National Provident Fund Final Report [Part 55]
Below is the fifty-fifth 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 55th 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 6 Continued
The inspectors then re- examined the builder’s construction costs which rose from the contracted price of K45,447,388 by K9,484,706.67 to K54,942,094. The inspector’s report provided a break up as follows:
The inspectors noted that the major cause of increased costs were:
- In-ground works variation costs of K3,006,270.26;
- Recovery of delays in the Stage 1 construction program (First acceleration fee) K1.4 million;
- Settlement of kina devaluation claim of K3.3 million; and
- The second acceleration claim of K2.505 million; All of these costs were examined by the inspectors.
In-ground Works Variation Costs Of K3,006,270.26
The inspectors listed the cost of these variations, which were caused by instability in the ground supporting the foundations, as follows:
The inspectors made no further inquiries, feeling they lacked expertise to do so. However, this commission did carry out further investigations and based upon the expert evidence it obtained, has reported in paragraphs 4.1- 4.9.
(a) The commission is satisfied that the redesign and re-engineering work was necessary in order to accommodate the substrata conditions encountered. This resulted in additional work, additional costs and 84 days time loss to the construction schedule
(b) The commission is further satisfied that the work costs and delay were thoroughly and professionally examined and vouched by Rider Hunt and PAC and that no further investigation is warranted.
Builders Other Works Variations:
The finance inspectors thoroughly examined the substantial list of builder’s works variations. Cost increasing variations amounted to K2,562,082.02 and cost decreasing variations amounted to K3,278,645.61. These are listed at paragraph 3.1, Table 3 of Schedule 6 and have been audited by the inspectors. The commission has not inquired further into those variations as they appear to professional auditors to be in order.
Cost To Recover Stage 1 Delays (First Acceleration Fee) K1.40 million
The inspectors reported on the decision to try and recover the 12 weeks time lost due to the additional in- ground construction works. The project architects, PAC, told the inspectors that they were not asked to comment on the options Kumagai offered to facilitate the acceleration, which had been requested by Mr Copland. They told the inspectors that, had they been asked, they would have expressed doubt whether the expenditure of an additional K1.4 million was warranted for this acceleration. At paragraph 4.12.1, the commission has found that:
(a) The first acceleration transaction for K1.4 million does not require to be examined further; and
(b) Acceleration of the works was of questionable value to NPF. Both NPF management and the board were remiss in not accepting the offer of PAC to further advise the board on the subject.
Kina Devaluation Claim And Negotiation Between Parties
The inspectors reported that negotiations to settle a kina devaluation claim of K6.60 million by Kumagai, had reached the stage where Kumagai had agreed to accept a devaluation fee of K3,054,354, increasing the total cost of construction to K51.3 million.
The inspectors expressed surprise and suspicion to note that, at this stage, Mr Leahy directed PAC to withdraw from negotiations and a settlement was reached (without PAC’s expert advice) to combine a second, and probably unnecessary acceleration fee of K2,505,000, together with a kina devaluation fee of K3,300,000, amounting in total to a settlement payment of K5,805,000. This brought the total cost up to K54 million, i.e. K2.7 million more than what Kumagai had requested as full payment.
To the inspectors, it looked as though NPF was paying a larger kina devaluation fee than Kumagai had agreed to accept as well as an unfounded second acceleration fee.
The inspector’s further investigations uncovered suspicious documents and calculations such as a schedule justifying the K2.505 million acceleration costs, which had not been evaluated by PAC, whose architect said he could not tell if extra people had been placed on site. The amount was paid to Kumagai but there was no report or accounting of the additional labour.
The inspectors concluded the K54 million settlement agreed by the new NPF board on February 8, 1999, was deliberately inflated in order to include the two claims. Submissions to the board by management were misleading as they concentrated on the devaluation fee and ignored the second acceleration fee.
A further ground for suspicion was that the project consultants had recommended that the K2.505 million acceleration fee be paid by way of a slow release of funds as the project neared completion. However, it was paid out quickly months before the project was completed.
The inspectors concluded, on this topic:
“This investigation is highly suspicious of the manner the NPF and Kumagai Gumi reached this understanding. Why did NPF abandon its negotiated gains on Kumagai Gumi’s kina devaluation claim? Why is it that PAC was excluded from a very important technical negotiations on kina devaluation claim and acceleration which involved quite a large sum of money? This investigation believes that it was highly possible that corrupt practices may have existed in the negotiation leading to the settlement of K5,805,000. A probe by the National Fraud Squad is highly recommended by this investigation.”
The commission shared the inspectors suspicions about these two payments and therefore thoroughly investigated them as reported at paragraph 5 below and in Schedule 6 paragraphs 5.1 to 5.7.
Finally, the finance inspectors examined the question of the greatly increased payments for professional fees, listed as follows:
Although suspicious, because the fees had blown out to K3,568,298.84, they were unable to offer an explanation.
The commission carried out its own examination of the costs for professional services, which is reported at paragraphs 6.1 to 6.3.
Commission’s Investigations Into Professional Fees Paid By NPF
The commission worked from the records of PAC, which was the professional project manager, rather than NPF’s very fallible records. On that basis, the general professional fees that the commission examined were:
The consultancy agreement between NPF and PAC, which provided for all consultancy fees, was delivered to PAC on August 20, 1997, to be signed. It had originally been drafted in April 1995 but was revised on June 12, 1997, to set out the fees for the construction phase – so that the contract administration component for each area of specialty was calculated as a percentage of the base contract price of K45,447,388.
The main 23-page consultancy agreement provided for NPF to pay the project manager all fees on a lump sum basis, as detailed in the terms of reference agreement.
The terms of reference agreement referred to the consultants services by reference to the six appendices to the consultancy agreement, referring also to a fee schedule at appendix 1 of the letter from PAC dated August 23, 1994.
Appendix 1 in the consultancy agreement, applicable to each specialty service, stated a lump sum amount.
When all the documentation is studied however, in order to determine the agreed terms of payment, a distinct ambiguity arises, which is analysed in detail in paragraph 6.3 of Schedule 6. Although the consultancy agreements and the appendices to them assume “fixed lump sum payments”, in order to identify the appropriate lump sum payable for each specialty service, one is referred to the terms of reference which in turn refer one to Appendix 1 of a letter of 23rd August 1994 from PAC to NPF (Exhibit T19).
That document (Exhibit T19) provides for payment as a percentage of construction cost – 8 per cent of construction cost of K24,135,000. PAC has interpreted this as an entitlement to fees at 8 per cent (but it charged at only 6.47 per cent). The result of this interpretation is that the fees charged varied as a percentage of the (increasing) construction cost. The revised fees quoted by PAC in a facsimile of June 12, 1997, (before the signed contracts were sent to them by Mr Leahy on August 20, 1997) reflect their interpretation as it applied to the contract administration portion of the works at a base contract price K45,447,388. The effect of the variation for the contract administration phase was:
- The architects fees increased from K210,350 to K454,473 (and in total from K965,400 to K1,218,523);
- The structural and civil engineer’s fees increased from K96,540 to K181,789 (and in total from K386,160 to K471,409); and
- Each of the mechanical, electrical and hydraulics engineer’s fees and the quantity surveyor’s fees increased from K72,405 to K136,342 (and in total from K289,620 to K353,557).
The commission’s report at paragraph 6.3 exposes the ambiguity caused by the wording of the consultancy agreements and associated documents. It is left to NPF and PAC to take up this matter by way of legal interpretation through the courts, if so desired. Suffice it to say that the additional costs resulting from PAC’s interpretation are considerable.
(a) Owing to ambiguity in the documentation, it could be interpreted that the professional fees paid by NPF exceeded the contractual agreement. This would need to be interpreted in court;
(b) NPF management (Mr Kaul and Mr Wright) failed to obtain NPF board approval for expenditure of more than K1.5 million on professional fees. They may be personally liable for losses suffered by NPF members; and
(c) NPF was in breach of S.61(2) of the PF(M) Act in not obtaining prior Ministerial approval before paying additional professional fees beyond the K1.93 million previously approved by the Minister.
Commission’s Investigations Into The Kina Fluctuation Claim
The kina fluctuation claim is first discussed in paragraph 5.2.1, from Kumagai’s perspective. By February 1998, Kumagai had given notice of its intention to claim additional cost because the kina had devalued against the Australian dollar from K1= $A0.93 to K1= $A0.74.
Kumagai persisted with this claim until, on legal advice, NPF management formally rejected the claim.
On July 10, PAC confirmed its previous advice that there was no legal basis for the claim but added that Kumagai was being genuinely disadvantaged by the kina fluctuation (paragraph 5.2.1).
A dispute was notified and Kumagai analysed its actual and anticipated cost increases due to the kina fluctuation, presenting a total claim to PAC on August 27,1998, of K6,756,388.46 (paragraph 5.2.1).
On November 24, 1998, Kumagai wrote to PAC itemising all variations due to Architectural Instructions (AI), aggregating the net increase due to AI variations and the cost of kina fluctuation at K6,600,000 and offered to split the cost between itself and NPF by accepting K6,600,000÷2= K3,300,000 as the additional cost for the kina fluctuation, on top of the then project cost of K48,245,645. Kumagai then offered to accept K51,545,646 as the total cost, as varied (a 13.4 per cent increase above the original project cost).
Kumagai’s calculations were checked by PAC and Rider Hunt who adjusted Kumagai’s calculations to a lesser figure. Though reiterating that NPF was not legally bound to do so, PAC advised on December 10, 1998, that it would be wise to offer Kumagai K50.5 million as a final price to ensure the project was safely completed with no costly disputes. This matter was to be considered by the NPF board on December 22, 1998, however, at that meeting, management held back the full details of Kumagai’s claim and of PAC and Rider Hunt’s advice. Seeing only PAC’s letter of December 10, and accepting PAC’s advice, the NPF board resolved at that meeting to reject Kumagai’s offer of K51.5 million to settle and resolved to make a full and final settlement offer of K50.5 million for the full project price. PAC conveyed this to Kumagai on January 25, 1999.
Kumagai rejected that offer and made a counter offer on the same day to accept K51.3 million as the total project cost.
NPF did not respond and negotiations ceased when Mr Maladina became chairman of the NPF board and became involved in the matter (Mr Kobayashi of Kumagai gave evidence that the claim was absolutely genuine and had it not been met Kumagai would have been obliged to suspend operations, to everyone’s substantial disadvantage).
That was where matters stood when Mr Leahy, on January 29, 1999, directed that PAC pull out of any further negotiations with Kumagai on this issue (paragraph 220.127.116.11).
TO BE CONTINUED