Audit at Kemsa reveals massive financial and procurement irregularities

The Kenya Medical Supply Authority (Kemsa), which buys drugs for all public health facilities in Kenya, is on the spot after a special audit unearthed procurement and financial irregularities that put at risk over Sh100 billion of donor funds.

A special audit of the parastatal conducted from October 2019 has recommended an overhaul of the entire procurement system at Kemsa and wants a new accountability system that has an end-to-end supply chain visibility platform installed to prevent losses and wastage.

In one of the most disturbing findings of the review, it has emerged that despite being given the monopoly to sell exclusively to government agencies, Kemsa has been overcharging counties by up to 77 percent for some essential drugs.

In non-pharmaceutical items, it had a freer run, and was overcharging counties to as high as four times the market price, raising queries on just why counties need the agency in the first place.

DEN OF THIEVES

This lends credence to allegations by Health Cabinet Secretary Mutahi Kagwe that his ministry is a den of thieves run by procurement cartels. 

The joint audit report done by the United States Agency for International Development (USAID) and the Global Fund — that mainly fights Aids, tuberculosis and malaria — has documented several malpractices at Kemsa among them stock management challenges at its warehouses.

In the past, the two development partners conducted separate audits. This is the first time they have undertaken a joint audit. The audit was initiated on October 23, 2019 and the report is dated December 2019.

The donor agencies officially transmitted the report electronically to Kemsa on May 4, 2020 after it was completed. They then requested the agency to set up an official meeting to consider its findings and agree on how the recommendations will be implemented. They requested Kemsa to have its board chair and the Principal Secretary of Health in attendance.

SYSTEMS REVIEW REPORT

The letter sharing the report and seen by the Nation is dated May 4, 2020 and it was copied to Mr Kagwe, Treasury CS Ukur Yatani, Health PS Susan Mochache and Kemsa board chairman Kembi Gitura.

"We would like to share the Kemsa systems review report with your organisation and given the current environment of Covid 19-pandemic, we are transmitting it electronically to you and the PS Ministry of Health," the letter addressed to Kemsa CEO Dr Jonah Manjari reads in part.

"We want to schedule a virtual meeting with you, the Kemsa board chair and MOH principal secretary to deliberate on the report findings and proposed action plans to implement the recommendations as proposed from the joint review," the letter adds. It was co-signed USAID Kenya mission director Mark Meassick and Global Fund portfolio manager John Ochero.

The audit comes at a time when investigators from the Ethics and Anti-Corruption Commission (EACC) is conducting a separate probe on procurement at the agency.

The two development partners put together a multi-disciplinary, highly experienced team of financial, supply chain, legal and contracting experts to conduct the audit.  It reviewed Kemsa's management systems.

It also looked at legal, governance, financial, organisational, procurement and management processes. USAID and the Global Fund have invested substantial resources in Kemsa, giving it at least Sh100 billion over the last five years.

MEDICAL COMMODITIES PROJECT

USAID is currently supporting the Kemsa medical commodities project (MCP), with funding of about Sh69 billion (USD650 million) for procurement of all commodities funded by the US government for the five-year period between 2015 and 2020.

Kenya is one of the Global Fund's “high-impact” countries with active signed grants of Sh40.7 billion (USD384 million) for the period between January 2018 to June 2021. The Global Fund has supported HIV, TB and malaria programmes in Kenya since 2002, disbursing to the country cumulatively Sh120.8 billion (USD1.14 billion) to date.

The report notes that 60 percent of these billions are for procurement of health commodities through Kemsa. The US government through USAID/KEA entered into a contract with Kemsa MCP in 2015. 

The programme aims to operate a safe, secure, reliable and sustainable supply chain management system for HIV/Aids commodities needed to provide care and treatment for persons with HIV/Aids and tuberculosis.

EFFICIENT SUPPLY CHAIN

It also supports the warehousing and distribution of US government-funded family planning, nutrition and malaria commodities.

"Both development partners intend to serve beneficiaries through an efficient supply chain that ensures timely and uninterrupted access to required health products and technologies," the report adds.

It says that, given the prominent role Kemsa plays in fulfilling the objectives for both development partners, a review of its operations and operating environment serves as an important step in each programme cycle.

Roll-out of Universal Health Coverage (UHC) in full is expected to result to a fourfold increase in demand for Kemsa's services.

ON VERGE OF BANKRUPTCY

Despite receiving billions of shillings, Kemsa is on the verge of bankruptcy.

The report says it computed a few financial ratios among them the liquidity, profitability, debt-to-equity and activity ratios to determine its financial health and the verdict was shocking.

"The review established that Kemsa's financial health is weak. The ratios illustrate Kemsa's low financial stability and vulnerability to any changes in the market," the report notes.

It also found a risk of loss, leakage and wastage of drugs though its supply chain system since the current system does not support traceability and accountability. Kemsa only undertakes post-delivery monitoring in areas where substantial risk has been identified.

The audit also fingered Kemsa for failing to adjust its annual inventory count for the year ended June 2019, which saw it hide at least Sh220 million in its books. The auditor-general also raised queries about this variance in past audits.

VARIANCE NOT ADJUSTED

"The review team noted that the variance had not been adjusted in the organisation's books of account. Kemsa indicated that the variance will be adjusted for during the next audit," the report notes. This Sh220 million inventory scandal is likely to open the lid on just what ails the agency.

On pricing, the audit sampled out various prices Kemsa was charging counties and compared it with market prices. And here is where the scandal lies. Kemsa is expected to be the cheapest in the market given the economies of scale it enjoys.

But a sample of about 25 products among them pharmaceutical items, non-pharmaceutical items and linen items revealed price variations of up to 77 percent, illustrating just how much it was stealing from counties.

For instance, a tin of 1,000 pills of a drug coded PM07AMT001 was retailing at Sh233 on the market but Kemsa was selling it at Sh405, which is 42 percent higher.

A pack of 25S of another non-pharmaceutical item coded NMO1GAU007 was sold to counties at Sh430 while the market rates were Sh99.25 at the time of the audit. This is four times more.

INTERNAL AUDIT RECOMMENDATIONS

The audit also took issue with the move by Kemsa to drop internal audit recommendations without implementing them.  The other problem it found was the board composition.

During the audit period, the report noted that, prior to filling the two vacant positions that were on the board, the board's ability to provide strategic direction was constrained.

"The board could not meet on a regular schedule to provide continuous oversight to the organisation. This resulted to two of the committees having the same meeting chair to meet required quorum," the report notes.

This was the case for the Audit and Risk Committee and the Finance and Strategy Development Committee. The audit notes that this decision resulted in significantly impaired independence of the audit committee.

FOLLOW-UP LACKING

"Internal audit reports were lacking follow-up and resolution of identified issues and recommendations raised by the internal audit and risk department," it said adding that most of the decisions were signed off by Kemsa chief executive Jonah Manjari.

Our attempts to get Dr Manjari to comment on the story yesterday were futile. He neither returned our calls nor responded to text messages. 

It said chairing of more than one committee put board members in a conflict of interest situation. It was also challenging to attain quorum requirements for board meetings to happen.

"Since the board requires a quorum of five members to convene, it means that all current members (at the time of the review) have had to be available for all board meetings," the report says. 

The audit also noted that Dr Manjari and his team of directors were yet to be placed on performance-based contracts pending the next State Corporation Committee (SCAC) review in early 2020.

Whereas Kemsa is legally bound to supply the complete range of health products and technologies required by facilities across the country, like any other procurement and supply chain organisation, it cannot assure 100 percent availability of all required drugs at all times.

KEMSA WAREHOUSES

The report found that the Kemsa warehouses only have half of the various types of drugs and medical supplies required by counties most of the time, putting the lives of Kenyans who depend on public health facilities at risk.

"Kemsa is unlikely to reach the desired order fill rate of 100 percent or improve turnaround time to the target 4-10 days, yet customers have no other option when Kemsa fails to meet these standards," the audit notes. Sales to counties in 2018/19 for instance accounted for 90 percent of Kemsa's revenues.

Due to this, it has asked Parliament to change the law to free counties to make the decision to buy drugs that cannot be strategically sourced by Kemsa elsewhere.

"The requirement for health facilities to order only from Kemsa faces challenges of stock outages and long turnaround times," the report notes.

TAX EXEMPTION

It says these two challenges have been further exacerbated by the recent introduction of new processes for tax exemption and the requirement for pre-shipment verification of conformity (PVoC) of pharmaceuticals by the Kenya Bureau of Standards (KEBs).

Challenges with customs clearance and related processes also forced Kemsa to request suppliers to deliver annual quantities rather than call-downs of multiple shipments. This has resulted in the holding of a large inventory, increasing the likelihood to strain warehouse capacity and increase the risk of expiries.

"The large inventory held translates to inadequate storage space and exacerbates the challenges of stock management across Kemsa's warehouses," the report notes.

The order fill rate for essential medicines and medical supplies has been pegged at a lowly 52 percent but could be much lower because the measure only captures products that are listed in Kemsa's ordering system, not the items on the actual facility's order. A fill rate is the percentage of customer requirements available in Kemsa warehouses.

INADEQUATE CAPITALISATION

The report notes that Kemsa's ability to satisfy customer needs is threatened by inadequate capitalisation and significant debts, most of which are held by the Ministry of Health and counties.

As at October 2019, it was owed about Sh4.8 billion.

Out of this, Sh3.3 billion was more than 91 days overdue, which in proper accounting would have been classified as bad or doubtful debts and a provision for the same made in the agency’s books.

In addition, funds for quarter three and four of the UHC pilot had not been released to Kemsa by the time of the audit.

UHC FUNDING

"While the impact of the UHC pilot has been tangible, county governments have not understood what should be covered with UHC funding and some of them reduced or eliminated funds for health commodities at a time when the demand for health services had increased," the report notes.

"Without funds, health facilities are unable to purchase from local wholesalers even when suppliers have not been availed from Kemsa," the report said adding that the roll-out of UHC will demand more in terms of capacity of warehousing space, distribution points, information and communication.

The audit also found that Kemsa does not have a consolidated procurement plan hence procurement is fragmented along health programmes and funding streams which limits leveraging across all investments.

Kemsa also lacks an ICT strategy for a robust system that ensures interoperability across existing systems, warehouse management system and logistics. Its current system was also found to have had regular downtimes, which slowed down operations.