Home > Corruption, Papua New Guinea > National Provident Fund Final Report [Part 38]

National Provident Fund Final Report [Part 38]

September 28, 2015 Leave a comment Go to comments

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 38th 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 Schedule 4d Continued 


(a) Mr Wright, probably with Mr Kaul’s approval, purchased three parcels of shares totalling $A1,323,397 prior to receiving Ministerial approval in breach of S.61 of the PF(M) Act. The frequency with which these unauthorised investments occurred is a disgrace and amounts to improper conduct by both men;
(b) Mr Kaul’s letter dated April 9, 1996, misrepresented and overstated the extent of the board resolution of April 10, 1996. Whether this was deliberate or merely negligent, it was a failure of his fiduciary duty to the members;
(c) The DoF failed in its duty to provide the Minister with an expert independent and critical appraisal of the proposed investment and failed to pick up Mr Kaul’s misrepresentation in his letter dated April 9, 1996;
(d) Minister Haiveta approved the proposed investment in STC prematurely and without receiving any critical analysis of the proposal. This amounted to improper conduct by the Minister;
(e) Minister Haiveta’s approval dated April 15, 1996, was “open-ended”, releasing NPF from proper Ministerial constraints required by the PF(M) Act. This was an improper exercise of the discretionary power given to him by the PF(M) Act;
(f) The NPF’s resolution of April 26, 1996, which ratified the circular resolution of April 10, 1996, also gave management open-ended power to “continue buying CXL shares . . .” without setting an upper limit. This was an improper delegation of its power to management and constituted a breach of the trustee’s fiduciary duty to the members to exercise proper control over management’s expenditure of funds. All trustees concerned may be personally liable for any losses incurred by this breach of duty. It is unlikely that they could claim a defence of “acting in good faith”; and
(g) Minister Haiveta’s approval on April 15, 1996, for NPF to acquire up to K1 million worth of shares at any one time was invalid as it was made under the wrong section of the PF(M) Act.

Minister’s standing approval of transactions up to K1 million 

As a sign of his approval of NPF’s new aggressive investment strategies under Mr Copland’s chairmanship, Minister Haiveta purported to give his standing approval for NPF to invest up to K1 million in equity stocks traded on authorised stock exchanges overseas (As his declaration was made under the wrong section of the PF(M) Act, it was invalid until it was corrected in June 1995). Mr Haiveta also approved an increase of Mr Copland’s remuneration to K20,000 per annum in addition to his trustees’ entitlements.

There was no power for Mr Haiveta to do this.

Purchase Of POSF And DFRBF Holdings In STC And CXL Ministerial approval

NPF quickly proceeded to implement its take over strategy by acquiring the significant STC and CXL holdings of POSF and DFRBF. This rushed transaction was arranged at the meeting at the Gateway Hotel between Mr Copland, Mr Kaul and Mr Haiveta in April 1996 at which Minister Haiveta verbally approved the transaction which would involve NPF spending almost K40 million of borrowed funds.

The agreed price for the shares was above market price:

table 1

NPF Board approval

No management paper was prepared for the NPF board, which approved the K40 million investment in less than 30 minutes. Minister Haiveta then granted written approval for the purchase of 4,941,247 STC shares at K3.50 (K17.3 million) and 5,207,700 CXL shares (K22.4 million) totalling K39.7 million. The immediate and enthusiastic approval by the NPF board and Minister Haiveta reflected the nationalistic, aggressive stance then driving NPF’s investment policy.

Minister Haiveta’s improper conduct

As well as approving that NPF acquire the CXL and STC shares, Minister Haiveta also approved in writing the sale of these shares by POSF and DFRBF. He received no formal, written request for those approvals nor did he or any of the institutions involved seek independent investment advice. This was improper conduct by Minister Haiveta who had been a strong supporter of the take over strategy since the Gateway Hotel meeting in early April.

Had objective expert advice been considered, it would have been apparent that STC’s huge and powerful owner John Swire and Sons (PNG) Ltd (Swires), would not allow such a raw takeover strategy to succeed without a fight.

In his “self-congratulatory” letter to Prime Minister Sir Julius Chan on June 4, 1996, Mr Haiveta claimed to be an initiator of the strategy stating:

“I write to keep you abreast of the recent purchase of Steamships and Collins & Leahy shares by the National Provident Fund Board of Trustees.

“I have attached a longer brief by way of background for your information.

“In April, I decided to authorise NPF to acquire a reasonable interest in Steamships and Collins & Leahy, the two largest trading houses in PNG.

“This decision was based on the following considerations: (a) It was always my intention to move private sector investments to NPF to ensure increasing involvement by the fund in private sector activities by being a proactive investor; (b) To give ownership participation by the 4000 employees of the two companies who were members of the fund, who will indirectly be given investment returns through NPF’s interest distribution; and (c) To increase national shareholding and limit outflow of dividends paid to foreign shareholders; or maintaining large portions of dividend onshore, through dividend flows to NPF.

“When reviewing the STC and CXL accounts, NPF advised me that both shares were probably trading under Net tangible asset backing (NTA) and that any buy would be an exceptionally good buy.

“The fund’s analytics and research showed that both STC and CXL were trading on Australian Stock Exchange (ASX) at a significant discount to their Net Tangible Asset backing (NTA). This represented exceptional buying as valuing shares at NTA is the most conservative valuation methodology, and the fund have acquired their current holdings in both STC and CXL at an average below NTA.

“I am now informed that NPF’s average entry price to STC was K3.40 per share compared to an NTA of K3.44 per share, and its average entry price to CXL was K4.02 per share compared to a NTA of K4.14 per share.

“By reviewing prior year profitability of STC and CXL the fund can expect a return on investment at 16 per cent and dividend flows of over 5 per cent. This an attractive long term return for the fund’s membership.

“Honourable Prime Minister, the National Provident Fund currently holds 37.5 per cent of CXL and 19.3 per cent of STC providing the fund and its 150,000 strong membership a strategic holding in the two largest and most successful trading houses in PNG. It should be noted that almost 4000 of NPF’s contributing members are employed by STC and the joint venture companies.

“In addition, it is generally believed by NPF’s board and management that there is much upside in the STC and CXL investment with the potential for the fund to actively participate in the ongoing growth of STC and CXL investment with the potential for the fund to actively participate in the ongoing growth of both companies.

“It is also believed that both companies are under valued, in fact, a research paper put out by stockbroker D&D Tolhurst Ltd suggests that the realistic NTA of STC maybe as high as 2-3 times of the quoted market price per the ASX and at least twice the actual price paid by the Fund.” (Exhibit S38)

Unfortunately, NPF management and Mr Haiveta failed to take into account the costs and risks of borrowing in order to finance this investment, which undermined the positive aspects of the scheme.

Together with Mr Copland, Minister Haiveta was a prime mover in NPF’s bid to acquire a controlling interest in STC and CXL. At this stage, he had approved an investment of up to 37.5 per cent of CXL and 23 per cent of STC and must bear much of the responsibility for the losses, which subsequently occurred.


To finance these investments, NPF drew down K35.8 million from its ANZ facility on June 8, 1996.

The shares were immediately pledged to ANZ Nominees as security for the loan. The share sale agreement between NPF, POSF and DFRBF was dated June 17, 1996. It provided for NPF to purchase at above current market price. Contrary to the working of the agreement, Mr Kaul gratuitously and without any NPF board approval, guaranteed POSF and DFRBF that accrued dividends payable in December 1996, on the shares, would be received by the vendors.

Mr Kaul is probably personally liable for NPF’s loss caused by this breach of his fiduciary duty to the NPF members.

Board representation – NPF bid for greater influence fails 

Having acquired a significant ownership, NPF sought to nominate three persons for appointment to the CXL board. After strong discussions, NPF gained one seat on the CXL board (Mr Kaul) and one on the STC Board (Mr Copland). The takeover strategy was not going too well.


(a) Mr Wright and Mr Kaul failed to seek independent expert advice on the strategy to invest heavily in and attempt to gain control of CXL and STC. Nor did they provide such advice to the NPF board. This was a breach of duty and fiduciary duty respectively;
(b) The NPF Board of Trustees failed to direct management to provide it with independent expert or any sufficient advice before resolving to purchase CXL shares with K22.4 million STC shares and worth K17.3 million from POSF and DFRBF. This was a breach of their fiduciary duty to the members of the NPF for which they will be personally liable if the members can establish that they thereby suffered loss. It is unlikely that a defence of “acting in good faith” would be successful. Mr Copland, as an instigator and active proponent of this investment strategy, would have particularly clear liability;
(c) The NPF management and Board of Trustees failed to brief Minister Haiveta with formal written expert advice on the investments;
(d) Minister Haiveta, an ardent supporter of the strategy, failed to obtain expert independent advice from DoF or other expert sources before approving this very significant investment by NPF in CXL and STC as part of a strategy to gain control of these companies. He approved the strategy without due consideration and this amounted to improper conduct by Mr Haiveta;
(e) Minister Haiveta approved DFRBF and POSF selling their CXL and STC share holdings without sighting board resolutions from POSF and DFRBF (as no such resolutions occurred). This was improper conduct by the Minister;
(f) NPF drew down K35.8 million from their ANZ Bank loan facility to help finance the purchase of shares in CXL and STC, pledging the shares to ANZ Bank as security. This seriously depleted any benefits that NPF may have been able to gain from these investments;
(g) Mr Kaul gave unauthorised undertakings to POSF and DFRBF, allowing them to retain the benefits of dividends to be received at December 31, 1996, after the sale of CXL and STC shares to NPF. Mr Kaul should be personally liable to NPF for loss suffered by his negligent handling of this matter, which amounted to a breach of his fiduciary duty as an NPF trustee. His unauthorised undertaking was contrary to the clear terms of the contract and he would have great difficulty establishing a defence of “acting in good faith”.

During the remainder of 1996, NPF management purchased 102,090 shares in STC for $A348,477. Some purchases were within Mr Wright’s delegated limit but for others, he failed to obtain required board and Ministerial approval as shown in the following table. See table below.

These purchases in STC and CXL were not discussed with the board nor were they disclosed, except in the schedule of investments included in the board papers.

Wrong accounting treatment

In the 1996 annual financial report, NPF adopted International Accounting Standard 28 (IAS28) which is normally used to account for investment in associates. The proper standard should have been IAS26. Using IAS28 significantly enhanced the value of STC and CXL shares in 1996, as shown below:

table 2


(a) Between June 1 and December 17, 1996, Mr Wright purchased small parcels of shares in STC, sometimes beyond his delegated authority. Five of the purchases were made without NPF board approval (see Table No. 4, paragraph 4.7.1).

table 3

table 4

There was no explicit notification to the NPF board. This was a failure by Mr Wright of his duties to the NPF board;
(b) NPF did not follow International Accounting Standard No. 26 (IAS 26) in reporting on its investments in STC and CXL where investments are marked to market. Prima facie, NPF’s valuations method employed was not a “market” valuation and therefore was contrary to accepted practice and enabled NPF to record higher profits in 1996 than warranted (and lower than warranted profits in 1997 — see paragraph 4.8.1). The financial statements in each of 1996 and 1997 did not explain the sensitivity of the financial results reported and the valuation method employed in relation to these investments.


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  1. September 29, 2015 at 12:00 pm

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