same PSM plan indicates that this product will be purchased from a WHO approved
  supplier at an approximate estimated cost of USD 9.31 per pack. This price paid by NDoH
  regarding this procurement from City Pharmacy was USD 15.45 per pack, more than USD
  6.00 per bottle more.
  127. Given that this procurement was not consistent with the PNG Government procurement
  requirements, and Global Fund grant requirements; NDoH’s actions resulted in additional
  and unwarranted costs to the grant corresponding to the difference between the medium
  transaction price of USD 6.74 per bottle and the price paid to City Pharmacy regarding this
  procurement, the total of which is PGK 13,336 (USD 4,735).

  G.2.2.5. HIV – 6955
  128. This procurement relates to an NDoH R4 HIV (Phase I) PGK 99,840 (USD 35,455)
  purchase of 600 bottles of 600mg Efavirenz (Estiva) tablets from City Pharmacy via single
  source procurement in June 2007, in contravention of PNG Government procurement
  requirements.
  129. This procurement was initiated via an Inter-Office memo (Annex 24) dated 4 June
  2007, requesting urgent purchase of ARV’s to prevent a stock out. Attached to the memo was
  a quotation from City Pharmacy regarding the supply of 600 bottles of Efavirenz (Estiva)
  600mg tablets for a price of PGK 99,840 (USD 35,455) or PGK 166.40 (USD 59) per bottle
  (Annex 25).
  130. WHO GPRM data shows that the 2007 median transaction price for Efivarenz 600 mg
  tablets manufactured by Hetero Drugs Ltd (India) was USD 21.00 (PGK 59.13) for 30
  tablets.55
  131. This procurement did not comply with government procurement requirements or
  Global Fund grant requirements, and resulted in additional and unwarranted costs to the
  grant corresponding to the total difference between the median transaction price price of USD
  21.00 (PGK 59.13) and the price paid to City Pharmacy of USD 59.09 (PGK 166.40) regarding
  this procurement, a total of USD 22,856 (PGK 64,362).

  G.2.2.6. HIV – 9621
  132. This procurement relates to a 2008 NDoH R4 HIV PGK 288,420 (USD 111,453)
  purchase of anti-retroviral drugs: Lamistar; Nevilast and Estiva tablets.
  133. This procurement was initiated via an Inter-Office Memo (Annex 26) requesting an
  emergency procurement of: 900 packs of ‘Lamistar 30’ (Lamivudine 150mg + Stavudine
  30mg); 2400 packs of ‘Nevilast 30’ (Lamivudine 150mg + Stavudine 30mg + Nevirapine
  200mg); and 1,200 packs of ‘Estiva’ tablets (Efivarenz 600 mg), followed by an Inter Office
  Memo (Annex 27) requesting release of funds for this procurement and an Inter Office Memo

  54Based on pricing for lower middle-income countries with WHO DDD of 1X200mg tablet per day and an annual
  treatment cost of USD 41.04 (USD 0.1124 cents per tablet).
  55Based on pricing for lower middle-income countries with WHO defined daily dose (DDD) of 1 X 600 mg tablet
  per day (365 tablets per year) and an annual treatment cost of USD 255.57 per year (USD o.700 per tablet). WHO
  GPRM database can be found at: http://apps.who.int/hiv/amds/price/hdd/

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  from requesting approval for a Short Form Contract for City Pharmacy to supply an urgent
  order (Annex 28).
  134. City Pharmacy provided a quote of PGK 288,420 to supply the drugs as follows:
  Lamistar 30– 900 packs (60 tabs per pack) at a total cost of PGK 34,020; Nevilast 30- 2400
  packs (60 tabs per pack) at a total cost of PGK 122,400; and Estiva 600- 1200 packs (30 tabs
  per pack) at a total cost of PGK 132,000 (Annex 29).
  135. The procurement was approved and a short term contract was entered into between the
  NDoH and City Pharmacy to supply the quoted drugs. The drugs were delivered on 19 May
  2008 and full payment received by City Pharmacy from NDoH on 27 May 2008 (Annex 30).
  136. The drugs were ordered on 10 April 2008, via an NDoH Integrated Local Purchase
  Order and Claim Form (ILPOC) (Annex 31). The relevant CSTB contract states the terms
  “Immediately after placement of Order/issuing ILPOC – 21 days as per suppliers quote’’. The
  goods were delivered 39 days after the issue of the ILPOC, outside the required terms (Annex
  32).
  137. With regard to this procurement, NDoH paid the following prices for the procured
  drugs: PGK 37.78 (USD 14.60) for each pack of Lamistar -30; PGK 51.00 (USD 19.70) for each
  pack of Nevilast – 30; and PGK 110.00 (USD 42.50) for each pack of Efavirenz 600 mg
  (Annex 33).
  138. WHO GPRM data shows that the median transaction prices for these drugs56 was:
  Lamistar57-USD 5.00 (PGK 12.93) per bottle of 60 tablets58; Nevilast59 USD 11.62 (PGK 30.07)
  per bottle of 60 tablets60 and Estiva61 USD 13.38 (PGK 34.62) per pack of 30 tablets.62
  139. Based on the above, NDoH’s actions resulted in an additional and unwarranted cost to
  the grant corresponding to the total difference between the median transaction price and the
  price paid to City Pharmacy amounting to PGK 163,134 (USD 63,039).63

  Figure 12: – Summary of Prices Charged by City Pharmacy Compared to WHO GPRM Median

  Description Brand Name No. of Manufacturer City Pharmacy WHO GPRM Difference Total
  packs Price (PGK) Median Difference
  (PGK)
  Lamivudine 150mg+ Lamistar-30 900 Hetero, India 37.78 12.93 24.94 22,446
  Stavudine 30mg
  Lamivudine 150mg+ Nevilast-30 2,400 Hetero, India 51.00 30.07 20.93 50,232
  Stavudine 30mg+
  Nevirapine 200mg
  Efavirnez 600mg Estiva-600 1,200 Hetero, India 110.00 34.62 75.38 90,456
  TOTAL 163,134

  G.2.2.7. HIV – 11634
  140. This procurement relates to a NDoH R4 (Phase 2) PGK 182,746 (USD 70,618) single
  source procurement of a number of different drugs to treat opportunistic infections from City
  Pharmacy in October 2008.

  56 In USD for 1 year’s treatment at a WHO recommended usual adult defined daily dose (DDD)
  57 Lamiduvine 150mg + Stavudine 30 mg tablets
  58 Based on 1 years treatment costing USD 60.86 and a WHO DDD of 2 tablets per day (USD 0.083 cents per

  tablet).
  59 Lamivudine 150mg + Stavudine 30mg + Nevirapine 200 mg
  60 Based on 1 years treatment costing USD 141.44 and a WHO DDD of 2 tablets per day (USD 0.193 cents per

  tablet)
  61 Efivarenz 600mg
  62 Based on 1 years treatment costing USD 162.91 and a WHO DDD of 1 tablet per day (USD 0.466 per tablet).
  63 Total price paid to City Pharmacy of PGK 288,420, less the total WHO GPRM median transaction price of PGK

  125,363 = PGK163,057

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  Figure 13: – Opportunistic Infection Drugs Purchased from City Pharmacy
  Invoice Delivered Item Amount per bottle Qty Total Amount (PGK)
  / packet
  (PGK)
  594596 4 Nov 2008 Abacivir Tablets 300mg 60.00 80 21,600
  (80 bottles of 60 tablets)
  Ritocom tablets (Lopinarir 200mg + Ritonavir) 474.96 100 47,496
  (100 bottles of 120 tablets)
  Tenofovir 300mg 165.00 150 24,750
  (150 bottles of 30 tablets)
  Saquinavir 500mg 590.00 30 17,699.75
  (30 bottles of 120 tablets)
  Aciclovir tablets 200mg (Virest) 15.00 80 1,200
  (80 packets of 25 tablets)
  Fluconazole tablets 200mg (Flucap200/L) 60.00 500 30,000
  (500 bottles of 100 tablets)
  Azithromycin Tabs 500mg 100.00 90 9,000
  (90 bottles of 100 tablets)
  601246 2 Dec 2008 Azithromycin Tabs 500mg 100.00 310 31,000
  (310 bottles of 100 tablets)

  141. A review of documents included in the relevant procurement file provided to OIG
  reveals that this procurement was initiated via an Inter Office Memorandum dated 6 August
  2008 (Annex 34). The Memo states that funds for the purchase have been budgeted for and
  that a quotation for second line ARV’s is attached.
  142. As a result of this memo a NDoH HSIP Requisition for Expenditure was raised on 20
  August 2008 and approved on 26 August 2008 for purchase of 2nd line antiretroviral drugs
  and opportunistic infection drugs valued in total at PGK 182,746 (USD 70,618) from City
  Pharmacy (Annex 35) “as per quote attached’’ (Annex 36).
  143. There is no indication in the relevant procurement file that this purchase is an
  “emergency purchase’’ and there is no COI issued by the CSTB. There are also no other quotes
  contained in the file.
  144. The order was delivered to NDoH on 4 November 2008 (Annexes 37 & 38), over two
  months after the order was placed.
  145. A review of the PSM Plan submitted by NDoH to the Global Fund for procurement of
  HIV related products64 found that NDoH were to use UNICEF as the procurement agent for
  the procurement processes of all international health products required by NDoH under the
  grant unless the procurement did not meet the minimum order quantities of UNICEF’s
  suppliers.65 Given that this order totalled over USD 70,000 and there was no UNICEF
  “Request for Cost Estimate Form’’ or UNICEF “Cost Estimate’’ in the procurement file66 this
  procurement contravened the agreed PSM plan.
  146. WHO GPRM data shows that the median transaction price for Ritocom was USD 4.04
  (PGK 10.45) per bottle of 120 tablets67 and for Tenofovir, USD 17.10 (PGK 44.25) per bottle of
  30 tablets.68 The Management Sciences for Health (MSH) International Drug Pricing Guide69
  shows that the median transaction prices for the other drugs were: Saquinavir – USD 83.40

  64 PNG National Department of Health Procurement and Supply Management Plan – GFATM Proposal (Round 4
  Phase 2) HIV and AIDS Component. November 2008
  65 Ibid. P.14-15.
  66 Refer to: http://www.unicef.org/supply/files/Procurement of HA supplies(1).pdf for further details of

  UNICEF Procurement Process re HIV/AIDS related supplies
  67 Based on 1 year’s treatment costing USD 49.26 and a WHO DDD of 4 tablets per day (USD 0.033 per tablet).
  68 Based on 1 year’s treatment costing USD 17.10 and a WHO DDD of 1 tablet per day (USD 0.570 per tablet).
  69 http://erc.msh.org/mainpage.cfm?file=1.0.htm&module=DMP&language=english

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  (PGK 215.82) per bottle 120 tablets; Aciclovir – USD 1.37 (PGK 3.55) per pack of 25 tablets;
  and Fluconazole – USD 15.10 (PGK 39.08) per bottle of 100 tablets.70
  Figure 14: Borneo Pacific price versus WHO GPRM and MSH Median Price for Ritocom, Tenofovir,
  Saquinavir, Aciclovir and Fluconazole Tablets.
  Description Brand Name No. of City Pharmacy Price WHO GPRM MSH Difference Total
  bottles / per bottle/pack Median Median Difference
  packs (PGK) (PGK)
  71
  Lopinarir 200mg + Ritocom 100 474.96 10.45 464.51 46,451.00
  Ritonavir 50 mg
  72
  Tenofovir 300 mg Tenofovir 150 165.00 44.25 120.75 18,112.25
  73
  Saquinavir Saquinavir 30 165.00 215.82 50.82 1,524.67
  74
  Aciclovir Aciclovir 80 15.00 3.55 11.45 916.00
  75
  Fluconazole Fluconazole 500 60.00 39.08 20.92 10,460

  147. Based on the above, NDoH’s actions resulted in an additional and unwarranted cost to
  the grant corresponding to the total difference between the median GPRM price and the price
  paid to City Pharmacy for the drugs Ritocom and Tenofovir alone amounting to at least PGK
  64,563 (USD 24,949).76

  G.2.2.8. HIV – 7947
  148. This procurement relates to an NDoH R4 HIV PGK 34,000 (USD 12,074) purchase of
  800 bottles of Nevirapine 200mg (Nevivir) tablets from City Pharmacy via single source
  procurement in September 2007, in contravention of PNG Government procurement
  requirements. The procurement was initiated by an Inter Office Memorandum dated 27
  September 2007 (Annex 39).
  149. The quote from City Pharmacy shows that City Pharmacy quoted a price of PGK 42.50
  (USD 15.09) per pack (60 tablets) of Nevirapine 200mg (Nevivir) tablets with the total order
  being for 800 packs at PGK 34,000 (USD 12,074) (Annex 40).
  150. WHO GPRM data shows that the median transaction price for Nevirapine 20mmg
  tablets was USD 3.12 (PGK 8.78) per bottle.77
  Figure 15: Summary of Prices Charged by City Pharmacy Compared to GPRM Average
  Description Brand Pack Size Manufacturer City WHO GPRM Difference
  Name Pharmacy Median
  Price (PGK)
  Nevirapine 200 mg Nevivir 60 tablets Hetero, India 42.50 8.78 33.72
  (800 bottles)
  TOTAL 26,976

  151. OIG’s review of the procurement file found that it did not contain any other quotes or
  reference to other quotes apart from the quote from City Pharmacy. This procurement

  70 MSH International Drug Pricing Guide consulted due to no prices of these drugs being recorded in the GPRM
  data base.
  71 Each bottle containing 120 tablets
  72 Each bottle containing 30 X 300mg tablets
  73 30 bottles of 120 X 300 mg tablets
  74 80 packets of 25 X 200mg tablets
  75 500 bottles of 100 X 200mg tablets
  76 The total difference between the MSH median price and the price paid to City Pharmacy for the drugs

  Saquinavir, Aciclovir and Fluconazole amounting to a total difference of approximately PGK 12,900 (USD 4,985)
  has not been included in the unwarranted costs amount due to the prices not including shipping costs. The drugs
  Abacavir and Azithromycin were found to have been supplied by City Pharmacy at a competitive price. WHO
  GPRM data re Abacavir tablets, found the median price to be USD 25.99 (PGK 67.25) which compares favourably
  against City Pharmacy’s price. MSH data re Azithromycin tablets, found the median price to be USD 62.19 per
  bottle (PGK 160) which conmpares favourably against City Pharmacy’s price.
  77Based on WHO GPRM data of 1 years treatment costing USD 38.04 at a WHO DDD of 2 tablets per day (USD
  0.052 per tablet).

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  therefore appears inconsistent with PNG Government procurement requirements and also
  Global Fund grant requirements.
  152. OIG’s calculation based on the difference between the PQR average price for Nevirapine
  200mg (Nevivir) tablets and the price paid by NDoH to City Pharmacy is that this single
  source procurement resulted in an additional and unwarranted cost to the corresponding
  grant of PGK 26,976 (USD 9,579). This amount should be refunded to the Global Fund. In any
  event, the entire amount of the procurement can be considered non-compliant with the terms
  of the grant agreement.

  G.2.2.9. HIV – 13415
  153. This procurement relates to an NDoH R4 HIV PGK 46,350 (USD 17,910)
  pharmaceutical purchase comprising of 3,270 packs of Cotrimoxazole 400+80mg tablets (100
  tablets per pack) valued at PGK 16,350 (USD 6,318) and 1,000 packs of Ciprofloxacin 500mg
  tablets (100 tablets per pack) valued at PGK 30,000 (USD 11,592) procured in 2008 from City
  Pharmacy via single source procurement, contrary to PNG Government procurement rules
  and regulations and contrary to Global Fund Grant requirements.
  154. This procurement was initiated by an Inter Office Memo “Reprogramming of Remaining
  STI and HIV and AIDS to Procure HIV Drugs and Drugs for the Treatment of Opportunistic
  Infections’’ from the acting director of NDOH’s Disease Control Branch to the director of
  HSIP’s Management Branch, dated 19 December 2008 (Annex 41).
  155. Although the Memo states “Please see the quotes attached for the costs of these drugs’’,
  a review of the procurement file provided by NDoH reveals only one quote, being from City
  Pharmacy dated 18 December 2008 (Annex 42).
  156. The quote from City Pharmacy offers Cotrimoxazole tablets at PGK 5.00 (USD 1.93)
  per pack and Ciprofloxacin tablets at PGK 30.00 (USD 11.59) per pack.
  157. Although the procurement file does not contain any invoice or delivery note from City
  Pharmacy or any receiving documentation from NDoH, a cheque in the amount of PGK
  46,350 (USD 17,910) was drawn by the NDoH and payable to City Pharmacy.
  158. A review of the relevant PSM plan reveals that the drugs approved for procurement to
  treat opportunistic infections were: Septrim tablets; Septrim suspension; Amphotericin B IV
  vials; and Fluconazole capsules, tablets and suspension. The drugs for opportunistic
  infections purchased in this procurement were Cotrimoxazole and Ciprofloxacin; neither is
  approved in the PSM plan.
  159. Given that the purchase of these drugs (Cotrimoxazole and Ciprofloxaxin) were not
  approved in the PSM plan for the treatment of opportunistic infections and the absence of
  documentation showing delivery of these pharmaceuticals to NDoH, the expenditure of PGK
  46,350 (USD 17,910) is considered to be unsupported by any books and records, and therefore
  non incurred in compliance with the grant agreement.

  G.2.3. North West Scientific
  G.2.3.1. HIV – 15148
  160. This procurement relates to the July 2009 NDoH purchase of Rapid Syphilis Test Kits
  from North West Scientific valued at PGK 298,800 (USD 113,937) funded via the Global Fund
  R3 HIV grant.
  161. This procurement was initiated via an Inter Office Memo “Funding for the Purchase of
  Syphilis Test Reagents for Sentinel Sero-Surveillance 2009’’ from the executive manager
  Public Health, to NDOH’s HSIP director, dated 7 July 2009 (Annex 43). The memo states that
  “North West Scientific Limited is the only distributor of the preferred reagents and that is the
  reason for the submission of only one quotation’’.
  162. On 14 July 2009, a memo was sent to the Secretary of NDoH with a supply contract for
  the supply and delivery of Rapid Syphilis Testing Kits by North West Scientific Ltd (Annex

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  44). The memo stated that North West Scientific “is the only distributor of this preferred
  reagent’’.
  163. The single source quote from North West Scientific Ltd. (Annex 45) indicates 120,000
  tests (89 test kits) to be delivered to NDoH at a total cost of PGK 298,800 (USD 113,937). 88
  of the kits “Syphilis 3.0 Device’’ each containing 45 tests and one of the kits containing 40
  tests were delivered into the NDoH Area Medical Store on 24 July 2009.
  164. Despite NDoH’s preference for this particular type of testing kit (SD rapid test kits),
  given that the total cost of this procurement was PGK 298,800 (USD 113,937) it was required
  to be conducted by way of public tender unless a COI was issued by the CSTB. The
  procurement file reveals no such certificate and the relevant payment voucher confirms that
  the procurement was “sole source’’ and funded by the Global Fund (Annex 46).
  165. Included in the procurement file was a letter from the head of obstetrics and gynecology
  at the University of PNG’s School of Medicine and Health Sciences. The letter states that
  testing of rapid syphilis test kits from SD diagnostics of Korea reveals that they have the same
  specificity and sensitivity as the Abbot brand ‘Determine’ test kits. The letter further states
  that: “It would seem reasonable therefore to order the SD Korean Syphilis rapid tests kits if
  they are available locally and are not more expensive for our use in screening antenatal
  women in PNG’’ (Annex 47).
  166. This procurement was single sourced. NDoH appears inconsistent with PNG
  government procurement requirements by not putting this procurement out to tender, and
  therefore the global fund grant agreement. The expenditure for the entire amount of this
  procurement, PGK 298,800 (USD 113,937) was not compliant with the terms of the grant
  agreement.

  G.3. Purchase of Non-Health Products
  G.3.1. Pengco Pacific Limited
  G.3.1.1. HIV-16580
  167. This procurement relates to a NDoH R4 (Phase 1) HIV PGK 31,569 (USD 12,037)
  procurement of office and stationery items for the STI/HIV Unit of the Disease Control
  Branch in July 2009 and received by NDoH on 2 December 2009.
  168. The procurement was initiated via an Inter Office Memorandum “Funding for
  STI/HIV/AIDS Office Supplies’’ from the executive manager Public Health to the director
  HSIP Management Branch, dated 7th July 2009 (Annex 48).
  169. Quotes were received from three suppliers, as required under PNG Government
  procurement policy with Pengko Pacific Limited being the cheapest quote (Annex 49).
  170. The Inter Office Memorandum indicates that the stationery procurement was purchased
  using funds from “DC503195’’. A document contained in the procurement file indicates that
  this code is a Global Fund grant activity “Procurement of training materials’’ for disease
  control.
  Figure 16: NDoH Activity Codes Showing DC503915 as a Global Fund Financed Activity

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  171. The “Requisition for Expenditure’’ regarding this procurement indicates that the goods
  are “for purchase of office items and stationery for 2010 Office Use’’ (Annex 50). This is not a
  ‘procurement for training materials’ and this procurement should not have been funded from
  Global Fund grant funds allocated to ‘procurement of training materials’’. Consequently, the
  value of the entire procurement PGK 31,569 (USD 12,037) is outside of the approved work
  plans and budgets for the grant and was not incurred in compliance with the terms of the
  grant agreement.

  G.4. NDoH Cash Advances
  172. During this investigation a desk verification of the cash advances relating to years 2009
  and 2010 was undertaken. OIG found that no record of advances and their acquittals prior to
  2009 was available. That is, NDoH was not able to provide supporting documents explaining
  the final use of these funds.
  173. As per the “Advance Acquittal Register – 2009’’ a total of PGK 7,353,351 (USD
  2,803,946) was provided to employees and vendors as advances in that year, of which, a total
  of PGK 2,425,404 (USD 924,844) was related to The Global Fund. Of the PGK 2,425,404
  Global Fund related advances, PGK 1,398,967 (533,447) – 58%, was not acquitted at the end of
  the year. No documentation was provided for PGK 1,300,781 (USD 496,008) out of the
  unacquitted advances.
  174. As per the “Advance Acquittal Register – 2010 (as at 31st December 2010)’’ a total of
  PGK 9,539,146 (USD 3,693,192) was provided to employees and vendors as advances in that
  year of which a total of PGK 3,112,486 (USD 1,205,035) was related to The Global Fund. Of
  the PGK 3,112,486 (USD 1,205,035) Global Fund related advances, PGK 2,087,134 (USD
  808,058) – 67%, was not acquitted at the end of the year. No documentation was provided for
  PGK 2,033,734 (USD 787,383) out of the unacquitted advances.
  175. Of the PGK 1,026,437 and PGK 1,025,366 advances acquitted completely or partially
  during the year 2009 and 2010 respectively, no documentation was provided for PGK 123,053
  (USD 46,922) – 12%, and PGK 642,058 (USD 248,580) – 63%, respectively.

  Figure 17: Summary of advances provided during 2009 and 2010 (Amounts in PGK)

  2009 2010
  Total TGF Others Total TGF Others
  Total Advances 7,353,352 2,425,404 4,927,948 9,539,146 3,112,486 6,426,661
  % on Total 33% 67% 33% 67%
  Acquitted 2,506,589 1,026,437 1,480,152 2,886,759 1,025,366 1,861,393
  % 42% 30% 33% 29%
  Unacquitted 4,846,762 1,398,967 3,447,795 6,652,388 2,087,120 4,565,268
  % 58% 70% 67% 71%

  176. An age analysis of the advances provided indicated that out of the total advances for
  2009 and 2010 about 42% and 25% respectively were outstanding for more than 180 days.
  For 2009, 35% of the advances were outstanding for more than 365 days.
  Figure 18: Summary of age analysis of advances as on 31/12/201 (Amounts in PGK)

  Total Advance Total Advance >180 days % on total >365 days % on total
  2009 2,425,404 175,802 7% 841,927 35%
  2010 3,112,486 777,383 25% 0 0%

  177. A review of advances provided to vendors and employees indicated that for the year
  2009 (Annex 51) and 2010 (Annex 52), 72% and 74% of the total advances were outstanding
  from the vendors respectively for these years.

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  178. Moreover, it was noted that fresh advances were provided to employees before acquittal
  of the previous advances. Instances were noted where advances were provided even when two
  or more prior advances were outstanding.
  Figure 19: Summary of advances provided to vendors and employees (Amounts in PGK)

  Advance Type 2009 2010

  A. Vendor Advance 1,014,104 72% 1,553,525 74%

  Three or more non-acquittals 384,189 38% 799,312 51%
  Two non-acquittals 201,860 20% 122,295 8%
  One non-acquittal 60,327 6% 67,461 4%
  Others 367,728 36% 564,458 36%

  B. Employee Advance 384,863 28% 533,595 26%

  Three or more non-acquittals 33,545 9% 217,729 41%
  Two non-acquittals 51,566 13% 80,471 15%
  One non-acquittal 52,717 14% 14,586 3%
  Others 247,035 64% 220809 41%
  Total Outstanding 1,398,967 100% 2,087,120 100%

  179. OIG verification found that frequently further advances have been given to officials
  without first obtaining the acquittals and adjustments of previous advances, contrary to the
  requirements of PNG Government’s Financial Management Manual which states that no
  second advance is to be made to an officer where a previous advance is outstanding.
  180. The investigation found that there was no central control to record the debits and
  credits for the individual hotels or venues thereby providing a list of balances against each
  hotel or venue. This has led to a situation where large amounts of advances are held with
  hotels over which NDoH has little control.
  181. Examination of the advance register for 2009 and 2010 further indicated that as against
  the PNG Government’s Financial Management Manual, which states that no advance is to be
  provided for accommodation costs and that the accommodation expenses are to be paid using
  an Integrated Local Purchase Order and Claim (ILPOC) form, advances were provided for
  accommodation.
  182. It was further noted that out of the total outstanding advance for the year 2009 and
  2010, 82% and 54% respectively of the outstanding advances were related to accommodation.
  Figure 20: Advances provided for accommodation (Amounts in PGK)

  2009 2010
  % of Not % of
  Advance Type Total Advance Not Acquitted total Total Advance Acquitted total
  Accommodation 1,898,025 1,150,182 82% 1,458,563 1,136,202 54%
  Others 527,379 248,785 18% 1,653,922 950,918 46%
  Grand Total 2,425,404 1,398,967 3,112,486 2,087,119

  183. A sample review of documents provided for acquittals and partial acquittals due for
  more than 14 days and amounting to more than PGK 4,000 was carried out for each of the
  year 2009 and 2010.
  184. On review of the advances for 2009, it was noted that for advances of PGK 330,431
  (USD 125,998) acquittals were not completely adjusted and a balance of PGK 91,441 (USD
  34,868) – 28%, was still outstanding.

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health
  185. Out of the selected sample, amounting to PGK 1,552,747 (USD 592,086); no
  documentation was available for PGK 982,302 (USD 374,567) including PGK 39,352 (USD
  15,005) for which either acquittals or partial acquittals were already adjusted.
  Figure 21: Sample transactions selected for review (Amounts in PGK)

  Total Advance Total Acquitted Total Balance
  Particulars
  Amount Amount Amount
  Acquitted 279,336 292,026 (12,660)
  Partially Acquitted 330,431 238,990 91,441
  Not Acquitted 942,950 0 942,950
  Total 1,552,717 531,016 1,021,701

  Figure 22: Documentation not available for selected sample (Amounts in PGK)

  Partially
  Particulars Acquitted Not Acquitted Total
  Acquitted
  Total transactions selected 279,336 330,431 942,950 1,552,747
  Documentation not available 13,075 26,277 942,950 982,302

  186. OIG’s review of the advances for 2010 found that for advances of PGK 246,088 (USD
  95,275) acquittals were not completely adjusted and a balance of PGK 83,440 (USD 32,304) –
  34%, was still outstanding.
  Figure 23: Sample transactions selected for review (Amounts in PGK)

  Total Acquitted Total Balance
  Particulars Total Advance Amount
  Amount Amount
  Acquitted 286,035 286,320 (285)
  Partially Acquitted 246,088 162,648 83,440
  Not Acquitted 1,361,139 0 1,361,139
  Total 1,893,262 448,968 1,444,294

  Figure 24: Documentation not available for select sample (Amounts in PGK)

  Partially
  Particulars Acquitted Not Acquitted Total
  Acquitted
  Total transactions selected 286,035 246,088 1,361,139 1,893,262

  Documentation not available 156,726 92,041 1,361,139 1,609,906

  187. It was noted that out of the total advances not acquitted amounting to PGK 1,398,967
  (USD 533,447) and PGK 2,087,134 (USD 808,058) for 2009 and 2010, 58% and 67%
  respectively were related to HIV Program.
  Figure 25: Advances not acquitted for different programs (Amounts in PGK)

  % of % of Grand % of
  Particulars 2009 2010 % Remarks
  total total Total total
  Total Not Acquitted On total
  1,398,967 58% 2,087,134 67% 3,486,101 63%
  Advances Advances*
  On total not
  HIV Program 983,084 70% 1,032,853 49% 2,015,937 58%
  acquitted
  On total not
  Malaria Program 134,930 10% 452,445 22% 587,375 17%
  acquitted
  On total not
  TB Program 280,952 20% 443,761 21% 724,713 21%
  acquitted
  On total not
  Others (Unknown) 0 158,075 8% 158,075 5%
  acquitted

  *Refer to Figure 19 for total advances

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• Investigation of Global Fund Grants to Papua New Guinea National Department of Health

  H. Expenditures Not Compliant with the Grant Agreements

  H.1. Determination of compliance
  188. The OIG presents factual findings which identify certain expenses as ineligible for
  funding with grant funds. Such ineligibility is based on the provisions of the Global Fund’s
  Standard Terms and Conditions of the Program Grant Agreement (“STCs”). The OIG does not
  aim to conclude on the appropriateness of seeking refunds from recipients, or other sanctions
  on the basis of the provisions of the grant agreement.
  189. Various provisions of the STCs provide guidance on whether a program expense is
  eligible for funding by the Global Fund. It is worth noting that the terms described in this
  section are to apply to Sub-recipients as well as Principal Recipients.
  190. At a very fundamental level, it is the Principal Recipient’s responsibility “to ensure that
  all Grant funds are prudently managed and shall take all necessary action to ensure that Grant
  funds are used solely for Program purposes and consistent with the terms of this Agreement”.
  In practice, this entails abiding by the activities and budgetary ceilings proposed in the
  Requests for Disbursement, which in turn must correspond to the Summary Budget(s)
  attached to Annex A of the Program Grant Agreement.
  191. Even when the expenses are made in line with approved budgets and work-plans, and
  properly accounted for in the Program’s books and records, such expenses must be the result
  of processes and business practices which are fair and transparent.
  192. The STCs specifically requires that the PR ensures that: (i) contracts are awarded on a
  transparent and competitive basis, and (iv) that the PR and its representatives and agents do
  not engage in any corrupt practices as described in Article 21(b) of the STCs in relation to such
  procurement.
  193. For the avoidance of the doubt, the STCs explicitly forbid engagement in corruption or
  any other related or illegal acts when managing Grant Funds :
  “The Principal Recipient shall not, and shall ensure that no Sub-Recipient or person
  affiliated with the Principal Recipient or any Sub-recipient participate(s) in any other
  practice that is or could be construed as an illegal or corrupt practice in the Host
  Country.”
  194. Amongst prohibited practices is the rule that the PR shall not and shall ensure that no
  person affiliated with the PR “engage(s) in a scheme or arrangement between two or more
  bidders, with or without the knowledge of the Principal or Sub-recipient, designed to establish
  bid prices at artificial, non-competitive levels.”
  195. The Global Fund’s Code of Conduct for Supplier and Code of Conduct for Recipients
  (the “Codes”) further provide for additional principles by which recipients and contractors
  must abide, as well as remedies in case of breaches of said fundamental principles of equity,
  integrity and good management. The Codes also provide useful definitions of prohibited
  conducts.
  196. The Codes are integrated into the STCs through Article 21(d) under which the PR is
  obligated to ensure that the Global Fund’s Code of Conduct for Suppliers is communicated to
  all bidders and suppliers. Similarly, Article 21(e) provides for communication of the Code of
  Conduct for Recipients to all Sub-recipients, as well as mandatory application through the SR
  agreements.
  197. Principal Recipients are contractually liable to the Global Fund for the use of all grant
  funds, including expenses made by Sub-recipients and contractors.
  198. The factual findings made by the OIG following its investigation and summarized
  through this report can be linked to the prohibited conducts or other matters incompatible
  with the terms of the Program Grant Agreements.

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  H.2. Reimbursements or Sanctions
  199. The Secretariat of the Global Fund is subsequently tasked with determining what
  management actions or contractual remedies will be taken in response to those findings.
  200. Such remedies may notably include the recovery of funds compromised by contractual
  breaches.
  201. Article 8 of the Global Fund’s Round 3 (Phase 1) malaria Grant and Round 4 (Phase 1)
  HIV Grant with the NDoH establishes that the Global Fund may require the NDoH to
  immediately refund disbursement of the Grant funds if: “In the case of any disbursement of
  the Grant that is not made or used in accordance with this Agreement, or that finances goods
  or services that are not used in accordance with this Agreement, the Global Fund,
  notwithstanding the availability or exercise of any other remedies under this Agreement, may
  require the Principal Recipient to refund the amount of such disbursement in United States
  dollars to the Global Fund within sixty (60) days after the Principal Recipient receives the
  Global Fund’s request for a refund.
  202. Article 27 of the Global Fund’s Round 3 (Phase 2) malaria Grant, Round 4 (Phase 2)
  HIV Grant and the Global Fund’s TB Grant Agreement with the NDoH stipulates that the
  Global Fund may require the PR “to immediately refund to the Global Fund any disbursement
  of the Grant funds in the currency in which it was disbursed [in cases where] there has been a
  breach by the Principal Recipient of any provision of this (sic) Agreement […] or the Principal
  Recipient has made a material misrepresentation with respect to any matter related to this
  Agreement.”78
  203. According to Article 21(d) of the Global Fund’s Round 3 (Phase 2) malaria Grant, Round
  4 (Phase 2) HIV Grant and the Global Fund’s TB Grant Agreement with the NDoH, “in the
  event of non-compliance with the Code of Conduct, to be determined by the Global Fund in its
  sole discretion, the Global Fund reserves the right not to fund the contract between the
  Principal Recipient and the Supplier or seek the refund of the Grant funds in the event the
  payment has already been made to the Supplier.”79
  204. Additional sanctions, including with respect to Suppliers, may be determined pursuant
  to the Sanction Procedure of the Global Fund, for breaches to the Codes.
  205. The OIG’s findings are presented below with the amounts corresponding to each
  expense in relation to which compliance issues were identified.
  206. Specifically, the investigation found that the following provisions of the Grant
  Agreements have not been complied with:

  H.2.1. Round 3 Malaria Grant: PNG-3-4-G01-M (Phase 1),
  and Round 4 HIV Grant: PNG-405-G02-H (Phase 1)
  207. Under Article 9 – Management of Grant Funds, the NDoH agreed to “ensure that all
  Grant funds are prudently managed and shall take all necessary action to ensure that Grant
  funds are used solely for Program purposes and consistent with the terms of this Agreement”.
  208. Under Article 17 (a), the NDoH agreed to follow Global Fund’s procurement practices,
  which require at a minimum that: “contracts shall be awarded on a transparent and
  competitive basis”; “contracts shall be awarded only to responsible contractors that possess
  the ability to successfully perform the contracts”; and “no more than a reasonable price (as
  determined, for example, by a comparison of price quotations and market prices) shall be paid
  to obtain goods and services.”80

  78 Ibid at Art. 27(b) and (d).
  79 Ibid.
  80 Ibid. Article 17.a – Contracts for Goods and Services

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  209. Under Article 18 (f), the NDoH agreed to “use good procurement practices when
  procuring Health products, including competitive purchasing from qualified manufacturers
  and suppliers to obtain the lowest price of products.”

  H.2.2. Round 3 Malaria Grant: PNG-304-G01-M (Phase 2);
  Round 4 HIV Grant: PNG-405-G02-H (Phase 2); Round 6
  TB Grant: PNG-607-G03-T (Phase 1 and 2)
  210. Under Article 6 (d) the NDoH committed to “comply with host country law and other
  applicable law”.
  211. Under Article 9 – Management of Grant Funds. the NDoH agreed to “ensure that all
  Grant funds are prudently managed and shall take all necessary action to ensure that Grant
  funds are used solely for Program purposes and consistent with the terms of this Agreement.”
  212. Under Article 18 (a) – Procurement Practices, the NDoH agreed to follow Global Fund’s
  procurement practices, which require at a minimum that: “contracts shall be awarded on a
  transparent and competitive basis”; “contracts shall be awarded only to responsible
  contractors that possess the ability to successfully perform the contracts”; and “no more than
  a reasonable price (as determined, for example, by a comparison of price quotations and
  market prices) shall be paid to obtain goods and services.”
  213. Under Article 19 (c), the NDoH agreed “to ensure that procurement under the program
  is carried out in accordance with the PSM plan”.
  214. Under Article 19 (g), the NDoH agreed to “use good procurement practices when
  procuring Health Products, including competitive purchasing from qualified manufacturers
  and suppliers to attain the lowest prices of products, consistent with quality assurance”.

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  H.3. Summary of Expenditures Identified as Non-Compliant
  215. As a result of its investigation, the OIG has calculated total additional and unwarranted
  costs resulting from compliance issues, across the three grants to be up to PGK 3,539,512
  (USD 1,352,696). The table below summarizes the categories that make up this amount.
  Figure 26: Non-compliance categories and amounts

  Non-Compliant Expenditures
  Categories – Report Section
  PGK USD
  Mismanagement (Procurement)
  Borneo Pacific
  F.3.1.1 107,021 40,809
  F.3.1.2 39,600 14,062
  F.3.1.3 152,262 50,208
  Sub total (A) 298,883 105,079
  City Pharmacy
  F.3.2.1 228,691 88,373
  F.3.2.2 2,351 835
  F.3.2.3 14,113 5,011
  F.3.2.4 13,336 4,735
  F.3.2.5 64,362 22,856
  F.3.2.6 163,134 63,039
  F.3.2.7 64,563 24,949
  F.3.2.8 26,976 9,579
  F.3.2.9 46,350 17,910
  Sub total (B) 623,876 237,287
  Pengco Pacific
  F.3.3.1 31,569 12,037
  Sub total (C) 31,569 12,037
  North West Scientific
  F.3.4.1 298,800 113,937
  Sub total (D) 298,800 113,937
  Mismanagement (Cash Advances)
  Unjustified & Un-acquitted Cash Advances (for accommodation only)
  F.4 (2009) 1,150,182 444,463
  F.4 (2010) 1,136,202 439,893
  Sub total (E ) 2,286,384 884,356
  Grand Total (A+B+C+D+E) 3,539,512 1,352,696

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  I. Recommendations

  216. The OIG makes the following recommendations as a result of the findings of this
  investigation:
  (a) The Secretariat should seek to recover from the Prinicipal Recipient (NDoH),
  expenditures of Global Fund grant funds that were not made in compliance with the
  terms of the relevant grant agreements, in accordance with the applicable legal
  rights and obligations, based on its determination of legal breach of the grant
  agreements and associated determination of recoverability.

  (b) The Secretariat should ensure that all core health products for grants in PNG be
  procured through the Voluntary Pooled Procurement (VPP), or equivalent,
  mechanism to ensure a cost-effective and cost-efficient procurement process. Local
  procurement of health products should be avoided, except in emergencies, due to
  excessive mark-ups.

  (c) The Secretariat should ensure that cash advances to be subject to strict approval
  limits. Large transactions should be undertaken directly by the PR or SR, via a
  purchase order or invoice. Acquittal of cash advances should be reported to the LFA
  on a quarterly basis.

  41