Home > Corruption, Papua New Guinea > National provident Fund Final Report [Part 54]

National provident Fund Final Report [Part 54]

October 20, 2015 Leave a comment Go to comments

Below is the fifty-fourth 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 54th 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.

Some Concluding Comments

Although the planned scope of the Waigani land fraud was very serious, the actual loss suffered by NPF and its members was reduced to the loss on the valuation fees and legal costs because at the last moment, NPF withdrew from the purchase agreement. Members have mainly journalist Ruth Waram (Editor’s Note: Ms Waram was the business editor of the Post-Courier at that time) and the national press to thank for this partial reprieve.

This report demonstrates the amoral greed of the conspirators who preyed upon the NPF when its finances were in a desperately weak state and the depths of official corruption which existed in the Lands Ministry and the Land Board.

Some positive aspects which emerged from the inquiry were:

(a) THE benefit of a free and courageous press;
(b) THE effectiveness of the finance inspector’s inquiry;
(c) THE energetic and effective inquiry carried out by the NPF board of trustees after August 1999, which led to the termination of Herman Leahy and Jimmy Maladina from the NPF.

One matter of great public concern was the attempt by professional people to interfere with and undermine this commission of inquiry in order to protect Mr Maladina and his fellow conspirators. It is particularly disturbing that some of those people were lawyers, whose profession imposes upon them a duty to serve the court as their primary responsibility.

Executive Summary Schedule 6 NPF Tower Investigation Introduction 

The commission’s inquiries into the financing and construction of the NPF Tower, reported upon in Schedule 2B to the commission’s report, disclosed several matters which required further detailed investigation.

Those investigations are reported upon in Schedule 6, of which this is an executive summary.

The matters requiring further investigation, which are reported upon in Schedule 6, are:

  • THE in-ground works variation of K3,006,270.26;
  • THE resultant acceleration claim of K1.4 million;
  • THE currency fluctuation claim of K3.3 million;
  • THE second acceleration claim of K2.505 million;
  • THE professional fees of K3,568,298.84; * WHERE the K2.65 million from the arrangements made by Mr Maladina with Kumagai Gumi Company Ltd (Kumagai) went; and
  • THE proposed sale to PNG Harbours Board (PNGHB).

Overview 

In 1999, the Secretary for the Department of Finance (DoF) directed that there be an investigation by finance inspectors under Section 64 of the Public Finances (Management) Act 1995 (PF(M) Act). Among other matters, the inspectors were to investigate and report upon the NPF Tower construction.

Schedule 6 quotes the finance inspector’s report in full by way of an overview (paragraph 3.1). The lack of planning and critical financial analysis by NPF management and the board is criticised by the inspectors who blame chairman David Copland, general manager Robert Kaul and deputy managing director Noel Wright as being primarily responsible for this.

They were also primarily responsible for the failure to properly obtain the approval of the NPF board for the full amount of the preliminary expenditure that cost K1.93 million which Mr Kaul asked the Minister to approve. The trustees had approved a lesser expenditure of K1.50 million as professional fees for the feasibility studies conducted during the pre-tender stage.

The finance inspectors criticised the trustees for authorising the expenditure of such a large sum before basic calculations regarding the likely construction costs, sources and costs of funding as well as the availability of joint venture partners and estimated rental returns had been put before the board and considered. The inspectors also criticised the role of the DoF, particularly its senior officers serving as NPF trustees, for not providing a professional critical analysis of NPF’s proposals for initial expenditure, and for meekly supporting those proposals and recommending Ministerial approval. The commission fully endorses all these criticisms.

By the time the project was presented to the NPF board again in October 1996, K3 million had already been spent on pre-tender documentation (double the amount the board had approved). Management recommended that the board authorise the commencement of the project on the strength of a preliminary feasibility study by Rider Hunt and Partners (Rider Hunt). The board gave its approval on the basis that:

  • The total cost would be under K50 million;
  • The expected rate of return would be 10 per cent;
  • THE proposed residential floors would be converted into rentable office space; and
  • Funding would be partly by cash and partly from borrowings, repayable in approximately eight years.

The commission fully agrees with the inspector’s comments that an expected return of only 10 per cent on such a high-risk venture was far too low; funding partly by borrowing was unwise because of the significant cost of borrowing over eight years (The commission adds the overriding criticism that, legally, NPF lacked the power to borrow); NPF had dropped its previous requirement that joint venture partners must be found and this significantly increased NPF’s exposure to risks and cost blow-outs.

The inspectors were very critical of DoF Deputy Secretary (and NPF trustee) Vele Iamo and First Assistant Secretary, Commercial Investments Division Salamo Elema, for not recommending against this proposal.

On their recommendation, the Minister approved the construction of the Tower, at a cost not exceeding K40 million.

The accepted tender by Kumagai was for a construction cost of K45,447,388 and this required further Ministerial approval for a revised cost of K50 million on May 27, 1997. A contract was entered into with Kumagai for a construction cost of K45,447,388 which Mr Kaul signed on behalf of NPF on June 2, 1997.

This was signed prior to NPF board approval for this amount being obtained, which was not given until August 22, 1997.

The inspectors go on to describe how the concept of partial funding through members’ contributions was set aside as management negotiated a K50 million fully drawn down loan facility (FDL) with PNGBC which was later increased to K59 million.

Findings 

The irregularities in obtaining board and Ministerial approval for this facility and for the subsequent variations are described in Schedule 2B at paragraphs 4.3 and 4.8-4.10, where the commission has found that:

(a) Mr Kaul’s request to Minister Konga for NPF to borrow K50 million from PNGBC had not been considered or resolved upon by the NPF board. This amounted to improper conduct by Mr Kaul and a breach of his fiduciary duty to the members of the fund;
(b) Minister Konga was also guilty of improper conduct in approving Mr Kaul’s request without sighting an NPF board resolution and without seeking advice from the DoF.
(c) Mr Wright’s application to PNGBC for loan facility had no authority from the NPF board;
(d) PNGBC was negligent in not requesting a copy of the NPF board approval and the Minister’s approval before approving the loan facility of K50 million. PNGBC also failed to perform due diligence in relation to NPF’s power to borrow;
(e) PNGBC’s analysis of the loan application was flawed;
(f) Mr Wright’s conduct in accepting the loan facility on behalf of the NPF board and authorising payment of the K375,000 establishment fee without consulting the board, was improper;
(g) The conduct of Mr Kaul and Mr Frank in applying the NPF seal to and executing the loan facility agreement without the authority of the NPF board, was improper conduct;
(h) The improper conduct and breach of duty by Mr Kaul and Mr Wright leave them open to personal liability for loss suffered by members of NPF and, in the circumstances, it is unlikely they could defend themselves against an action by claiming to have “acted in good faith”.

The inspector’s report goes on to describe how the cost of the project increased because of a successful kina fluctuation claim by Kumagai and how Mr Fabila, the new general manager of NPF, used this to justify an increase in the FDL.

They point out that Ministerial approval was for an increase to K55 million but that NPF exceeded this limit by obtaining from PNGBC, an increase to K59 million of which K58,122,757 had been drawn down by November 30, 1999.

The inspector’s report shows that when construction was completed in October 1999, the total costs incurred by NPF to develop and build the Tower amounted to K72,890,199.73 broken up as follows:

npf 54 image c

The inspectors comments on this table were:

“It will be noted that since the inception of the project in 1994 and up to September 1999, the expected overall cost of the development of the NPF Tower had increased tremendously, by as much as 2.43 times – from K30.0 million in August 1994; to K39.30 million in December 1995; to K48.14 million in September 1996; to K54.80 million in September 1997; to K58.03 million in January 1998; to K59.68 million in March 1998; and to K72.89 million (see Table 1 above) as at October 1999. This investigation notes that while the maximum development costs approved by the Minister was K50 million, actual development cost incurred amounted to almost K60 million. These exorbitant costs incurred in the project with no definite sign of profitability reflect the financial mismanagement and inefficiency by the involved NPF management and board.”

TO BE CONTINUED

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  1. October 21, 2015 at 12:01 pm

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