National Provident Fund Final Report [Part 72]
Below is the seventy-second 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 72nd 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 7b Continued
(e) NPF management, specifically Mr Mitchell and Mr Mekere, were in breach of their common law duty to the NPF board in failing to obtain and provide this expert opinion;
(f) The NPF trustees were in breach of their fiduciary duties to the members of the Fund in failing to obtain this advice.
(g) The NPF management were remiss in not providing the Minister and the DoF with the contrary advice given by PwC and FPK that NPF would be better off continuing with the BoH assignment agreement;
(h) The DoF review and assessment was detailed but it followed NPF’s own line of reasoning closely and failed to address whether it might be best for NPF to retain the BoH agreement and (possibly) to sell the BSP shares separately;
(i) The Secretary of the DoF was in a conflict of interest situation as adviser to the State on the one hand, which would benefit if Finance Pacific gained from the deal. On the other hand, the Secretary also had a duty to ensure that the best interests of NPF and its members were safeguarded. The Secretary and his senior officers were remiss in not ensuring that independent advice, focusing entirely on NPF’s best interests, was obtained;
(j) The Minister, Sir Mekere Morauta, was also in a similar conflict of interest situation as he was required to consider the best interests of both the State (through Finance Pacific) and NPF. He was not advised that PwC and FPK had advised NPF against unwinding the BoH assignment transaction; and
(k) Sir Mekere acted in accordance with the NPF request, after considering a detailed brief from DoF in support of it. His approval was properly granted, in the circumstances.
Possible ulterior motives behind the Finance Pacific offer
At the time the Finance Pacific offer was being considered, the executive chairman of Finance Pacific was Peter O’Neill. The chairman of the NPF was Jimmy Maladina and the NPF corporate secretary/legal counsel was Herman Leahy.
The commission’s investigations into the NPF Tower fraud, which are reported upon in detail at Schedule 2, have disclosed a criminal conspiracy to defraud NPF to which these three persons were linked.
The conspiracy, in fact, succeeded in illegally obtaining K2.5 million from NPF and it was contemporaneous with this proposed purchase of Roadstock and BSP shares by Finance Pacific. The deal came to nothing because Mr O’Neill was terminated from Finance Pacific before it was completely in place.
In the light of the other evidence linking Mr O’Neill, Mr Maladina and Mr Leahy, the commission is very suspicious of the bona fides of this proposed purchase and of Mr Leahy’s role in ignoring the PwC and FPK reports and of his role in strongly advocating that NPF approve unwinding the BoH transaction sale, despite the negative expert advice.
As the sale did not eventuate, the commission did not pursue these inquiries any further.
Payment Of Interest And Management Fees To NPF Interest
On the commission’s calculations, the State has honoured its obligations under the Freeway loans, in fact there has been a small over payment of interest of approximately K25,000.
For each loan agreement, an annual management fee of K10,000 was payable to NPF.
The State failed to pay and the NPF failed to collect these fees. At March 5, 2001, the NPF took action to recover the sum of K283,932.35 from the State.
At paragraph 11.3, the commission found:
The failure by NPF management to seek payment of management fees, payable on each of the Freeway loan agreements, was a serious failure of duty.
The investment in the Poreporena Freeway loans turned out to be one of NPF’s more profitable investments as it returned a comfortable dividend of 14.67 per cent per annum plus management and line fees.
There have, however, been some very worrying features.
Firstly, there was the failure of NPF management and trustees to seek independent expert advice about:
(a) the structure of the loans which resulted in the mismatch between the interest rate and maturing conditions of NPF’s loan facilities with the banks from which it borrowed compared with the interest rate and maturing conditions of the on-lending to Curtain Burns Peak.
The mismatch left NPF in a losing situation during the period when the ILR interest it was paying to the lender bank, exceeded the fixed interest rate it was receiving from the borrower. As the period of the loan to Curtain Burns Peak was a fixed 10-year term. NPF was persuaded to assign the loans to the Bank of Hawaii at a considerable discount in order to extricate itself from this unfavourable situation;
(b) the “off balance sheet” revised funding arrangements whereby Curtain Burns Peak (instead of the State) became the borrower. Before seeking advice on this legally controversial arrangement, NPF had already lent K10 million’
(c) The Bank of Hawaii transaction proposal;
(d) The proposed sale of the Freeway (and other State loans) together with NPF’s BSP shares to Finance Pacific.
Secondly, the conflict of interest situation facing DoF senior officers who had “State” responsibilities to obtain funding for the Freeway Project and who also “put together” the loan arrangements with NPF and applied pressure on NPF to borrow the money to on-lend to the State (directly and through Curtain Burns Peak). The same officers were also involved in making recommendations to the Minister to approve NPF’s loan arrangements.
The conflict was particularly severe for officers like Vele Iamo who was also an NFP trustee with a fiduciary duty to act only in the best interests of the members of the NPF, yet he was also a member of the State committee responsible for keeping up the supply of necessary funds so the State would not be in breach of its project agreement with Curtain Bros.
The failure of these public service representative trustees to declare their conflict of interest and refrain from voting on the Freeway loan resolutions at NPF board meetings was also a breach of fiduciary duty.
Thirdly, management on some occasions failed to consult the board and acted without board authority. This included Mr Wright’s unauthorised activities in August 1997 to redeem deposits and alter security arrangements. Mr Wright also acted improperly by applying incorrect accounting principles to book K18.5 profit in 1997 on the BoH transaction, which resulted in an incorrect bonus being paid to senior management.
Finally, Minister Haiveta who failed on several occasions to seek advice of the DoF before granting approvals under Section 61 of the PF(M) Act, was possibly guilty of improper conduct under the Leadership Code.
Executive Summary Schedule 7c
NCD Water and Sewerage Ltd/Eda Ranu Loan Funding
This is a summary of the commission’s report Schedule 7C which deals with NPF’s loans to the National Capital District Water & Sewerage Ltd (NCD W&S). Unless otherwise stated, paragraph numbers referred to in this summary are references to paragraphs in Schedule 7C.
Following a Cabinet submission from the then Minister for Finance Chris Haiveta, the NCD W&S Ltd was set up under NEC decision No. 85/96 of May 31, 1996. Its purpose was to take over responsibilities for water supply and sewerage from the National Capital District Commission (NCDC). The trading name of this new organisation is Eda Ranu.
The same NEC decision also directed the Department of Finance (DoF) to review various options for the funding of this newly created entity.
Department Of Finance Submission
The Department of Finance policy submission to the Minister in support of the Minister’s Cabinet paper details the background to the loan as follows:
- ON September 3, 1996 (SIC) (NPF Board approved K5 million loan to Eda Ranu on August 27, 1996, at meeting No.102) the board and management of NPF agreed to provide a commercial loan of K5 million to NCD Water and Sewerage Pty Ltd under the same terms and condition as the Poreporena Freeway loans.
- It was advised that the option to convert the loan to equity could be considered at a later date but at that stage the NPF board had no interest in being part owner of the water supply company;
- IT was said that the terms and conditions were “quite favourable” to Eda Ranu and the State.
The wording of this policy submission brought out clearly the latent conflict of interest facing the DoF and the Minister, as DoF and the Minister also had a duty to take into consideration the interest of NPF. In this case, they did not do that sufficiently.
NPF’s Decision To Lend Funds To NCD Water & Sewerage Ltd
NPF board approved a K5 million loan to Eda Ranu in their meeting held on August 27, 1996. The terms of this loan were similar to the loan NPF had given to the Poreporena Freeway project.
NPF’s Funding Of The K5 Million Loan
NPF’s original intention was to fund this loan through its current loan facility with the ANZ bank.
However, NPF eventually sourced funds to meet this loan commitment of K5 million through its BSP loan facility of K30 million. The K30 million facility is dealt with in Schedule 2C “Borrowings”.
NPF Seeks Legal Advice About Reliance On State Guarantee
The State guarantee for the K5 million loan to Eda Ranu was dated October 31, 1996. NPF sought legal advice from Gadens Lawyers about its reliance solely on the State guarantee, given the State’s current cash restrictions in meeting its ordinary budgetary expenses. The legal advice they received stated that it was dangerous for NPF to rely solely on the State guarantee and NPF was advised to ask Eda Ranu to grant a fixed and floating charge over the borrower’s assets in addition to the State guarantee. Establishment Of A Debt Sinking Fund
In order to address NPF’s concern about the Government guarantee, Eda Ranu was to establish a debt sinking fund by way of a trust account with a commercial bank. NPF was advised of this move in a letter dated October 11, 1996, from Salamo Elema of the DoF. This same letter also advised that the first drawdown was required by November 4 to enable Eda Ranu to meet is payroll commitments.
(a) The pace at which the preconditions to the initial drawdown were being addressed shows clearly the apparent failure by the Department of Finance to critically analyse this loan funding, due to it’s attitude of serving the State’s interest first, even though they have a responsibility to protect the interest of NPF as well;
(b) The execution of the loan agreement was done without the inclusion by NPF lawyers of provisions for the establishment of a trust account and the Finance Minister’s approval for Eda Ranu to borrow from NPF as a precondition;
(c) The execution of the loan agreement was also done contrary to the PF(M) Act, which covered the NCD Water and Sewerage Pty Ltd and therefore required the prior approval of the Minister for Finance for Eda Ranu to borrow the funds.
Concerns Raised About Proposed Trust Account
Following conversations between NPF and Gadens Lawyers, NPF instructed Gadens on November 8, 1996, to write to Eda Ranu and DoF about its concerns regarding the trust account. Stephen Lewin of Gadens wrote to Young and Williams pointing out NPF’s concerns regarding the Trust Instrument on November 8, 1996.
These concerns include:
(a) Part Ill of the Public Finances (Management) Act 1995 (PF(M) Act) is not intended to be used for trust accounts of the type proposed;
(b) Notice by Minister for Finance arguably purports to amend and/or does not comply with the provisions of Part Ill of the PF(M) Act;
(c) Incorrect reference to section 10 (should be section 15);
(d) Poorly drafted notice;
(e) As lawyers for NPF, Gadens Ridgeway have not sighted any executed documents;
(f) Amend the Governor-General’s approval to specifically refer to section 37 of the PF(M) Act; and
(g) Declaration by existing shareholders of NCD W&S Pty Ltd that they hold shares in trust for the Independent State of Papua New Guinea.
Eda Ranu and DoF addressed the above concerns in a letter to NPF dated November 8, 1996. In this letter, Eda Ranu gave an undertaking that:
“1. IF the trust account established pursuant to a deed of trust executed by the Minister for Finance is declared invalid for any reason or the operation of it causes any difficulties, it will execute a new trust instrument with you in relation to the account upon request;
2. THAT it will use its best endeavours to obtain an amended executed approval from the Governor- General within 30 days after drawdown whereby the GG will approve the purpose of the loan pursuant to section 37 of the Public Finances (Management) Act, the loan being clearly stated to be made to NCD W&S Pty Limited.
3. THAT it will obtain a declaration by the existing shareholders of the company that they hold the shares in NCD W&S Pty Limited in trust for the Independent State of Papua New Guinea and will forward executed copies of those declarations of trust to your lawyers and that it will within 30 days satisfy you that 100 per cent of the issued share capital in the company is held legally and beneficially by the Independent State of Papua New Guinea or officers of the State on behalf of the State”. (Exhibit E74)
Lack Of Due Diligence
Right up until the day before the K3 million was advanced by NPF, there were still serious concerns about the legal validity of NPF lending money to NCD W&S Pty Ltd as a means of avoiding restrictions on direct state borrowing from NPF. Right up until the last day, NPF did not have details of the shareholders in the borrower company and whether they were acting as trustees for the Sate pursuant to valid declarations of Trust.
NPF, however, released K3 million of the K5 million to Eda Ranu without confirming who Eda Ranu shareholders were.
At paragraph 12.1, the commission has found that:
(a) NPF lent money to Eda Ranu without the benefit of knowing who the directors and/or shareholders of the company were and before legal due diligence had been completed; and
(b) The speed at which this loan was being arranged, under pressure from DoF and Eda Ranu, resulted in NPF entering into commitments prior to completion of basic aspects of due diligence and despite expressed concerns about the legality of the arrangements and the effect of hastily prepared trust arrangements designed to avoid doubts about the State’s power to borrow without an Act of Parliament. Drawdowns
The drawing notice from Eda Ranu to NPF predated the loan agreement and guarantee. It was dated October 22, 1996.
In an attempt to correct the drawing notice, Kenneth Frank wrote to Salamo Elema on December 4, 1996, enclosing a substitute drawing notice signed by Eda Ranu dated November 18, 996 (sic) for Mr Elema’s signature.
This action by Mr Frank was improper and risky as it may have legal implications in the sense that Eda Ranu could choose not to pay the interest and principal because the drawing notice predates the loan agreement.
In a letter dated November 8, 1996 to Chris McKeown of BSP, Mr Wright of NPF requested a draw down of K3 million. BSP released K3 million the same day to Eda Ranu.
The second K2 million was presented to Eda Ranu on November 20, 1996. This was sourced from a maturing IBD although Mr Wright made out that it was sourced from the BSP K30 million facility.
At paragraph 14.1, the commission has found that:
(a) The drawing notice predated the loan agreement and guarantee. While this matter was corrected by Mr Frank in his letter to Mr Elema on December 4, 1996, such action was not proper and it may have legal repercussions in the sense that Eda Ranu could choose not to pay the interest and principal because the initial drawing notice predated the loan agreement.
TO BE CONTINUED
* PART 71 is missing and has not been published in this series