National Provident Fund Final Report [Part 46]
Below is the forty-sixth 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 46th 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 4J Continued
(a) The BSP investment was performing well as a high dividend long-term investment with good capital growth potential;
(b) Mr Wright’s reassessment of the value of NPF’s BSP shares should have been supported by a professional review;
(c) Mr Wright gave unprofessional investment advice to sell-off the BSP investment based on extraneous matters; and
(d) The trustees were in breach of their fiduciary duty in uncritically accepting Mr Wright’s advice and resolving to sell NPF’s BSP investment without obtaining independent advice about the decision to sell or the price offered.
Investment In 1998
Finalisation of the sale to DFRBF was protracted and in the meanwhile, BSP’s results continued to be very favourable. Mr Kaul clearly favoured holding onto the BSP shares and to await the results of a valuation that was being carried out by Coopers & Lybrand.
By the time Minister Lasaro finally approved DFRBF’s request to buy the BSP shares from NPF on September 1, 1998, the DFRBF had decided the price was too high and withdrew from the proposed sale.
While Mr Wright sought legal advice regarding a possible breach of contract by DFRBF, the NPF board adopted a positive view of the situation and decided instead to participate in a K15 million rights issue by BSP, which, together with a relaxation of the BPNG’s prudential guidelines, would free BSP to offer larger loans.
Misleading Conduct By Mr Wright
Not only did Mr Wright change his mind about the need to sell-off the BSP shares, he went ahead and acquired 333,333 shares in the new issue before seeking the NPF board’s approval.
At the November 6, 1998, NPF board meeting, Mr Wright sought the board’s approval for this purchase, deliberately not informing the board that the transaction had already been completed. This deliberately misleading conduct was improper.
Mr Wright also wrongly advised the trustees that the transaction would not require Ministerial approval as it was valued at K999,999, which was just below the K1 million level already approved by the Minister in June 1995 for transactions which would not require Ministerial approval.
This advice was wrong because the dispensation from seeking Ministerial approval for transactions valued under K1 million, applied only to transactions involving shares listed on authorised stock exchanges. The BSP shares were unlisted so the Minister’s approval was required for transactions above K500,000.
(a) The management and the trustees, failed in their fiduciary duties where independent advice was not obtained and no critical appraisal of the proposal to purchase further BSP shares, was performed (Exhibit B96);
(b) Mr Wright and Mr Kaul failed in their fiduciary duty by misrepresenting to the board that they were requesting board approval to purchase 333,333 shares on November 6, 1998, when in fact they were requesting ratification of the 333,333 shares already purchased without board authority on October 29, 1998;
(c) Mr Wright and Mr Kaul failed in their fiduciary duty as they had acted beyond their authorised financial delegation limit by committing the funds prior to obtaining the board’s approval;
(d) Mr Wright failed in his fiduciary duty to the board when he misrepresented to the board that the K1 million limit approved by the Minister, covered NPF’s investment in BSP. However, the dispensation only applied to the purchase and sale of shares listed on approved stock exchanges and the BSP shares were not listed on any stock exchange;
(e) The trustees failed in their fiduciary duty to the members when they failed to obtain Ministerial approval for the transaction thereby contravening Section 61 of the PF(M) Act.
Investment In 1999
Resignation Of Mr Wright And Engagement Of PwC
Mr Wright was forced to resign in January 1999 and the then recently appointed managing director Henry Fabila, appointed PriceWaterhouse Coopers (PwC) to review NPF’s investments. On March 8, 1999, Mr Marshall of PwC reported to the NPF board that NPF was facing huge unrealised losses and a severe cash flow crisis.
Proposed Sale Of BSP Shares
It was decided to try and sell the BSP shares and notes which were professionally valued by PwC at K5 to K5.90 and K4.25 to K5.20 respectively, which put the total value of NPF’s holdings in BSP at K8 million. NPF then offered 1,192,661 BSP shares to Finance Pacific for K6.5 million. The NPF board also resolved to offer to sell its Government Roadstock, worth K62 million, to Finance Pacific.
Mr Peter O’Neill’s Involvement
Finance Pacific, of which Peter O’Neill was then executive chairman, then made a package offer to buy the whole of NPF’s Government Roadstock as well as all of its BSP shares for K59.5 million, provided that NPF could obtain an extension of the Government’s expired guarantee of the Roadstock.
It was proposed that the sale would be to the Motor Vehicle Insurance Trust, which was part of the Finance Pacific Group.
The sale price of K59.5 million was exactly equal to the outstanding amount NPF owed to the PNGBC, which was also part of the Finance Pacific Group and so this proposed sale would clear that debt.
Mr Mitchell has given evidence that he was informed by Mr O’Neill and the new NPF chairman Jimmy Maladina, that the purchase of the Government Roadstock was dependent on the sale of NPF’s BSP shares (which would increase Finance Pacific’s holding in BSP to 30 per cent of its issued capital).
In view of the commission’s finding that Mr O’Neill was implicated with Mr Maladina in the NPF Tower fraud and received part of the illegal proceeds, the commission regards this proposed transaction between NPF and Finance Pacific with suspicion.
The sale, however, did not proceed because NPF had not succeeded in obtaining an extension of the Government’s guarantee of the Roadstock before Mr O’Neill was removed from the position of executive chairman of Finance Pacific.
Dividend Income BSP dividend payment history
According to BSP’s historical financial performance schedule, included in its 1999 Annual Report, the bank’s operating profit after tax had grown from K2.984 million in 1993 to K19.570 million in 1999, with 1999 being a record high (Exhibit B141).
As per the 1999 annual report, the total dividend paid between 1995 and 1999 was as follows:
BSP dividends received by NPF
BSP have confirmed that NPF was paid a total dividend of K2,358,082 for the years 1995 to 1999.
Directors fees and allowances paid to NPF’s representative directors on the BSP board, Mr Kaul and Mr Fabila successively, were correctly paid into NPF’s accounts.
The fact that the BSP investment has been profitable for NPF is due entirely to BSP’s successful management qualities and is not due to NPF’s investment policies or skills. It is probably fortunate that NPF never acquired sufficient equity in BSP to enable it to significantly influence BSP’s management policies.
The investment survived two misguided attempts by NPF to sell it.
Looking below the profitable surface of this dividend producing investment, we see Mr Wright acquiring notes without board authority and giving false and misleading information to the board when retrospectively seeking board approval for what he had already done. Once again, we find that the Board of Trustees failed to maintain control over management.
Executive Summary Schedule 4K Westpac Bank (PNG) Ltd, SP Holdings Ltd and Toyota Tsusho (PNG) Ltd
The NPF investment in these three PNG companies has been relatively small but profitable in terms of capital gain and dividends.
After their initial investments, there were no further transactions during the period 1995 to December 31, 1999, and the investments have not been the subject of report or discussion at any board meeting.
The initial investments in these companies was as follows:
The unrealised gains made by NPF in these investments at December 31, 1999, are in the ranges as follows:
- Westpac bank – between K669,600 and K1,103,600;
- SP Holdings – between K748,000 and K1,468,000; and
- Toyota Tsusho — between K34,931 and K120,074.
In addition to the significant capital gains made on these investments for the years 1995 to 1999, NPF earned the following in dividend income:
- Westpac bank – K1,135,375;
- SP Holdings – K600,000; and
- Toyota Tsusho – K140,266.
NPF’s investment in these companies is clearly consistent with more traditional investment philosophies of provident funds in most countries.
The full details of these investments are set out in the report.
Executive Summary Schedule 4l Crocodile Catering (PNG) Ltd And Maluk Bay Investment
In late 1996, the NPF was approached by representatives of the Crocodile Group of companies, which specialised in remote site catering in Australia and PNG.
The Australian company, Crocodile Pty Ltd (Crocodile Australia) was in financial difficulties and the principals wished to sell off its interests in Crocodile Catering (PNG) Ltd (Crocodile) in order to pay off the debts of Crocodile Australia and to enable them to obtain repayment of personal loans given by them to Crocodile Australia.
In January 1997, prior to obtaining the required Ministerial approval under the Public Finances (Management) Act 1995 (PF(M) Act), NPF acquired the share capital of Crocodile for K300,000.
In the period from January 1, 1997, to December 31, 1999, NPF then invested (in net terms) a further K7.4 million in the form of both equity and loan capital.
Crocodile performed very poorly because of:
- an apparent lack of management skills, particularly with regard to financial management skills, with the few profitable catering contracts managed by Crocodile “dragged” down by loss making contracts and a high administrative overhead structure (examples included at Transcript pp. 7166, 7208-9, 7290-7294, 7335-7338);
- a lack of attention to financial results and a failure to initiate appropriate corrective action in a timely fashion (examples included at Transcript pp. 7199-7200, 7202, 7208, 7220, 7242, 7280, 7288);
- an ineffective board of directors and poor corporate governance (examples included at Transcript pp. 7188-7189, 7192, 7307-8);
- managing director Garry Jewiss living in Indonesia to the detriment of effectively managing the PNG operations (see report on Maluk Bay);
- unfavourable economic conditions; and
- a continued investment in Crocodile without properly appraising this investment Transcript pp. 7177- 7178, 7261, 7091.
Crocodile recorded accounting losses every year from 1996 to 1999 and by December 31, 1999, there was a net unrealised loss of K7.4 million. Source: NPF accounting records/Crocodile accounting records (Exhibit CC700A). See table 3:
Summary of Crocodile financial performance as reported by financial statements in the period 1997 – 1999
Source : NPF accounting records/ Crocodile accounting records (Exhibits CC808B & 959).
Acquisition Of Crocodile
The due diligence performed by Mr Wright was inadequate in that there was no:-
- search into the background of the company and its directors;
- legal due diligence conducted; and
- financial appraisal of Crocodile’s catering and associated contracts.
Consequently, the information presented to the NPF board at the 104th NPF board meeting on December 9, 1996, was inadequate as a basis for an investment decision because:-
- It failed to mention Crocodile’s obligations to finance, construct and operate a warehouse at Paiam;
- Placer had provided free freight from Lae to Porgera and this artificially increased apparent net profits;
- NPF had no understanding of Crocodile’s business strategy;
- NPF did not assess Crocodile’s management team;
- NPF did not assess Crocodile’s business risks;
- NPF did not conduct a rigorous audit (including the commerciality of the contracts);
- NPF did not assess its ability to own and manage a remote site catering business or the appropriateness of doing so; and
- NPF did not consider the future funding requirements of the business and whether it would call upon NPF for funding.
NPF management, particularly Mr Wright and Mr Kaul, failed their duty to properly brief the board and the trustees failed their fiduciary duty to the members, by acquiring this business without insisting upon proper due diligence and analysis beforehand.
As sole shareholder, NPF appointed the following people as directors on the board of Crocodile: David Copland (chairman); Robert Kaul; Noel Wright; Tau Nana; Henry Leonard with Kenneth Frank as corporate secretary.
The practice was to hold Crocodile meetings at NPF headquarters the day before the scheduled NPF meeting.
From the start, it became apparent that it was a mistake to have appointed Mr Jewiss as manager, as he had few managerial and organisational skills and was extremely poor at consulting with and reporting to the Crocodile board.
To try and strengthen financial control, Crocodile’s former financial controller, Ray Barredo, was retained. This did not work and NPF was frequently called upon to make direct injections of financial support.
During 1997, Crocodile struggled to finance and organise the required warehouse at Paiam. It was eventually funded by a PNGBC loan guaranteed by NPF. The cost was about K4 million.
(a) NPF breached the PF(M) Act by entering the contract to acquire Crocodile before Ministerial approval had been given;
(b) NPF management, particularly Mr Wright, failed its duty to the NPF board by not performing due diligence on Crocodile prior to buying the company and by failing to critically appraise the business prospects and risks of becoming sole owner and manager of a remote site catering business;
TO BE CONTINUED