National Provident Fund Final Report [Part 73]
Below is the seventy-third 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 73rd 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 7c Continued
(b) NPF’s source of funding for the second tranche of the loan to Eda Ranu was deliberately obscured by Mr Wright who was deceiving the BSP about the purpose of a drawdown intended to finance an unauthorised purchase of Orogen shares.
Decision To Sell Down
NPF’s finance report for the months of May 1997 discussed the option to convert the loans to the Poreporena Freeway project and the K5 million loan to Eda Ranu to bonds. Instead, the loans were eventually assigned to the Bank of Hawaii on December 8, 1997.
Request For A K1 Million Loan
At the 106th board meeting on May 5, 1997, Noel Wright informed the board that Eda Ranu had requested a second loan of K1 million. The board resolved to reject this request. At the 107th NPF board meeting held on July 4, 1997, the K1 million loan request was revisited and the board eventually approved the loan.
NEC, however, had already approved the grant of a Government guarantee to NPF for the K1 million loan at its meeting on April 24, 1997. In this same meeting, NEC advised the Governor-General to approve the purpose of the loan pursuant to Section 37 of the PF(M) Act. This premature decision by the NEC amounted to political interference with the management of the NPF.
The purpose of this second loan was for the payment of termination benefits to former NCDC employees.
A brief by Salamo Elema dated September 18, 1997, to the Minister and acting Secretary explained the facts surrounding the NEC decision and at the same time recommended approval for Eda Ranu to enter into a K1 million loan agreement with NPF. Again there is clearly a conflict of interest where the DoF recommended approval for Eda Ranu to enter into a second K1 million loan agreement with NPF without considering NPF’s interest.
The action of DoF and NEC shows clear political interference with the administration of NPF. The second K1 million was paid to Eda Ranu on June 12, 1998.
(a) The NPF Board of Trustees and management failed to critically analyse this additional K1 million loan funding when K5 million had already been lent;
(b) The Finance Department treated the NPF as a bank, making frequent requests and supporting of loans for Government initiated projects and entities to be sourced through NPF without due consideration for the effect on members’ funds and the financial position of NPF, especially when it was borrowing the money at commercial interest rates to on-lend to the institutions recommended by the DoF;
(c) There was a conflict of interest situation, within DoF where they supported and recommended NPF to lend funds to Eda Ranu.
Interest Received By NPF
Clause 5 of the Fixed Rate Loan Agreement required the borrower to pay interest to NPF on the amount of each advance outstanding from time to time at the interest rate of 15.67 per cent. However, if payment was made within three days of the due date, interest would be payable at the concessional rate of 14.67 per cent.
These interest payment dates fell due at the end of the month of each quarter in each year.
The theoretical total income receivable by NPF at the end of 1999 from interest payments at the concessional rate of 14.67per cent was K2,522,018.93.
The amount actually received was K2,480,035.39, which shows an underpayment of K36,976.46. This discrepancy occurred because NPF failed to bank the cheque received for the interest paid for the last quarter of 1998. After that was pointed out by this commission and rectified, the full amount of interest receivable at the concessional rate balanced.
There were, however, also instances of interest being paid outside the three-day grace period, when the higher rate of interest should have been 15.67 per cent but it was not applied by NPF. There were also instances when the daily and compound interest on the unpaid interest was not calculated. These instances were not included in the calculation of the total amount of interest theoretically receivable by NPF as stated above.
If the additional interest for late payment and compound interest had been strictly imposed, NPF would have been entitled to a further K45,000 to K46,000 approximately in addition to the theoretical interest receivable figure of K2,522,018.93.
(a) NPF did not enforce Clause 5 of the Fixed Rate Loan Agreement to situations where interest payments were made outside the three-day grace period, which resulted in loss of interest income to NPF of between K45,000 to K46,000;
(b) NPF management’s administration of the loan was careless in that they failed to bill interest when due and they failed to charge higher interest on the default amount when DoF failed to pay by the due date.
The outstanding features of the NPF’s two loans to Eda Ranu were:
(a) the acute conflict of interest faced by DoF senior officers and the Minister for Finance when advising NPF and recommending and approving transactions in matters where significant State interests were involved;
(b) the State’s failure to recognise and deal with these conflicts by ensuring that NPF was given independent and objective advice;
(c) the way the State’s urgent need to find finance for Eda Ranu was allowed to dominate arrangements and negotiations so that proper legal and financial arrangements were rushed and not properly in place before the drawdowns were made;
(d) The behaviour of the NEC and its advisers, which led to NEC approval being given to guarantee a loan which NPF had not yet even considered, amounted to political interference with the management of the fund;
(e) The failure by NPF management and board of trustees to resist these political pressures and insist that due diligence be performed and that due process be followed, with all required approvals and all security arrangements in place;
(f) Even though NPF’s investment in these loans to Eda Ranu turned out to be sound, the way they were handled by management and trustees put NPF at risk and was a breach of duty by management and of fiduciary duty by the trustees; and
(g) There was serious failure by management to keep the NPF board adequately informed.
Executive Summary Schedule 7d Southern Highlands Four Roads Project
In 1998, at a time when NPF was in financial difficulties with the Australian & New Zealand Banking Group (PNG) Limited, (ANZ) the Department of Finance (DoF) was actively promoting a proposal that NPF would agree to lend K17 million to the Southern Highlands Provincial Government (SHPG) for major roadworks.
The proposal was being “worked up” by Mete Kahona working with the State’s Infrastructure Development Group (IDG), which was acting as paid consultants to the SHPG. Clearly, the IDG had the interest of the State and its paying client (the SHPG) primarily in mind — not the interests of NPF.
DoF’s Conflict Of Interest
When NPF was considering these proposals, its chairman Morea Vele was Secretary for Finance and trustee Iamo Vele was a senior officer of the DoF. Both participated in the NPF decision-making process despite their undisclosed conflict of interest.
It was a very bad time for NPF to be lending K17 million as it was itself suffering a severe cash crisis and its lender banks were reducing NPF’s credit facilities. Neither NPF management nor the trustees considered a specific funding plan for this loan. They seemed to rely upon the vague possibility that it could be funded from the $A54 million bond that NPF was fruitlessly trying to issue.
Concern About Security For The Loan
Initially, the NPF board refused to approve the loan because it had major concerns about the security being offered, as the loan was not going to be guaranteed by the State (as the Freeway loans had been). NPF would not accept a guarantee by the SHPG as sufficient security. Mr Kahona and the IDG worked out an alternative security proposal, which included SHPG giving NPF a charge over its share of the conditional grants from the State for infrastructure purposes.
NPF Approves Loan To SHPG
NPF approved the loan in principle “subject to availability of funding” and subject to legal counsel (Mr Leahy) checking the adequacy of the security documents.
Mr Leahy sought advice from Carter Newell lawyers who responded with an alternative proposal, saying the draft charge prepared by the State was worthless. The State rejected Carter Newell’s draft but amended its own draft charge in order to address Carter Newell’s concerns. Mr Leahy and NPF management did not advise the board about these matters.
When the loan agreement was drawn up, the security provided for was the amended version proposed by the State. Mr Leahy failed to ensure that the formal agreement was made conditional upon the availability of finance to enable NPF to fund the loan.
Failure To obtain Independent Investment Advice
Management and the trustees were in serious breach of their duty to the board and members of the fund for not obtaining independent investment advice before entering into this loan, especially as the DoF, which had the duty to consider NPF’s best interests and to give impartial expert advice on the proposed loan to the Minister, was employed by SHPG to look after its interests.
When SHPG sought two drawdowns of K500,000 each, NPF management had great difficulty finding the funds — eventually sourcing the money from its member’s contributions account. Management made payments to SHPG in accordance with drawdown requests, without obtaining board approval.
After the first two drawdowns in August and September 1998, respectively, SHPG proved to be an unreliable borrower and had to be “chased up” for payment of interest and fees.
NPF Terminates The Loan Agreement
This proved to be a boon for NPF as it enabled Mr Fabila to seek out details of the various defaults in SHPG’s performance under the agreement. This enabled NPF to terminate the agreement and institute legal proceedings to recover the principal and outstanding interest.
As at December 1999, the NPF had received K110,728.35 in interest payments from SHPG and was owed K221,057 in outstanding interest. NPF has now commenced action to recover the principal of K1,000,000 and outstanding interest.
This investment by NPF in this commercial loan to the SHPG highlighted the severe unaddressed conflict of interest faced by the DoF, which was advising both SHPG and NPF. The conflict was particularly acute for the public service representative trustees Morea Vele and Vele Iamo.
The NPF board demonstrated a rare streak of independence when it initially refused to approve the loan and commissioned legal advice on the security aspects. After this, however, it adopted a more compliant attitude, Mr Leahy failed to ensure NPF’s interest were safeguarded by the loan agreements and management and the trustees failed their duty to seek independent investment advice.
(a) The concept of NPF lending K17 million to SHPG seems to have originated from within the DoF, which called for expressions of interest from ANZ Bank, PNGBC and NPF. DoF actively supported and facilitated the establishment and funding of the project;
(b) The CID of DoF favoured the NPF offer because it was the offer most favourable to SHPG. DoF did not seem to consider whether making the loan would be in the best interests of NPF;
(c) DoF trustees on the NPF board, including the Secretary of DoF were in a conflict of interest situation, pulled between their duty as trustees and their duty to DoF to implement National Government policy;
(d) The NPF board had not expressly resolved to approve the loan to SHPG before Cabinet and SHPG had given approval. DoF had input to the Cabinet submission;
(e) After Cabinet and SHPG approved the project, NPF management sought and received Ministerial approval for NPF to create a loan facility of K17 million for SHPG. Again DoF advised Ministerial approval; (f) NPF board approval was then obtained and it was given subject to legal counsel checking the adequacy of the securities to ensure repayment. The board specifically directed legal counsel to ensure a fixed charge was granted over the conditional grants, which were to secure the loan;
(g) NPF board approval was made “subject to availability of funds”;
(h) The NPF board and management did not seek independent investment advice before approving this loan or have it independently evaluated;
(i) Legal counsel Mr Leahy, prepared a draft charge document and sought external legal advice from Carter Newell who advised the charge in its then form was worthless as an enforceable security. Carter Newell recommended taking a legal assignment of SHPG’s entitlement to royalties from the Kutubu project and prepared appropriate documents;
(j) DoF rejected Carter Newell’s suggestion and Mr Leahy did not advise the NPF board of this situation. Mr Leahy and Mr Wright signed the loan agreement and fixed charge document, the latter amended to accommodate the main criticisms made by Carter Newell;
(k) Mr Leahy should have advised the NPF board of Carter Newell’s concerns that NPF’s securities for this loan may not be adequate. Mr Leahy and Mr Wright may be personally liable for losses incurred by NPF from their signing of the loan agreement and charge, to the extent they were not in accordance with the board’s approval conditions and direction regarding security;
(l) From the outset, NPF had not established its source of funding to provide this loan. Its facilities with PNGBC were insufficient; ANZ was calling in and capping its facilities to NPF. For NPF to rely on the eventual success of the $A54 million bond issue was reliance on fantasy, in view of the difficulties being encountered in bringing the bond issue to fruition;
(m) Even at the time of the first drawdown of K500,000, it was clear that NPF lacked the funds to fulfil its commitment under the loan agreement it had entered into;
(n) The approval by the NPF board was explicitly made “subject to availability of finance”. Mr Leahy as legal counsel failed to ensure that the loan agreement also contained a “subject to finance” clause. This was a failure in his professional duty to NPF;
(o) SHPG defaulted in its interest payments under the agreement. NPF successfully obtained three of the quarterly payments from the State pursuant to the undertaking and charge over the conditional grant money. This satisfied interest payments for the December 1998, and the March and June 1999 quarters, totaling K110,728.35. As at December 1999, there was K221,057 owing and no further payments were received;
(p) From July 2, 1998 until April 1999, NPF management did not adequately advise the NPF board regarding SHPG’s breaches of the loan agreement. This was a failure of management’s duty to the board;
(q) HAD the SHPG not defaulted in its obligations under the loan agreement, which provided NPF with grounds to terminate the agreement, NPF risked being in breach because of its inability to meet drawdown requests due to a lack of funds and because there was no protective “subject to finance” clause in the loan agreement.
(r) NPF board allowed itself to be drawn into this loan agreement without obtaining adequate advice from management about the source of funding, the reliability of the borrower or the adequacy of its securities to protect NPF against possible default by SHPG. This was a breach of fiduciary duty by the trustees.
(s) NPF management, particularly Mr Fabila, Mr Leahy and mr Wright, failed in their duty to provide necessary and timely information and advice to the NPF board;
(t) Mr Leahy, as legal counsel, failed in his duty to ensure the loan documentation was adequate, was subject to NPF having available funds and that adequate security was provided to protect NPF against possible default by SHPG. He failed in his duty to advise the NPF board that he may have been unable to ensure adequate security was in place — despite having received Carter Newell’s detailed professional advice on that subject.
TO BE CONTINUED