National Provident Fund Final Report [Part 20]
Below is the twentieth 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 2002/3.
NPF Final Report
This is the 20th 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.
Executive Summary 2c Continued
(a) Management, particularly Mr Kaul and Mr Wright, were in serious breach of their duty to the NPF board and NPF members by failing to disclose and seek board approval for the negotiations with BSP, the substitution of security arrangements and the acceptance of a K30 million loan facility;
(b) The NPF board minutes for 1997, up to the 109th board meeting on October 28, 1997, record:
(i) The brief mention of the Poreporena Freeway loan at the 105th meeting held on February 27, 1997 (Exhibit B1011)
(ii) The brief mention of the Poreporena Freeway, NCD Water and Sewerage and Eda Ranu loans – but not the source of funds for them – at the 106th meeting held on May 5, 1997;
(iii) a resolution to loan a further K1 million to NCD Water and Sewerage – but not the source of funds for it – at the 107th meeting held on July 4, 1997.
(iv) a brief mention that BPNG approval for BSP to loan K30 million to NPF had not been obtained by the time of the 108th meeting held on August 22, 1999 (Exhibit B1036) and at the same meeting, the Eda Ranu loan was mentioned but not the source of funds.
There is, otherwise, not a single mention in the board minutes of all the events earlier catalogued in this report.
There were no board approvals sought or given for the drawdowns on the BSP facility, the altered security arrangements with BSP or acceptance of the new BSP facility arrangements contained in the facility letter of October 10, 1997;
(c) The drawdowns on the BSP facility, the altered security arrangements (which involved pledging NPF assets) and the entry into the new facility arrangements in October 1997, were all matters beyond any financial or other delegated authority of any member of the NPF management team and all required board approval.
The 109th NPF board meeting held on October 28, 1997, afforded a clear opportunity for management to brief the board and to obtain board ratification of what had been done and board approval of the BSP facility letter of October 10, 1997 but this was not done;
(d) Mr Kaul, as managing director, was clearly in breach of his duties in not curbing these management excesses and requiring that the requisite board approvals be obtained.
(e) Mr Wright was clearly in breach of his duties in exceeding his delegated authority and not obtaining the requisite board approvals; (f) Herman Leahy was remiss in his duties in:
(i) Signing the false board minutes of October 9, 1997. For this it is recommended that Mr Leahy be referred to the PNG Law Society to consider whether to impose disciplinary measures and
(ii) Not advising of the need to obtain board approvals.
(g) The NPF Board of Trustees were in breach of their fiduciary duty in not questioning NPF management about where the money for substantial investments was coming from, what the borrowed funds were being expended on and what security NPF was giving BSP for this substantial facility.
(h) The DoF (Mete Kahona, in particular) had a serious conflict of interest as it represented the State’s interest in urgently securing funding for the freeway as well as having the function of making recommendations regarding NPF’s requests for approval. It failed to address the danger of NPF borrowing at a variable (ILR) interest rate and then on-lending to Curtain Burns Peak at a fixed rate.
Drawdown paid through NPF’s PNGBC account: BSP co-operates with NPF management regarding unauthorised transactions
BSP paid the K3 million balance of the K8 million loan approved by the Minister to NPF’s Papua New Guinea Banking Corporation account before it was on-loaned to Curtain Burns Peak on November 20, 1997.
Payment through another account, in this way, has made it difficult to trace the source of the freeway project loan funding.
In January 1998, NPF’s drawdown balance was K20,092 and the accrued interest totalled K19,926.
In February 1998, Mr Kaul agreed with BSP about rearranging NPF securities and also drew down K1.8 million for payments on the NPF Tower. The board was not informed of these transactions.
At the same time Mr Kaul asked BSP to act as security custodian for NPF’s proposed $A54 million bond issue while Mr Wright sought the release of Orogen shares to bolster NPF’s security requirements elsewhere.
These moves were necessary as NPF’s finances were being seriously affected by the fall in the value of its shares and the rise in interest rates.
Again, management kept the NPF board in the dark in relation to these activities.
BSP TIGHTENS ITS CREDIT ARRANGEMENTS, 1998
In March 1998, BSP did release seven million Orogen shares but ensured it maintained a 4.5 per cent differential between the rate it paid on borrowed funds and the rate it charged.
In order to protect its own profitability, BSP notified NPF that it was tightening its credit arrangements with NPF. BSP also refused to accept the assignment by NPF of IBD’s held at other banks as security and effectively began putting pressure on NPF to find more acceptable security or begin retiring its debt to BSP .
In April 1998, BSP did release K1 million in term deposits to NPF but retained its 4.5 per cent differential and kept the NPF within its K22 million limit. It was keeping a vigilant eye on NPF.
NPF was obliged to accept commercial terms or apply maturing IBD’s to retire the BSP debt. Mr Wright agreed to retire the debt.
In June 1998, BSP conferred with ANZ about NPF’s credit rating and both banks agreed to tighten up their credit arrangements with NPF.
In July, Mr Wright was obliged to apply maturing IBD’s with PNGBC and the Bank of Hawaii (BoH) to retire the BSP debt.
GOVERNMENT PRESSURES NPF TO DRAWDOWN AND ON-LEND TO BUY TREASURY BILLS
In December 1998, the Government put pressure on the financially ailing and debt-burdened NPF to seek a further K15 million drawdown on its BSP facility in order to purchase Treasury Bills to assist the Government cope with an urgent cash flow crisis.
NPF complied and BSP agreed to the drawdown on the condition that it took a lien over the Treasury Bills.
DoF and Minister’s conflict of interest
In applying this pressure and then recommending Ministerial approval for the drawdown, the DoF was acting contrary to NPF’s interest and its senior officers were in an impossible conflict of interest situation, as was the Minister for Finance when he gave that approval.
In relation to all these negotiations and transactions entered into by NPF management, the commission has found at paragraph 4.3.13 that:
(a) Yet again, the NPF board minutes for 1998 do not record any information being given or noted by the board in relation to transactions concerning this BSP facility. No board approvals were sought or given in relation to any drawdown of funds on this facility; the request to fund a payment to Kumagai Gumi for the NPF Tower construction; the release of Orogen shares from BSP to be used as security for another loan; the numerous alterations in the security offered to and held by BSP; the realisation of NPF’s IBD assets to retire debt; the purchase of K15 million in Treasury Bills; the drawdown on the BSP facility to finance that purchase or the pledging of the Treasury Bills as security to BSP;
(b) Yet again the transactions listed in (a) above were beyond any financial or other delegated authority of the NPF management team and all transactions required board approval;
(c) Yet again, both Mr Kaul and Henry Fabila, as successive managing directors of NPF, were each clearly remiss in their duties in not curbing these excesses and requiring that the requisite board approvals be obtained and that for transactions over K500,000, the requisite Ministerial approval be obtained;
(d) Again, Mr Wright was clearly in breach of his duties in exceeding his delegated authority and not obtaining the requisite board and Ministerial approvals and in pledging NPF assets without those approvals;
(e) The NPF Board of Trustees also failed their fiduciary duty by not questioning management’s conduct and not making inquiries about the source of the funds for NPF’s investments and the expenditure or application of the funds, which they clearly knew NPF was borrowing;
(f) In relation to the drawdowns for the freeway loans and the drawdown for the K15 million to buy Treasury Bills, each of the Minister for Finance and the DoF officers (and in particular Mete Kahona) were placed in an impossible position as the interests of the State, which they were obliged to advance, were in conflict with the interests of NPF, which they were obliged to protect (when advising the Minister whether to grant approval under section 61(2) of the PF(M) Act).
RETIREMENT OF BSP DEBT – 1999
By February 1999, NPF had consulted and been advised by PwC about the massive 1998 losses and the urgent need to reduce assets and retire debt. The maturing K15 million Treasury Bills were accordingly used to retire debt in February 1999.
This was done without board or Minister’s approval or knowledge.
Finally, K8 million of maturing IBD’s were used in April to fully pay off the BSP loan, despite a last minute attempt by the NPF board to “hawk” it around to find an investment at a higher interest rate.
During 1999, although management put more effort into working under the controlling authority of the NPF board, the commission has found at paragraph 4.4.9, that there were shortfalls.
(a) Mr Fabila exceeded his delegated authority in applying the K15 million in Treasury Bills to retire debt without board or Ministerial approval and failed to inform the board of his action;
(b) Haro Mekere, inadvertently, provided false information to the board meeting of April 30, 1999 as to the purpose of the BSP loan facility and did not explicitly advise the board whether NPF was free to deal with the maturing K8 million IBD.
He did, however, get the board, rather than management, to make a decision as to what to do with that IBD;
(c) Someone in NPF management exceeded his delegated authority in paying off the approximate K8 million balance of the BSP facility in April/May 1999, without specific board or Ministerial approval and failed to inform the board of his actions. That “someone” is not identified on the evidence before the commission;
(d) Rod Mitchell inadvertently provided false information to the board meeting of May 21, 1999, as to the existence of and need to address the BSP facility when that facility had, unknown to Mr Mitchell, in fact been paid out in full, prior to that date.
The commission’s investigations into NPF’s BSP loan arrangements have revealed that management operated almost totally outside of the control of the NPF board.
For the most part the board was not informed or consulted.
Management sometimes entered into loan agreements entirely without the board’s knowledge and drew down funds without board authority, frequently paying the funds into accounts at other banks rather than spending them directly on BSP approved purposes.
On at least one occasion, when evidence of (a non-existent) board approval was required by BSP, Mr Leahy simply presented a falsified approval resolution.
When NPF management sought approvals for the K30 million BSP facility, BSP, BPNG and the Minister approved the facility be used to fund local “Government” projects – i.e.: Freeway, NCD Water and Sewerage and Eda Ranu. Mr Wright, however, also had an additional purpose to use the facility to fund the purchase of Orogen shares and he disclosed this only to the NPF board. When the Ministerial and BSP approvals did not include this purpose, Mr Wright simply paid the drawdown into another bank account and then used it to buy Orogen shares, despite the lack of Ministerial and BSP approval.
The NPF board was kept in the dark about the fact that various “investments” were financed out of the BSP facility and the purposes for which drawdowns on the BSP facility were applied. Each decision involving over K100,000, required board approval and each decision over K500,000 required Ministerial approval, as there was no delegation of powers.
Mr Wright seems to have thought he had the power to do what he liked and no one in NPF curbed him.
The only partially effective curb was BSP’s insistence on Ministerial approvals to cover the stated purpose of each drawdown.
Many drawdowns were not directed to their approved purpose but were paid to NPF’s ANZ or PNGBC accounts where they were mixed with other funds. This confused the position as it is hard to say what the actual source of funds for a given investment was. This is important in relation to the source of funds for the freeway loans and probably “masked” the payment of K9.6 million for Orogen shares.
Neither the NPF board nor the Minister were adequately briefed as to the risk of borrowing funds at a variable interest rate (ILR) and on-lending at a fixed interest rate. The concessional interest rate on the freeway and NDCW&S loans was 11 per cent after tax (14.67 per cent gross).
The on-loans were profitable only when the ILR was below 11 per cent, when NPF was paying tax or 14.67 per cent when not paying tax. From October 1996, the ILR remained below 14.5 per cent only until April 1998.
Thereafter, it ranged from 17.5 per cent to a high of 23 per cent then back to 19.75 per cent when the loan was repaid in May 1999.
After 1998, NPF was clearly making a loss on the money on-lent for the Poreporena Freeway project.
Not only did management act beyond the control of the board regarding entering loan agreements and making drawdowns, it was equally beyond control in the way it pledged assets for security and redeemed and substituted securities with no reference to the NPF board whatsoever.
Throughout the period of the BSP loan facilities, from January 1996 until early 1999, there is no evidence that the Board of Trustees ever questioned management about what was occurring. All trustees appointed at the time were therefore in breach of their fiduciary duty to the members of the fund.
TO BE CONTINUED