The R3.6 billion Off-Tender Vaccines Deal

when supply deals leave more questions than answers

Set up to replace the failed State Vaccine Institute, is The Biovac Institute an example of a public private partnership gone wrong for lack of transparency?

In Brief

  • Operations of The Biovac Institute, a public private partnership created to replace the State Vaccine Institute, are opaque. It seems the entity never quite achieved its objective to jumpstart local production of pediatric vaccines
  • Details of the PPP agreement are elusive, but we gathered suspicious information particularly relating to one of the private sector partners, Litha Healthcare Limited
  • In 2013, The Biovac Institute got an exclusive R3.6b contract to supply pediatric vaccines to the Department of Health. The entity, which struggled to fulfill the supply contract, imports the vaccines from global manufacturers who are already doing business with the department
  • Section 217(1) of South Africa’s Constitution demands that State organs contract for goods and services “in accordance with a system which is fair, equitable, transparent, competitive and cost-effective”. Is The Biovac Institute, a middle-entity, offering any value to the public? 

For the better part of 2014, The Biovac Institute, the company we can now reveal is the sole beneficiary of multi-billion rand off-tender paediatric vaccines procurement, was in the news for the wrong reasons.

Media reports that The Biovac Institute, (Supplier Code V0SM1), could not meet orders created a furore. Shortages of polio drops meant newborns were being put at risk. At the peak of the stockouts, The Biovac Institute’s chief executive officer (and deputy CEO of Litha Healthcare), Dr. Morena Makhoana, said the polio vaccine shortage was a global problem. He blamed an unnamed French multinational drug manufacturer for the set back, saying WHO’s recommended polio vaccination campaign had overwhelmed the vaccine manufacturer.

What the media coverage of this debacle didn’t quite address is how The Biovac Institute was awarded the supply contract, or why it is still importing vaccines almost a decade since it was established under a Public Private Partnership (PPP) to replace the failed state vaccine institute. Also, missing from the reports was the special treatment the company seemed to enjoy.

Securing the future of children

Vaccination against diseases such as polio is controversial in other parts of the world, for example, in Kenya and India. But the reality of poliomyelitis registers for many parents, and therefore controversy somewhat takes a back seat. When parents and healthcare providers in South Africa could not access various vaccines, some uncomfortable questions needed to be asked.

Due to the claimed PPP and the single-sourcing nature of the procurement, details of The Biovac Institute’s R3.6 billion pediatric vaccines contract remained buried in records at the Department of Health such that it didn't feature among those published by the department. However, this changed in April when the department published the Master Procurement Catalogue of its R29 billion pharmaceuticals expenditure.

Representing 12% (R3,624,499,243.87) of the total expenditure, Contract No. PPPVAC-2013-1 takes second spot, after ARVs’. A closer look at the data revealed clues about the exact nature of the contract, specifically the items ordered. However, our team could not establish the duration of the current contract. It appeared that The Biovac Institute had landed an exclusive and uncontested contract that it was struggling to fulfill.

What R3.6b buys the public

The Biovac Institute declares on its website that it is a PPP between the South African government and the Biovac Consortium. Public Finance Management Act of 1999 and Regulation 16 of the Treasury jointly govern PPPs at the national level. The Regulation outlines two types of scenarios; where the private entity performs an institutional function and where the entity acquires the use of state property for its own commercial purposes.

In this case, the private partner would appear to have been granted both scenarios, which is quite legal.

Guided by Section 217(1) of the Constitution of the Republic of South Africa, uSpiked team tried to decipher the constitutionality of these arrangements that placed the inoculation of our children at the hands of a single entity. The aforementioned Section reads; “When an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective,”

Data and other records we have managed to obtain from various quarters including the World Bank, the departments of Treasury, Health and Trade and Industries’ CPIC and the private entities involved, provided more questions than answers. Unsurprisingly, the parties involved did not respond to inquiries regarding the deals. The Department of Health told us to use the right channel, but did not provide details on the said channel. 

South Africa’s PPP programme is well regarded and praised by institutions including the World Bank, IMF and various business schools. In fact, several of the country’s PPPs are used as benchmarks – the best examples of how PPPs should work. The Biovac Institute partnership is not among the good examples, and we dare say it is akin to the troublesome sibling you would want hidden in the closet.

Creation of The Biovac Institute

According to its website, The Biovac Institute was formed in 2003 after The Biovac Consortium and Litha Healthcare Limited entered into a Public Private Partnership with the government (Treasury). PPP projects are initiated by respective government departments or institutions, but can only be signed off by the Treasury after thorough examination of the applicants’ feasibility study and assessment of the cost value and benefits to state (public). 

“The Department of Health (DoH) partnered with a strategic equity partner, the Biovac Consortium to create The Biovac Institute in 2003,” the website states. This was to replace the State Vaccine Institute that was experiencing difficulties at the time. There was indeed a need to replace the ailing state institution, but when we are confronted by a chicken and egg situation, more questions must be asked. Questions such as how a partnership was formed to create a new entity that was in fact already in existence and for several years.

The Biovac Consortium (Pty) Ltd, which is 85% owned by Litha Healthcare, was registered in 2001 well in time for it to enter into the 2003 partnership with the State to create The Biovac Institute. Only that Biovac Institute was already in existence by the time its private parent was being created.

According to CIPC’s records, ‘The Biovac Institute’ is the registered short name for The Biologicals and Vaccines Institute of Southern Africa (Pty) Ltd. a private limited liability company that was registered in 1998, about five years before it was claimed to have been formed by the consortium. Among its directors then were Mpumelelo Sowazi, who also serves as its company secretary and also the Group Corporate Affairs Executive for Litha Healthcare Group Limited.

That was not the only yellow flag that should have slowed the finalisation of the agreement. According to the BBBEE Certificate published on its website, The Biovac Institute is 19.68% black-owned and 8.28% black women-owned. Information that has been availed to business journalists maintains that Litha Healthcare owns 52% of the Institute. The ownership of the remaining 47% is uncertain – but other records lead us to believe that it rests with the consortium in which Litha Healthcare owns 85%.

A fish only gets caught when it opens its mouth

In June 2012, as the Institute was gearing to secure the R3.6b vaccine contract, Litha’s CEO, Martin Kahanovitz announced the deconsolidation of The Biovac Institute from Litha Healthcare’s income statement. The Institute’s financials have since then been presented as a joint venture. Who exactly are the other members of the said JV?

‘Unaudited Condensed Consolidated’ quarterly results for Litha Healthcare Group Limited for the three months ending 30 September 2012 revealed more; “The funding for Biovac's manufacturing facility was raised at the Biovac Consortium Proprietary Limited level, a holding company of Biovac and an 85% held subsidiary of Litha”. This matched the records resting with the Treasury’s PPP Unit.

According to records publicly availed by the Unit, the project which fell under State Vaccine Institute (Department of Health) listed Biovac Consortium as the private partner with 15% BEE equity. The 2003 agreement prepared by accounting firm PricewaterhouseCoopers and the law firm of Deneys Reitz, provided no value for the government from the private partners. On the Net Present Value (NPV) to the government, it was then recorded as “R15m system investment; and NPV value for money (vfm) of R60m over current spend.” Classic case of accounting jargon that does not say exactly what the private party was bringing to the table.

The PPP experts we consulted talked to us about the general workings of the PPPs, but declined to talk about Litha Healthcare or the Biovac Consortium deal. The PPP Unit’s records further provided a four-year equity partnership from January 2004, which was later extended to December 2009. 

The Biovac Consortium’s PPP is currently listed among closed projects. Considering Biovac has all along imported vaccines, can it be assumed the project’s objective was to import the vaccines on behalf of the department? If that is the case, then the deal falls short of the constitutionality yardstick.

A deal that could have provided a replacement to the failed state vaccine institution has become an illegal procurement vehicle for private players.

On its website the entity states; “Biovac recognizes the need to partner with others in order to realise its mandate of re-establishing vaccine manufacture. To this end it has entered into technology transfer partnership with Sanofi Pasteur, Heber Biotec and Biofarma … In addition, Biovac distributes products for the following vaccine manufacturers: Sanofi Pasteur, GSK, Heber Biotec, Pfizer, Novartis, Biofarma and SSI.”

Nearly all the above manufacturers are presently supplying various products to the department, so of what value is the mandate to a middle-entity? On affordability and fairness that Section 217 of the constitution envisioned, what mechanism has been put in place to ensure that the off-tender prices are not inflated? How much of the supplied vaccines are sourced under deals backed by partners involved in the global inoculation campaigns?

Answers to many questions involving the vaccine procurement and the partnership or venture – joint or otherwise – remain elusive. In February, the Ireland headquartered Endo International plc acquired Litha Healthcare and delisted it from the JSE. Last month (August), in a deal that must have surprised some of Endo’s investors, it divested from the assured money-minter, the vaccine and devices businesses.

Moneyweb called the reacquisition by Litha as ‘…founders coming full circle’, which leads to another wonder, did Endo’s post-acquisition due diligence on Litha Healthcare find the PPP arrangement too complex to include in its stable?

By being a broker, the entity is making money without laying a single brick. What, then, would motivate a push for investment in a vaccine manufacturing plant?