National Provident Fund Final Report [Part 47]
Below is the forty-seventh 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 47th 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 4L Continued
(c) The NPF trustees failed in their fiduciary duty to the members of the fund by not insisting upon performance of due diligence, a business risk appraisal and independent expert advice;
(d) NPF trustees and the management were remiss in not critically assessing the competency and integrity of the Crocodile management team;
(e) NPF trustees and the management failed their duty to the members in not assessing Crocodile’s need for further funding and where the funds would come from.
Maluk Bay Project
When NPF acquired the business in January 1997, Crocodile’s company office, all its contracts and activities and all its prospects were in PNG. It was pursuing catering opportunities in Highlands Pacific Ltd (HPL), camps at Ramu and Freida River, Lihir Gold, OK Tedi Mining, Misima Mines and Trans Island Highlands.
Mr Jewiss, however, immediately after his appointment, developed plans to expand Crocodile into ventures in Indonesia. By February 1997, he had secured qualified approval from the Crocodile board to embark upon a project to construct a hotel at Maluk Bay, Sumbawa Island.
By April, he relocated himself and family to Bali, Indonesia where he was seeking various investment opportunities, particularly the purchase of land at Maluk Bay to build the hotel complex.
Mr Jewiss remained “located” in Bali and was focussing on various Indonesian ventures (particularly Maluk Bay), recruiting staff, sorting out land rights and other legal problems under Indonesian law and dealing with Indonesian bureaucracy and local authorities.
Neither he nor his key staff had visas allowing them to work in Indonesia so this meant they had to fly out and return every month. All this was most disruptive. It constituted a serious flaw in the overall management of Crocodile and its ‘mainstream’ PNG ventures suffered. It was also very costly.
Between July and September 1997, NPF advanced K850,000 and then a further K250,000 to Crocodile as capital loans with no formal approval from the NPF board. This was authorised by Mr Wright (acting way beyond his authority). The requisite Ministerial approval was not sought and no loan documents were in place (Mr Leahy was asked to draw these up after the event).
Quite clearly, Mr Copland who as the active chairman of both boards must have known of these loans and Mr Wright and Mr Kaul were in gross breach of duty to the NPF board and members. When the NPF simply ratified these loans after the event, without taking steps to rationalise and control financial relationships between NPF and Crocodile, all the trustees involved were failing their fiduciary duties to the members of NPF.
This was not an equity investment requiring professional expertise that the trustees lacked. This was a matter of business loans and contracts of which several trustees had experience and their silence about what was happening is inexcusable.
Attempts By Crocodile Board To Impose Controls
The Crocodile board was not entirely inactive however, it resolved not to continue with the loss making Kundu Catering division because of irregularities and it directed Crocodile management to impose cost controls in July 1997 (paragraphs 4.2 & 4.3). Crocodile management made no attempt to comply with these board directions.
On the request of Mr Copland, Mr Jewiss provided the Crocodile board with a proposed revised management structure. Although it was clearly inappropriate it was accepted by the Crocodile board and by NPF, Crocodile’s only shareholder.
(a) Mr Wright and Mr Kaul acted improperly and in excess of their delegated authority by advancing “capital loans” of K850,000 and K250,000 to Crocodile without prior NPF board authority;
(b) When ratifying these loan payments NPF trustees failed to reprimand or openly address the serious breach of duty by Mr Wright and Mr Kaul;
(c) NPF failed to obtain Ministerial approval as was required by the PF(M) Act for the K850,000 loan;
(d) Mr Wright and Mr Kaul and possibly also the NPF trustees in office at the time who failed to inquire about Ministerial approval, may be personally liable to repay the amount of the loan to NPF;
(e) Crocodile management failed to implement cost controls as directed by the Crocodile board and the board failed to address this failure by management; and
(f) The Crocodile board failed to ensure an appropriate management structure was put in place to handle both domestic and international operations before commencing the Indonesian operations. The structure that was determined was inadequate.
At the Crocodile board meeting on October 27, 1997, there was concern about the cash flow problem. The minutes show that “it was noted that the managing director is not required on a full time basis in Indonesia. . .” and it was resolved that management focus its attention on the PNG operations (Mr Jewiss continued to reside in Bali, however).
At the NPF board meeting the next day, Mr Kaul advised that Crocodile was defaulting on interest payments to NPF. It was resolved to convert the loans to Crocodile into share capital. This was done without the requisite Ministerial approval (paragraph 4.4.10).
Crocodile management was not performing well and Crocodile was running at a loss. It is of concern therefore that Mr Jewiss provided the senior managers with a computer notebook each as a bonus.
(a) Mr Jewiss failed his duty to the Crocodile board by not relocating and focusing his attention in PNG;
(b) The Crocodile board directors failed their duty under the Companies Act by not following up on their direction to Mr Jewiss and ensuring compliance;
(c) Crocodile management and the board failed to deal with Crocodile’s chronic cash flow problems (other than by turning to NPF);
(d) NPF management, particularly Mr Kaul and Mr Wright and the NPF trustees on the Crocodile board failed to fully advise the NPF board about Crocodile’s cash flow problem; and
(e) Mr Jewiss’s decision to grant a bonus to senior management was not justified by their (or Crocodile’s) performance.
Continuing Cash Flow Problems
After Mr Fabila replaced Mr Kaul at NPF and on the Crocodile board in May 1998, the Crocodile cash flow problems continued, largely because of the financial drain caused by the Maluk Bay project. Crocodile was facing legal proceedings for a debt of $A356,524 it owed to one of its suppliers. In June 1998, PNGBC formally approved a loan of K2.9 million to Crocodile and part of the security was an unlimited guarantee from NPF. In this way, NPF’s exposure to the troubles of Crocodile was steadily increasing.
In late 1998, despite Mr Jewiss’s confident forecasts, the Crocodile board was concerned about poor performance, which Mr Jewiss blamed on delays in completing the Paiam warehouse. Mr Copland was expressing dissatisfaction with Mr Jewiss.
With the PNGBC K2.9 million loan not yet in place, NPF management extended bridging finance to enable Crocodile to meet payments due on the Paiam warehouse. This was arranged entirely without the knowledge or approval of the NPF board (paragraph 4.7.2).
To enable Crocodile to drawdown on the PNGBC K2.9 million facility, NPF gave a limited guarantee to PNGBC on September 4, 1998, (paragraph 4.7.3). Again, this was carried out without the approval of the NPF board through formal resolution, as required.
On September 14, 1998, Crocodile drew down K2.9 million on the PNGBC facility, using the funds to repay K2 million borrowed from NPF and retaining K900,000.
Although Crocodile continued to rely on NPF finance, its board still failed to critically review the business in order to rationalise its operations and reduce costs.
(a) The provision of bridging finance to Crocodile was made without the knowledge or approval of the NPF board. Mr Wright acted improperly and breached his duty to NPF in this matter. It is highly likely that the NPF managing director Mr Fabila was aware of the transaction. Also, Mr Copland, who was chairman of both boards and taking an active interest in the management of Crocodile must have been aware of the provision of bridging finance;
(b) Providing bridging finance is not a permitted investment under the NPF Act;
(c) NPF’s limited guarantee of the PNGBC K2.9 million loan facility to Crocodile, was not properly approved by NPF board resolution;
(d) Mr Jewiss failed to ensure some of the required essential conditions were included in the catering contract with Tolukuma Gold Mines;
(e) The Crocodile management and board failed to critically review Crocodile’s poor performance in order to reduce costs and rationalise the management of the business.
Falsley Inflated Profits
Mr Jewiss’s report to the November meetings of the Crocodile and NPF boards used incorrect accounting procedures to show a net profit of K256,612, which was wrongly inflated by K208,333 (paragraph 4.8.1).
He also provided a five-year forecast projecting profits of K31.6 million which was made without any firm foundation.
1999 – Addressing The Problems
With NPF now recognising its own desperate financial crisis and after the January 1999 departure of Mr Wright, NPF focussed critical attention on Crocodile and its mismanaged, loss-making, finance-draining ventures.
At the February 8, 1999 NPF board meeting, a false profit of K759,733 was reported for the year ending December 1998. Subsequent calculations, using the correct accounting procedures, showed it was really a loss of K600,590.
Mr Fabila, Mr Maladina and Mr Tamarua were installed as directors of Crocodile. At this meeting, management informed the NPF trustees for the first time that NPF had funded payments to the Paiam warehouse builder and, importantly, that secret payments from Wilson HTM’s offshore NPF account had been paid to fund Maluk Bay by Mr Wright, without the NPF board’s knowledge or approval (paragraph 4.9.1).
Appointment Of Ram Business Consultants
Soon after his appointment to the Crocodile board in February 1999, Mr Maladina, without any authority to do so, unilaterally appointed Ram Business Consultants as investigators and as the independent internal auditor of Crocodile. This was contrary to normal procedures, which required the consent of the Auditor- General as well as approval by the NPF board.
PNGBC now tightened up on its temporary K1.8 million overdraft facility to Crocodile, converting it to a loan.
(a) The appointment of Ram Business Consultants was made without the Auditor-General’s consent and was in breach of standard procedures;
(b) In light of evidence linking Mr Maladina with Ram Business Consultants in other matters, the commission finds that this appointment amounted to improper conduct by Mr Maladina and was nepotistic.
By April 1999, attempts to replace Mr Jewiss with Mr Barredo as manager of Crocodile were being hatched by Mr Maladina and Mr Leahy (paragraph 4.10). It resulted in Mr Jewiss being terminated as manager at the end of April 1999, and the complete cancellation of his employment contract in August 1999.
After Mr Jewiss was terminated as manager in late April, Mr Maladina, as chairman of Crocodile, and without any authority to do so, unilaterally signed a contract of employment for Mr Barredo on extremely favourable terms. The terms included a grant of K150,000 of Crocodile shares per annum, which would soon have given Mr Barredo control of the company (On August 24, 1999, Mr Maladina disclosed his unilateral action to the NPF board which resolved that Mr Barredo’s contract should be reviewed by NPF management and then placed before the Crocodile board for approval. This never happened).
As sole shareholder in Crocodile, the NPF trustees could and should have reprimanded Mr Maladina for unilaterally signing the contract.
(a) The NPF board’s appointment of Mr Barredo as managing director of Crocodile was not valid, as the Crocodile board did not approve it;
(b) Mr Maladina had no authority to sign the contract of appointment on behalf of the Crocodile board;
(c) Mr Barredo’s contract was vastly overgenerous. The inclusion of a grant of K150,000 worth of Crocodile shares per annum would give him effective control of Crocodile in a short period;
(d) Mr Maladina’s appointment of Mr Barredo was improper and nepotistic;
(e) Mr Maladina’s negotiations with the IPI landowners were conducted without consulting with or obtaining the approval of either the Crocodile or NPF boards;
(f) Crocodile management’s failure to ensure that title to the Paiam warehouse land had been satisfactorily resolved before outlaying substantial expenses was a major failure of duty.
Mr Maladina’s actions regarding Mr Barredo constituted one of the grounds leading to the board’s vote of no confidence in him on October 8, 1999, which led to his suspension as chairman of NPF.
In November 1999, PNGBC showed its concern about Crocodile’s apparent inability to pay its debts when it converted an existing overdraft facility into a loan of K1.8 million, guaranteed by NPF. This was then taken over by NPF and converted to a further equity investment in Crocodile.
The fact that NPF was obliged to go further into debt with PNGBC to save Crocodile from financial collapse, at the same time as NPF was selling down the bulk of its equity portfolio at a huge loss to extricate itself from debt to ANZ Bank, emphasises the folly of NPF’s heady involvement in remote catering through its unwise investment in Crocodile.
Maluk Bay Project
A major factor contributing to Crocodile’s losses was its protracted involvement in the project to build a resort complex at Maluk Bay, Sumbawa Island, Indonesia and this was made a separate term of reference for this inquiry (Term of Reference 1(m)).
The Maluk Bay project is dealt with in detail in Part 2 of the Crocodile Report at Schedule 4L, paragraphs 6 to 9.
Very soon after NPF acquired Crocodile in January 1997, employing one of the former owners Mr Jewiss as executive manager, Mr Jewiss met up with a former friend and workmate Keith Wilson who was planning to build a small bar and grill at Maluk Bay, Sumbawa Island, Indonesia with a group of his friends.
They had incorporated a company called Maluk Bay Investments Ltd (MBI) for the purpose. Three of the group were employed by Cikoba Konseptama Bangunmutra (Cikoba), which was an Indonesian company operating on Sumbawa Island. Mr Jewiss saw possibilities for a larger hotel complex to serve the needs of nearby mining communities. He saw the possibility of Crocodile participating in the venture and became enthusiastic; believing it would also open the door for catering contracts with the nearby mining companies, whose staff, he believed, would use the hotel for rest and recreation.
After Mr Jewiss and MBI agreed to participate in a joint venture to construct and run the hotel, Mr Jewiss put his proposal to the Crocodile board meeting on February 27, 1997. The board requested more information before making a decision.
Mr Jewiss then falsely informed MBI that Crocodile had agreed to invest $US1 million. Mr Jewiss then took up residence in Bali with his family. The commission assumes that Mr Jewiss enjoyed the life style on Bali, which was also in the vicinity of Sumbawa Island, as there was no valid “business reason” for him to move there.
At the Crocodile board meeting on May 5, 1997, Mr Jewiss reported vaguely about securing four catering contracts in Indonesia but provided no details. Without having received any firm information about the Maluk Bay project, the Crocodile board approved a budget of $US1.3 million, subject to “the numbers, guarantee, costing and other details”. The “numbers, guarantee, costing” never materialised yet Crocodile then proceeded into the project, being “drip-fed” with funds from NPF.
Crocodile seemed to benefit from the relationship with Mr Jewiss’ new friends from Cikoba when that company awarded a catering contract to Crocodile. The contract was never properly formalised, however, and this led to later difficulties and Crocodile lost K200,000 when Cikoba failed to pay its debts.
At the Crocodile board meeting in July 1997, the board approved, in principle, Crocodile’s participation in the Maluk Bay project but subject to the satisfaction of a number of prior conditions:-
- Crocodile would not commit to the project until the design, costing and budget had been finalised and provided by the joint venture partner (i.e. MBI);
- Any excess over the $US1.3 million guarantee costing would be borne by the joint venture partner;
- The joint venture partner would obtain the land title;
TO BE CONTINUED