Home > Corruption, Papua New Guinea > National Provident Fund Final Report [Part 76]

National Provident Fund Final Report [Part 76]

November 18, 2015 Leave a comment Go to comments

Below is the seventy-sixth 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 76th 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 8 Continued

This was primarily a failure of duty by Mr. Wright and his successors regarding this duty, Mr Mekere, Mr Mitchell and Mr Gire. It was also a failure of fiduciary duty by the trustees who allowed this situation to continue for some 14 months.

Failure To Properly Implement The Deed Of Acknowledgement Of Debt

After the deed was signed on October 29, 1998, NPF failed to:

  • adjust prior billings to reflect the terms of the deed;
  • request the 1997 interest or obtain acknowledgement of its capitalisation;
  • BASE subsequent calculations on the higher principal sum and an interest rate of 14.67 per cent or 15.67per cent as appropriate; and
  • exercise its rights under the deed resulting from the State’s default in payment of interest. Auditor-General’s Intervention

The Auditor-General notified NPF of the understated interest in September 1999 and Mr Mitchell subsequently advised DoF that the cumulative underpayment for the period to December 31, 1999 was K4,000,510.91. This related only to the interest differential between 12.67 per cent and 14.67 per cent.

The commission finds that this figure must be increased to take account of:

(a) The applicable interest rate under the deed should often have been 15.67 per cent — with a discount rate of 14.67 per cent.
(b) The use of the incorrect principal sum in the calculations; and
(c) Penalties for late payment of interest.

The commission has given careful and detailed consideration to the underpayment of interest as set out in paragraph 8 of the report. It finds that the underpayment of interest (not including penalty interest) amounts to K4,288,674.

Findings

(a) The NPF management particularly Mr Wright, Mr Mekere, Mr Mitchell and Mr Gire failed in their duties when:

  • they failed to apply the correct interest rate and principal amount resulting in the interest being under- billed;
  • when DoF defaulted on numerous instances, NPF management failed to exercise its rights granted by the deed; and
  • their administration of the deed was careless resulting in loss of income to NPF;

(b) The trustees failed in their fiduciary duties to the members where:

  • they have failed to apply the correct interest rate and principal amounts, resulting in the interest amount being under-billed;
  • when DoF defaulted on numerous instances, NPF failed to exercise its rights granted by the deed; and
  • they failed to detect and correct management’s mishandling of this matter. Concluding Comments

The transfer of members and members’ entitlements from POSF to NPF consequent upon corporatisation of NAC and PTC was badly mishandled by NPF and also by the State and POSF. The transfer was characterised by a failure to anticipate and provide for the problems which would be encountered, with the result that basic policy decisions and administrative arrangements were not in place before the date of corporatisation and the implementation of the transfer of membership from POSF to NPF on 1st January 1997.

This unnecessarily caused great and understandable concern among the transferring members and led their unions to adopt a hardline and unreasonable stance. Faced with strong inappropriate demands for the payout of employee contributions to members who transferred to Air Niugini, NPF decided to honour an extra legal agreement between employees and Air Niugini management, despite the fact that it was in breach of the NPF Act.

Subsequently, when faced with strike action by communication workers unions for payout of the State’s contributions, NPF again capitulated. This was illegal and unfair to other NPF members as it allowed this group of transferred members to avoid the effects of the eventual write down of NPF member’s entitlements. It is clear that NPF’s decision to make the extra legal payment of the State share to former PTC employees was influenced by political pressure to settle the strike action.

Faced with the failure by POSF and the Sate to resolve the problems caused by the State’s longstanding failure to pay POSF the State’s contribution to the fund, NPF initiated a loan to the State to fund the transfer without seeking investment advice or performing due diligence on the State’s ability to meet its commitments. This was of great concern because NPF was already massively exposed to the State through the freeway loans.

Having entered into the loan to finance the transfer of the State’s contribution, NPF management and trustees demonstrated negligence and ineptitude in administering the loan. They under-charged the interest rate and applied it to an understated principal sum, resulting in a loss of more than K4 million to NPF members. This was gross mismanagement of the trust fund and a serious breach of fiduciary duties.

SCHEDULE 9 – Tender Procedures and Nepotism

INTRODUCTION

Terms of Reference and Finance Inspectors Report

The commission’s term of reference Number 1(0) requires the commission to investigate and report on:

“The failure to comply with prescribed tendering processes, and whether such failure benefited any person and if so who, and the role of any trustee or manager of the funds or of any other person or entity”.

The finance inspectors provided an excellent report on these topics, on December 15, 1999, exposing irregularities in the National Provident Fund’s (NPF) financial management.

This was one of the big issues, which led to the setting up of this commission of inquiry. The finance inspectors drew attention to the deficiencies in the procedures used by NPF in the procurement of goods and services and the disposal of assets.

Commission’s inquiries

The commission chose not to make a full and detailed investigation into every possible irregularity, as the task would be massively beyond this commission’s resources. Instead the commission examined the following topics in detail for the whole period under review, January 1995 to December 1999:

(a) Procurement and disposal of motor vehicles;
(b) Procurement of property management;
(c) Procurement of legal services;
(d) Procurement of security services;
(e) Procurement of accounting services;
(f) Procurement of computer and computer services;
(g) Procurement of other professional services; and
(h) Procurement of stationery and office supplies.

The results of the commission’s own investigation into these matters are presented in the main report (Schedule 9). That report shows a worrying lack of formal tendering procedures and many serious financial irregularities. The corrupt practices of NPF staff and instances of nepotism are also noted in the main report.

The law applicable to tender procedures

The commission has found, in paragraph 3, that Section 59 of the Public Finances Management Act (PF(M) Act) does not apply to the NPF but that the NPF must nevertheless follow financial instructions issued from time to time. In addition, all NPF trustees were under a fiduciary duty to ensure proper management of the fund’s assets and this would include the need to follow suitable tender procedures for the acquisition and disposal of assets, goods and services.

On the evidence, it is clear that management (wrongly) assumed that NPF was bound by Section 59 of the PF(M) Act and that, in 1989, a Supply and Tenders Committee had been established.

Mr Wright, Mr Leahy and Mr Tarutia were members of the committee, which ceased to operate before January 1995 (the commencing date set by the Commission’s terms of reference).

In March 1989, a NPF board resolution established a Supply and Tenders Committee and procedures and financial delegations for tenders. Although this resolution remains in force, it fell into disuse before January 1, 1995.

The commission has found that there were no clear procedures being followed between January 1995 to December 1999 and that this was a failure of duty of both management and the trustees.

We will now report upon each of the selected topics in turn.

Procurement And Disposal Of Motor Vehicles

Policy on use of motor vehicle

The procedure for acquiring and disposing of motor vehicles followed no clear policy. There was a formal policy adopted on October 27, 1994 regarding the use of motor vehicles which allowed vehicles supplied as part of an officer’s contract entitlement (“employment contract vehicles”) to be used on a 24-hour basis by the managers to whom they were allocated and to be replaced every four years. All other vehicles were to be used for official duty only and to be replaced every four years or “on reaching 150,000 kilometres whichever is the earlier”.

The policy did not deal with acquisition and disposal procedures.

The commission found that the standard of NPF’s documentation, regarding acquisition and disposal of motor vehicles, was extremely poor.

1995

A study of the Fixed Assets Schedule provides evidence of what vehicles were held at the beginning of 1995, how many of those were still held at the end of 1995 (or had been disposed of during the year) and how many new vehicles were acquired and became part of the NPF fleet during 1995. That evidence discloses that:

(a) NPF owned the following vehicles throughout the whole of 1995:

76 b

(b) NPF also owned the following other vehicles in 1995, but disposed of them during the year:

76 c

(c) NPF also purchased the following vehicles in 1995, which showed up on the capital asset schedule as at December 1995:

76 d

In addition to the outline of evidence provided by the Fixed Assets Schedule, the commission sought other evidence located in NPF’s poor record system in order to flesh out the outline.

The Fixed Assets Schedule indicates that during 1995 NPF disposed of four Suzuki Vitara’s used by divisional offices and a Nissan Pathfinder used by the managing director. Three of these were traded in — three Mitsubishi L200 4×4 single cabin utilities.

It seems that competitive quotes were obtained from Boroko Motors, Toba Motors, PNG Motors and Ela Motors. The Toba Motors quote was accepted. Toba is a subsidiary of STC and Mr Copland, who was managing director of STC at the time, declared his interest

Toba’s quote for supplying the three L200’s was K74,514 less K19,000 on the three traded Suzuki’s. The fixed asset schedule shows that NPF allowed K83,314 (K20,000 higher).

Although the Mt Hagen Suzuki was dropped off the fixed asset schedule by December 1995, it was not actually disposed of in that year. It seems that it was involved in a fatal accident and sold by internal tender among Mt Hagen NPF staff in 1996, though it was not carried forward onto the fixed asset schedule for that year.

Some documentary detective work shows that the managing director’s Nissan Pathfinder was stolen during 1995 and K29,500 was put towards the purchase price of K41,499 on a Mitsubishi Verada from Toba Motors.

No competitive quotes were obtained for similar vehicles from other firms this time and Mr Copland did not record his conflict of interest nor is he recorded as abstaining from discussions.

Findings

(a) NPF’s records on procurement and disposal of motor vehicles were fragmented and inadequate and it is necessary to use inference and deduction in order to make findings;

(b) Three area office Suzuki Vitara’s were traded in on the purchase of three Mitsubishi L200 4X2 single cabin utilities.

  • Competitive quotes were obtained;
  • Mr Copland declared his interest and abstained from discussions; and
  • THE fixed asset schedule records the purchase price paid as K20,000 higher than the quote. This could not be followed up, as NPF could not produce the vouchers;

(c) A fourth Suzuki Vitara was damaged at Mt. Hagen. It dropped off the Fixed Asset Schedule as at December 1995, but was not carried forward onto the 1996 Assets Schedule, though it was still owned by NPF (It was sold during 1996 by internal staff tender). This procedure was improper and amounted to nepotism;

(d) The Nissan Pathfinder allocated to the managing director was stolen and replaced by a Mitsubishi Verada from Toba Motors;

  • No competitive quotes were obtained; and
  • Mr Copland did not declare his interest or abstain from discussions;

This was improper procedure and nepotistic. Mr Copland’s conduct was improper.

1996

Again, based on the evidence of the Fixed Asset Schedule:

(a) NPF owned the following vehicles throughout the whole of 1996: (See Table 1 below)

76 e

(b) NPF also owned the following (Head Office) vehicles in 1996, but disposed of them during the year:

(c) NPF also purchased the following (Head Office) Vehicles in 1996, which were recorded on the Fixed Asset Schedule at the end of 1996: (See Table 2 below)

76 f

Changes in motor vehicle policy

The board amended the Motor Vehicle Policy regarding the change over of vehicles during their 101st board meeting on June 28, 1996, and resolved to reduce the mileage limit for change over of vehicle from 80,000km to 50,000km.

The reason given to justify this change in policy was the current condition of roads.

The resolution was based on a false premise, as the previous mileage limit was 150,000km, not 80,000km. The resolution also removed the four-year rule, leaving the 50,000km mileage limit as the only criteria for replacement.

The Fixed Asset Schedule for 1996 records that NPF disposed of two Suzuki Vitara, a Mazda 626 and a Mazda Bus and purchased two Mitsubishi Double cabs, a Mitsubishi bus and 4 Mitsubishi Lancers, all from Toba Motors.

TO BE CONTINUED

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