National Provident Fund Final Report [Part 70]
Below is the seventieth 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 70th 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.
SCHEDULE 7B Poreporena Freeway Loan
After a troubled history leading to a Supreme Court order against the Independent State of Papua New Guinea (the State), a contract was executed between the State and Curtain Bros (QLD) Pty Ltd (Curtain Bros) to construct the Burns Peak and Waigani Drive project on March 3, 1995.
The contract was made conditional upon funding. It was originally intended that the State would borrow money offshore to fund the project but the Government was advised that this would contravene World Bank guidelines.
On July 13, 1995, the contract was declared unconditional and the Government proposed to contribute equity of K12.7 million with the balance of K48 million to come from commercial loan funding from PNG banks and superannuation funds.
When Curtain Bros refused to receive the loans directly, a special entity, Curtain Burns Peak Pty Ltd (Curtain Burns Peak) (jointly owned by the State and Curtain Bros.) was incorporated to receive the borrowed funds.
Having trouble raising the money from the commercial banks, the State turned to the PNG superannuation funds. On legal advice, the other funds refused to participate and it was left for NPF to become, in effect, the lender of last resort.
In all, NPF provided loans totalling K62 million to Curtain Burns Peak. This loan funding is referred to here as the Poreporena Freeway loan.
The loans were as follows:
K9 Million Loan — September 7, 1998:
This loan was made using contributor’s funds and was made directly to the State.
The details and conditions of the K9 million loan appear to have been worked out and agreed to in discussions between Mr Kaul and the First Assistant Secretary (FAS) of the Commercial Investment Division (CID) of the Department of Finance (DoF) Vele Iamo.
Mr Iamo was also a Public Service representative trustee on the NPF board.
The NPF board approved the loan on June 29, 1995 and Mr Iamo briefed the Secretary for Finance Gerea Aopi and the Minister for Finance on July 18, 1995, recommending approval and saying that the DoF had been fully involved in the decision-making process.
The brief was forwarded to Minister Haiveta on July 17, 1995, and he approved the K9 million loan that same day on the recommended terms. He also gave approval for NPF to provide “additional funding of K10 million in 1996 and or 1997 under the same terms and conditions as above”.
Conflict of interest
Mr Aopi and Mr Iamo were Secretary for Finance and FAS (CID) of the DoF respectively, with the responsibility of protecting the State’s financial interests. They were also chairman and trustee, respectively, of the NPF Board of Trustees, with strict fiduciary duties to look after the interests of members of the fund.
Their conflict of interest was, therefore, acute.
K10 Million Loan — June 27, 1996:
Approval for the additional K10 million had not been resolved by the NPF board or requested from the Minister. Mr Haiveta’s premature approval was, therefore, irregular. It perhaps indicates his keenness to secure the funds that the Government required to fulfil its contractual obligation to Curtain Bros.
The additional K10 million loan was required by the State because the Public Officers Superannuation Fund (POSF) and Motor Vehicles Insurance Trust (MVIT) had withdrawn from their intention to make loans.
The proposal was subsequently approved by the NPF trustees, initially by circular resolution and later ratified at a board meeting on August 29, 1995.
Failure to disclose conflict of interest and to abstain from voting
At that meeting, three employee representative trustees voted against the proposal. Chairman Aopi and Trustee Iamo voted in favour, despite their undisclosed conflict of interest, mentioned above.
Had they refrained from participating in the vote, the motion to advance the K10 million would not have been approved.
At paragraph 4.10 of the report, the commission has found:
a) NPF’s investment appraisal and decision-making process, concerning this loan, was inadequate;
(b) To be able to make a prudential assessment of the investment, this matter warranted a full board discussion and a formal documentation of that appraisal. The decision to advance such large sums of money to the State should have been based on a critical appraisal of risk and return.
The clear existence of conflicts of interest with regard to the State representative trustees, should have led the board to seek independent advice as to the merits and appropriateness of this investment.
Judging by what was recorded in the minutes (Exhibit G3 and G10 and the board papers (Exhibit P2)), NPF did not carry out any critical appraisal on this investment proposal and its management did not obtain or offer the trustees any independent advice;
(c) The trustees and management failed respectively in their fiduciary and common law duties by using a circular resolution to approve a transaction that involved substantial amounts of members’ funds;
(d) The commission notes that Trustees Gerea Aopi (who was the chairman of the NPF board at that time) and Vele Iamo were, at that time, Secretary and FAS CID, respectively, of the DoF.
Minutes of the National Executive Council (NEC) meetings found in the DoF files (commission documents 5A), record that the DoF was charged with the responsibility of procuring funds for the Poreporena Freeway project. Both Mr Aopi and Mr Iamo were also members of the Poreporena Freeway Project Management Group, which was responsible for providing advice to and liaison with the NEC in respect of this project.
Mr Aopi and Mr Iamo were clearly in a position of conflict of interest and therefore should have withdrawn from participating at the NPF board meeting when the board considered the Freeway project funding request.
Mr Aopi and Mr Iamo did not declare their obvious conflict of interest position to the NPF board nor did the board consider the implication of this conflict. The NPF Board of Trustees failed in their fiduciary duty in this respect;
(e) The NPF management (particularly Mr Kaul, Mr Wright and Mr Leahy) failed to properly brief the board on this issue;
(f) NPF’s use of borrowed funds to on-lend in this way was not sanctioned by the NPF Act or any other law. It was, therefore, illegal as well as being thoroughly inappropriate for a provident fund;
(g) In light of this clear conflict of interest within the DoF, an independent review of the NPF loan proposal was required. DoF did not attempt to isolate its review process through the use of “Chinese Walls” or similar methods to ensure that an independent review of the investment, from NPF’s perspective, rather than from the State’s perspective was achieved. This shortcoming, in a structural sense, persists; and
(h) Trustees Paska, Gwaibo and Leonard voted against making the additional K10 million loan. Had Mr Aopi and Mr Iamo refrained from voting because of their conflict of interest, the motion to approve the additional K10 million loan would, on the numbers, not have been passed;
(i) The loans provided by NPF were long-term loans and long-term loans are approved investments, under NPF’s investment guidelines.
The approval given for the K10 million loan had the State as the borrower.
Borrower becomes Curtains Burns Peak
The new arrangement, to lend through Curtain Burns Peak as intermediary, was put to the NPF board on April 26, 1996. No independent or expert advice was given or sought about the effect on NPF’s security of this “off balance sheet” transaction. The Minister approved this new arrangement on the same day.
Management allows early drawdown
The NPF board approval was that the K10 million could be drawn down in two tranches of K5 million each in 1996 and 1997. The K10 million loan was signed on June 27, 1996. Management allowed both tranches to be drawn down in 1996. This was because the State had applied pressure on NPF to advance the second drawdown date because POSF and the Defence Force Retirement Benefits Fund (DFRBF) had sought legal advice about the validity of the changed arrangements and would not commit their funds to the Poreporena freeway funding. This left a shortfall, which NPF was asked to fill.
The source of funds for this on-lending was NPF’s loan facility with the Australia & New Zealand Banking Group (PNG) Limited (“ANZ Bank”).
At paragraph 6.4, the commission has found:
(a) Management was in breach of its common law duty to the board in not obtaining independent expert advice regarding the State’s revised “off balance sheet” loan arrangements, using Curtain Burns Peak as an intermediary to receive the funds;
(b) THE trustees were in breach of their fiduciary duties to the members of the fund by failing to insist on obtaining independent expert advice about the loan agreement as well as an assessment of NPF’s security for the loan;
(c) NPF management acted beyond their authority by allowing Curtain Burns Peak to drawdown the entire K10 million loan in 1996, contrary to the loan agreement. This was a failure by Mr Kaul of his fiduciary duty as a trustee. He and Mr Wright also failed their common law duties to the NPF board;
(d) THE trustees failed in their fiduciary duty to the members by not noticing and questioning this obvious departure from the terms of the loan agreement;
(e) Minister Haiveta’s approval of the loan agreement between NPF and Curtain Burns Peak, without seeking advice from DoF, was a failure of his duty as a Minister.
In view of the conflict of interest situation that he and senior officers of the DoF were in, it was impossible for them to properly advise and consider the best interest of both the State and NPF. In these circumstances, the Minister should have sought independent advice from outside the DoF. His apparent failure to seek and take any advice at all was improper conduct; and
(f) NPF’s use of borrowed funds to on-lend in this way, was not sanctioned by the NPF Act or any other law. It was, therefore, illegal, as well as being thoroughly inappropriate, for a provident fund.
K15 Million Loan — November 14, 1996
Management fails to disclose constitutional problems to NPF board
During August and September 1996, Mr Wright was negotiating a drawdown on the ANZ loan facility to enable NPF to on-lend a further K15 million for the project. Bank approval was given in principle, subject to the ANZ obtaining legal advice that a charge over the inscribed stock would be effective.
The Government’s need to obtain the further K15 million from NPF at this stage was because POSF and DFRBF were holding back from their lending commitment while seeking legal advice, from Blake Dawson Waldron, as to the constitutionality of the new “off balance sheet” loan to Curtain Burns Peak and of the State’s proposed guarantee.
Even though Mr Wright and the NPF management were on notice that this legal question had been raised, they proceeded to recommend the K15 million loan to the NPF board, without advising the trustees that such a loan could be illegal and unenforceable.
Failure to obtain independent expert advice
Once again, the NPF board approved this proposal without any formal expert briefing from management and without any independent expert advice. On September 26, 1996, Minister Haiveta gave his approval.
Despite the clear conflict of interest affecting the DoF senior advisers and the Minister, no attempt was made to ensure that expert independent advice was made available to NPF.
Before the K15 million loan agreement was signed by NPF, POSF and DFRBF received their legal opinion from Blake Dawson Waldron dated October 10, 1996. The opinion stated that the proposed method of funding, by Curtain Burns Peak borrowing from PNG institutions and the State issuing a guarantee, violated Section 209(1) of the Constitution as it would constitute a loan raised by the State, without the authority of an Act of Parliament. Only at this late stage did NPF management see fit to obtain its own legal opinion. That opinion, provided by John Batch SC, was contrary to that of Blake Dawson Waldron.
Opposing legal opinion
Mr Batch felt that the arrangement did not contravene Section 209 (1), though he conceded that if there was a contravention, the loan may not be recoverable against Curtain Burns Peak and that NPF would not be able to enforce the State guarantee in the Courts. Mr Batch’s opinion was dated November 7, 1996 and the K15 million loan agreement between NPF and Curtain Burns Peak was signed on November 14, 1996.
The K15 million loan agreement was executed on November 14, 1996, between Curtain Burns Peak and NPF. Again, it was fully drawn down ahead of the agreed dates. The management and facility fees totalling K85,000, were paid to NPF.
At paragraph 6.8, the commission has found:
The Board of Trustees did not critically appraise the provision of further loans to the State and thereby failed in their fiduciary duties, in that:
(a) No consideration was given to the impact this further loan would make on NPF’s investment portfolio balance;
(b) The impact on NPF’s debt management and cash flow planning was not considered and documented;
(c) No assessment was made of the ability of the Government and Curtain Burn Peak to fulfil their obligations;
(d) No assessment was made of how the World Bank would view the State’s use of NPF funding for the State’s infrastructure projects, as political influence had clearly been brought to bear;
(e) NO consideration was given to the risks and returns or to other possible investment opportunities;
(f) There was a mismatch in the arrangements because the borrowed funds advanced to the State to finance the project, were repayable by NPF to ANZ “on demand”, whereas NPF’s loan to the State was not repayable for 10 years;
(g) THE trustees did not seek independent investment advice concerning this additional loan, nor was a critical investment appraisal of the additional loan to the State made;
(h) THERE was no documented input from NPF’s investment division.
Of the K48 million which the State had expected to raise in order to fund the original Freeway contract between 1995 and 1997, NPF provided K42 million. This was K23 million more than had been planned in 1995.
Second K15 Million Loan — March 13, 1997
Board and Minister approve further loan without any expert advice
As a result of the Blake Dawson Waldron advice, POSF and DFRBF resolved not to participate in the Poreporena Freeway loan and pressure was put on NPF to make good the funding shortfall.
NPF management eagerly accepted this challenge. Chairman Copland sought the board’s view at the 104th Board meeting, on December 9, 1996, about advancing another K15 million for the Freeway project. On the strength of a mere verbal proposal, without any attempt at appraising the investment, the board gave its immediate approval.
Minister Haiveta approved the proposal on January 28, 1997, without seeking advice from DoF.
THE NEXT EXTRACT, No.71 IS MISSING. WE WILL CONTINUE WITH PART 72 TOMORROW