The red flags of the hospitals scandal

It’s over. Last week, the Court of Appeal confirmed the annulment of the 2015 privatisation deal that saw three public hospitals handed to Vitals Global Healthcare (VGH), and later Steward Healthcare. 

The judgment comes eight years after the government granted a concession for the running of St Luke’s Hospital, Karin Grech Hospital, and the Gozo General Hospital, to VGH. The concession had been negotiated by Konrad Mizzi, who was health minister at the time.  

The deal with VGH, a relatively unknown consortium at the time, raised many eyebrows. Moreover, it has been criticised heavily by the judiciary and the National Audit Office, both of which have pointed to blatant collusion in awarding the tender.  

Indeed, the VGH tender is a case study in procurement red flags. The evaluation criteria were subjective and the tender description itself was vague in its selection of the three hospitals – this according to the NAO’s audit of the tender process.  

Most damning was the emergence of a pre-tender agreement, or memorandum of understanding, that the government signed with a subset of VGH investors. This threw the integrity of the whole concession into doubt from the word go.  

But what were the other red flags along the way that led to the annulment of the entire concession?

A missing memorandum of understanding 

Between 2017 and 2018, one of the VGH investors submitted documents in court while filing two warrants of prohibitory injunction to prevent the sale of VGH Ltd to Steward Healthcare. One of the documents presented was a memorandum of understanding between the key shareholders. In this document, it appeared that they had entered into an agreement with the government to build and develop a “world class healthcare facility” in Gozo. 

This document was signed in November 2014, predating the request for proposals issued by the Maltese government in March 2015. Yet, what was outlined in that agreement overlaps heavily with the eventual concession deal. It described a partnership involving the takeover of the Gozo General Hospital, the building of a medical college, and the potential acquisition of St Philip’s Hospital or St Luke’s Hospital. 

According to the NAO, this document shows that the concession was pre-agreed, and the procurement process undertaken was “a superficial exercise leading to an already determined outcome”.

Subjective evaluation criteria 

The NAO had also remarked on the evaluation criteria used to assess the bids received. The criteria were given from the outset, but the NAO said they “did not provide a sufficiently robust mechanism to determine which proposal best met government’s stated needs”. 

The office said that the evaluation criteria was too subjective, “allowing for considerable interpretation in the allocation of marks”. Apart from this, the term set for the concession was also deemed too short by the NAO.  

“Good practice dictates that the term be determined by allowing a sufficient period for the concessionaire to recover the investment made and register a reasonable profit. In this case, no such analysis was undertaken, with the term, and its subsequent option to extend, set arbitrarily.”

All bids disqualified 

Only three bids were submitted for the concession, including that of VGH. But beyond that, the two other bids were disqualified on the grounds of administrative non-compliance and other serious shortcomings. This left little competition for VGH to secure the tender. 

VGH was the only company to provide an obligatory bid bond. In the case of Image Hospitals, one of the three bidders, the copies of the bid were marked and signed incorrectly. A business plan was not provided either. The other bidder, BSP Investments Ltd, did not provide a financial proposal, copies of the bid, nor a business plan.

No business expertise 

VGH was set up in Malta a few months before the request for proposals was published. The company was fully owned by Bluestone Special Situation 4 Ltd, forming part of Oxley Group.  

When submitting their bid, the companies had to provide experience of their professional and technical qualifications, as well as management experience. But the business experience cited by the VGH was not attributable to it, but rather to the Oxley Group or partners. 

The NAO flagged that the Oxley Group had undertaken healthcare projects in the past, but these were not related to hospital management. “This Office maintains that the only relevant operational and management experience cited was limited to two of the VGH’s key staff, that of the CEO and the project director.”

Contractual deviations 

Several points were changed between the initial request for proposals and the final contractual framework. These included extensions to the temporary emphyteutical term, the ground rents payable, and the occupied areas within the sites. 

 These deviations and inclusions in the contracts changed the scope of the concession, according to the NAO, and altered the risk for the Maltese government, as well as the profitability of the project. 

“Graver still was the government’s failure to consult with critical stakeholders. This omission resulted in the concession failing to meet its intended objectives, be it the health-related improvements originally envisaged and the classification of the concession as off-balance sheet, which failure implied that the VGH’s capital expenditure on the project was registered on the government’s accounts,” the NAO said. 

The NAO said the Labour administration quickly revised VGH’s deliverables, in a way that was “consistently adverse to government, with a significant reduction in services without any change in the compensation due”. 

Most glaring was a mismatch of labour resources allocated to the VGH by the government with the charge that was to be recovered. The discrepancy arising from this mismatch was borne by the government.

Missed milestones 

Several milestones were laid out in the concession agreement. These milestones, including the renovation of Gozo General Hospital, were to be reached by 31 December 2018. None of the milestones were reached by VGH by the time the concession was transferred to Steward Healthcare. 

The NAO blamed these shortcomings of the investors’ inability to secure financing. “All VGH’s commitments regarding the envisaged improvements to infrastructure and services were rendered unattainable in view of this failure.” 

But the government allowed these failures to slide. Instead, government representatives kept endorsing waivers to the financing requirement, “perpetuating the failure that this concession came to represent”, the NAO said.

The next steps? 

The courts have annulled all contracts tied to the concession, but there could be movements once the magisterial inquiry into the deal is concluded.  

It was Repubblika that in 2019 asked for an inquiry into the transfer of three public hospitals to VGH to establish whether ministers Edward Scicluna, Chris Cardona and Konrad Mizzi, as well as Technoline managing director Ivan Vassallo had given the VGH investors unfair advantage in the contract’s selection process.  

At first, Magistrate Claire Stafrace Zammit upheld Repubblika’s request. But Mr Justice Giovanni Grixti later overruled the go-ahead, saying that the facts brought to court were simply a collection of journalistic opinions and blogs which Repubblika chose to cobble together. 

Repubblika’s lawyer, Jason Azzopardi, subsequently filed a second application in 2019, alerting the court that the day after the NGO had formally requested the inquiry, “Tumuluri placed nine of the previously hidden Jersey companies involved in the Vitals Global Healthcare (VGH) concession’s web of offshore companies and contracts into liquidation.” 

In requesting the inquiry, the Repubblika lawyer asked the inquiring magistrate to issue, amongst other things, an urgent European Investigative Order, to preserve the evidence and avoid the stultification of any eventual magisterial inquiry. 

EIOs are legal instruments meant to facilitate cross-border evidence-gathering in criminal investigations. Once issued by a judicial authority in an EU member-state, the issuing country is empowered to make use of evidence gathered during criminal investigations carried out in other EU member-states. 

It does not look like the EIO was issued, however. 

In a clamorous twist to the saga, Joseph Muscat’s house in Burmarrad was searched by the police in January 2022 on order of the inquiring magistrate. 

By then, it had been revealed by the media that Muscat had received overseas consultancy payments after he left politics from a company with links to Steward Healthcare. Subsequently, it was revealed that Muscat had also received payments from a Swiss company Accutor that was originally called VGH Europe. 

Muscat has denied any wrongdoing, insisting the work was legitimate and is accounted for. 

Four years on from the filing of Repubblika’s request for the inquiry, the conclusion of this process is now understood to be close at hand, the likely time frame being described as “weeks.”