Home > Corruption, Papua New Guinea > National Provident Fund Final Report [Part 17]

National Provident Fund Final Report [Part 17]

Below is the seventeenth 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 17th 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. 

Mr WRIGHT ADVISES NPF BOARD OF EXISTENCE OF A K4 MILLION OVERDRAFT

In May 1998, PNGBC incorporated the various assets over which it had obtained security for the overdraft facility into the security it held for the PNGBC Tower loan.

It was not until June 1998 that Mr Wright provided any information to the NPF board about the long-standing overdraft. At this time it stood at K4 million. The information provided to the board, however, was very guarded and misrepresented the true facts.

Findings

(a) Disclosure of the overdraft facility by management (Mr Wright and Ms Dopeke) to the NPF board at the 113th board meeting on July 2, 1998, was inadequate and misleading as it implied that the overdraft was a new event and failed to mention it had been in place a long time; and
(b) Minister Lasaro was in breach of his duty as a Minister in not seeking DoF or other expert advice before approving the K4.5 million overdraft on August 19, 1998.

FURTHER OVERDRAFT ASSISTANCE FOR NPF BOARD

From August 1998, NPF required temporary overdraft assistance from PNGBC of K5 million to help meet its cash flow crisis. NPF management made minimal explanation to the board and the trustees failed to notice that management was exceeding its authority.

Findings

(a) PNGBC was remiss in August 1998 in not insisting that it sight board and ministerial approval before granting the K5 million temporary overdraft facility at 22.75 per cent interest;
(b) NPF management and Mr Wright in particular was in breach of duty in not keeping the NPF board fully informed and seeking approval for the K5 million overdraft facility;
(c) Mr Wright and NPF management failed to obtain approval from either the NPF board or the Minister for the K5 million overdraft facility;
(d) As the NPF 1998 Annual Report showed overdraft at December 31, 1998 of K6,770,000, both PNGBC and NPF trustees were negligent in not perceiving that this was in excess of the K4.5 million approved by the Minister of Finance.

NPF ADVISED OF LACK OF POWER TO BORROW FUNDS

When in August 1998, Gadens advised PNGBC that NPF lacked the power to borrow, PNGBC continued to lend to NPF, thus creating a very real possibility that the loan may not be recoverable and exposing the bank to a possible class action brought on behalf of NPF members in the future.

Findings

(a) Management’s reporting to NPF board in the last half of 1998 was scant and misleading as the overdraft balance was netted off against credit balance. This concealed the fact that NPF’s account with PNGBC was overdrawn by K6 million;
(b) The NPF board was remiss in accepting and not questioning such scant information and in simply approving confirmation of the overdraft facility at a level in excess of that earlier approved by the board and the Minister.

NEGLIGENCE OF NPF AND PNGBC

By December 31, 1998, NPF’s overdraft with PNGBC was K6,770,000 and it was having difficulty meeting its commitments to reduce it.

Findings

As the NPF 1998 Annual Report showed an overdraft at December 31, 1998, of K6,770,000, both PNGBC and NPF trustees were negligent in ignoring the known fact that this overdraft figure was in excess of the K4.5 million approved by the Minister of Finance.

FURTHER INCREASE IN FACILITY

PNGBC then acceded to NPF’s improper request to increase the overdraft facility even further by increasing it to K7 million subject to board and Minister’s approval.

The Department of Finance (DoF) recommended that the Minister give his approval without performing any analysis of the situation.

Findings

The Department of Finance was clearly remiss in not obtaining advice and not pointing out to the Minister – as it should have earlier:-

(a) Section 56 does not apply to the NPF Board of Trustees as it is not “a public body to which this Act applies”; and
(b) the NPF Board of Trustees has no power to borrow at all;
(c) the Minister should accordingly not grant approval under Section 61 of the borrowing as a contract because it was ultra vires the NPF board’s powers; and
(d) Those involved in giving advice to the Minister were clearly remiss in their duties.

REQUEST TO INCREASE OVERDRAFT FACILITY

The NPF board was notified of the overdraft extension to K7 million and a request for a further K2 million as well as a K9 million addition to the NPF Tower loan after the event.

Findings

(a) NPF management was remiss in the way it sought board approvals for extensions of the PNGBC overdraft facility to the extent that a valid approval was not obtained before management entered a binding commitment;
(b) The NPF board was remiss in not questioning management’s actions and not censuring management for acting in excess of its lawful authority.

ASSETS SALE TO REDUCE OVERDRAFT

By March 1999, Mr Marshall of PwC was helping NPF reduce its burden of debt by selling off assets.

The proceeds were used to reduce the PNGBC overdraft, which had been almost eliminated by January 2000. A similar overdraft for Crocodile was to be eliminated soon afterwards.

CONCLUDING COMMENTS

In addition to the major point that NPF had no power to borrow at all by way of overdraft or any other form of loan, the major discovery which the study of the PNGBC overdraft facility disclosed was that it had been arranged by NPF management secretly and that, mostly, PNGBC had gone along with management’s failure to obtain board (and sometimes ministerial) approval.

Entering into and using an overdraft facility is a contract requiring Ministerial approval in accordance with the sum involved. Deceptive accounting had initially hidden the existence of the overdraft and even after it had been disclosed to the board, the management provided misleading information. These matters were not properly regularised until Mr Mitchell had been appointed in 1999.

Executive Summary Schedule 2B

This is a summary of Schedule 2B which deals with the financing and construction of the NPF Tower.

See Schedule 6 also for details of special investigations into certain matters relating to the NPF Tower.

References in this summary to paragraph numbers in the report (unless otherwise stated) refer to the report on the NPF Tower loan set out in Schedule 2B.

deloitte-tower

INTRODUCTION

This report focuses on the loan funding obtained from the PNGBC to construct the NPF Tower.

It also outlines relevant aspects of the construction of the tower in order to provide background context for the loan funding. It overlaps to some extent with Schedule 6, which reports on several matters mentioned in this report that required detailed investigations.

RELATIONSHIP OF THIS REPORT TO SCHEDULE 6 – THE REPORT ON NPF TOWER 
INVESTIGATIONS

Schedule 2B reports on the decision to construct the NPF Tower, the incorporation of a company, The Tower Pty Ltd, to be the legal entity for the project; the tenders procedures and building contracts which resulted in the appointment of Pacific Architects Consortium (PAC) as the architects and Kumagai Gumi Company Ltd as the builders; the financing of the project and the performance of NPF management and the board in obtaining and servicing the loan from PNGBC; difficulties and claims during construction and machinations to sell a share in the tower to the PNG Harbours Board (PNGHB).

Schedule 2B also describes the history of the construction, with initial delays and increasing costs of K2 million caused by unexpected problems with the foundations.

It describes increased costs due to architect approved variations and an increase in costs of K1 million because of a genuine acceleration claim and of K2.5 million resulting from a fraudulently inflated settlement of a currency devaluation claim and a fraudulent second acceleration claim.

Further investigation of this fraud and other suspicious activities are reported upon in Schedule 6 which also relates the full history of the frauds perpetrated by Jimmy Maladina, Herman Leahy and Angelina Sariman in early 1999 whereby they illegally obtained K2.5 million from NPF and attempted to benefit from a K2 million commission to Port Moresby First National Real Estate (PMFNRE). It also reports upon the involvement of Peter O’Neill, Maurice Sullivan and Ken Barker.

Schedule 6 presents the results of the commission’s investigation into the money trail, which traced the “dirty money”, as far as possible to its eventual recipients.

The trail leads through the bank accounts of Carter Newell Lawyers and PMFNRE to the intended beneficiaries who include Mr Maladina, Mr Leahy and Ms Sariman as well as the directors of PMFNRE

Ken Barker and Maurice Sullivan and Peter O’Neill, executive chairman of the PNGBC and Finance Pacific and the secret “owner” of PMFNRE.

In this Schedule 2B those criminal matters are merely outlined, in order to provide background content for the loan funding for the construction of The Tower, which is the major focus of this Schedule.

EARLY DISCUSSIONS

The tower project was first discussed at NPF board meetings in December 1994 when K1.5 million was approved for preparing documentation to the pre-tender stage. Ministerial approval for K1.93 was requested and obtained by management, which was in excess of the board’s resolution. Throughout 1995, the board proceeded with caution and sought details of the financial viability of the project, refusing to be pressured by Mr Wright into premature approval.

Findings

(a) In 1995, the board authorised expenditure of up to K1.5 million to get the proposed NPF Tower development to pre-tender stage and made it clear that NPF by itself should not be exposed to a venture of this magnitude. The board emphasised the need for joint venture partners;
(b) Although the NPF board approved feasibility costs of only K1.5 million to pre-tender stage, Mr Wright exceeded his authority by seeking and obtaining Ministerial approval for such costs to K1.93 million;
(c) The Minister was not told that the board had only approved K1.5 million;
(d) The board was not told the Minister had approved K1.93 million;
(e) The cost estimate for the construction of the NPF Tower was K39.285 million;
(f) There were no projected rental calculations from Mr Wright as requested by the board; and
(g) No information on possible joint venture partners was forthcoming from Mr Kaul.

The project was temporarily shelved while management unsuccessfully sought joint venture partners.

When the project was revived by Mr Copland, Mr Kaul and Mr Wright in mid 1996, they discussed partial loan funding and the ANZ Bank, which was NPF’s major financier, was keen to provide a loan facility but under BPNG guidelines, it was unable to do so because ANZ was already over exposed to NPF.

APPROACH TO PNGBC FOR A LOAN FACILITY

By August 1996, the project was being pushed along by NPF chairman Copland as interest rates were low and he felt the time was ripe (paragraph 2.7.2).

With Mr Kau’s support, the project was approved in principle by the NPF board on August 27, 1996.

This approval was premature and based on little detailed information.

Findings

(a) The trustees failed in their fiduciary duty to the members by approving the development of the NPF Tower despite obvious deficiencies in the information provided to them on key matters such as thorough marketing evaluation, rental calculations and the availability of a joint venture partner.
(b) The trustees failed to inquire into the unexpected doubling of the approved K1.5 million initial investigation costs to K3 million.

Mr Wright approached Mr Holmes of PNGBC in October of 1996 (paragraph 3.1). He welcomed the possible business but wisely expressed precautions about the lack of research into the financial viability of the project and noted that the loan should be limited to K25 million which was about 50 per cent of the projected cost of the project. He felt that 100 per cent loan financing would lead to a prohibitively high interest rate burden. Unfortunately, this wisely cautious approach was later abandoned by PNGBC.

MINISTER HAIVETA APPROVES THE CONSTRUCTION OF THE NPF TOWER AT A COST OF K40 MILLION

NPF’s headlong rush into this risky and expensive venture continued and no brakes were applied by the supervisory bodies. Mr Kaul’s submission for Minister Haiveta’s approval provided no detailed financial analysis. The Minister granted approval without waiting for Department of Finance advice.

The DoF advice, when it came, provided no critical analysis of the economics of the proposal.

Findings

(a) Mr Kaul failed to provide a properly researched brief to the Minister to support his request for approval of the NPF Tower project;
(b) Senior officers in the DoF failed their duty to provide the Minister with an objective critical analysis of the proposal;
(c) Minister Haiveta failed in his duty to act on independent expert advice and granted approval without any expert advice other than the preliminary feasibility studies submitted by NPF. In granting premature approval to a half thought out project in these circumstances, Minister Haiveta was guilty of improper conduct;
(d) The approval was given even though there had been no market research to determine possible occupancy and achievable rental rates. There were no plans formulated to finance the total cost of the project or to service the debt over a stated time frame. The only due diligence and documented material available to the Minister and his advisors was the feasibility assessment by Rider Hunt;
(e) The hasty process by which Ministerial approval was given and recorded may have resulted in conditions imposed by the Minister being not recorded in writing.
(f) As both the Minister and the senior officers of the DoF failed in the discharge of their duties – this resulted in premature Ministerial approval of a poorly thought out, unresearched, unplanned and extremely speculative expenditure of up to K40 million of members funds.

MR WRIGHT APPLIES TO PNGBC FOR K50 MILLION LOAN FACILITY

Without NPF board authority, Mr Wright began negotiating the loan arrangements with Mr McAnally of PNGBC, seeking a K50 million facility on security of the tower, Highlands Pacific shares and an NPF guarantee. The Tower Pty Ltd was shown as the borrower.

While PNGBC were considering the loan application, the NPF board continued to make ill-considered decisions in February and May 1997 towards implementing the project, including the un-tendered appointment of Century 21 Siule Real Estate to market the leasing of the tower (paragraph 4.6) and the appointment, after considering tenders, of Kumagai as builder. The board was not informed of the proposals to borrow K50 million from PNGBC.

Findings

(a) The management and trustees were in breach of their duty in appointing Century 21 to market the tower leases without calling for tenders;
(b) Mr Wright acted improperly in not disclosing to the board that his wife was employed by Century 21.

PNGBC APPROVES K50m FACILITY

With the PNGBC Lending Committee about to meet, Mr Kaul quickly obtained approval from acting Minister Konga to increase the cost of the project by K10 million to K45 million.

In recommending approval of the loan facility, the PNGBC Lending Committee gained reassurance from the fact that it was a fixed price contract which it felt removed the possibility of subsequent costly kina fluctuation claims and that NPF would itself be able to finance any cost over K50 million.

Both these sources of assurance proved to be unwarranted as later there was a successful kina depreciation claim and NPF was not able to meet costs more than K50 million from its general revenue.

TO BE CONTINUED TOMORROW

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