#59 THE G|O Briefing, June 2, 2021
External Audit flags massive problems in WHO procurement practices - How to fix the Gates Foundation - Nestlé's unhealthy food products
This is an onsite, slightly edited republication of the complete G|O Briefing newsletter
Today in The Geneva Observer, from appearances of favoritism in the selection of consultancy companies to persistent flaws in the procurement process, laxism in human resources management and sloppiness in financial housekeeping, a largely overlooked external audit of the WHO adopted last week during the 74th Session of the World Health Assembly paints the troubling image of an organization beset by serious and persistent managerial dysfunctions. It's a long read.
Taken in its entirety the document is not only scathing, it’s also telling in its striking rebukes to the WHO’s responses, thus casting some serious doubts on the organization’s credibility. Examples of such rejections of the WHO responses abound in the 64-page long report written by Krishna Subramaniam, Director of the WHO-External Audit with the Office of the Comptroller and Auditor General of India. “The reply is not tenable,” he writes in one instance, noting elsewhere that “this reply is self-contradictory.” “This justification and bid evaluation was not in compliance with the WHO Procurement Manual provisions and violated the norms of public procurement because of the following reasons,” sternly remark the auditors at some point before proceeding to fully reject the WHO’s arguments in three lengthy paragraphs.
Documentation is often missing. In some instances, the investigators were not given access to some files, left to wonder if they were either inexistant or if the WHO was simply not willing to produce them. Several recommendations made in the audit were accepted by WHO. But then again, the audit notes “inadequate documentation of the procurement process has been pointed out by external auditors for the last 10 years. However, the discrepancy still persists, and no substantial improvement has been made by WHO in this regard,” questioning the organization’s current ability or willingness to put its house in order.
Patience among Member States with the WHO’s modus operandi seems to be running thin indeed. Last Friday (May 27) in a joint statement, 53 countries expressed their “deep concerns” about the WHO’s handling of sexual abuse in Congo, another matter investigated by the team of auditors and related in the report. The AP recently revealed that the organization had been aware of the scandal since 2019 but has been late in addressing it.
“We must from now on see much more transparency from the WHO,” said Simon Manley, the new UK Ambassador to Geneva. Our piece focuses on the troubling weakness of the procurement’s practices flagged and meticulously dissected in the External Audit. We must admit having shaken our heads while reading it.
Also in The G|O today: “How to fix the Gates Foundation?”, an obviously timely companion piece to our own reporting, written—interestingly—by two former senior employees of the foundation. The answer, they write, lies mostly in better governance. “The conflation of the personal and the institutional is a serious problem for all private foundations with living donors,” they argue.
Should the WHO be rebuilt from scratch?
By Philippe Mottaz and Jamil Chade
It is now abundantly clear that the reform of the WHO will need to be profound in nature and comprehensive in scope. That’s in essence what The Independent Panel on Pandemic Preparedness and its blunt conclusion that the COVID-19 pandemic could have been “preventable,” and two related reports presented during the 74th session of the World Health Assembly (WHA) suggest. Add the External Audit conducted by the Office of the Comptroller and Auditor General of India to the catalogue of interrogations reinforcing the case for profound change.
Somewhat overlooked as all the attention has lately been concentrated on the institutional aspects of the organization’s reform, the document, which covers 2020 opens a wide window on the daily managerial inner workings of the organization. Its key findings are cutting and its conclusions blunt. “WHO did not depict its cash and short-term investments distinctly (…) resulting in incomplete and non-transparent disclosure,” (…), a high priority program adopted from 2019 “was not yet rolled out in any of the four country offices we audited,” “There was an increasing trend of misconduct, especially relating to fraud, harassment and non-compliance to professional standards and sexual misconduct. There were delays in investigation and taking disciplinary actions. (…) Efforts at prevention were found to be inadequate.”
" The firm’s role in procurement constituted a conflict of interest as the firm provided assistance to both WHO as well as the supplier.”
On that very subject, the auditors make a point of writing that “the number of complaints or reports of misconduct are a reflection of the ethical climate of an organization and its ‘tone at the top;’ and therefore, an increasing trend of such complaints should be a cause of concern for the management.”
The audit found repeated and major weaknesses in the organization’s procurement system and mechanisms, which are the focus of this piece. The report also flags problems and questionable practices when dealing with consultancy companies. “We noted several transgressions in the selection and engagement of a consultancy firm. The firm was assisting WHO in the procurement of personal protective equipment (PPE), without due approval. (…) The firm’s role in procurement constituted a conflict of interest as the firm provided assistance to both WHO as well as the supplier,” the report notes about one contract.
In addition to the clear conflict of interest described above, there appears to be favoritism in another contract’s attribution. The report explains that in December 2020, “WHO initiated an open competitive bidding process for further engagement of consultants to ‘support the long-term vision for WHO supply chain and to build capabilities’ to execute the long-term supply chain vision.” Two firms, D and A, both qualified, ended up competing. In the final technical evaluation, D obtained the highest score. As the auditors write, “The consultancy should have been awarded to Consultant D. However, WHO changed the evaluation criteria and re-evaluated the bids as per which Consultant A scored higher and was awarded the consultancy.”
In their conclusions, the inspectors also dismiss the validity of the explanation provided by the WHO for its choice. “This justification and bid evaluation was not in compliance with the WHO Procurement Manual provisions and violated the norms of public procurement. Changing the technical requirement or scope of work, from what was stated and changing the evaluation criteria at the time of evaluation violates public procurement principles and vitiates the tendering process” they write.
“The role of consultants in the health sector has been a problem for quite some time, especially since the last 10 or 20 years when the Gates Foundation got all these big consultants,” a WHO insider told The G|O under the condition of anonymity. In effect, the Gates Foundation created a new market for consultants. “Even people within the health organizations are not happy with this situation. They find that these consulting firms are not adding value, they are just piggybacking on the Gates Foundation to enter the health sector. It’s a small group of firms, always the same,” the source added.
A lucrative business
“The WHO’s consultancy pool completely lacks diversity. It relies heavily on a few firms, essentially American and British that have a de facto exclusive relationship with the organization,” bemoans a senior member of the Geneva diplomatic corp. “The consultants’ selection process must be made much more rigorous, and the current situation must be corrected, it is a matter of concern and will be part of the reform,” he told The G|O.
It is a lucrative business. According to the audit, “During 2020, total expenditure on contractual services was US$ 986.13 million which was the second highest expense item after staff costs. The main components within contractual services are direct implementation; general contractual services; and consulting and research contracts. Consultancy contracts worth US$ 332.79 million were signed in 2020. Eight contracts with a total value of US$ 11.72 million were placed with one consulting firm.”
Another audited case analyzed the procurement of COVID-19 related emergency equipment. Ninety percent of the US$ 866.72 million spent in 2020 by the WHO went to the purchase of medical supplies and materials, including personal protective equipment and Covid-19 testing kits.
While acknowledging “the fact that 2020 was an abnormal year for the medical sector, which saw disruptions in the market and supply chain due to a surge in demand and shortage of supplies,” Subramaniam and his team also note that they identified “deficiencies in quality assurance and technical evaluation” and a “lack of objectivity in bid evaluation and selection of suppliers the testing kits,” stressing that “the procurement system suffered from inadequate documentation and lack of supplier performance evaluation.”
When the COVID-19 crisis hit in early 2020, the WHO did not have clear technical specifications for PPEs even as the auditors write, “the critical importance of PPE was known to WHO from the previous outbreaks over the last two decades, including the recent Ebola virus disease outbreak. As part of its preparedness for emergencies, WHO should have adopted specifications for PPE much earlier.”
That led to the WHO having to cancel orders for protective gowns worth US$ 4.42 million after a WHO supplier spotted quality issues. The auditors’ report not only reveals that it took WHO more than four months to cancel the orders and place new ones with another firm, but that the credential of the new firm could not be verified: “Before issuing the purchase order and while examining the credentials of Firm U, the Firm was asked to give references of its past customers. The Firm initially declined to give the references on grounds of confidentiality. Later the Firm gave the names of three customers. While two customers did not confirm, the third customer did not exist. Further, it was seen that the Firm did not have an export license. Despite these anomalies, orders were placed with the Firm.”
All red flags that according to the inspectors, the WHO ignored.
“The pandemic has upended many things and it’s not a surprise that last year’s audit is therefore more critical than the years before,” the same diplomat tells The G|O. But, besides the severity of its conclusions, what is also striking in the report is the number of occurrences and the care the investigators take in calling WHO’s explanations unconvincing.
Such is the case in the signing of a consulting firm’s contract. Again, let’s let the audit speak:
“At the start of the pandemic in March 2020, Consultant A offered ‘pro bono’ services to help WHO in procurement and supply of PPE and essential equipment. WHO accepted the offer and engaged Consultant A. According to the offer of Consultant A, the firm was to provide the service for seven months, in different phases. The total cost of the engagement, as worked out by Consultant A, was US$ 7.30 million, of which 55% (US$ 4.03 million) was to be borne by Consultant A, 35% (US$ 2.53 million) by WHO and about 10% (US$ 0.73 million) by The Bill & Melinda Gates Foundation.”
“We are of the view that calling this engagement pro bono is not correct because Consultant A had proposed a project of US$ 7.30 million in which WHO was made to commit US$ 2.53 million. Details of how the pro bono services were valued was not available on record.”
Diplomatic sources told The G|O that the report of the External Auditor is being meticulously studied by the WHO Member States.
“We hope our inputs and the lessons learned are used to strengthen the system of emergency procurement so that WHO is better prepared for the next emergency,” Khrisna Subramaniam told the World Health Assembly last week in introducing his report.
He will be closely monitoring the implementation of his recommendations.
ELSEWHERE IN THE ECOSYSTEM
Nestlé: "Good food. Good life." Not so reveals the Financial Times.
Thanks to the Financial Times, we now know that 60% of Nestlé’s food portfolio does not meet the “recognized definition of health.” In case you missed the news: “The world’s largest food company, Nestlé, has acknowledged that more than 60% of its mainstream food and drinks products do not meet a “recognized definition of health” and that “some of our categories and products will never be ‘healthy’ no matter how much we renovate.” A presentation circulated among top executives this year, seen by the Financial Times, says only 37% of Nestlé’s food and beverages by revenues, excluding products such as pet food and specialized medical nutrition, achieve a rating above 3.5 under Australia’s health star rating system,” the paper wrote on Monday, May 31.
Will Nestlé also acknowledge and conclude that its CHF 2 million contribution to the WHO Foundation might now appear slightly schizophrenic? Its donation to the recently created Foundation whose aim is to help WHO fundraise was roundly criticized by global health advocates when it was announced.
Nestlé’s critics have accused the company of repeated violations of the marketing code of infant formulas. Not a good start for the WHO Foundation tweeted Global Health Expert Ilona Kickbush at the time of the announcement.
How to fix the Gates Foundation
By Alex Friedman and Julie Sunderland*
Bill and Melinda Gates are getting divorced, and the world can’t stop talking about it. Ever since the news broke, the press and social media have been abuzz with speculation about what ended their 27-year marriage. Could it have something to do with Bill Gates’s relationship with Jeffrey Epstein or the personal behavior of Gates’s money manager? And what will happen to their immense fortune, including their Lake Washington mansion?
Given the Gates’s wealth and status, such tittle-tattle is understandable. But it distracts from the very real risk the couple’s split poses to the lives of millions of people around the world.
The Bill & Melinda Gates Foundation has a far-reaching, positive global impact. But the way the Gates family has chosen to construct and manage their organization’s $50 billion endowment is far from ideal, with direct implications for planning and investing in programs that take years to implement.
Emulating the best-run public companies
As living donors, Bill and Melinda Gates make all of the foundation’s critical strategic decisions, and the organization’s impact depends as much on its co-chairs’ reputations and moral authority as it does on their money. This conflation of the personal and the institutional is a serious problem for all private foundations with living donors. As the Gates family and Foundation pass through the wringer of intense public scrutiny, it is worth considering how to improve founder-controlled philanthropy. Three reforms are needed.
First, resilient governance mechanisms must be introduced. The Gates Foundation has three trustees: Bill, Melinda, and Warren Buffett. This would not be appropriate in most organizations, let alone the world’s second-largest charitable foundation. After all, it means that a fracture between any of the trustees – such as a divorce – could render any semblance of good governance impossible.
Charitable organizations should emulate the best-run public companies. They should establish a board of directors that is large enough to minimize their vulnerability to personal fissures and ensure that at least most members are making independent decisions on strategic matters.
This also means appointing a chair who is not the foundation’s CEO, founder, or a founder’s family member. And given that founders receive a substantial tax benefit for their donations, the assets the board oversees should be regarded as belonging to the public, with the board being held accountable to a fiduciary standard of care.
Second, foundations must embrace genuine transparency. As it stands, foundations’ annual reporting centers on IRS disclosure forms, which require few specifics about spending. This undermines discipline in charitable giving, with foundations often measuring their performance by how much money is pushed out the door and whether the founders have been embarrassed, rather than clear impact assessments.
Foundations should be required to file detailed annual reports analogous to those filed by public companies. These reports should specify not only how the organization spent its money, but also why it made the choices it did, what results it has achieved (good or bad), and what risks it foresees. Over time, such transparent and comprehensive reporting could help to create a market-like mechanism of public accountability for a foundation’s effectiveness.
Third, foundations should be required to double the amount they give away each year. Since 1969, the United States tax code has required all foundations to donate 5% of their assets, on average, each year, in order to preserve their nonprofit status. The rationale is that this enables properly managed foundation endowments to produce returns similar to those offered by financial markets. The foundation could exist in perpetuity, with the donors (and their family) exerting permanent control.
We expect our heroes to be perfect
In reality, financial returns have far exceeded 5% – the S&P 500 has risen more than 10% annually since 1969 – and foundation endowments have grown by even more than that. Doubling the amount foundations must give away each year would create a powerful incentive for donors to focus on active charitable investment, rather than building eternal monuments to themselves.
This would also spur foundations to provide more resources to nonprofits, which often struggle to acquire the overhead funding they need to implement their programs. A major problem here is that foundations tend to restrict their funding to highly specific program grants, often shaped by the donor’s priorities, rather than the recipient’s needs. This starves nonprofits of effective leadership and institutional capabilities, undermining their impact. If foundations were forced to give away 10% of their assets annually, the most innovative nonprofits would be far more likely to receive the resources they need.
We expect our heroes to be perfect. So, when they turn out to be mere human beings, we are fascinated, disappointed, and perhaps even feel some schadenfreude. But, while Bill and Melinda Gates have done enormous good, the true heroes are the thousands of talented, creative, and caring people they have empowered through the Gates Foundation. We would all benefit from focusing less on salacious gossip about their personal lives and more on how to take a good foundation model and make it better.
*Alex Friedman is former chief financial officer of the Bill & Melinda Gates Foundation. Julie Sunderland is former director of the Bill & Melinda Gates Strategic Investment Fund.
Today's Briefing: Philippe Mottaz - Jamil Chade
Guest essay: Alex Friedman - Julie Sunderland
Edited by: Dan Wheeler