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					NATIONAL HOSPITAL INSURANCE FUND

REPORT OF THE CONTROLLER AND AUDITOR GENERAL ON THE ACCOUNTS
OF NATIONAL HOSPITAL INSURANCE FUND FOR THE YEAR ENDED 30 JUNE
2004

1. CONSTRUCTION OF NHIF BUILDING

As reported in the previous years report, the Fund entered into a fixed sum contract with a
construction firm for the construction of the NHIF building at cost of Kshs.1,483,000,030.
The project was commissioned on 18th September 1997 and the completion date was
expected to be in April 2001. The contract sum was however revised three (3) times from
the original contract sum of Kshs.1,483,000,030 to Kshs.3,306,981,329. The building was
completed and occupied by the Fund in April 2005 by which time the Fund had paid the
contractor a total of Kshs.3,278,226,690 and the consultants another sum Kshs.931,622,237
making a total of Kshs.4,209,848,927. The final accounts have not however, been prepared
to determine the actual cost of the construction. The large cost overrun and the huge
contract sum variations have not been justified by the Fund. Consequently, it is not
possible to give an opinion on the carrying value of the property (NHIF Building) of
Kshs.4,532,490,274 reflected in the financial statements as at 30 June 2004.

The Committee heard the evidence given by the Chief Executive that the Fund entered
into a contract with N K Brothers for the construction of NHIF Building at a contract sum
of Kshs.1,483,000,030 and works were scheduled to begin on 18th September 1997, to be
completed on 15th April 2001.

The Committee further heard that 3 variations were effected, thereby raising the contract
figure to Kshs.3,306,981,329.

The Committee was informed that;

(i)    The three price variations to the contract were effected as a result of financial
       appraisals prepared and recommended by the Ministry of Roads and Public
       Works which was the lead consultant and departmental representative and
       approved vide MIN B/357/2000, MIN B/S/25/2002 and MIN B/508/2003.

(ii)   The report by the consultant cited the following as the causal effect of the
       variations:
           Geology of the location
           Price escalation due to economic factors, statutory and contractual obligation of
            parties to the contract
           Contractual claims for losses and expenses
           Changes due to new proposals and additional operational requirements
            arising out of change of status as government department to a fully fledged
            parastatal
           Design and specification changes occasioned by technology advancements.

(iii)   That the project implementation was delayed from April 2001 to 2006 when the
        building was occupied mainly due to geology of the location, extremely hard rock,
        El-nino and La Nina weather phenomenon, additional works, delayed approval of
        work and delayed payments on the contract.

(iv)    The following consultancy firms were engaged and paid amount totaling to
        Kshs.1, 001,212,050.

        (a) Womi Associates                            -      Kshs.285,239,750.36
        (b) Design (Interior Designs)                  -      Kshs.84,456,567.40
        (c) Ujenzi Consultants                         -      Kshs.196,364,622.22
        (d) Kaigutha Chepkwony & Partners              -      Kshs.45,606,945.70
        (e) Kinyua Koech Agencies                      -      Kshs.7,800,000.00
        (f) Friscan Management Project Managers        -      Kshs.168,617,186.71

(v)     The Ministry of Public Works has completed the technical report and post project
        appraisal on the project.

(vi)    The Ministry of Roads and Public Works engineers, project architects, M/s Womi
        Associates and Quantity Surveyors, M/s Ujenzi Consultants provided technical
        expertise on the project while R. S. Manga and Associates were Structural and
        Civil Engineers.

(vii)   Some of the consultants were appointed in disregard of legal stipulations as
        agreed between the Chief Architect and the lead consultant M/s Womi Associates
        while some payments were made prior to certificates being signed by the Lead
        Consultant.

(viii) At some point the lead consultant failed to discharge his duty forcing the clients
       to issue instructions on site and that in the course of the project implementation,
        the Ministry of Roads and Public Works were not consulted in a number of
        decisions made on the project.


The Committee noted that this matter was dealt with at length in its 13 th Report pages
191-195 wherein the Committee expressed concern over the escalation of the project cost
and the unsatisfactory manner in which the project was handled.

The Committee then had made several observations as follows:-

(i)     The cost of the project which was estimated at Kshs.1,762,000,000 had almost
        trippled, with the contractor who had quoted Kshs.1,483,000,030.65 having been
        paid Kshs.3,279,226,690 by 6th May 2005 (while the current estimate for the project
        is Kshs.4,2billion);

(ii)    The justification for some of the reasons for variations of contract sum are
        unconvincing as they were foreseeable particularly the hard rock and price
        escalations due to economic factors;

(iii)   The project was handled in most unsatisfactorily manner and this was the most
        imprudent investment ever made;

(iv)    The Parent Ministry and the Ministry of Finance failed in their fiduciary duty to
        control and supervise the Fund in the implementation of the project. The
        Committee noted that the Parent Ministry was represented in all the meetings
        where variations were approved while Treasury continued approving the budget
        without questioning the excessive expenditure on the project;

(v)     The Lead Consultants, M/s. Womi Consultants were hired despite their past poor
        record, exhibited difficulties in their dealing with the Fund, had no office and
        appears to have been a “brief-case consultant”. In the Sixth Report of the PIC, the
        M/s. Womi Associates had been accused of conspiracy and fraud, by participating
        in irregular variation of a contract to partition offices of the National Council for
        Science and Technology from Kshs.5,388,520 to Kshs.26,946,467 in 1993;

(vi)    Blasting of the hard rock could not have been a factor for delay and/or contract
        price variation as the contractor was not limited to drill and blast more than ten
        pits in a day and in any case by the time the Commissioner of Mines and Geology
        restricted blasting, most of the hard rock had been removed.
The Committee also expressed concern that:-

(i)    The Ministry of Roads & Public Works were excluded from the project for a
       period of over one year and as a result the project was poorly executed as
       instructions were issued directly to the contractors by the Fund, while sub-
       contractors appointed and valuation and certification of the works done without
       involving the Ministry.

(ii)   The parent Ministry and the Treasury continued to approve budget of the Fund,
       which contained exaggerated variations without questioning the rationale behind
       them.

The Committee observed that, arising out of the Committee’s recommendation in the
13th Report that the Ministry of Roads and Public Works should carry out a technical
audit on the whole project and evaluate the variations undertaken with a view to
determining the reasons for the huge escalation of the project cost, and having noted the
contents of the report prepared, it is apparent that the said post project report seems to
be a justification for the errors and omissions executed in this project by all the players
involved, including the Ministry of Public Works officials the Consultants and the lead
Architect as well as the then Chief Executive of the Fund and his staff who were
members of the Tender Committee.


The Report however, concurs with the Committee’s observations, that some of the costs
could have been avoided as they were foreseeable, and states that

       “the bulk of the costs a situation that could have been avoided with proper planning
       and project/construction management.”

The Report further pegs the gross development value of the building at Kshs.4,
965,042,150.00 at 15% developers profit and therefore found the project viable even after
taking into consideration interest lost on nugatory expenses on previous consultancies,
cost of finance which brought the total investment outlay to Kshs.4,317,427,954.90.

The Committee therefore reiterates its earlier recommendation in the 13 th Report Page
195 that:-

(i)    The Director of Criminal Investigations Department should institute immediate
       investigations into the conduct and the manner in which the lead Consultant in
       the Medicare Project, M/s Womi Associates conducted his duties with respect to
        the project with a view to preferring criminal charges against Mr. Wanyonyi
        Muchanga and M/s. Womi Associates, if found culpable;

(ii)    M/s. Womi Associates and its Directors be prohibited from participating in and/or
        being awarded contracts by the government and its agencies; and

(iii)   The Fund should, with immediate effect, refrain from contract price variations
        and where necessary, must obtain prior approval from the parent Ministry and the
        Treasury.

The Committee also recommends that the Director of Criminal Investigations
Department should also investigate the role(s) played by the officials of the Ministry of
Public Works and the then Chief Executive, Mr. Hussein Ibrahim in the implementation
of the project, with a view to preferring charges against them, if found culpable.

2. CONSTRUCTION OF MULTI -STOREY CAR PARK

As reported in the previous year’s report, the fund entered into a contract agreement with a
construction firm for the election and completion of a multistory car park at a contract sum
of Kshs. 909,709,305. The project commenced on 3 May 2002 and was to be completed by
August 2003. The contract amount was revised upwards to Kshs. 1,581,213,586 to
accommodate vehicular lifts at a cost of Kshs. 673,465,787; a cost was not in the original
design of the building. The idea of the vehicular lifts was latter dropped and the cost
revised downwards to Kshs. 1,179,611,756 and the completion date revised to June 2005.
However, as at the time of audit in July 2005, the multi storey car park was still incomplete.
By august 2005, the Fund had incurred total expenditure of Kshs. 1,379,224,675 on the
project. The propriety of the total expenditure to Kshs. 1,379,224,675 on the project
including the cost overrun has not been justified. It is also not possible to confirm whether
the project will be completed in the near future or to determine the additional costs, if any
that would be necessary to complete the project or the losses that the Fund would suffer in
the event that the project is not completed. Consequently, it is not possible to give an
opinion on the carrying value of the multi storey car park figure of Kshs. 1,253,607,753 as
reflected in the financial statements.

The Committee heard the evidence given by the Chief Executive that the Fund entered
into a contract with M/s N. K. Brothers for construction of Multi-Storey Car Park at a
contract sum of Kshs.900,709,205.40 with a 65 weeks contract period which was to expire
in August 2003.
The Committee was informed that :

(i)     The management introduced vehicular lifts, an addition to the contract, which
        were not part of the tendered design and bills of quantities, thereby necessitating
        an additional cost of Kshs. 673,465,787.10. The Fund later discarded the idea after
        the contractor had already increased the surface area and design changes were in
        effect made to substructure and foundation works.

(ii)    An additional basement floor was created to cater for the displaced areas arising
        out of vehicular lifts, ramps and design overhaul and that the changes
        necessitated a further variation to Kshs.1,179,611,756.

The Committee noted that:-

(i)     At the documentation stage the contract for the building did not include provision
        for vehicular lifts and corresponding space requirements and that the
        management there after introduced the lifts which led to an increase in surface
        area at an additional cost of Kshs. 673,465,787.10.

(ii)    The lifts were found unreliable and the contract price was varied down to
        Kshs.1,179,611,756 and the completion dates adjusted accordingly to December
        2005.


(iii)   Even though the Car Park has been completed and is in use, the Committee
        observed with concern that the project was meant to fleece the corporation as the
        manner in which it was handled appears to have been shrouded in a lot of
        mystery.

(iv)    The Committee also observed that the cost of the project is estimated at over
        Kshs.2billion due to the delay in completion period and other contractual
        obligations, arising out of a Treasury Circular No. 10 dated 22nd May 2003 which
        suspended all government projects.

The Committee also noted that the matter was discussed in its 13th Report Pages 195-196
wherein the Committee observed the unprofessional manner in which the project was
executed.

The Committee therefore recommends that in view of the unprofessional manner in
which the whole process of conceiving and implementing the Car Park Project was
conducted, the Director Kenya Anti Corruption Commission should institute
investigations on the project with a view to preferring charges against all those who
would be found culpable.

3. IRREGULAR PROCUREMENT OF CONSULTANCY SERVICES

During the year ended 30 June 2004, the Fund entered into an agreement with a
consultancy firm for a training programme on promotion of culture quality for staff of the
Fund at an agreed sum of Kshs. 1,650,000 without following the required procurement
procedures for competitive bidding. The Fund also contracted another firm from the
design and installation of a performance management/appraisal tool at a contact sum of
Kshs. 3,840,000 also without following proper tendering procedures for competitive
bidding and without Board’s approval. In the circumstances, therefore, it was not possible
to confirm that the Fund obtained value for its money in the procurement of these
consultancy services.

The Committee heard the evidence given by the Chief Executive that during the year
under review, the Fund entered into a contract with M/S Eliud and Associates for
Kshs.3,840,000 for design and installation of a performance management tool;

The Committee further heard that the Fund also engaged M/S Ace Training Ltd at a cost
of Kshs.1,650,000 to train senior staff on promotion of culture of quality;

The Committee was informed that:

(i)     The Fund floated quotations for design and installation of a performance
        management tool where the following firms applied:-
         Impel Training
         Eliud and Associates
         Career Development Consultants

(ii)    As per the Public Procurement Regulations, the Fund engaged the services of
        Eliud and Associates being the lowest tenderer and the sum being below the
        allowable ceiling of Kshs. 5 million.

(iii)   M/s Ace Training Ltd were engaged to undertake training after the Fund had just
        been transformed to a parastatal as a means to enhancing formulation of policies
        and procedures.
The Committee noted that the provisions of the Public Procurement Regulations were
not complied with in the engagement of M/s Ace Training Ltd.

The Committee recommends that the Chief Executive should ensure that procurement
regulations and the Public Procurement and Disposal Act, 2005 are complied with in the
procurement of goods and services.

4. LONG TERM INVESTMENT

During the year ended 30 June 2004 and as previously reported, the Fund continued to hold
an investment of Kshs. 54,200,000 consisting of 2,120,000 4% non cumulative preference
shares of Kshs. 20 each and 590,000 ordinary shares of Kshs. 20 each at the Consolidated
Bank of Kenya. The investment is carried in the financial statements at cost instead of fair
value as stated in the policy of the Fund. Further, the investment has yielded nil returns
since 1998/99, as the bank has reportedly not made any profits. Under the circumstances
the stated value and the viability of the investment is doubtful.

The Committee heard the evidence given by the Chief Executive that the Fund held
Kshs54,200,000.00 in Consolidated Bank of Kenya since 1990 consisting of non-
cumulative and ordinary shares which had not yielded returns.

The Committee was informed that the investment arose out of conversion of investments
in five financial institutions that were merged into the Consolidated Bank of Kenya
through a government directive.

The Committee was also informed that the investment portfolio comprises 2,120,000 4%
cumulative preference shares of Kshs.20 each and 590,000 ordinary shares at 20 each.

The Committee noted that the Bank is operating as a going concern and posted a profit
in their 2007 audited accounts, though dividends were not paid out.

The Committee reiterates its recommendation in its 13th Report Page 175 that the Chief
Executive should ensure that any future investments of the Fund are made in accordance
with Treasury circulars and are based on prudent commercial practices.

5. DEBTORS AND PREPAYMENTS

The debtors and prepayments balance of Kshs. 703,310,583 as at 30 June 2004 includes
outstanding contribution debtors of Kshs. 452,938,566 some of which have remained
unpaid for long periods of time, including Kenya Railways Corporation staff contributions
of Kshs. 113,000,000. The debtors and prepayments balance also includes Kshs. 102,326,959
being outstanding supplier advances out of which Kshs. 26,483,128 was advanced to
various sub-contractors on 9 January 2003 for construction works at a multi storey car park,
an indication that the sub-contractors had not moved to site 18 months after being paid the
advances. No certificate or fee note had been raised at the time of audit although the
management explained that the advances were 10% of the contract sum paid as per the
terms and conditions of the contract. Under the circumstances, it is evident that there was
no justification for paying these advances long before the contractors were ready to move to
site and start their jobs. Any provision that could have been necessary in relation to these
uncertainties has not been incorporated in these financial statements.

The Committee heard the evidence given by the Chief Executive that during the year
under review, the Fund failed to recover NHIF deductions from various organizations;

The Committee also heard that advance payments were made to sub contractors even
though works had not commenced.

The Committee was informed that the balance outstanding to-date is Kshs.600,314.25
having effected recoveries as follows:

NAME                       AMOUNT              AMOUNT              B ALANCE
                           Kshs.               Kshs.               Kshs.
                           Advanced            Recovered           Outstanding

M EHTA E LECTRICAL         7,996,572.00        7,996,572.00        N IL
Esese Engineering          2,123,197,00        1,462,882.75        660,314.25
Volcanic Plumbing          7,138,885.50        7,138,885.50        Nil
V IA N ET                  5,220,500.00        5,220,500           N IL
Solakold                   4,003,974.00        4,003,974.00        Nil
             Total         26,483,128.50       25,822,814.25       660,314.25

The Committee noted that the Fund had no business paying the sub-contractors as their
contractual engagement lay between the Fund and N.K. Brothers, who were the main
contractors.

The Committee recommends that the Chief Executive should ensure that projects are
implemented in accordance with contracts signed and advance payments be paid in
accordance with existing guidelines on charges for consultants..
The Committee also recommends that the Fund should concentrate on it core mandate
and desist from real estate development and channel excess funds to members’ rebates.


6. BENEFITS TO CONTRIBUTORS

According to the National Hospital insurance Fund Act and the Funds Mission Statement,
the mandate and main objective of the Fund is to provide affordable, accessible and
sustainable Health Care financing for all employed and self employed persons. It is
however, noted that during the year under review, the Fund collected contributions
totaling Kshs. 2,639,477,891 and paid out only Kshs. 713,287,272, equivalent to 27.0% of the
total income to contributors as benefits thereby realizing a surplus of Kshs. 463,137,279 for
the year ended 30 June 2004. The Fund spent a total of Kshs. 1,531,315,827 equivalent to
58.0% of its total contributions income on personnel costs and other administrative
expenses. It is clear from the foregoing that the Fund spends greatest portion (58.0%) of its
member’s contributions on personnel and other administrative costs and only a small
portion (27.0%) on contributors benefits. Under the circumstances the question arises as to
whether the Fund is presently geared or organized to achieve its mandate and main
objective.

The Committee heard the evidence given by the Chief Executive that during the year
under review, the Fund spent only 27.0% of its income on contributors’ rebates while
51% was spent on personnel and administrative costs.

The Committee was informed that the Fund had enhanced benefits to contributors and
had in effect introduced 3 categories of contracts with health care providers:-

Contract A: This covers government hospitals where members enjoy comprehensive
            cover for maternity, medical and surgical cases and enjoy free admission.

Contract B: This covers private and mission hospitals where members enjoy
            comprehensive cover on medical cases and may be required to co-pay in
            surgical cases.

Contract C: This covers high cost hospitals where the member tops up daily rebates.

The Committee was also informed that during the year 2007/2008 the Fund paid a total of
45% of contributions received.
The Committee recommends that the Fund should cut down on administrative and
personnel expenditure and direct more benefits to contributors.

The Committee also recommends that the Fund should ensure that hospital rebates
including outpatient services are enhanced to 60% of all revenue collected and that the
highest percentage of rebates is given to contributors visiting public health institutions.
REPORT OF THE CONTROLLER AND AUDITOR GENERAL ON THE ACCOUNTS
OF NATIONAL HOSPITAL INSURANCE FUND FOR THE YEAR ENDED 30TH JUNE
2005

1. PROPERTY, PLANT AND EQUIPMENT

      (i) CONSTRUCTION OF NHIF BUILDING

As reported in the previous year’s report, the Fund entered into a contract with a
construction firm for the construction of the National Hospital Insurance Fund building at a
contract sum of Kshs.1,483,000,030. The project was commissioned on 18 September 1997
and was to be completed by April 2001. The contract sum has however been varied
upwards three (3) times from the original contract sum of Kshs.1,483,000,030 to
Kshs.3,306,981,329. According to note 2 to the accounts under Medicare, the amounts spent
on the building totaled Kshs. 4,583,282,756 as at 30 June 2005 which include payment to
contractors of Kshs.3,548,302,212 and to consultants Kshs.1,034,980,544. These amounts
include additional payments of kshs.50,792,482 made during the year under review. The
final account has however not been prepared to determine the actual cost of the project. No
justification has also been provided for the variation of the contract sum by 130%.

The Committee heard the evidence given by the Chief Executive that the Fund entered
into a contract with N K Brothers for the construction of NHIF Building at a contract sum
of Kshs.1,483,000,030 and works were scheduled to begin on 18th September 1997, to be
completed on 15th April 2001.

The Committee further heard that 3 variations were effected, thereby raising the contract
figure to Kshs.3,306,981,329.

The Committee was informed that;

(i)      The three price variations to the contract were effected as a result of financial
         appraisals prepared and recommended by the Ministry of Roads and Public
         Works which was the lead consultant and departmental representative and
         approved vide MIN B/357/2000, MIN B/S/25/2002 and MIN B/508/2003.

(ii)     The report by the consultant cited the following as the causal effect of the
         variations:
          Geology of the location
            Price escalation due to economic factors, statutory and contractual obligation of
             parties to the contract
            Contractual claims for losses and expenses
            Changes due to new proposals and additional operational requirements
             arising out of change of status as government department to a fully fledged
             parastatal
            Design and specification changes occasioned by technology advancements.

(iii)   That the project implementation was delayed from April 2001 to 2006 when the
        building was occupied mainly due to geology of the location, extremely hard rock,
        El-nino and La Nina weather phenomenon, additional works delayed approval of
        work and delayed payments on the contract.

(iv)    The following consultancy firms were engaged and paid amount totaling to
        Kshs.1, 001,212,050.

        a)   Womi Associates                            -      Kshs.285,239,750.36
        b)   Design (Interior Designs)                  -      Kshs.84,456,567.40
        c)   Ujenzi Consultants                         -      Kshs.196,364,622.22
        d)   Kaigutha Chepkwony & Partners              -      Kshs.45,606,945.70
        e)   Kinyua Koech Agencies                      -      Kshs.7,800,000.00
        f)   Friscan Management Project Managers        -      Kshs.168,617,186.71

(v)     The Ministry of Public Works has completed the technical report and post project
        appraisal on the project.

(vi)    The Ministry of Roads and Public Works engineers, project architects, M/s Womi
        Associates and Quantity Surveyors, M/s Ujenzi Consultants provided technical
        expertise while R. S. Manga and Associates were Structural and Civil Engineers.

(vii)   Some of the consultants were appointed in disregard of legal stipulations as
        agreed between the Chief Architect and the lead consultant M/s Womi Associates
        while some payments were made prior to certificates being signed by the Lead
        Consultant.

(viii) At some point the lead consultant failed to discharge his duty forcing the clients
       to issue instructions on site and that in the course of the project implementation
       the Ministry of Roads and Public Works were not consulted in a number of
       decisions made on the project.
The Committee noted that this matter was dealt with at length in its 13th Report pages
191-195 wherein the Committee expressed concern over the escalation of the project cost
and the unsatisfactory manner in which the project was handled.

The Committee then had made several observations as follows:-

(i)     The cost of the project which was estimated at Kshs.1,762,000,000 had almost
        trippled, with the contractor who had quoted Kshs.1,483,000,030.65 having been
        paid kshs.3,279,226,690 by 6th May 2005 while the current estimate for the project
        is Kshs.4,2billion;

(ii)    The justification for some of the reasons for variations of contract sum are
        unconvincing as they were foreseeable particularly the hard rock and price
        escalations due to economic factors;

(iii)   The project was handled in most unsatisfactorily manner and this was the most
        imprudent investment ever made;

(iv)    The Parent Ministry and the Ministry of Finance failed in their fiduciary duty to
        control and supervise the Fund in the implementation of the project. The
        Committee noted that the Parent Ministry was represented in all the meetings
        where variations were approved while Treasury continued approving the budget
        without questioning the excessive expenditure on the project;

(v)     The Lead Consultants, M/s. Womi Consultants were hired despite their past poor
        record, exhibited difficulties in their dealing with the Fund, had no office and
        appears to have been a “brief-case consultant”. In the Sixth Report of the PIC, the
        M/s. Womi Associates had been accused of conspiracy and fraud, by participating
        in irregular variation of a contract to partition offices of the National Council for
        Science and Technology from Kshs.5,388,520 to Kshs.26,946,467 in 1993;

(vi)    Blasting of the hard rock could not have been a factor for delay and/or contract
        price variation as the contractor was not limited to drill and blast more than ten
        pits in a day and in any case by the time the Commissioner of Mines and Geology
        restricted blasting, most of the hard rock had been removed.
The Committee also expressed concern that:-

(i)    The Ministry of Roads & Public Works were excluded from the project for a
       period of over one year and as a result the project was poorly executed as
       instructions were issued directly to the contractors by the Fund, while sub-
       contractors appointed and valuation and certification of the works done without
       involving the Ministry.

(ii)   The parent Ministry and the Treasury continued to approve budget of the Fund,
       which contained exaggerated variations without questioning the rationale behind
       them.

The Committee observed that, arising out of the Committee’s recommendation in the
13th Report that the Ministry of Roads and Public Works should carry out a technical
audit on the whole project and evaluate the variations undertaken with a view to
determining the reasons for the huge escalation of the project cost, and having noted the
contents of the report prepared, it is apparent that the said post project report seems to
be a justification for the errors and omissions executed in this project by all the players
involved, including the Ministry of Public Works officials the Consultants and the lead
Architect as well as the then Chief Executive of the Fund and his staff who were
members of the Tender Committee.


The Report concurs with the Committee’s observations, that some of the costs could have
been avoided as they were foreseeable, and states that “the bulk of the costs … a
situation that could have been avoided with proper planning and project/construction
management.”

The Report further pegs the gross development value of the building at Kshs.4,
965,042,150.00 at 15% developers profit and therefore found the project viable even after
taking into consideration interest lost on nugatory expenses on previous consultancies,
cost of finance which brought the total investment outlay to Kshs.4,317,427,954.90.

The Committee therefore reiterates its earlier recommendation in the 13 th Report Page
195 that:-

(i)    The Director of Criminal Investigations Department should institute immediate
       investigations into the conduct and the manner in which the lead Consultant in
       the Medicare Project, M/s Womi Associates conducted his duties with respect to
        the project with a view to preferring criminal charges against Mr. Wanyonyi
        Muchanga and M/s. Womi Associates, if found culpable;

(ii)    M/s. Womi Associates and its Directors be prohibited from participating in and/or
        being awarded contracts by the government and its agencies; and

(iii)   The Fund should, with immediate effect, refrain from contract price variation and
        where necessary, must obtain prior approval from the parent Ministry and the
        Treasury.

The Committee also recommends that the Director of Criminal Investigations
Department should also investigate the role played by the officials of the Ministry of
Public Works and the then Chief Executive, Mr. Hussein Ibrahim in the implementation
of the project, with a view to preferring charges against them, if found culpable.

(ii)    PARTITIONING OF NHIF BUILDING

The Fund entered into a contract for the partitioning and furnishing of the NHIF building
with a contractor, on 10 march 2003 at a contract sum of kshs.756,220,120. Although the
completion period was scheduled for 12 August 2003, the partitioning work has not been
completed to date. However the work certified amounted to Kshs.748,742,852 as at 30 June
2005 out of which Kshs.711,246,472 have been paid. Further, various consultants for the
partitioning project have been paid Kshs.557,90`,265 being 74% of the contract sum of the
project. Management has not explained the criteria used to pay such a high percentage of
contract sum contrary to existing guidelines on charges for consultations which should not
exceed 15% of the contract sum.

The Committee heard the evidence given by the Chief Executive that the Fund entered
into a contract with various consultants for partitioning of NHIF building at a contract
sum of Kshs.756,220120.

The Committee was informed that other works of fittings and furnishings were also
undertaken in branches countrywide, and charged to the same account hence the
expenditure of Kshs.557,961, 265.00 for all the works. The works included;
 Branding and interior design for branch offices
 Supervision and detailing of construction and decoration work on the main building
 Cataloguing of the existing and proposed fittings and furnishings
 Abandoned works and
 Reimbursable expenses
The Committee observed with concern that the scope of works involved, far exceeded
the allowable limit of Kshs.5million and further that no tenders were floated for the
works, in contravention of the procurement regulations which require that new works
must be contracted.

The Committee recommends that the Director, Kenya Anti-Corruption Commission
should institute immediate investigations into the conduct and the manner in which the
then Chief Executive Mr. Ibrahim Hussein awarded the partitioning works with a view
to preferring criminal charges against him, if found culpable.

The Committee also recommends that projects by the Fund should be implemented in
accordance with existing guidelines and that advance payments be made accordingly.

(iii)   CONSTRUCTION OF MULTI – STOREY CAR PARK

As reported in the previous year’s audit reports, the Fund entered into a contract
agreement with a construction firm for the erection and completion of a multi storey car
park at a contract sum of Kshs.909,709,305. The project which commenced on May 2002 had
to be completed by August 2003.            The contract was later revised upwards to
Kshs.1,581,213,586 to accommodate vehicular lifts. The vehicular lifts item was later
discarded and the cost revised downwards to Kshs.1,179,611,756 and the completion date
revised to June 2005. However as at 30 June 2005, the multi-store car park was still
incomplete while the Fund had incurred a total of kshs.1,506,033,941 which was in excess of
the original contract sum. The propriety of the total expenditure of Kshs.1,506,033,941
including the cost overrun of Kshs.326,422,185 has not been justified. These situations are
indicative of significant impairment on the properties. Consequently it is not possible to
confirm the carrying values as stated in the financial statements reflect the fair values of the
properties as at 30 June 2005.

The Committee heard the evidence given by the Chief Executive that the Fund entered
into a contract with M/s N. K. Brothers for construction of Multi-Storey Car Park at a
contract sum of Kshs.900,709,205.40 with a 65 weeks contract period which was to expire
in August 2003.

The Committee was informed that :

(i)     The management introduced vehicular lifts, an addition to the contract, which
        were not part of the tendered design and bills of quantities, thereby necessitating
        an additional cost of Kshs.673,465,787.10. The Fund later discarded the idea after
        the contractor had already increased the surface area and design changes were in
        effect made to substructure and foundation works.

(ii)    An additional basement floor was created to cater for the displaced areas arising
        out of vehicular lifts, ramps and design overhaul and that the changes
        necessitated a further variation to Kshs.1,179,611,756.

The Committee noted that:-

(i)     At the documentation stage the contract for the building did not include provision
        for vehicular lifts and corresponding space requirements and that the
        management there after introduced the lifts which led to an increase in surface
        area at an additional cost of Kshs.673,465,787.10.

(ii)    The lifts were found unreliable and the contract price was varied down to
        Kshs.1,179,611,756 and the completion dates adjusted accordingly to December
        2005.


(iii)   Even though the Car Park has been completed and is in use, the Committee
        observed with concern that the project was meant to fleece the corporation as the
        manner in which it was handled appears to have been shrouded in a lot of
        mystery.

(iv)    The Committee also observed that the cost of the project is estimated at over
        Kshs.2billion due to the delay in completion period and other contractual
        obligations, arising out of a Treasury Circular No. 10 dated 22nd May 2003 which
        suspended all government projects.

The Committee also noted that the matter was discussed in its 13th Report Pages 195-196
wherein the Committee observed the unprofessional manner in which the project was
executed.

The Committee therefore recommends that in view of the unprofessional manner in
which the whole process of conceiving and implementing the Car Park Project was
conducted, the Director Kenya Anti Corruption Commission should institute
investigations on the project with a view to preferring charges against all those who
would be found culpable.
2. INVESTMENTS IN EQUITY KSHS.54,200,000

Investments at Consolidated Bank of Kenya are carried at cost. This treatment does not
comply with the requirements of International Accounting Standards (IAS) 39 which
requires entities with financial asset and liabilities to carry them at fair values. Further the
investment has yielded nil return since 1998/99 financial year as the bank has reportedly
made losses.

The Committee heard the evidence given by the Chief executive that the Fund held
Kshs.54,200,000.00 in Consolidated Bank of Kenya since 1990 consisting of non-
cumulative and ordinary shares which had not yielded returns and that the investments
are carried at cost in the Funds books of accounts.

The Committee was informed that the investments were carried at cost in compliance
with International Accounting Standard (IAS) 39 which requires all investments in
equity and which do not have a quoted market price in an active market to be reported at
cost.

The Committee was further informed that the investment arose out of conversion of
investments in five financial institutions that were merged into the Consolidated Bank
of Kenya through a government directive. The investment portfolio comprises 2,120,000
4% cumulative preference shares of Kshs.20 each and 590,000 ordinary shares at Kshs.20
each.

The Committee noted that the Bank is operating as a going concern and posted a profit
in their 2007 audited accounts, though dividends were not paid out.

The Committee reiterates its recommendation in its 13th Report Page 175 that the Chief
Executive should ensure that any future investments of the Fund are made in accordance
with Treasury circulars and are based on prudent commercial practices.

3. SHORT TERM INVESTMENTS

The balance sheet short term investments balance of Kshs.1,199,705,751 as at 30 June 2005
includes an amount of Kshs.46,000,000 held at the Consolidated Bank of Kenya. The
viability of the investment is in doubt and may not be recoverable as the bank has disputed
the amount and recognizes an amount of only Kshs.13,812,890 inclusive of interest. From
the foregoing, it has not been possible to verify the existence and validity of short-term
investment of Kshs.46,000,000.00 included in the balance sheet investments figure of
Kshs.1,199,705,751.

The Committee heard the evidence given by the Chief Executive that during the year
under review, the Fund’s investments totaling Kshs.46,000,000 held in Consolidated
Bank were disputed by the Bank which recognizes only Kshs.13,812,890 inclusive of
interest.

(i)    The Committee was informed that the Fund made an investment of Kshs.
       600,000,000 in the Bank and later redeemed Kshs.404,000,000

(ii)   Demand by the Fund for the balance of Kshs. 46,000,000 were not fruitful and the
       Fund filed a case HCCC No 505 of 2003 for the recovery of the investment and the
       case is ongoing.

The Committee noted that it had dealt with the matter in its 13th Report page 162 and
reiterates its recommendation that the Chief Executive should ensure that any future
investments of the Fund are made in accordance with Treasury circulars and are based
on prudent commercial practices

4. BENEFITS TO CONTRIBUTORS

According to the National Hospital Insurance Fund Act the Fund’s mission statement, and
as previously reported the mandate and main objective of the Fund is to provide accessible,
affordable, sustainable and quality social health insurance to its contributors. It was
however noted that during the year ended 30 June 2005, the Fund collected contributions
totaling to Kshs.3,117,241,202 and paid out only Kshs685,490,051, equivalent to 22% of the
total income to contributors as benefits down from 27% the previous year, while at the
same time recording a surplus of kshs.1,010,316,241 compared to the previous year’s
surplus of Kshs.463,137,279. Further, the Fund spent a total of kshs.1,578,784,141
equivalent to 50.65% of its total contributions on personnel and administrative costs. It is
clear from the foregoing that the Fund spent the greater portion of its member’s
contributions or about 51% on personnel and administrative costs and only a small portion
of 22% on contributors’ benefits. Under the circumstances therefore and as previously
stated, the question arises as to whether the Fund is geared or organized to achieve its
mandate and mission.
The Committee heard the evidence given by the Chief Executive that during the year
under review, the Fund spent only 22% of its revenue on contributors’ benefits while
51% was spent on personnel and administrative costs.

The Committee was informed that the Fund had enhanced benefits to contributors and
had in effect introduced 3 categories of contracts with health care providers:-

Contract A: This covers government hospitals where members enjoy comprehensive
cover for maternity, medical and surgical cases and enjoy free admission.

Contract B: This covers private and mission hospitals where members enjoy
            comprehensive cover on medical cases and may be required to co-pay in
            surgical cases.

Contract C: This covers high cost hospitals where the member tops up daily rebates.

The committee was also informed that during the year 2007/2008 the Fund paid a total of
45% of all contributions received.

The Committee recommends that the Fund should cut down on administrative and
personnel expenditure and direct more benefits to contributors.

The Committee also recommends that the Fund should ensure that hospital rebates,
including outpatient services, are enhanced to 60% of all revenue collected and that the
highest percentage of rebate is given to contributors visiting public health institutions.


5. BOARD ALLOWANCES TO STAFF

During the year ended 30 June 2005 and contrary to section 10 (1) of the State Corporations
Act (Cap 446), the Fund paid a total of Kshs.860,000 to its staff and the Chief Executive as
sitting allowances on various occasions when the officers attended board meetings. It is not
clear and management has not explained why the officers who are not board members
were paid sitting allowances in contravention of the law.

The Committee heard the evidence given by the Chief Executive that during the year
under review, staff were paid a total of Kshs.860,000 as sitting allowance when they
attended board meetings.
The Committee was informed that the members of staff were paid allowances
amounting to Kshs.860,000 for preparation and submission of board papers. The
payment was approved by the board as an extraneous allowance for staff working
beyond normal working hours.

The Committee noted that the payment is irregular and in contravention of regulations
which allow payment of Board Members with the exception of the Chief Executive and
corporation staff.

The Committee therefore recommends that the Chief Executive should recover the
irregular payment from all the staff members paid.

6. DEBTORS AND PREPAYMENTS

The Fund’s balance sheet debtors and prepayments figure of kshs.738,909,078 as at 30 June
2005 includes outstanding contribution of Kshs.452,938,566, hospital surcharge of
kshs.46,804,290 and RD cheques amounting to kshs.64,120,773 most of which have
remained unsettled for a long time, some dating back to 1999/2000. Under the
circumstances, I am unable to confirm whether the debts are recoverable and if so when the
Fund would be able to recover them. Any provision that should have been necessary in
relation to this uncertainly has not been incorporated in these financial statements.

The Committee heard the evidence given by the Chief Executive that during the year
under review, the figure of Kshs.738,909078 includes outstanding contributions
amounting to Kshs.452,938,566, hospital surcharge of Kshs.46,804,290 and RD cheques
amounting to Kshs.64,120,773.

The Committee was informed that the debts unpaid relate to :

Nairobi City Council                    -      16 639 850
Kakamega Municipal Council              -      19 931 805

The Committee was also informed that:-

(i)    The Fund is currently recovering outstanding amounts from councils through
       LATF disbursements.

(ii)   Hospital surcharges totaling Kshs.4,574,811 were still outstanding despite
       findings of police investigations in fraudulent cases in NHIF where a total of sixty
        hospitals were investigated     and   a   recommendation    made   to   recover
        Kshs.118,064,775.

(iii)   The Fund has made provisions for write off as most of the hospitals involved in
        the fraudulent claims have closed down.

(iv)    R/D cheques amounting to Kshs.64,120,773 are irrecoverable and the management
        is seeking approval for write off.

The Committee recommends that the Chief Executive puts in financial controls and debt
collection mechanisms, to ensure collection of debts, immediately they fall due.
REPORT OF THE CONTROLLER AND AUDITOR GENERAL ON THE ACCOUNTS
OF NATIONAL HOSPITAL INSURANCE FUND FOR THE YEAR ENDED 30TH JUNE
2006

1. CONSTRUCTION OF NHIF BUILDING

As indicated in the previous reports, the Fund entered into a contract with a construction
firm for the construction the National Hospital Insurance Fund building at a contract sum
of Kshs. 1,483,000,030. The project was commissioned on 18 September 1997 and was to be
completed by April 2001. The contract sum has however, been varied upwards three times
from the original contract sum of Kshs. 1,483,000,030 to Kshs. 3,306,981,329. According to
note 2 (schedule 1) to the financial statements, the amount spent on the building totaled
Kshs. 4,619,656,532 as at 30 June 2006 made up of payments to contactors of Kshs.
3,584,675,988 and consultants of Kshs. 1,034,980,544. These amounts include additional
payments of Kshs. 36,373,776 made during the year under review. In its thirteen report, the
Public Investment Committee recommended that the Ministry of Roads and Public Works
should carry out a technical audit on the whole project and evaluate the variations
undertaken with a view to determining the reasons for the huge escalation of the project
cost. However, such technical audit report has not been seen.

The Committee heard the evidence given by the Chief Executive that the Fund entered
into a contract with N K Brothers for the construction of NHIF Building at a contract sum
of Kshs.1,483,000,030 and works were scheduled to begin on 18th September 1997, to be
completed on 15th April 2001.

The Committee further heard that 3 variations were effected, thereby raising the contract
figure to Kshs.3,306,981,329.

The Committee was informed that;

(i)     The three price variations to the contract were effected as a result of financial
        appraisals prepared and recommended by the Ministry of Roads and Public
        Works which was the lead consultant and departmental representative and
        approved vide MIN B/357/2000, MIN B/S/25/2002 and MIN B/508/2003.

(ii)    The report by the consultant cited the following as the causal effect of the
        variations:
(iii)   Geology of the location
(iv)    Price escalation due to economic factors, statutory and contractual obligation of
        parties to the contract
(v)     Contractual claims for losses and expenses
(vi)    Changes due to new proposals and additional operational requirements arising
        out of change of status as government department to a fully fledged parastatal
(vii)   Design and specification changes occasioned by technology advancements.

That the project implementation was delayed from April 2001 to 2006 when the building
was occupied mainly due to geology of the location, extremely hard rock, El-nino and La
Nina weather phenomenon, additional works, delayed approval of work and delayed
payments on the contract.

The following consultancy firms were engaged and paid amount totaling to Kshs.1,
001,212,050.

Womi Associates                         -      Kshs.285,239,750.36
Design (Interior Designs)               -      Kshs.84,456,567.40
Ujenzi Consultants                      -      Kshs.196,364,622.22
Kaigutha Chepkwony & Partners           -      Kshs.45,606,945.70
Kinyua Koech Agencies                   -      Kshs.7,800,000.00
Friscan Management Project Managers     -      Kshs.168,617,186.71

The Ministry of Public Works has completed the technical report and post project
appraisal on the project.

The Ministry of Roads and Public Works engineers, project architects, M/s Womi
Associates and Quantity Surveyors, M/s Ujenzi Consultants provided technical expertise
while R. S. Manga and Associates were Structural and Civil Engineers.

Some of the consultants were appointed in disregard of legal stipulations as agreed
between the Chief Architect and the lead consultant M/s Womi Associates while some
payments were made prior to certificates being signed by the Lead Consultant.

At some point the lead consultant failed to discharge his duty forcing the clients to issue
instructions on site and that in the course of the project the Ministry of Roads and Public
Works were not consulted in a number of decisions made on the project.
The Committee noted that this matter was dealt with at length in its 13th Report pages
191-195 wherein the Committee expressed concern over the escalation of the project cost
and the unsatisfactory manner in which the project was handled.

The Committee then had made several observations as follows:-

(i)     The cost of the project which was estimated at Kshs.1,762,000,000 had almost
        trippled, with the contractor who had quoted Kshs.1,483,000,030.65 having been
        paid kshs.3,279,226,690 by 6th May 2005 (while the current estimated expenditure
        for the project is Kshs.4,2billion);

(ii)    The justification for some of the reasons for variations of contract sum are
        unconvincing as they were foreseeable particularly the hard rock and price
        escalations due to economic factors;

(iii)   The project was handled in most unsatisfactorily manner and this was the most
        imprudent investment ever made;

(iv)    The Parent Ministry and the Ministry of Finance failed in their fiduciary duty to
        control and supervise the Fund in the implementation of the project. The
        Committee noted that the Parent Ministry was represented in all the meetings
        where variations were approved while Treasury continued approving the budget
        without questioning the excessive expenditure on the project;

(v)     The Lead Consultants, M/s. Womi Consultants were hired despite their past poor
        record, exhibited difficulties in their dealing with the Fund, had no office and
        appears to have been a “brief-case consultant”. In the Sixth Report of the PIC, the
        M/s. Womi Associates had been accused of conspiracy and fraud, by participating
        in irregular variation of a contract to partition offices of the National Council for
        Science and Technology from Kshs.5,388,520 to Kshs.26,946,467 in 1993;

(vi)    Blasting of the hard rock could not have been a factor for delay and/or contract
        price variation as the contractor was not limited to drill and blast more than ten
        pits in a day and in any case by the time the Commissioner of Mines and Geology
        restricted blasting, most of the hard rock had been removed.
The Committee also expressed concern that:-

(i)    The Ministry of Roads & Public Works were excluded from the project for a
       period of over one year and as a result the project was poorly executed as
       instructions were issued directly to the contractors by the Fund, while sub-
       contractors appointed and valuation and certification of the works done without
       involving the Ministry.

(ii)   The parent Ministry and the Treasury continued to approve budget of the Fund,
       which contained exaggerated variations without questioning the rationale behind
       them.

The Committee observed that arising out of the Committee’s recommendation in the 13th
Report that the Ministry of Roads and Public Works should carry out a technical audit
on the whole project and evaluate the variations undertaken with a view to determining
the reasons for the huge escalation of the project cost, and having noted the contents of
the report prepared, it is apparent that the said post project report seems to be a
justification for the errors and omissions executed in this project by all the players
involved, including the Ministry of Public Works officials the Consultants and the lead
Architect as well as the then Chief Executive of the Fund and his staff who were
members of the Tender Committee.


The Report concurs with the Committee’s observations, that some of the costs could have
been avoided as they were foreseeable, and states that “the bulk of the costs … a
situation that could have been avoided with proper planning and project/construction
management.”

The Report further pegs the gross development value of the building at Kshs.4,
965,042,150.00 at 15% developers profit and therefore found the project viable even after
taking into consideration interest lost on nugatory expenses on previous consultancies,
cost of finance which brought the total investment outlay to Kshs.4,317,427,954.90.

The Committee therefore reiterates its earlier recommendation in the 13 th Report Page
195 that:-

(i)    The Director of Criminal Investigations Department should institute immediate
       investigations into the conduct and the manner in which the lead Consultant in
       the Medicare Project, M/s Womi Associates conducted his duties with respect to
        the project with a view to preferring criminal charges against Mr. Wanyonyi
        Muchanga and M/s. Womi Associates, if found culpable;

(ii)    M/s. Womi Associates and its Directors be prohibited from participating in and/or
        being awarded contracts by the government and its agencies; and

(iii)   The Fund should, with immediate effect, refrain from contract price variations
        and where necessary, must obtain prior approval from the Parent Ministry and the
        Treasury.

The Committee also recommends that the Director of Criminal Investigations
Department should also investigate the role played by the officials of the Ministry of
Public Works and the then Chief Executive, Mr. Hussein Ibrahim in the implementation
of the project, with a view to preferring charges against them, if found culpable.

2. CONSTRUCTION OF MULTI- STOREY CAR PARK

As indicated in the previous audit reports, the Fund entered into a contract agreement with
a construction firm for the erection and completion of a multi-storey car park at a contact
sum of Kshs. 909,709,305. The project which commenced in May 2002 was to be completed
by August 2003. The contract was later revised upwards to Kshs. 1,581,213,586 to
accommodate vehicular lifts. The vehicular lifts item was later discarded and the cost
revised downwards to Kshs. 1,179,611,756 and the completion date revised to June 2005.
However, as at 30 June 2006, the multi-story car park was still incomplete while the Fund
had incurred total expenditure of Kshs. 1,944,218,595, which was in excess of the original
contract sum. The propriety of the total expenditure of 1,944,218,595 and the cost overrun
of Kshs. 764,606,839 which have not been justified in terms of need and approval by the
Board cannot, therefore, be determined.

The Committee heard the evidence given by the Chief Executive that the Fund entered
into a contract with M/s N. K. Brothers for construction of Multi-Storey Car Park at a
contract sum of Kshs.900,709,205.40 with a 65 weeks contract period which was to expire
in August 2003.

The Committee was informed that :

(i)     The management introduced vehicular lifts, an addition to the contract, which
        were not part of the tendered design and bills of quantities, thereby necessitating
        an additional cost of Kshs. 673,465,787.10. The Fund later discarded the idea after
        the contractor had already increased the surface area and design changes were in
        effect made to substructure and foundation works.

(ii)    An additional basement floor was created to cater for the displaced areas arising
        out of vehicular lifts, ramps and design overhaul and that the changes
        necessitated a further variation to Kshs.1,179,611,756.

The Committee noted that:-

(i)     At the documentation stage the contract for the building did not include provision
        for vehicular lifts and corresponding space requirements and that the
        management there after introduced the lifts which led to an increase in surface
        area at an additional cost of Kshs. 673,465,787.10.

(ii)    The lifts were found unreliable and the contract price was varied down to
        Kshs.1,179,611,756 and the completion dates adjusted accordingly to December
        2005.


(iii)   Even though the car park has been completed and is in use, the Committee
        observed with concern that the project was meant to fleece the corporation as the
        manner in which it was handled appears to have been shrouded in a lot of
        mystery.

(iv)    The Committee also observed that the cost of the project is estimated at over
        Kshs.2billion due to the delay in completion period and other contractual
        obligations, arising out of a Treasury Circular No. 10 dated 22nd May 2003 which
        suspended all government projects.

The Committee also noted that the matter was discussed in its 13th Report Pages 195-196
wherein the Committee observed the unprofessional manner in which the project was
executed.

The Committee therefore recommends that in view of the unprofessional manner in
which the whole process of conceiving and implementing the Car Park Project was
conducted, the Director Kenya Anti Corruption Commission should institute
investigations on the project with a view to preferring charges all those who would be
found culpable.
3. INVESTMENTS IN EQUITY KSHS. 54,200,000

Investments in Consolidated Bank of Kenya are carried at cost. This treatment does not
comply with the requirements of International Accounting standard (IAS) 39 which
requires entities with financial assets and liabilities to carry them at fair values. Further the
investment has yielded nil returns since 1998/1999 financial year as the bank has
reportedly made losses.

The Committee heard the evidence given by the Chief executive that the Fund held
Kshs.54,200,000.00 in Consolidated Bank of Kenya since 1990 consisting of non-
cumulative and ordinary shares which had not yielded returns and that the investments
are carried at cost in the Funds books of accounts.

The Committee was informed that the investments were carried at cost in compliance
with International Accounting Standard (IAS) 39 which requires all investments in
equity and which do not have a quoted market price in an active market to be reported at
cost.

The Committee was further informed that the investment arose out of conversion of
investments in five financial institutions that were merged into the Consolidated Bank
of Kenya through a government directive. The investment portfolio comprises 2,120,000
4% cumulative preference shares of Kshs.20 each and 590,000 ordinary shares at 20 each.

The Committee noted that the Bank is operating as a going concern and posted a profit
in their 2007 audited accounts, though dividends were not paid out.

The Committee reiterates its recommendation in its 13th Report Page 175 that the Chief
Executive should ensure that any future investments of the fund are made in accordance
with Treasury circulars and are based on prudent commercial practices.

4. DEBTORS AND PREPAYMENTS

The debtors and prepayments figure of Kshs. 778,535,087 as at 30 June 2006 includes
outstanding contribution of Kshs. 452,938,566, Hospital surcharge of Kshs. 42,872,833 and
unpaid cheques amounting to Kshs. 112,162,615 most of which have remained unsettled for
a long time, some dating as far back as 1999/2000. Under the circumstances, I am unable to
confirm whether the debts are recoverable and if so when the Fund would be able to
recover them. Any provision that should have been necessary in relation to this
uncertainty has not been incorporated in these financial statements.
The Committee heard the evidence given by the Chief Executive that during the year
under review, the figure of Kshs.738,909078 includes outstanding contributions
amounting to Kshs. 452,938,566, hospital surcharge of Kshs.42,872,833 and unpaid
cheques amounting to Kshs. 112,162,615.

The Committee was informed that the debts unpaid relates to :

Nairobi City Council                    -      Kshs.16 639 850
Kakamega Municipal Council              -      Kshs.19 931 805

The Committee was also informed that:-

(i)     The Fund is currently recovering outstanding amounts from councils through
        LATF disbursements.

(ii)    Hospital surcharges totaling Kshs4,574,811 were still outstanding despite findings
        of police investigations in fraudulent cases in NHIF where a total of sixty
        hospitals were investigated and a recommendation made to recover
        Kshs.118,064,775.

(iii)   The Fund has made provisions for write off as most of the hospitals involved in
        the fraudulent claims have been closed down.

(iv)    R/D cheques amounting to Kshs.64,120,773 are irrecoverable and the management
        is seeking approval for write off.


The Committee recommends that the Chief Executive puts in place financial controls and
debt collection mechanisms, to ensure collection of debts immediately they fall due.

				
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