National Provident Fund Final Report [Part 13]
Below is the thirteenth 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 thirteenth 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.
Continued from yesterday
OVERVIEW – OFFICERS AND EMPLOYEES
The commission reviews the situation regarding appointment and conditions of officers and employees and analyses how the flawed Hay Group methodology resulted in excessive remuneration based on job evaluations, while ignoring the occupant of the job’s capability to fulfil the requirements of the position.
The capabilities of NPF officers is then assessed according to their performance measured by reference to the findings of three key reports:
A. Auditor-General Reports 10.5.3 to 10.5.5
B. PwC Reports 10.5.5 to 10.5.7.1
C. KPMG Special Purpose Audit Report 10.5 to 10.5
These reports provide a very useful checklist of the failures of NPF management (and trustees) to perform within the structural framework of the legislation and the envisaged reporting requirements.
It is reported under the following headings:
- Auditor-General’s section 8 reports
- Audit Report Qualifications
- Other Matters
(a) Crocodile Catering Limited – Maluk Bay;
(b) Maintenance of investment ledgers /reconciliation;
(c) Eight-mile subdivision;
(d) Nine-mile subdivision;
(e) Interest paid;
(f) Contributions bank account reconciliation;
(g) Investment approach/ strategy and corporate governance; and
(h) Many problems caused by structural weaknesses.
Management’s response to the 1998 section 8 Auditor- General’s report
This raised 18 matters investigated on a sample basis as follows:-
(i) Deficiency in members’ funds;
(ii) Deloitte Tower construction costs;
(iii) Tender process;
(iv) Capital expenditure budget;
(v) Property valuation fees;
(vi) Board minutes;
(vii) Investment portfolio – tax implications;
(viii) Tax due to IRC;
(ix) Payroll tax;
(x) Property Section 73 Allotment 13 Boroko;
(xi) Nine-mile subdivision;
(xii) General ledger reconciliation;
(xiii) Creditors subsidiary ledger;
(xiv) Fixed asset register;
(xv) Bank reconciliation;
(xvi) Controls over purchases and accounts payable;
(xvii) Controls over withdrawals of member’s funds;
(xviii) Member’s funds
(a) It is very significant that during the five year period being reviewed by this commission, we find that the attention of the NPF board and senior management was taken up almost entirely with improper, sometimes illegal, matters like borrowing funds, playing the stock markets, corporate take-over games and increasing their own salaries and allowances. Meanwhile, as shown in the Auditor-General’s reports, the staff’s performance of the nuts and bolts functions of the NPF such as collecting and recording contributions, maintaining members’ accounts and the books of NPF, monitoring compliance and the like, was absolutely appalling. This was a complete failure of management for which NPF’s senior officers and Board of Trustees were responsible.
(b) Many of the incidents of maladministration investigated by this commission were also highlighted by the Auditor-General’s reports, as evidenced above. The problem was that the reports, in later years, were late (for reasons indicated) and hence did not result in timely rectification. In any event, mechanisms for ensuring that rectification occurred would not have been effective prior to the change in management in late 1999.
(c) On the evidence of the Auditor-General’s Section 8(2) and 8(4) reports, NPF senior management was seriously inept and deserved no bonuses. The Board of Trustees was in breach of their fiduciary duties in not overseeing the performance of management.
PwC Report 1999 (10.5.6) and further PwC Report 1999
These two very full reports into NPF’s investment portfolio show how NPF’s failure to follow the structure provided by legislation and guidelines had brought NPF to the verge of financial destruction.
KPMG Special Purpose Audit
The commission agrees with and adopts the following comments quoted from the KPMG Report.
“We can not comprehend the prior management and board’s investment strategy of holding significant positions in unproven resource stocks. Dividends in these companies are unlikely until after five to 10 years of operations.
The lack of understanding of risks and returns by prior board and management has transpired into the losses in 1998 and 1999. We understand that most of these shares were acquired in 1996 as part of the Government’s aim to support development mining in Papua New Guinea. A huge loss of K62 million was recorded on sale of shares during 1999.”
In overview the return on investments of the fund in 1999 is described in a word as “appalling” but attributable to bad investment decisions of the board and management made prior to January 1, 1999.
Receipt of required contributions
“Our review of the Compliance division shows various operational weaknesses and fall in productivity. This has led to defaulting and outstanding contributions being at an all-time high in December 1999 with 160 known defaulting contributors.”
“. . . the current position of the fund is a direct result of a whole host of weaknesses and failure at the board and management level to set the appropriate corporate governance measures.
“. . . these weaknesses and failures included among others lack of direction by the board and management, misunderstanding and abuse of trustees role and the politicising of decisions.”
“. . . there were inherent weaknesses in the investment division stemming from board and management override, total disregard of risks, top down decision making, lack of separation of duties, inadequate information system and a lax environment being carried on from year to year.”
Compliance and membership
“Our review indicates that both the compliance and membership functions have not been performed in an efficient and effective manner. Essential operational measures required to track and monitor performance has not been established. The following has been lacking:-
- “Staff do not have performance targets. The board and management have not set the objectives for these divisions. There were no measures in place for measuring performance;
- There are no internally documented procedures manual and guidelines to facilitate and guide the overall conduct and running of these divisions;
- Essential information for operational decision making such as aged outstanding contributions were not always readily available from the information system.”
“Our review indicates that the accounting function has not been properly performed. Basic accounting procedures have not been performed.
Weaknesses identified include:
- Untimely production of management accounts;
- Inaccurate management accounts;
- Entry of journals by junior staff without senior accounts personnel review and authorisation;
- Inadequate audit trail of journals;
- Monthly reconciliation of general ledger balances were either not performed or incomplete and inaccurate;
- A lack of understanding shown by the finance manager on certain accounting issues, thereby leading to accounting errors; and
- No proper segregation of the ordering, purchasing and accounts payable function.”
“Our review indicates that the internal controls required to ensure the efficient and effective functioning of the fund in all areas of operation were either non-existent or lacking. The weaknesses are a direct result of the board and senior management lack of direction.
The results for 1999 and 1998 is a manifestation of the continued ignorance of the prior boards and management to set the appropriate processes and systems to achieve maximum performance for the members.”
(a) The massive losses in 1998 and 1999 of K153 million were a result of poor investment decisions in 1996-1998 in PNG resource stock and STC and CXL and the NPF Tower, mostly funded by illegal borrowing;
(b) The return on investments was appalling;
(c) Operational weaknesses in NPF’s Compliance Division led to 160 known defaulting contributors in December 1999;
(d) NPF’s liabilities exceeded its assets and there were significant unrecorded commitments and contingencies. Until late 1999, NPF management had been stumbling blindly from loss to loss;
(e) No meaningful and effective trend and ratio analysis had been carried out prior to 1999 to record the turn around from healthy profit in 1997 to massive downturn in 1998 with a loss of K70.9 million at that time and with a further loss on sale of shares of K84 million in 1999;
(f) Debt to equity ratio rose from 1 per cent in 1992 to 10 per cent in 1995, to 28 per cent in 1996 to peak in 1998 at 57 per cent of equity:
(g) In early 1999, interest on the Government loan stock was being received quarterly compared with monthly operating expenses of K500,000 and interest on the Tower loan of K600,000. The fund relied on overdraft to remain liquid. This was the result of ignoring the structural constraints on investment;
(h) The internal controls for all areas of operation were either non-existent or lacking;
(i) The board’s performance until April 1999 was inept. There were six different chairmen, the last of which was committing criminal fraud against the fund. The trustees had little understanding of their role and failed to stand up to the strong personalities of Mr Copland and Mr Wright or to monitor, criticise and rectify the performance of management; and
(j) Senior management was characterised by a “combination of sheer arrogance, incompetence and political interference”. From the end of 1998 until the suspension of Mr Leahy on October 8, 1999, it contained an active criminal element.
NPF DECISION-MAKING FORUMS AND DELEGATIONS
Financial Delegations to Management
NPF board’s decisions can only be made in properly constituted board meetings unless the power has been delegated to management.
The only general delegations made by the board to management were:
July 30, 1993 Delegations to:
Managing director up to K100,000;
Financial controller up to K25,000; and
Divisional manager up to K10,000;
February 8, 1999 Delegations to:
Managing director up to K50,000;
Financial controller up to K50,000; and
Divisional manager up to K10,000.
March 8, 1999 Delegations to:
Managing director up to K100,000;
Deputy managing director up to K50,000;
Corporate secretary up to K50,000; and
Divisional manager up to K10,000.
Attempt to “doctor” minutes
At the March 8 meeting, Mr Fabila and Mr Leahy had sought to increase the managing director’s delegation to K350,000 (in order to enable two cheques for K175,000 each to be written for excessive valuer’s fees as part of the NPF Tower fraud).
The board rejected this.
The commission found that Mr Leahy directed Ms Dopeke to change the draft minutes to falsely show that his own delegation had been increased to K100,000.
Board meetings and circular resolutions
Following sub-paragraphs, the commission reports on the practices of management making decisions beyond power then seeking subsequent ratification by the board (184.108.40.206) and circular resolutions whereby the trustees were frequently asked to make important decisions by consulting a short management paper seeking a “for or against” signature – to be (sometimes) ratified at a subsequent board meeting.
Both these devices were “extra legal” and constituted an abuse of process.
Quorum at meetings
The problem of meetings attended by invalidly appointed trustees or an excessive number of trustees of a particular category is discussed at .
(a) The formal structure of bi-monthly meetings with the proper quorum of trustees attending and proper minutes being taken and subsequently confirmed was generally complied with;
(b) “Short-cuts” occurred, however, in the form of management “beyond power” decisions with subsequent board ratification and decision-making by way of circular resolutions.
These devices were extra legal and gave rise to invalid and ill-considered resolutions; and
(c) Some tampering with minutes has been found.
BOARD POLICY AND DIRECTIONS
Board “home grown” policies
The NPF board formulated few, if any, express policies or strategies. It expressly put to one side its obligation to annually update a five-year rolling plan.
There were some board statements of policy intentions:
- resolution to implement DoF jobs creation investments (paragraph 220.127.116.11), This was not followed through.
- Direction that management should pursue investment opportunities then submit them to the board (paragraph 12.2.4).
The investment guidelines – 1993
Sir Julius Chan’s guidelines should have provided NPF with a clear policy to follow on investments – but it ignored them and followed a strategy of high-risk investment in PNG resource stock (paragraph 12.2.2).
The commission reports on the trend of NPF’s investments into high-risk investments and how it sought to be liberated from the constraints of seeking (through DoF) the Minister’s approval of its equity investments. Minister Haiveta gave his approval for NPF to “trade in equity stocks within its investment portfolio which are listed on stock exchanges within the country and overseas . . . without approval provided that each investment whether a sale or purchase does not exceed a maximum level of K1 million at any one time.
This opened the floodgates for a series of unvetted transactions up to K1 million, using funds that were mainly borrowed from ANZ Bank.
This borrowing was beyond NPF’s legal power and it led to a rapid accumulation of high risk, no return investments, which would be very difficult to sell and to a massive debt.
The interest on the debt exceeded K1 million per month, which caused an acute cash liquidity crisis that threatened NPF’s solvency.
Paragraph 12 traces the evolution of these disastrous investment strategies and the continued failure by NPF management and trustees to evaluate its financial situation and direction.
When it did notice it was acting outside the investment guidelines the NPF board did not seem to realise that it was investing funds illegally and that the trustees were each in breach of fiduciary duty by doing so and would be personally liable for the massive losses, which were accumulating.
Rather than trying to rectify the situation by bringing the portfolio back into line with the guidelines, the board sought to have the guidelines changed so that the guidelines would conform to NPF’s high risk and totally inappropriate investment policy.
(a) NPF management and the board ignored the requirement to maintain an annually updated rolling five-year plan and to report on its policies to the Minister and to its members.
They failed to address strategic planning and consequently jumped from one ad hoc high-risk investment decision to the next, following the personal inclinations of Mr Wright and Mr Copland, encouraged by Minister Haiveta’s enthusiastic support.
Mr Kaul was unwilling or unable to restrain Mr Wright’s grandiose plans for NPF as a major institutional investment player.
(b) NPF’s expressed policies were confined to policies regarding staff benefits which were approached enthusiastically by management, and some schemes for members’ benefits such as education loans, long-term members bonuses and some poorly thought out and disastrous home ownership subdivisions;
(c) The absence of carefully conceived and expressed policies, the commission finds that defacto “policy trends” existed as follows:
(i) acquire high-risk, non-income producing PNG resource shares with preference for some decision making role in the hope of making longer term capital gains;
(ii) maintain flexibility and freedom from (Ministerial control and guidelines);
(iii) assert NPF’s independence and freedom from DoF as adviser, monitor and link to the Minister;
(iv) maintain willingness to depart from guidelines and to act without required Ministerial approval when necessary;
(v) a “big is beautiful and borrow to achieve it” approach to investment;
(vi) acquire a significant share holding in CXL and STC for nationalistic reasons and because those companies employed many NPF members.
(d) Following these defacto policy trends and also making ad hoc opportunistic investment decisions, taken without regard to the structural constraints, which were intended to safeguard the members’ funds, caused massive losses for NPF in 1997, 1998 and 1999.
(e) By the time of Mr Fabila’s appointment in May 1998, the damage was done and NPF faced bankruptcy.
With Mr Maladina as chairman and Mr Leahy as his willing criminal conspirator and a new Board of Trustees, the end loomed for NPF.
To a large extent, the situation was turned around by Mr Bai’s firm leadership as Secretary of DoF, the appointment of PwC and the instigation (by Mr Bai) of the Finance inspector’s investigation.
This gave the opportunity for Mr Mitchell and newly appointed trustee John Jeffery to bring both the management and board into line, remove Mr Maladina and Mr Leahy, reduce debt by asset sales and to put appropriate policies in place.
INVESTMENT GUIDELINES AND DIRECTIONS
The commission has made a detailed report on the guidelines and directions, which, under the applicable legislation, NPF was obliged to follow.
Its blatant failure to do so was illegal, and was a breach of fiduciary duty by all the trustees in office at the time.
“All monies belonging to the fund shall be,
(a) . . .
(b) invested by the board in accordance with investment guidelines issued under Subsection (2).
The Minister may from time to time issue guidelines as to the manner in which moneys held by the board shall be invested”.
Rule 32 (1)(b) provides:
“all monies belonging to the fund shall:
(b) be invested, subject to such directions as the Minister may from time to time give, in securities, debentures and other ways provided that such securities are payable both in respect of capital and of interest in Papua New Guinea.”
There is controversy whether rule 32(1)(b) is inconsistent with Section 36(1) of the NPF Act.
Rule 32(1(b) is not inconsistent with Section 36(1) of the Act and is not ultra vires of Section 61(1)(g) of the Act.
Any direction or guideline given under Rule 32(1)(b), however, must be read down, if necessary, to fit within the provisions of the Act.
There have been few directions.
The commission reports on the few direction, which have been given to NPF by the Minister.
The directions by Minister Haiveta for NPF to purchase Government securities, not to withdraw maturing deposits from the loan banks and to use new contributors funds to purchase Government securities was not a matter of issuing guidelines.
It amounted to a direction, which was beyond power and therefore amounted to improper interference with the management of the fund.
(a) Prime Minister Skate’s freeze on investments;
(b) Direction by Minister Lasaro repeating the freeze direction;
(c) Direction to purchase Treasury Bills.
The directions listed above go beyond issuing guidelines.
Those that amounted to more than mere requests were beyond power and amounted to improper interference in the management of the fund.
Failure by NPF to follow the investment guidelines has been a far more serious mater.
In paragraph 14.4.2 and following sub paragraph, the commission examines in detail each part of the 1993 investment guidelines and the effect of NPF’s failure to comply.
The important matter of Minister Haiveta’s variation of the guidelines regarding K1 million transactions in overseas equities is dealt with in detail in Appendix 21.
(a) Minister Haiveta acted improperly in failing to obtain expert or DoF advice before granting approval to trade in equities up to K1 million per transaction.
It was a very significant relaxation of Minister’s control as previously prescribed in the guidelines promulgated by Sir Julius Chan, which led to massive losses of the members’ funds.
(b) Minister Haiveta should be referred to the Ombudsman Commission to investigate whether his reckless failure to seek expert advice from DoF or elsewhere amounted to a breach of the Leadership Code.
To Be Continued on Monday