National provident Fund Final Report [Part 24]
Below we continue the re-publication 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.
The Inquiry findings provide an unprecedented insight into the methods that are still being used today by the mobocracy that is routinely plundering our government finances. The inquiry uncovered for the first time how the Waigani mafia organise complex frauds using mate-networks, shelf companies, proxy shareholders, and a willing fraternity of lawyers, accountants, bankers and other expert professionals.
The Commission findings also reveal the one grand truth at the centre of all the corruption in Papua New Guinea: it is pure theft, no different from an ordinary bank robbery. However, if you steal the money by setting up, for instance, a bogus land transaction, the crude nature of the criminal enterprise is disguised to all but forensic experts, making it seem the perfect crime!
NPF Final Report
This is the 24th 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.
(f) ANZ’s assessment of the ability of NPF management and the stability of the Fund, was flawed;
(g) MR Wright and Mr Kaul and the NPF trustees were far too optimistic about the prospects of HPL in which NPF had invested more than $A50 million, of which K15.75 million was borrowed from ANZ. ANZ managers should have exercised more caution when approving the drawdown for this investment which one year later it was treating as worthless paper, unacceptable as security for NPF’s debt.
Use of ANZ Facilities – 1998 Pledging further scrip to maintain 150 per cent security to loan ratio
After three drawdowns in early February totalling $A5,203,359, the rest of the year NPF was struggling to maintain the 150 per cent security to loan ratio in the light of the falling value of its share scrip by pledging additional securities or by reducing the debt. There were no further drawdowns. NPF was under increasing pressure form external economic circumstances and from troubles being experienced with the construction of the NPF Tower.
In March 1998, ANZ Nominees received the following shares from Wilson HTM as security against NPF’s debt:
In April 1998, NPF transferred the following shares to ANZ Nominees:
From June 1998 onwards, NPF repeatedly breached its loan covenant with ANZ, as it was unable to pledge enough acceptable stock as security. By this stage, ANZ was treating HPL scrip as worthless and refusing to accept it as security.
Attempted issue of $A Bond
In order to get itself out of its critical cash flow problem, NPF attempted to issue a $A54 million bond to Warrington International of Canada. This prolonged attempt continued until November 1998 before coming to nothing. ANZ was not involved in this matter except that it was requested to provide a custodial service to hold the securities for the bond.
In May 1998, ANZ reviewed NPF’s audited financial statements and was generally positive about NPF’s prospects. It was, however, a shallow assessment, which failed to take note of some improper aspects of NPF’s accounting procedures that gave NPF falsely favourable results.
NPF’s first breach of the 150 per cent security to loan ratio was treated by ANZ as a technical matter only.
(a) ANZ’s analysis of NPF’s audited 1996 financial statements was too shallow, failing to recognise basic flaws in NPF’s accounting procedures. Consequently, its assessment of NPF’s financial stability was too optimistic;
(b) The economic circumstances were reducing the value of NPF’s share scrip held by ANZ as security, which obliged NPF to pledge additional scrip as security in order to maintain the 150 per cent security to loan ratio;
(c) Instead of calling on NPF to reduce debt as a way of maintaining the security to loan ratio, ANZ encouraged NPF to borrow further and approved further drawdowns on the facility;
(d) NPF’s position was put under further stress by the rising interest rate payable on its borrowing and by costly problems with the construction of the NPF Tower;
(e) NPF’s assurances to ANZ that all its cashflow problems would soon be solved when the $A bond was issued, were worthless.
Management hides breaches of loan covenant
From June 1998 onwards, there were repeated breaches of the 150 per cent security to loan covenant. NPF was finding it increasingly difficult to lodge further acceptable share scrip as security.
Despite this being a very serious matter, which entitled ANZ to cancel the loan facilities and sell off its securities, NPF management did not report anything about it to the board from May 1997 until the special board meeting on March 16, 1999. In that period, no mention at all was made about the ANZ facility at any board meeting. This failure of management to advise the board of such a serious problem is almost unbelievable. Nor did management provide the board with timely updates in its management papers, about the use and status of the ANZ facility.
(a) Management failed its duty to provide the Trustees with:
* relevant, timely and adequate information concerning NPF’s debt position;
* relevant risk management procedures to mitigate borrowing risks;
* information and developments concerning pledging additional share scrip when the value of assets pledged to ANZ fell below the required 150 per cent security coverage.
(b) Management failed to react in a timely manner when, clearly, the macro-economic environment was adversely affecting the PNG resource sector and ultimately the fund in terms of interest rates and exchange rates.
(c) The trustees failed in their fiduciary duties to the members of the fund by failing to:
* Inquire from management about the state of the ANZ facilities;
* fully understand the risks inherent in the fund’s investment approach;
* consider whether management was appropriately qualified and competent in matters of investment and provident fund issues;
* react in a timely manner to the clear warning signals where interest rates, exchange rate and share market prices would adversely impact upon the fund.
(d) The ANZ Bank failed to adequately assess the inherent dangers of NPF’s debt position with the bank and proceeded to actively encourage NPF to make further drawdowns on the ANZ facility.
In this economic climate, as ANZ management became increasingly concerned, Mr. Wright attempted to placate ANZ by promising that the $A bond money would soon be available and would be used to retire ANZ debt.
ANZ strategy to remedy the breach of loan covenants
At the end of August, ANZ formulated a 48 hour strategy to:-
- require NPF to remedy the current breach by finding cash cover, lodging security or retiring debt.
- cap the facility at $A53,760,533
A three-week strategy called for detailed information from NPF which would enable ANZ to make a well informed assessment of NPF’s situation.
The information required was entirely reasonable for making such an assessment, including such things as profit and loss statement and cash flow forecast, a summary of key investment and other strategies for the next 12 months, the updated five-year plan; a detailed update on the NPF Tower project, including details of pre-leases; a copy of the final audited accounts for the year ended 31st December 1997.
Unfortunately, quite a lot of this information was not available and was therefore not given to ANZ. ANZ then requested the lodgment of STC shares to provide a 10 per cent buffer.
(a) By mid 1998, there were repeated breaches of NPF’s security to loan ratio yet management did not advise the board and the board did not inquire about these serious difficulties with the ANZ facilities which threatened NPF’s financial viability;
(b) Management failed to recognise the grave risk to NPF and failed to obtain advice or to implement any remedial action;
(c) In August 1998, ANZ partially recognised the gravity of the situation and set strategies in place to protect its own position in respect of the “tottering” NPF;
(d) ANZ’s strategy was to tighten the loan facility by capping it at the present level of K53 million, to seek detailed financial disclosure from NPF and to increase the security to loan ratio to 160 per cent (putting further pressure on NPF in order to maintain a comfortable level of security for ANZ);
(e) Local ANZ staff were too close to NPF and in the credit memorandums overstated NPF management’s abilities, under-estimated NPF’s Tower construction problems; over-estimated the quality of the scrip; under-estimated the effect of interest rate rises; and failed to recognise difficulties which would be involved in any large scale sell-down of scrip, if it became necessary, because in such a small market, it would force share values down drastically.
(f) The ANZ senior credit manager’s more hard-headed analysis was more realistic but still under- estimated the extent of NPF’s financial problems;
(g) Mr Wright was unable to produce much of the requested financial projections and calculations because they had not been done;
(h) ANZ’s analysis of NPF’s situation was too shallow and ignored the false uplifting effect of the inappropriate crediting one year of the K18.5 million obtained from the Bank of Hawaii transaction (regarding profit on sale of Government Roadstock – See Schedule 7B) and the reversal of the K10 million reserve sum. ANZ therefore assumed NPF’s unaudited profit in 1997 was a fairly respectable K39.5 million and gained a false sense of comfort from this fact.
If ANZ had applied proper accounting procedures, the profit would have been reduced to K11 million. This would also have reduced ANZ’s level of comfort.
(i) ANZ’s shallow assessment of NPF’s position overlooked NPF’s extreme vulnerability to further falls in the share value of the narrow range of companies in which it held large shareholdings.
ANZ annual review of its Credit Memorandum with NPF
In September 1998, ANZ carried out a full review of the credit memorandum with NPF.
It listed the “risks and mitigants” and decided that the debt must be reduced to $A25 million even if NPF’s proposed bond issue was successful.
It found that NPF held only two good quality stock (Orogen and STC) and that the HPL stock was “approaching junk status”.
ANZ was still comfortable with NPF as a client, assessing its unaudited profits at K39.5 million.
ANZ, however, still failed to note the flaws in NPF’s accounting procedures, which, if corrected, would reduce the unaudited profits to K11 million.
ANZ gave NPF until October 31, 1998, to successfully issue the bond to Warrington before replacing all the HPL scrip held as security, with CXL and STC scrip. These demands must have embarrassed Mr Wright who had already falsely guaranteed in his negotiations with Warrington over the bond issue that the CXL and STC scrip was unencumbered.
Senior ANZ managers were still expressing themselves as “comfortable with our position going forward – the fund’s cash flow is sound”.
To reach this comfortable feeling, ANZ analysts had inappropriately “adjusted away” vital factors, as if they were merely temporary setbacks caused by the fall in the market value of NPF’s investments and the effect of the kina devaluation on NPF’s foreign loan interest burden.
As NPF’s core business was the investment of its members’ funds, such key factors cannot simply be adjusted away as temporary setbacks. They reflected grave policy mistakes and crucial deficiencies in NPF management.
(a) ANZ PNG’s review of the NPF account concentrated on minimising the risks to ANZ if NPF defaulted. It did not focus on the risks to NPF and its contributors;
(b) The ANZ assessment was superficial and flawed by not taking into account the unsatisfactory accounting procedures adopted by NPF, which gave a false picture of its financial soundness;
(c) ANZ’s assessment was also flawed by “adjusting away” key factors, which were contributing to NPF’s serious cashflow problems.
ANZ’s Role during the sell-down of NPF’s Equities – 1999
Pricewaterhouse-Coopers Report (PwC)
In February 1999, NPF managing director Henry Fabila engaged Paul Marshall of PwC to review NPF’s investments.
With NPF’s consent, Mr Marshall liaised closely with ANZ managers.
Mr Marshall reported his extreme concern about the unbalanced equity portfolio and the burden of servicing the ANZ facilities and the PNGBC Tower loan.
He recommended a massive sell-down of NPF’s equities in order to reduce the debt to ANZ. This seemed to “mirror” ANZ’s own strategy.
One problem with this strategy was that the share prices of resource stocks were at a historic all-time low and NPF’s decision to sell off its large holdings would push the prices even lower. NPF stood to make massive realised losses.
On March 11, 1999, Mr Fabila accepted ANZ’s request for a 10 per cent increase in the security ratio as a buffer and ANZ Nominees released Orogen, Cue and Macmin share scrip for sale, with a market value of $A15.4 million. On March 16, 1999, a special NPF board meeting was held to discuss NPF’s desperate financial position and the need to sell-down the investment portfolio in order to relieve the burden of its debt to ANZ.
The trustees had not held any substantial discussion about this topic since the 106th board meeting in May 1997. Meanwhile, ANZ sought to perfect its documentation as a way of strengthening its position against a possible default by NPF.
To this end, it arranged for NPF to sign the revised FCL agreement. It also asked Allens Arthur Robinson (Allens) to confirm that NPF had the power to borrow.
(a) As NPF advised by PwC focussed on developing a strategy to reduce its burden of debt, ANZ concentrated on perfecting its documentation, by belatedly arranging for the signing of the revised FCL agreement with NPF;
(b) PwC (Mr Marshall) and ANZ analysts were in substantial agreement that a massive sell-down of NPF’s equities would be in the best interests of both NPF and ANZ;
(c) Neither ANZ, PwC nor NPF had yet considered whether NPF had the power to borrow.
TO BE CONTINUED