Profiting from Sickness Part IV: LD Logistics

A Prequel to the 2017 Audit

This investigation centers on the findings of a 2017 audit ordered by the Prime Minister’s Department into the procurement and distribution of medical supplies across the country.

However, during the investigation it was discovered that the serious allegations made against LD Logistics in the 2017 audit, echo earlier concerns raised in a detailed 2013 evaluation of health reforms conducted by the highly regarded Burnet Institute. The concerns relayed to Burnet Institute researchers by health officials during fieldwork, it appears, did not affect LD Logistics’ ability to get further lucrative contracts from the government.

The Burnet Institute evaluation observes that in 2009, Papua New Guinea undertook governance and implementation reforms to improve the supply of medicines. This included the out-sourcing of distribution to a third-party logistics company, LD Logistics, ‘to distribute medicines between AMS [Area Medical Stores] and health facilities’.

The evaluation notes:

“Some aspects of the LD Logistics contracting seem irregular. For example, some interviews and document review suggested that: the desire for prompt payment to suppliers should over-ride the time that might be required for verification of charges by AMS [Area Medical Stores]; there is no need for detailed performance measures in terms of delivery coverage and timing (although the contract does include performance measures in relation to complaints); contractual arrangements have been extended in time without formal renegotiation or re-documentation; and there is wide variation in the costing of individual elements without clear criteria for estimating these costs”.

The report elaborates on different dimensions of the failures attributed to LD Logistics:

“Some managers interviewed reported satisfaction with their communications with AMS and receipt of supplies through LD Logistics provided transport. However many informants at all levels noted continuing problems in the distribution through the ‘pull’ system, with qualitative findings including lengthy waiting periods after ordering medicines from the AMS (in some cases up to 18 months); packages delivered to the wrong addresses; inadequate communication; damaged supplies being delivered; and a general distrust for the efficacy of the entire medical supply system. These seem to relate to problems in the processing of orders, and in delays in dispatch and transportation”.

Feedback from health professionals place a significant degree of blame for these shortcomings on LD Logistics. For example, one church health secretary reported:

“Our drug order two months ago is still sitting in the LD Logistics office in Mt Hagen waiting to be dispatched and we had a second order sitting in the AMS [Area Medical Stores]. All this drugs are sitting in Hagen waiting for dispatchment while our people in Karamui/Nomani district are dying”.

Similarly, the Burnet Institute evaluation notes:

“Sandaun Provincial administration wrote in May 2013 regarding ongoing poor and inconsistent deliveries by LD Logistics of essential and TB medicines, citing risks of treatment interruption, noting that deliveries expected in March arrived in May and that medicines that arrived at Badili AMS [Area Medical Stores]  in February for air freight were instead sent by sea”

The Burnett Institute adds:

“Long transit times negatively affect facilities’ commodity access given that an AMS [Area Medical Stores]  is unable to send an additional shipment if there is one on record as being on transit. One extreme example is represented by a consignment to Bomai in the Chimbu province, of an order placed in July 2012, collected from the AMS by LD Logistics in August but not received until June 2013, a transit time of 10 months. The reason given was that LD Logistics waited on other loads to consolidate shipments making it more cost efficient”.

Despite the wide ranging concerns raised by health officials and Burnet Institute researchers LD Logistics consolidated its position in 2014 as the national distributer of medical goods and supplies. Nevertheless, serious failings continue to be attributed to the company.

Audit findings

In 2013, LD Logistics was contracted to deliver medicines and medical supplies from the five Area Medical Stores located in Port Moresby, Lae, Mt. Hagen, Kokopo and Wewak to PNG’s 21 hospitals, 1,933 Health Centres and 771 Aid Posts. LD Logistics, therefore, was given a critical role to play in ensuring the delivery of effective health services across the whole country.

Overall the 2017 audit found:

‘There is no monitoring of delivery by LD Logistics Ltd and performance has been poor with deliveries delayed by months’ [p33].

Even more concerning, the audit says that according to Area Medical Stores management in Kokopo, Port Moresby and Mt Hagen, LD refuses to provide them with any proof that its deliveries have actually been made and they do not get to check or verify its invoices. Instead LD sends its invoices direct to NDOH in Port Moresby for payment. This significantly heightens the risk of fraud, it is claimed in the audit findings. [p34]

The auditors visited the Area Medical Store in Mount Hagen, which services Chimbu, Jiwaka, Western Highlands, Enga, Southern Highlands and Hela.

According to the audit, the Store Manager and his assistant reported:

1. LD Logistics Ltd is not doing delivery to all hospitals, clinics, and health centres. Most of the times, the health facilities are sending their own transport to collect orders as they could not wait longer;
2. LD Logistics Ltd is not delivering orders to clinics and health centres that are located in remote regions;
3. LD Logistics Ltd does not have the capacity to carry out deliveries to all health facilities throughout the Highlands Region; [p27]

The Area Medical Store in Lae serves Morobe, Madang, Eastern Highlands, Oro and Manus. According to the audit the Area Medical Store Manager reported that ‘LD Logistics Ltd needs to improve its deliveries done through sea and air. Health facilities accessible by air and sea do not get their medical supplies on time. Deliveries done through road seem to be done in a timely manner’. [p30]

Emergency supply

In emergency cases NDOH contractors may be required to deliver drugs and other supplies at short notice and very quickly. In such cases the contractor is entitled to be paid at a higher than normal rate for deliveries made within 24 hours of the order being given.

The audit looked at four claims submitted by LD Logistics for emergency or ‘rush’ services. It found the average time taken for the supplies to be delivered was actually 34 days!

The audit records:

Based on this analysis, it was noted that LD Logistics Ltd is submitting claims to NDoH for emergency or rush services at higher than normal rates even though deliveries were not made within a day. These findings were confirmed by Acting Internal Audit Manager-Southern Region, NDoH. [p19]

The failure to manage and monitor emergency or rush services rendered by logistic companies has, according to the audit, resulted in late deliveries and payment of high fees. [p19]

These are extremely serious allegations that require immediate investigation by the RPNGC’s National Fraud and Anti-Corruption Directorate, to see whether there is evidence that s406 or s407 of the Criminal Code Act 1974 has been breached.

406. CHEATING.

(1) A person who, by means of any fraudulent trick or device–

(a) obtains from any other person any thing capable of being stolen; or

(b) induces any other person–

(i) to deliver to any person any thing capable of being stolen; or

(ii) to pay or deliver to any person any money or goods, or any greater sum of money or greater quantity of goods than he would have paid or delivered but for the trick or device,

is guilty of a misdemeanour.

Penalty: Imprisonment for a term not exceeding two years

407. CONSPIRACY TO DEFRAUD.

(1) A person who conspires with another person–

(a) by deceit or any fraudulent means to affect the market price of any thing publicly sold; or

(b) to defraud the public, or any person (whether or not a particular person); or

(c) to extort property from any person,

is guilty of a crime.

Penalty: Imprisonment for a term not exceeding seven years.

Monitoring and evaluation

The audit found, astonishingly, that the Medical Supply and Procurement Division (MSPD) within NDOH does not take any steps to monitor or evaluate its contractors performance and does nothing to ensure satisfactory performance in accordance with the terms of their engagement [p15].

This is despite the very large value of the contracts being awarded, the continual reports of sub-standard performance from around the country, and the critical shortages of drugs in hospitals and clinics.

The audit noted one particular instance of this general failure to illustrate its point:

During the course of the Audit, we obtained copy of a letter dated 23^rd February 2017 written to the Health Secretary by Ms. Margaret Kaile from Division of Health of Chimbu Provincial Administration expressing dissatisfaction on the distribution of medical supplies by national distributor, LD Logistics Ltd. We noted that Deputy Secretary-National Health Planning & Corporate Services referred that matter to Executive Manager-Corporate Services to take appropriate action but there is no record of such action being taken.

Contract expiry

LD Logistics was engaged by NDOH as its national distributor of medicines and medical supplies under a three-year contract in November 2013. The contract expired on 19 November 2016. An option in the contract to renew for a further two years on successful completion and satisfactory performance was never exercised and lapsed when the contract expired in November 2016. [p35]

The original three-year contract was valued at K25,464,353. However, payments to LD for the three years 2014-2016 totalled, according to the audit, over K75 million.

Since the contract expired, LD Logistics has continued to be engaged and has been paid at least a further K9 million. According to the audit there was no new tender; instead LD is now contracted under a ‘certificate of inexpediency’, a measure strictly reserved for short-term emergencies (natural disaster, civil unrest, defence emergency or health emergency).

The audit found that although NDOH knew for three years the contract with LD would expire on 19 November 2016, it only took action on 4 November, when it contacted the Central Supply and Tender Board [CSTB] seeking to extend the contract for another year. [p36]

It appears NDOH was seeking to extend the contract without taking any steps to evaluate the performance of LD over the previous three-years and despite the widespread complaints in the media and internally about drug shortages and distribution problems.

The CSTB replied to the NDOH on 4 January 2017, advising the department that in its meeting held on 15 November the CSTB had rejected the request to renew the contract. The NDOH asked the CSTB to reconsider and on 16 February the Board approved the issuance of a certificate of inexpediency to extend the contract until November 2017.

It appears this decision of the CSTB was also made without any attempt to review or evaluate the performance of LD under its original contract.

According to the audit, in its February letter the CSTB advised the NDOH ‘to immediately review technical specifications and quantities, and finalise Tender documents for issuing of a superseding Tender as soon as practical. This is mandatory requirement under PFMA [Public Finance Management Act]’  [p37]

According to the audit, the CSTB again wrote to the NDOH on 4 April, reminding it of the need to prepare a new tender.

At September 2017, the audit found that NDOH had still not taken any steps to  prepare new tender documents as instructed in February and April. Meanwhile ‘it continues to make numerous payments to LD Logistics Ltd’ [p37]

Legitimate questions need to be asked about why the NDOH is so reluctant to re-tender the national distribution contract and instead prefers to continue to use the services of an allegedly under-performing contractor.

LD Logistics

LD Logistics Ltd is a Papua New Guinea company registered in May 2007. It is owned by Eddie and Francis Wagaia through their wholly owned company, Rhicornese Holdings Limited.

In the three years of its 2014-2016 NDOH distribution contract, the assets of LD Logistics more than tripled from K7 million to over K22 million. In the same period the company’s net worth (assets minus liabilities) almost quadrupled, from K3.3m to K11.7m.

The Wagaia network

In total, Eddie and Francis Wagaia, own or partly own at least 22 companies registered in PNG.

These include eight companies wholly owned through Rhicornese Holdings: LD Logistics Ltd, Techno EVM Limited, LD Civil Works Ltd, LD Express Limited, LD Travel Services Limited, POM Pharmaceutical Supplies Limited, GTM Distributors Limited and Tokiwa Limited.

Eddie and Francis also jointly own a further five companies: Ghaya Consultants Ltd, AOI Printing Ltd, South Seas Vanilla Ltd, Tara Travel Services Limited and Yumi Gas Limited.

Francis also owns a further four companies in his own name, Pac Gas Limited, Grey Hill Ltd, Colts Management Consultants Ltd and Fire Heel Turf Bookmakers Ltd. He also owns 60% of Deem Limited and 50% of LD Constructions Ltd, Muwa Trading Ltd and Stream Travel Services Ltd.

Conclusion

By focusing in this instalment of Profiting from Sickness on one company, its performance and the failure of the NDOH to seemingly exercise any monitoring or control, we hope to illustrate the scale and magnitude of the problems in the distribution of medicines and medical supplies and their ‘legendary’ nature.

We also hope to illustrate that some people seem to be profiting very handsomely from the current status quo, and, as we saw previously with Borneo Pacific, these are major business people with extensive interests across a range of sectors of the economy.

While these companies bank their millions under clouds of serious allegations levelled by a range of oversight bodies, there are mothers and children, sisters and brothers, aunts and cousins who are suffering and even dying because medicines and other health supplies are not available to them.

When someone causes injury or even death in a physical attack as a society we are outraged and we have a police force, courts and prison system to ensure a just punishment. But when medicines are not available to treat the sick or vaccines that could prevent serious illness are not delivered in time, it seems the system fails us and as a society we do not react with horror and outrage.

Yet by any objective measure these victims deserve our sympathy, and prompt reaction from government to determine which entities are responsible for these failings, and whether they should incur punishment under the criminal law, or through other sanctions.

In this investigation PNGi has pointed to serious allegations against LD Logistics that require criminal investigation to determine whether illegitimate and fraudulent claims and payments were made for ‘rush’ orders.

There are also very legitimate questions that must be asked of the Health Minister and the Secretary for Health about why companies that have been highlighted as performing poorly in independent reports, continue to be awarded new and lucrative contracts, especially when the consequences for people’s health and wellbeing are so dramatic.

Certainly, the audit by the Prime Ministers Department and the earlier study by the Burnet Institute are correct, LD Logistics and its owners appear to be one part of the systemic failures that are leading to misery and suffering for those across our nation who rely on the public health system.

Appendix - LD Logistics in the News