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National Provident Fund Final Report [Part 8]

Below is the eighth part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002.

NPF Final Report

This is the eighth extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

INTRODUCTION AND OVERVIEW

Schedule 1 reports upon the legislative and policy framework within which it was intended that the National Provident Fund (NPF) should operate.

It records how NPF management and trustees frequently operated outside of that structure and how, by 1999, that structure had, to a significant extent, broken down in key areas, such as the constitutional integrity of the NPF board, internal governance, accounting, compliance by contributors, investment strategies, reporting obligations and external monitoring and controls. Specific matters, which received detailed investigation, are reported upon in Appendices 1 to 21 that are attached to Schedule 1.

On August 11 and 15, 2000, the commission conducted a seminar in the form of a public hearing to seek the views of 78 participants about the effectiveness of the legislative and administrative structure for the NPF. The proceedings were recorded at transcript pp. 1-121. The report on the seminar is included as Appendix 23 to Schedule 1.

Just prior to presenting this report, the new Superannuation Act 2000 was brought into force and NPF restructured itself and was licensed under the new Act under the name of Nasfund. The NPF Act was then repealed in its entirety and Nasfund now operates under the provisions of the Superannuation Act 2000.

In this schedule, the commission presents its findings and recommendations regarding the legislative structure which applied to the NPF in the years January 1, 1995 to December 31, 1999. Despite the fact that the Act has been repealed, the schedule continues to talk about the NPF and the NPF Act in the present tense, as if the NPF Act and the NPF still exist.

This is partly to ensure that the commission’s report is faithful to its terms of reference and partly because it will be of current benefit to understand how the previous structure was largely by-passed by the former trustees and management with impunity and to consider whether the new structure put in place under the Superannuation Act 2000 successfully overcomes the previous weaknesses.

NPF Act and Rules

NPF is given corporate status and its powers and functions are strictly defined under the NPF Act.

Expenditure of funds is limited to NPF’s objectives and powers as defined in the NPF Act, or other legislation. It is, for instance and importantly, not given the power to borrow or pledge its assets.

It was naturally assumed that NPF’s governing board of trustees would be properly constituted in accordance with the provisions of the Act so that its decisions would be legally valid.

The Act established the NPF as an accumulated benefits superannuation fund for private sector employees. All private employment establishments employing 25 or more employees are required to join the fund, with employers and employees all contributing a percentage of the employee’s wages to be received by the fund and credited to the member’s account. NPF’s funds must be properly accounted for and deposited into a certified bank and invested in accordance with guidelines promulgated by the Minister.

The Act provides that the Minister with responsibility for financial matters, have portfolio responsibility for NPF, with powers regarding appointments to the managing board and some powers regarding termination of appointments.

Under the Public Finances (Management) Act 1995 (PF(M) Act 1995), the Minister was given powers to approve major transactions and investments. Under Section 26 of the NPF Act, the Minister is empowered to promulgate guidelines for NPF’s investments.

It was envisaged that the Minister would receive reports and financial statements on the progress and health of the fund and that these reports and statements would be audited by the Auditor-General and tabled in Parliament.

The Act established that the governing body of the NPF would be a board of trustees consisting of a mix of trustees from the public service (two), from private enterprise (three) and representing employees (three). The managing director would also serve on the board as a trustee.

The legislation

The major pieces of relevant legislation are:-

  1. The PF(M) Act;
  2. The Audit Act and
  3. The Salaries and Conditions Monitoring Act.

The NPF Act 1995 establishes the NPF as an accumulated benefits fund for all workers employed in private enterprise employment establishments employing 25 or more employees unless an exemption has been granted under Section 3(6) or 42, of the Act. Participation is compulsory (The amendment repealing subsection 3(6) was not brought into force).

The NPF falls within the portfolio of the Minister responsible for PNG financial affairs (the Minister) and it is governed by a board of trustees (the NPF board), consisting of two representatives of the public service, three representatives of employers and three representatives of employees. The NPF board is chaired by the Secretary for the department responsible for managing the country’s financial affairs, referred to here as the Department of Finance (DoF).

The Managing Director

The management of NPF is headed by a managing director appointed by the Minister after prior consultation with the board (Section 15), who is also a member of the board of trustees and is therefore himself a trustee pursuant to Section 6(1)(d).

Officers

The managing director has control of the officers appointed by the NPF board on the recommendation of the managing director (Section 19).

Employees

Beneath the officers are the employees of the fund, appointed by the managing director with the approval of the board (Section 21).

Contributions and compliance

Part V of the NPF Act provides for employers to contribute an amount equal to 7 per cent and employees to contribute 5 per cent of each employee’s monthly wage actually drawn. Section 35 obliges the NPF to credit to each member all amounts paid on his behalf.

Section 37 enables the managing director to charge a penalty interest to employers on overdue contributions. Failure to comply is also an offence (Section 36).

Withdrawals and payments from the Fund

Section 49 provides a mechanism whereby the managing director may approve a withdrawal to purchase a dwelling house or site or materials for a dwelling to a maximum limit of 24 times the member’s monthly pay.

Section 52 provides for withdrawal of the full amount standing to the credit of the member’s account on retirement after attaining 55 years, on attaining 55 years after previous retirement, on retirement due to total and permanent incapacity; or immediately prior to permanent emigration from PNG.

Reporting and external supervision

Although the NPF is designed to be independent of government control and interference, the legislation provides for a framework of external monitoring and supervision and for broad policy guidelines and directives on investment policies to be issued by the Minister (Section 26(2)) within which the NPF board and management is obliged to operate.

The NPF Act specifies rules for banking and investing the funds and the Minister is empowered to issue policy guidelines on investments (Section 26 of the NPF Act). Section 30 (now subsumed by Section 63 of the PF(M) Act) requires NPF to submit an annual report to the Minister and to also submit the report to the Auditor-General who, pursuant to Section 29, shall report the result of his audit to be Minister, who, in turn, is obliged to submit the audited report to Parliament each year.

Section 63(2)(b) of the PF(M) Act requires NPF to report quarterly to the Minister on all investment decisions and to provide an annual report on investment performance and an updated five year rolling plan on investment strategies and administrative systems. How this structure, which requires NPF to have in place and to report upon investment strategies and plans, was ignored, is set out in paragraph 16 of Schedule 1.

The formal legislative and administrative structure in place for NPF between 1995 and 1999 is shown in Table 1 below.

Trustees

Schedule 1 reports how the members of the NPF board failed to appreciate and to perform their fiduciary duty as trustees and how this leaves them open to personal liability for loss suffered by the fund and its members, arising from their breach of fiduciary duty. It reports in detail how the repeated irregularities in the appointment and termination of trustees seriously compromised the legal validity of the NPF board. It clearly demonstrates that no single agency was responsible for ensuring that the board was validly established at all times and that appointments and terminations were constitutional.

Problems regarding the determination of trustees’ expenses and allowances are studied in detail, as are the failures to properly administer and account for payments of these allowances to trustees. These are reported at paragraph five and in Appendix 16.

Managing Director

Similar problems with the appointment, termination of appointment and determination of terms and conditions of employment of the managing director are reported in paragraphs 5.4 and 5.4.5 of Schedule 1 which shows how the provisions of Section 15(2) of the NPF Act, requiring a determination by the Minister acting with the advice of the board were ignored in favour of signing a contract of employment with very favourable terms for early termination in defiance of the statutory provisions.

Officers

The appointment, termination and conditions of employment of the other officers are reported upon in paragraph 6 of the Schedule and how the necessity to obtain the approval of the Salaries and Conditions Monitoring Committee (SCMC) was ignored, which had the effect of making the contracts void.

The senior officers were given additional remuneration in the form of a senior officers bonus scheme, which was inappropriate and led to irregular accounting techniques in order to artificially boost the profit-based bonus payments.

In reporting upon the nature and defects of the bonus scheme the commission has made a detailed study of the ineffectiveness of NPF management and financial planning which is reported in detail as specific matter number 20 in Appendix 20.

As with the trustees, the commission has found that there were serious irregularities regarding the determination and administration of expenses and allowances for officers. These are reported at paragraph 8.6.

Employees

The fairly favourable conditions of employment of employees and their access to a home ownership scheme and staff performance benefits are reported in paragraph 9 of Schedule 1.

After the departure of experienced and well trained staff prior to January 1995, NPF suffered from a serious lack of experienced and well trained work force and this is clearly reflected in the lack of efficiency reported upon by the Auditor-General, Pricewaterhouse Coopers (PwC) and KPMG.

There were attempts to restructure all staff positions at NPF. This resulted, however, only in a restructure and salary increase for senior officers.

Overview of officers and employees

Paragraph 10 of Schedule 1 provides a detailed overview of NPF’s management problems and deficiencies as reported by the Auditor-General, PwC and KPMG, which the commission adopts as part of its own findings.

Board forum and decision-making

The structure created for NPF envisioned that decisions would be made by the NPF board in properly constituted board meetings, unless delegated to management.

In paragraph 11, the commission reports on ultra vires decision-making by management; failure by management to properly brief and inform the board prior to seeking a board resolution; decision-making by “circular resolutions” and the board’s frequent failure to obtain the required approval by the Minister for decisions involving transactions over K300,000 (later increased to K500,000).

The problem caused by the participation in board meetings of invalidly “appointed” Trustees is also discussed.

The relationship between structural problems and losses suffered by NPF

NPF failed to develop investment policies and strategies and to report upon them quarterly as required.

Instead, it embarked upon a wholly inappropriate series of high-risk investments in PNG resource and other shares.

It ignored the structural requirement to confine its activities within the boundaries of its statute-given powers. Most notably it borrowed the funds to make these investments, which was beyond its powers.

The NPF board was required to confine its investments within the guidelines set by Sir Julius Chan in November 1993. Its failure to do so was a breach of fiduciary duty by each trustee in office during the period in which these investments were made and retained. Most of

NPF’s huge losses resulted from stepping outside the set structure governing its activities in this way.

The reason these activities and the mounting losses continued for so long is that NPF also ignored the obligatory structural requirement that it report quarterly and annually to the Minister. DoF must have been aware of this but felt no obligation to monitor and rectify the situation.

This was a serious gap in the structure of reporting. With NPF’s reporting to the Minister having broken down, it meant that the Auditor-General’s audit and reporting system also failed to operate, as it required the receipt from NPF of its report to the Minister to set the audit procedures in motion.

Weak governance within NPF was a significant contributing factor to the losses, which NPF suffered.

For most of the time, trustees were badly informed by management and seemed content to passively attend meetings, draw their allowances, sign circular resolutions and not inquire what management was doing.

The managing directors and investment managers rarely sought expert advice, relying on their own ego-driven and extreme views of what were suitable investments and activities for a provident fund.

The trustees almost never questioned or criticised management and never insisted on being given independent expert advice. In this manner, the trustees meekly went along with management’s recommendations to borrow funds for high-risk equity transactions, to invest millions of kina in Crocodile Catering and its foolish Indonesian adventures, to attempt to issue a $A54 million bond and to construct the NPF Tower.

Having embarked upon those ventures, the trustees did not insist upon strict accounting and reports by management as to their progress and NPF’s financial situation.

Criminal conspiracies

In 1999, while NPF’s financial lifeblood was haemorrhaging and it was facing bankruptcy and the complete loss of its member’s funds, its chairman Jimmy Maladina and its legal counsel/board secretary Herman Leahy, with the complicity of its managing director Henry Fabila, in defiance of all legal constraints, set about defrauding the NPF by means of the Waigani land deal and the NPF Tower construction fraud. These criminal conspiracies caused a further loss of just under K3 million to the Fund.

This executive summary will now present the major findings made by the commission in Schedule 1 with a brief summary of the relevant context. References to the relevant paragraphs in Schedule 1 and to the relevant appendix are given.

IRREGULARITIES IN APPOINTMENTS, TERMINATIONS AND CONDITIONS OF TRUSTEES AND OFFICERS

The structural framework for appointing, removing and remunerating trustees and officers, was carefully specified in the NPF Act. The administration of the process was so poor, however, that it undermined the constitutional legality of the board and the integrity and efficiency of the officers.

Schedule 1 examines these processes in great detail in paragraphs 4, 5 and 6.

This executive summary first postulates the formal structure as intended by the Act and then tabulates the period of incumbency of successive trustees, chairmen, managing directors and officer holders, pointing out any irregularities in tabular form.

Finally, this section of the summary sets out the commission’s findings on appointments, terminations and remunerations with brief contextual comments.

The structural framework for appointments, removals and the remuneration of office holders 

The Board of Trustees

The tripartite structure of the board is designed to give representation to the public service (two trustees), the employers (three trustees) and the employees (three trustees).

Appointment of Trustees

The public service representative trustees are appointed by the Minister to ensure that the board contains their professional expertise and to allow for an informal avenue of co-ordination and communication between the NPF and the public service and government (the intention was frustrated because the senior public service representative Iamo Vele rarely attended board meetings. On several significant matters his role as a trustee was in direct conflict with his role as a senior DoF officer).

The employer representative trustees are to be appointed by the Minister from a panel of names submitted by organisations representing employers. This is designed to ensure that this category of trustee is made up of trustees acceptable to the contributing employer establishments (The appointment of Mr Maladina as a trustee was in breach of this requirement).

The employee representative trustees are to be appointed by the Minister from a panel of names submitted by an organisation representing employees (traditionally the PNG Federation of Trade Unions).

Termination of appointment of Trustees

The employer and employee representative trustees are appointed for fixed three year terms subject to terminations upon grounds set out in the Act, and not otherwise.

Section 10 provides mandatory grounds upon which the Minister shall terminate a trustee’s appointment if (relevantly), the trustee:

(c) resigns his office by writing under his hand addressed to the Minister;

(d) absents himself from three consecutive meetings without the written consent of the chairman;

(e) . . .

(f) . . .

(g) being a person appointed under Section 6(1)(e), ceases to be an employee;

(h) being a person appointed under Section 6(1)(f) ceases to be an employer.

Section 10(2) allows the Minister to terminate a trustee’s appointment on the clearly stated grounds of:

“. . . inability, inefficiency, incapacity or misbehaviour”.

These are the only legitimate grounds for termination, yet there were many purported terminations on other grounds.

Where the Minister terminates an appointment, Sub-section 10(3) provides that the Minister shall, by notice in the Gazette, declare the office vacant and sub-section 10(4) provides it shall then be filled in accordance with Section 6.

Schedule 1 traces the history of the appointment and termination of appointment of trustees in detail.

As there were so many irregularities and so little care taken to follow the provisions of the Act, that the board was improperly constituted for long periods of time, which throws the legality of major board decisions into doubt. These irregularities are set out in Table 1 of this executive summary and the commission’s findings on this aspect are set out at paragraph 3 of this Executive Summary.

The chairman

Section (6)(1)(a) provides that the chairman shall be the Secretary of the DoF or his nominee approved by the Minister (An amendment to Section 6 which was enacted by Act No. 40 of 1986, was never brought into force).

Expenses and allowances of Trustees

The Act provides for board expenses and allowances to be determined by the Prime Minister and this power was never delegated.

Schedule 1 shows how the power was illegally exercised by Acting Minister Konga (paragraph 5.3.5) and how the NPF board itself illegally increased its own expenses and allowances (paragraph 5.2.2).

The Finance inspectors’ report has traced serious irregularities in the way board expenses and allowances were administered and calculated and the commission has recommended a full audit and recovery action to be implemented in order to recover the vast increase in expenses and allowances (paragraph 5.3.7.1 and Appendix 16).

There are no provisions for granting additional allowances for the chairman (i.e. the Secretary of the DoF or his nominee).

The managing director

Section 15 of the NPF Act provides that the managing director will be the chief executive of the board and head of the staff.

He is appointed by the Minister by notice in the Gazette after prior consultation with the board.

Sub-section 15(2) provides that the managing director’s salary and conditions shall be determined by the Minister, acting with the advice of the board.

Vacation and termination of office are provided for in Section 16 if the managing director:-

(a) becomes incapable;

(b) resigns;

(c) undertakes outside work without board’s consent;

(d) becomes bankrupt;

(e) is guilty of moral turpitude; the board shall terminate his employment.

Under sub-section 16(2), the board may, with the approval of the Minister, terminate the managing director’s appointment for “inability, inefficiency, incapacity or misbehaviour”.

There is no room for the managing director to be engaged on different terms pursuant to a contract of employment or for his appointment to be terminated on grounds other than those specified in section 16, yet these things happened.

Officers

Section 19 provides that the board may appoint officers of the board on the recommendation of the managing director. Conditions of service of officers may be prescribed in the rules.

Though not stated in the NPF Act, it is clear that the remuneration of officers is subject to the SCMC Act. SCMC approval was, however, rarely sought for officers’ remuneration and conditions, including the benefit of the senior staff bonus scheme.

Other employees

By Section 21 of the NPF Act, the managing director may, with the approval of the board, appoint other employees on terms and conditions determined by the board. Their remuneration is also subject to SCMC approval, which was rarely sought.

Periods of appointment

The periods of office of the successive Minister, secretaries of DoF, chairmen of the NPF board, trustees and managing directors are set out in a graph at Appendix 22 to this executive schedule.

Dates of appointment

The dates of appointment to and vacation of office of the successive Ministers, chairmen of the NPF board, trustees and managing directors and officers of the board are set out in the following table, noting all major irregularities, with references to paragraphs in

Schedule 1 and its appendices.

DATES OF APPOINTMENT AND VACATION OF OFFICE NOTING MAJOR IRREGULARITIES

Position: Minister

Name: Chris Haiveta

Period: January 1, 1995 – August 26, 1997

Irregularity: None

Position: Minister

Name: Iairo Lasaro

Period: September 29, 1997 to August 2, 1999

Irregularity: None

Position: Minister

Name: Sir Mekere Morauta

Period: August 1, 1999 to December 31, 1999

Irregularity: None

Position: Chairman

Name: Gerea Aopi

Period: January 1, 1995 to October 3, 1995

Irregularity: Held position of chairman by virtue of being Secretary of the DoF and vacated the chairmanship on ceasing to be Secretary.

Position: Chairman

Name: Rupa Mulina

Period: October 3, 1995 to January 11, 1996

Irregularity: Mr Mulina became chairman by virtue of his appointment as Secretary of the DoF. He sensed a conflict of interest and willingly complied with Minister Haiveta’s request to nominate Evoa Lalatute in his place. Minister Haiveta proceeded, however, to appoint Mr Lalatute himself, illegally on December 13, 1995. On January 19, 1996, Mr Mulina then signed a nomination of Mr Lalatute which was backdated to December 1995

Position: Chairman

Name: Evoa Lalatute

Period: January 11, 1996 to October 18, 1996

Irregularity: Minister Haiveta’s appointment of Mr Lalatute was beyond power and invalid. This mistake was purportedly corrected when Mr Mulina nominated Mr Lalatute on January 19, 1996 by backdated nomination. Mr Lalatute’s appointment was later wrongly terminated by Minister Haiveta. Only the Secretary of the DoF, Mr Mulina, had the power to terminate Mr Lalatute’s chairmanship which he should have done by revoking his nomination. The termination of Mr Lalatute’s appointment by Minister Haiveta was, therefore, ineffective.

Position: Chairman

Name: David Copland

Period: April 18, 1996 to January 15, 1998

Irregularity: Mr Copland’s initial appointment was tainted by the failure to properly terminate Mr Lalatute’s appointment. Mr Copland’s appointment was probably ineffective. Mr Copland’s subsequent periods as acting chairman was by resolution of board meetings from which Mr Vele was absent. Mr Copland’s appointment was purportedly terminated by Minister Lasaro but no proper ground was stated and it was not gazetted as required by the Act.

Position: Chairman

Name: Morea Vele

Period: January 15, 1998 to August 4, 1998

Irregularity: Mr Vele assumed the role of chairman after his appointment as Secretary of DoF. He then absented himself for nine months without nomination of a successor.

Position: Chairman

Name: Brown Bai

Period: September 1, 1998 to January 27, 1999

Irregularity: Mr Bai actively assumed the role as Secretary of the DoF/chairman when appointed as Secretary DoF. Under pressure from Minister Lasaro and Prime Minister Bill Skate, he stood down and nominated Jimmy Maladina as chairman.

Position: Chairman

Name: Jimmy Maladina

Period: January 27, 1999 to December 31, 1999

Irregularity: Mr Maladina’s appointment was planned by Prime Minister Skate and Minister Lasaro with the assistance of Herman Leahy. Mr Maladina’s appointment as chairman (and as employer representative trustee) was strongly opposed by the Employers Federation who issued a Writ seeking a Court injunction.

Position: Public Service Trustees (Not more than two)

Name: Vele Iamo

Period: February 12, 1993 to january 1, 1999

Irregularity: Mr Iamo was a senior officer in the DoF. He was frequently absent without permission for more than three consecutive board meetings, which should have resulted in obligatory termination of his appointment by the Minister (Section 10 – NPF Act). This did not happen. He was eventually terminated for political reasons by Minister Lasaro for no stated ground and without gazettal as required under the Act. The termination was invalid.

Name: Alphmeledy Joel

Period: January 28, 1994 to February 9, 1995

Irregularity: No irregularities

Name: Evoa Lalatute

Period: May 18, 1995 — no formal termination

Irregularity: Carried on as trustee after his chairmanship was revoked. No resignation, formal termination or gazettal. Uncertainty about cessation of his appointment taints the appointment of his successor with legal uncertainty.

Name: Gerea Aopi

Period: February 8 to August 28, 1998

Irregularity: Mr Aopi was appointed as public service representative trustee prior to completion of Mr Lalatute vacating office as a trustee. As there were still two public service trustees, there was no vacancy for Mr Aopi in this category, so his appointment was invalid.

Name: Abel Koivi

Period: April 1, 1996 to January 19, 1999

Irregularity: Appointment was invalid because there was no vacancy in this category of trustee. Mr Koivi was an officer with Air Niugini when it was privatised at which time he ceased to be a public servant and was no longer qualified to be a public servant representative trustee, but he remained in the position. Two years and five moths later, Herman Leahy attempted to rectify the situation by having Mr Koivi’s Air Niugini position declared to be an office in the public service.

The termination of his office as trustee by Mr Skate as acting Minister was without prescribed ground and was not gazetted as required.

Name: Brown Bai

Period: January 19, 1999 to December 31, 1999

Irregularity:After he stood down as chairman (under pressure) Mr Bai remained Secretary of the DoF and he was also appointed as a public service representative trustee. Whether Mr Bai’s appointment was valid depends upon whether the irregular termination of the appointments of Mr Iamo and Mr Koivi were effective.

After appointment Mr Bai absented himself without permission from many more than three consecutive meetings making himself liable for obligatory termination by the Minister. This did not happen.

Name: Mickey Tamarua

Period: January 19, 1999 to October 29, 1999

Irregularity: The validly of Mr Tamarua’s appointment depends on whether the termination of the appointments of Mr Iamo and Mr Koivi were valid — otherwise there was no vacant public service representative trustee position for him to fill.

Mr Tamarua’s termination as a trustee was sudden, with no grounds given and no gazettal.

Consequently, formal date of his termination and its legality is uncertain.

* Three Employee Representative Trustees

Name: John Paska

Period: February 12, 1993 to February 7, 1999 and February 19, 1999 to December 31, 1999

Irregularity: Mr Paska’s appointment was allowed to expire on February 6, 1999, leaving a gap before his reappointment. Mr Fabila and Mr Leahy exploited this situation to reintroduce the proposal to buy the Waigani land in Mr Paska’s absence

Name: Michael Gwaibo

Period: February 12 1993 to February 7, 1999

Irregularity: No irregularity. His appointment was allowed to expire. For a long period, there was no third employee representative trustee.

CONTINUED ON MONDAY

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