National Provident Fund Final Report [Part 49]
Below is the forty-ninth 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 49th 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
The Crocodile board allowed Mr Jewiss to hire staff and enter into construction and other contracts without being presented with a satisfactory business plan, detailed costing, management structure or an agreed source of funding.
Even worse, Crocodile had not secured the required registration, which would have enabled it to open a bank account and carry on business in Indonesia; nor had it obtained secure title to the land on which the hotel would be constructed.
Mr Jewiss and his key expatriate staff had not acquired the appropriate visas to permit them to work in Indonesia.
This failure required them to fly out of Indonesia and return every 60 days at great cost. As Crocodile had not obtained its PMA status, Mr Jewiss, assisted by Mr Wright, used a number of methods to transfer funds to Indonesia including:
- Carrying foreign currency travellers cheques to Indonesia (Exhibit CC354, CC358 Transcript p. 6155);
- Personal credit cards and bank accounts (Exhibit CC307, CC309, CC310 Transcript pp. 6270);
- Mr Goodfellow’s bank account (Exhibit CC367, CC338, CC345, CC 360-362, CC367 – Transcript p. 6150);
- DGJ trust account (Exhibit CC270-278, Transcript pp. 6145-6147);
- NPF’s Wilson HTM trading account (Exhibit CC322); and
- PT Cipta Boga Baya (Exhibit CC383A) Crocodile entered an agreement to use this company’s bank account and work under its (legal) umbrella.
These devices were not legal, secure or transparent. The use of NPF’s offshore account with Wilson HTM as a vehicle to send funds to Indonesia was particularly contentious. Approximately $US600,000 was sent this way in breach of PNG foreign currency regulations and without the knowledge of the NPF board.
The Crocodile board made several attempts to impose cost controls on Mr Jewiss and to persuade him to provide proper financial reporting. These attempts failed.
With Mr Copland as chairman of the Crocodile board and with trustees Tau Nana and Henry Leonard and Mr Wright and Mr Kaul as directors, there should have been ample feed-back to the NPF board regarding the Maluk Bay affairs but this was not the case.
The willingness of NPF trustees to support Mr Jewiss’s wild and ill thought out proposals without insisting upon a professional feasibility study, was a failure of the trustees’ fiduciary duty to the NPF members.
Concluding Comments On Crocodile
During the period under review, from January 1997 to December 1999, NPF expended approximately K7.4 million by way of loan and equity investments in support of Crocodile for no return.
The commission has not pursued this matter after December 1999 but has been informed by the current NPF management that Crocodile has redirected its business operations to PNG, that management is vastly improved and that proper cost controls and reporting procedures are in place.
The commission has been told that there are signs of profitability and that once this trend is firmly established the intention is to sell off Crocodile.
Executive Summary Schedule 4M Amalpak Limited
This is a summary of the report on Amalpak Limited (Schedule 4M) which is set out in Schedule 4M of the commissions report. Unless stated otherwise, paragraph numbers referred to in this report are references to paragraphs in Schedule 4M.
Original Investment in Amalpak Ltd
NPF’s first invested in Amalpak Ltd, then named Amalgamated Packaging Pty Ltd, by purchasing 30 per cent of its shares in August 1990, for a price of K2,268,000.
The purchase agreement contained a performance warranty, which was not honoured by the company.
The shortfall was quantified at K1.033 million which was repaid to NPF meaning NPF’s net purchase price was K1.235 million.
The other shareholders were the Investment Corporation of PNG (30 per cent) and VisyBoard, the active foreign manager (60 per cent).
In October 1997, the company’s name was changed to Amalpak Limited (Amalpak).
Despite problems caused mainly by significant devaluation of the kina, which affected the cost of its raw materials, and other economic circumstances, the company remained moderately profitable for NPF, paying a total of K4000 per annum as directors’ fees for NPF’s two directors and reasonable dividends throughout the period under review.
Amalpak’s managing director reported monthly and it held directors meetings four times a year. Although NPF had two directors on the board, NPF management’s reports to NPF were limited to summaries of Amalpak management reports and the Amalpak, annual report. No discussions by NPF trustees were recorded in board minutes.
Value Of NPF’s Equity
NPF’s equity in Amalpak was valued as follows:
NPF’s investment in Amalpak is an illustration of a prudent passive investment in a sound well-managed commercial enterprise. The company has regularly reported and regularly paid high dividends with no problems. Although overall profits were reduced owing to the devaluation of the kina, it has remained a moderately profitable company paying an average return of 16 per cent on the total cost of investment.
During the five-year period under review by the commission, the returns on NPF’s investment were:
The history of this investment is in pleasing contrast to NPF’s loss making investments in high risk PNG resource stock and the other investments in which NPF aggressively sought to pursue a much more active role. No borrowed funds were used in the Amalpak investment.
In view of the uncontroversial nature of this investment from quarter to quarter, the quality of NPF management’s reporting to the NPF board was adequate, though it merely summarised the regular reports coming from Amalpak itself. In latter times the timeliness of NPF management’s reporting became a little bit confused.
Executive Summary Schedule 4N
Investment in Ambusa Copra Oil Mill Ltd – Proposal On Behalf Of Ambusa Pty Ltd For NPF To Fund Ambusa Copra Oil Mill
During the second half of 1996, Jai Ryan and Stanis Valu who were connected with Ulamona Sawmill in West New Britain Province, approached Mr Wright with a business proposal to establish a copra oil mill at Ambusa, WNBP.
Mr Valu claimed to represent a landowner group, which had been incorporated as Ambusa Pty Ltd. They had already been introduced by Mr Ryan to Odata Ltd of Canada, to supply a Copra Oil Mill through contacts in India, to construct the mill and then to manage it and market the product.
The group had unsuccessfully sought funding elsewhere and wished to apply to NPF to join with it as a joint venture investment. They provided Mr Wright with a detailed proposal/business plan which had been drawn up with the help of Odata.
Mr Mekere Prepares Proposal Utilising Odata’s Business Plan Without Any Due Diligence
Mr Wright asked his junior, Haro Mekere, to examine the proposal and to work with Mr Valu and Mr Ryan to develop it into a draft proposal in a format suitable to place before the NPF board.
Mr Mekere told the commission that he summarised the 40-page business plan into a few pages accepting the claims and assumptions at face value.
The only due diligence performed was to talk with unspecified officers in the Copra Marketing Board (CMB), the Bank of Papua New Guinea (BPNG) and the Bureau of Statistics. In essence, a new joint venture company would be incorporated consisting of NPF and Ambusa Pty Ltd who would each hold 50 per cent of the shares.
Ambusa Pty Ltd would contribute the former Ambusa Copra plantations, said to have been valued recently at K400,000, as its contribution to the joint venture. NPF would match this by contributing K400,000 which would be used for start up costs.
The new company, Ambusa Copra Oil Mill Ltd (ACOM) would enter a “turnkey contract” with Odata to build and manage the mill and to market the product. It would seek and obtain external funding for this purpose by way of bank loan.
NPF Board Accepts Proposal Involving Turnkey Contract Between Ambusa Copra Oil Mill Ltd And Odata
With virtually no due diligence, this proposal was put to and accepted in principle by the NPF board at the 110th meeting on December 11, 1997.
Management’s failure to perform due diligence and to carry out a professional analysis of the business plan, meant that the trustees did not have an adequate basis upon which to make a decision as to whether or not to invest in the project.
This was a failure by Mr Wright and Mr Mekere to perform their duty to provide professional investment advice to the board.
The trustees’ acceptance of management’s recommendation without insisting upon expert independent advice was a failure of their fiduciary duty to the members of the Fund.
Defects In NPF’s Due Diligence
In evidence, Mr Mekere stated:
(a) The idea for the ACOM originated with Stanis Valu, and Clebus Gavuli, local landowners and owners of Ulamona Sawmill Pty Ltd and Jay Ryan, the manager of Ulamona Sawmill. Mr Ryan secured the participation of Odata Ltd (Canada) as project manager and they developed a business proposal for the purpose of obtaining funding;
(b) After seeking funding from various sources, they approached Mr Wright of NPF who delegated to Mr Mekere the task of preparing the project in a form suitable as a proposal for the NPF board;
(c) Mr Mekere said that his due diligence consisted of having some discussions with Jay Ryan, Stanis Valu, Clebus Gavuli and officers of the CMB and the BPNG. Otherwise, he merely summarised the business proposal, which had been presented to him. He then gave the proposal, in the NPF board format, to Mr Wright who placed it before the board;
(d) Mr Mekere admitted the following defects in the due diligence process:
- No independent evaluation of the business proposal was done;
- No analysis was done of the (doubtful) assumption that it would have tax exemption for five years as it was a pioneer industry;
- No consideration was given as to whether NPF had the power to grant bridging finance;
- He was not aware of the existence of investment guidelines so gave them no consideration;
- He did not follow up on perceived factual errors in the proposal;
- He accepted the claim that it was a simple process but had never visited a copra mill;
- He did not check on the bona fides or the experience of Odata;
- He had no idea of the techniques used to load copra oil and did not inquire;
- He did not check on availability of monthly shipments;
- He did not consider bulk storage facilities to store oil between shipments;
- He claimed he intended to do a more thorough evaluation after the board had approved the project – but did not do so;
- He did not verify the (false) claim that licensing requirements had already been approved;
- No verification was done of the claim that K550,000 had already been spent on feasibility studies and initial costs;
- He did not complete any engineering evaluation of equipment proposed to be purchased;
- No check was done on Odata’s marketing experience or on the buyer allegedly under contract to Odata; and
- No verification was done of the (false) statement that the plantation to be contributed by Ambusa as its 50 per cent equity in the joint venture had really been valued at K400,000.
(e) The due diligence by Mr Wright and Mr Mekere was woefully deficient. Because of his immaturity, the cause of this in Mr Mekere’s case may be attributable to inexperience and naivety. The commission takes a harsher view of Mr Wright, who was a qualified accountant and who was in charge of supervising Mr Mekere. The commission finds that his failure to ensure that even basic and simple checks were made to verify the claims in Ambusa’s business proposal, should be attributed to reckless indifference about his duty to the NPF;
(f) Because of their breach of duty to the NPF board, Mr Wright and Mr Mekere may be personally liable for any loss incurred by NPF resulting from their failure to exercise reasonable care. It is unlikely that they could rely on a defence of “acting in good faith”, particularly not Mr Wright; and
(g) The trustees who attended the 110th NPF board meeting and who voted in favour of approving the project in principle, failed in their fiduciary duty to the members of the fund by not insisting that proper due diligence was carried out, including an independent professional evaluation of the proposal before approving it in principle.
After the NPF board approved the project in principle in December 1997, Mr Mekere conducted a site visit.
Having no expertise in the copra oil industry, he made a woefully inadequate assessment of the plantation.
NPF Board Resolves To Participate In ACOM
At the 111th NPF board meeting on February 20, 1998, the board resolved to invest in the project as recommended.
Mr Mekere then arranged for a shelf company to be purchased which was registered as “Ambusa Copra Oil Mill Ltd” with David Copland as chairman, Robert Kaul as director, Haro Mekere as executive director and two nominees from Ambusa.
Mr Mekere then became the main driving force pushing the project along.
TO BE CONTINUED