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National Provident Fund Final Report [Part 76]

November 18, 2015 Leave a comment

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

National Provident Fund Final Report [Part 74]

November 16, 2015 1 comment

Below is the seventy-fourth 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 74th 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

Transfer of members of Corporatised State Entities and their entitlements from POSF to NPF

This is a summary of the commission’s report which deals with the transfer of employee and State contributions from POSF to NPF, following corporatisation of Post and Telecommunication (PTC) and the National Airlines Commission (NAC).

Unless otherwise stated, paragraph numbers referred to in this summary are references to paragraphs in Schedule 8.

Background

On April 17, 1996, the National Executive Council (NEC) approved the corporatisation of PTC and NAC under the Companies Act. This NEC decision resulted in the transfer of all assets, rights and liabilities from PTC to two separate entities namely Post PNG Limited and Telikom PNG Limited. The transfer from NAC was to Air Niugini Ltd.

This move also required the transfer of both the employees’ and employers’ (State’s) contributions from POSF to NPF.

The State, however, had not been paying its share of contributions to POSF on an annual basis. It had merely been paying its share on an individual basis when an employee became entitled on retirement or death, so a large accumulated amount was owing by the State to POSF as the State contribution under the POSF Act.

At the date of corporatisation on December 31, 1996/January 1, 1997, the State was unable to meets its share of contributions. Subsequently, the State entered into an agreement with NPF and POSF acknowledging its debt to NPF. The total of the State’s contribution was acknowledged as K23,531,053, a sum understated by some K944,023. The actual total should have been K24,475,075.

NPF Considers The Transfer

The board, at its 102nd board meeting on August 27, 1996, was briefed by managing director Mr Kaul on the progress of the awareness campaign by NPF for Telikom, Post PNG and Air Niugini employees. Mr Kaul also requested the board to consider providing a loan to the State to cover the transfer of the State’s share of contributions.

Delay In Transferring Of Funds From POSF To NPF

The NPF board was advised during their 103rd board meeting on October 18, 1996, of the progress of the transfers, which included some administrative problems at POSF. The delays in transferring contributors funds from POSF to NPF was attributed also to the POSF’s poor record keeping and the fact that the Post and Telecommunication (Corporatisation) Act 1996 (PT(C) Act) had not been passed.

The NPF board was advised at its 104th board meeting on December 9, 1996, that the registration of Air Niugini employees was progressing well. The minutes of this meeting also reported that the PTC Workers Union was demanding a payout of their POSF contributions rather than having the contributions transferred to NPF.

Findings

(a) The NPF board of trustees resolved to offer a loan to the State to cover the amounts owed by the State as employer of the PTC and NAC employees, as a consequence of their transfer from POSF to NPF.

This loan offer was made without seeking independent investment advice or performance of due diligence.

The NPF board of trustees acted as “banker of last resort” to facilitate the transfer of the PTC and NAC employees funds to NPF and to assist the State to extricate itself from a politically and economically difficult position.

The commission finds that the board’s conduct was improper and the trustees failed to fulfil their fiduciary duties to the NPF members; and

(b) Trustees Vele Iamo and Abel Koivi were in a conflict of interest position regarding this issue, Mr Iamo as the State’s representative and Mr Koivi as personnel manager with Air Niugini.

There is no record that the board excluded these trustees from discussions, or that the board took this fact into account. In fact, both trustees played active roles in board deliberations and active roles in their positions with DoF and Air Niugini, respectively.

Mr Iamo and Mr Koivi also did not remove themselves from this conflict of interest position.

Status Of Transfer Of Funds From POSF

On December 31, 1996, PTC and NAC ceased to operate and on January 1, 1997, the newly incorporated bodies, Telikom PNG, Post PNG and Air Niugini came into effect.

This also means that the employees of these organisations were to commence their contributions to NPF on January 1, 1997.

The arrangement to transfer funds from POSF to NPF was not clear-cut and the State was not able to pay its share of unpaid contributions owed to POSF.

105TH Board Of Trustees Meeting

At the 105th NPF board meeting held on February 27, 1997, the board was advised that the contributions due from POSF to NPF with respect to the employees of Post PNG, Telikom and Air Niugini had not been effected.

The PTC(C) Act became effective on January 21, 1997.

Contributions From Employees Of newly Incorporated Entities Commence

At the 106th board meeting on May 5, 1997, the board was advised that the transfer of funds from POSF was still outstanding but employee contributions to NPF from the three organisations had commenced.

The board also discussed and resolved to suggest to POSF that POSF should offer a commercial loan to the State to cover the State’s share of contributions.

Unions Become Agitated Over Slow Transfer Of funds

Due to the slow progress in the transfer of member’s funds from POSF, the Papua New Guinea Communications Workers Union (PNGCWU) and the National Airlines Employees Association (NAEA) wrote separately on June 13, 1997, to POSF demanding action on the transfer of the contributions within 30 days.

Ereman Ragi managing director of POSF responded to the letters explaining the reasons for the delays.

He said that it was a legal requirement for the Minister for Finance to approve the transfer amount before the transfer is effected; and that the audit of the 1996 accounts was only recently completed. This had resulted in a final interest of 15 per cent to the members being declared by the POSF board. The employees would have missed out on this 15 per cent interest if their funds were transferred before the completion of this audit. He explained that the delay was not deliberate.

NPF Board Advised Of Difficulties With The Transfer

At the 107th board meeting on July 4, 1997, the NPF board was advised of the difficulties faced in the transfer and also that POSF board will not cover the State’s share of contributions.

The board also resolved at this 107th meeting to discuss the difficulties faced in the transfer of funds to NPF with the organisations and POSF, and if that failed, then the managing director was authorised to examine the possibility of NPF itself providing a commercial loan to the State to cover the State’s share of contributions.

The NPF board was also advised that contributions from the employees of the three new entities were continuing.

NPF Assumes State Liability

At the 108th board meeting on August 22, 1997, Mr Kaul advised the board in his report that the only serious option available to address the unpaid State share of contributions to POSF was for NPF to provide a loan to the State.

He also requested the trustees to set the terms and conditions for this loan.

Noel Wright then requested, through a circular resolution dated October 23, 1997, that the board assume the State’s debt.

This was approved and subsequently ratified by the board at its 109th board meeting on October 28, 1997. Mr Wright wrote to Minister Lasaro on October 24, 1997, requesting Ministerial approval for the loan to the State.

On the same day, the Commercial Investments Division of the DoF (CID) briefed the Secretary recommending that the State enter into a deed of acknowledgement of debt with NPF acknowledging the amount owed by the State to POSF as the unpaid State share of contributions.

Ministerial Determination Under POSF Act 1993

Minister Lasaro, in a notice in the National Gazette (G87) dated October 1997, directed the transfer of funds to be effected within 21 days.

The board also ratified Mr Wright’s circular resolution on October 23, 1997.

Findings

(a) The NPF board, through a circular resolution, approved the assumption of the State’s liability. Although subsequently ratified by the board, this was an unsatisfactory manner in which to make such an important decision.

The commission finds that the board of trustees failed in their fiduciary duty to NPF members because the decision to lend funds to the State was made by trustees via circular resolution and without the benefit of appropriate investment advice;

(b) The proposed interest rate for the loan was 3 per cent less than other loans NPF had provided to the State;

(c) Trustee Isikeli Taureka opposed the loan as minuted. The board of trustees failed to properly take cognisance of his views, which the commission finds were correct;

(d) Trustee Copland’s reported comment that “whilst the risks as outlined by trustee Taureka should be considered, they need to be weighed up against the cash benefit the NPF was receiving now” was slightly misleading. There was no direct linkage between the granting of a loan to the State (to fund the State’s obligations as employer for the payment of contributions due to members leaving the POSF) and the receipt of cash from POSF, because the payment from POSF was the employees contributions (excluding the State’s contributions due) which would be paid by POSF in any event.

(e) Despite a clear conflict of interest, the State’s representative Trustee Vele Iamo was permitted to and did participate in the NPF board’s decision regarding the loan funding to the State. This practice is inconsistent with good corporate governance, which would require those in a conflict of interest position to abstain from participating in any decision-making process. The trustees failed in their fiduciary duty to exclude those in a conflict of interest position from participating in any decision-making process. Similar conflict of interest existed for Mr Koivi;

(f) Trustee Taureka’s objections were valid and seem to have been dismissed by the remaining board members. A proper consideration of the loan would have led a prudent and rational investor to consider the State’s ability to meet the financial commitments and to fully assess the risks of the investment against its returns; and

(g) Mr Wright’s brief was woefully inadequate and failed to critically and objectively inform the trustees. In particular, it failed to highlight the risk of a concentrated association with this investment as NPF was already heavily exposed to the State through its loans to Curtain Burns for the Poreporena Freeway.

Mr Wright’s comment that “we believe the yield of 12.67 per cent with sovereign risk is a good return given that no funds have been committed by NPF to achieve the yield”, was misleading in that NPF was obliged to meet any liabilities as they fell due.

The question was whether this investment (the loan to the State) was providing NPF sufficient returns for the risks of tying up these funds. NPF would be obliged to meet all liabilities associated with the acknowledgement of this debt (including the possibility of paying the employers share);

(h) It is important to note that the commission is not saying that this was an inappropriate investment, but rather that the board failed to properly assess the investment. The approval that was performed was not objective and most importantly, no professional advice was sought.

Transfer Of The PTC And NAC Employee Contributions Completed

Ereman Ragi, the managing director of POSF, wrote on November 7, 1997, to the Secretary for Finance advising him that the transfer of funds to NPF was now complete and enclosed details of the funds transferred and their calculations.

At the 110th board meeting, the NPF board was advised by management that funds had been received from POSF.

Deed Of Acknowledgment Of Debt

By the time the transfer of funds from POSFB had been finalised, the deed was not yet executed. On November 10, 1997, DoF forwarded a draft of the deed to NPF. Mr Leahy responded, on November 14, 1997 to DoF, informing Mete Kahona of NPF’s suggested changes to the deed. At the NPF board meeting on December 11, 1997, it was noted that NPF had assumed the State’s debt to POSF of K23,785,056.23 and that funds had been received from POSF for the employee’s contributions.

However, despite the fact that there was no signed deed of acknowledgement of debt, the NPF board went ahead and approved the payout of the State’s share of contributions to the employees. There was no legal basis for this resolution, which appears to have been ignored between the months of March and August 1998 during which NPF management and the board strongly resisted demands by the communications unions for a payout of the State’s share.

Findings

(a) NPF management failed in their duty by not performing a critical analysis and not providing the board with a detailed brief that would facilitate a critical assessment by the board of the investment decision where:

  • THERE was doubt as to whether the State could service the debt and meet capital repayments;
  • the security available was contingent on the successful completion of privatising State entities, something beyond the control of NPF;
  • the investment risk profile of the fund increased as this additional investment in the State brought NPF’s total exposure to the State to K83.4 million as at December 31, 1997.
  • THREE was no proper evaluation of the returns achieved compared to the risks involved. NPF management should have sought independent investment advice where these skills were not available in- house;

(b) The NPF management and the trustees failed in their duties because the transfer was not adequately planned and important issues were not settled prior to the transfer being effected;

(c) The trustees failed in their fiduciary duties to the members by failing to:;

  • perform a critical analysis and assessment of the additional loans to the State;
  • exclude Mr Iamo and Mr Koivi from discussing and participating at the board meeting despite their clear conflicts of interest;
  • have the initial approval of the loan through a proper board meeting rather than by way of a circular resolution;
  • properly plan the transfer by ensuring that all issues were settled and sorted out between the POSF, the State and the members, prior to the transfer.

(d) Trustees Mr Iamo and Mr Koivi failed in their fiduciary duty to the members by failing to disclose their conflict of interest to the NPF board and failing to abstain from discussions and involvement at the NPF board meeting, when the loan to the State was discussed;

(e) The DoF failed to perform its function responsibly because:

  • no objective and critical appraisal of the proposed loan from NPF’s perspective was performed.
  • even though it was clearly in a conflict of interest position, it failed to provide an independent review of the NPF loan proposal and proceeded to recommend to the Minister that S61 approval be granted; and.

(f) The resolution to payout the State’s share of contributions to all the transferred employees was contrary to the NPF Act and without any legal foundation.

NPF’s Accounting Of The Funds Transferred As At December 31, 1997

NPF’s end of the year trial balance showed that the full amount of employee contribution including the State’s unpaid share had been taken up in their books.

However, because the deed had not been signed, NPF was not liable to payout the State’s share to employees, even though NPF had assumed the State’s liability for their unpaid share of contributions.

TO BE CONTINUED

National Provident Fund Final Report [Part 70]

November 11, 2015 Leave a comment

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 

Introduction 

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.

Loans

The loans were as follows:

npf 70

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.

Findings 

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”).

Findings

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.

Findings 

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

National Provident Fund Final Report [Part 55]

October 21, 2015 1 comment

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:

npf 55 a

The inspectors noted that the major cause of increased costs were:

  1. In-ground works variation costs of K3,006,270.26;
  2. Recovery of delays in the Stage 1 construction program (First acceleration fee) K1.4 million;
  3. Settlement of kina devaluation claim of K3.3 million; and
  4. 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:

npf 55 b

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.

Findings

(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.

Professional Fees

Finally, the finance inspectors examined the question of the greatly increased payments for professional fees, listed as follows:  

npf 55 c

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:

npf 55 d

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:

  1. The architects fees increased from K210,350 to K454,473 (and in total from K965,400 to K1,218,523);
  2. The structural and civil engineer’s fees increased from K96,540 to K181,789 (and in total from K386,160 to K471,409); and
  3. 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.

Findings

(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 5.2.2.5).

TO BE CONTINUED

National provident Fund Final Report [Part 54]

October 20, 2015 1 comment

Below is the fifty-fourth 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 54th 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.

Some Concluding Comments

Although the planned scope of the Waigani land fraud was very serious, the actual loss suffered by NPF and its members was reduced to the loss on the valuation fees and legal costs because at the last moment, NPF withdrew from the purchase agreement. Members have mainly journalist Ruth Waram (Editor’s Note: Ms Waram was the business editor of the Post-Courier at that time) and the national press to thank for this partial reprieve.

This report demonstrates the amoral greed of the conspirators who preyed upon the NPF when its finances were in a desperately weak state and the depths of official corruption which existed in the Lands Ministry and the Land Board.

Some positive aspects which emerged from the inquiry were:

(a) THE benefit of a free and courageous press;
(b) THE effectiveness of the finance inspector’s inquiry;
(c) THE energetic and effective inquiry carried out by the NPF board of trustees after August 1999, which led to the termination of Herman Leahy and Jimmy Maladina from the NPF.

One matter of great public concern was the attempt by professional people to interfere with and undermine this commission of inquiry in order to protect Mr Maladina and his fellow conspirators. It is particularly disturbing that some of those people were lawyers, whose profession imposes upon them a duty to serve the court as their primary responsibility.

Executive Summary Schedule 6 NPF Tower Investigation Introduction 

The commission’s inquiries into the financing and construction of the NPF Tower, reported upon in Schedule 2B to the commission’s report, disclosed several matters which required further detailed investigation.

Those investigations are reported upon in Schedule 6, of which this is an executive summary.

The matters requiring further investigation, which are reported upon in Schedule 6, are:

  • THE in-ground works variation of K3,006,270.26;
  • THE resultant acceleration claim of K1.4 million;
  • THE currency fluctuation claim of K3.3 million;
  • THE second acceleration claim of K2.505 million;
  • THE professional fees of K3,568,298.84; * WHERE the K2.65 million from the arrangements made by Mr Maladina with Kumagai Gumi Company Ltd (Kumagai) went; and
  • THE proposed sale to PNG Harbours Board (PNGHB).

Overview 

In 1999, the Secretary for the Department of Finance (DoF) directed that there be an investigation by finance inspectors under Section 64 of the Public Finances (Management) Act 1995 (PF(M) Act). Among other matters, the inspectors were to investigate and report upon the NPF Tower construction.

Schedule 6 quotes the finance inspector’s report in full by way of an overview (paragraph 3.1). The lack of planning and critical financial analysis by NPF management and the board is criticised by the inspectors who blame chairman David Copland, general manager Robert Kaul and deputy managing director Noel Wright as being primarily responsible for this.

They were also primarily responsible for the failure to properly obtain the approval of the NPF board for the full amount of the preliminary expenditure that cost K1.93 million which Mr Kaul asked the Minister to approve. The trustees had approved a lesser expenditure of K1.50 million as professional fees for the feasibility studies conducted during the pre-tender stage.

The finance inspectors criticised the trustees for authorising the expenditure of such a large sum before basic calculations regarding the likely construction costs, sources and costs of funding as well as the availability of joint venture partners and estimated rental returns had been put before the board and considered. The inspectors also criticised the role of the DoF, particularly its senior officers serving as NPF trustees, for not providing a professional critical analysis of NPF’s proposals for initial expenditure, and for meekly supporting those proposals and recommending Ministerial approval. The commission fully endorses all these criticisms.

By the time the project was presented to the NPF board again in October 1996, K3 million had already been spent on pre-tender documentation (double the amount the board had approved). Management recommended that the board authorise the commencement of the project on the strength of a preliminary feasibility study by Rider Hunt and Partners (Rider Hunt). The board gave its approval on the basis that:

  • The total cost would be under K50 million;
  • The expected rate of return would be 10 per cent;
  • THE proposed residential floors would be converted into rentable office space; and
  • Funding would be partly by cash and partly from borrowings, repayable in approximately eight years.

The commission fully agrees with the inspector’s comments that an expected return of only 10 per cent on such a high-risk venture was far too low; funding partly by borrowing was unwise because of the significant cost of borrowing over eight years (The commission adds the overriding criticism that, legally, NPF lacked the power to borrow); NPF had dropped its previous requirement that joint venture partners must be found and this significantly increased NPF’s exposure to risks and cost blow-outs.

The inspectors were very critical of DoF Deputy Secretary (and NPF trustee) Vele Iamo and First Assistant Secretary, Commercial Investments Division Salamo Elema, for not recommending against this proposal.

On their recommendation, the Minister approved the construction of the Tower, at a cost not exceeding K40 million.

The accepted tender by Kumagai was for a construction cost of K45,447,388 and this required further Ministerial approval for a revised cost of K50 million on May 27, 1997. A contract was entered into with Kumagai for a construction cost of K45,447,388 which Mr Kaul signed on behalf of NPF on June 2, 1997.

This was signed prior to NPF board approval for this amount being obtained, which was not given until August 22, 1997.

The inspectors go on to describe how the concept of partial funding through members’ contributions was set aside as management negotiated a K50 million fully drawn down loan facility (FDL) with PNGBC which was later increased to K59 million.

Findings 

The irregularities in obtaining board and Ministerial approval for this facility and for the subsequent variations are described in Schedule 2B at paragraphs 4.3 and 4.8-4.10, where the commission has found that:

(a) Mr Kaul’s request to Minister Konga for NPF to borrow K50 million from PNGBC had not been considered or resolved upon by the NPF board. This amounted to improper conduct by Mr Kaul and a breach of his fiduciary duty to the members of the fund;
(b) Minister Konga was also guilty of improper conduct in approving Mr Kaul’s request without sighting an NPF board resolution and without seeking advice from the DoF.
(c) Mr Wright’s application to PNGBC for loan facility had no authority from the NPF board;
(d) PNGBC was negligent in not requesting a copy of the NPF board approval and the Minister’s approval before approving the loan facility of K50 million. PNGBC also failed to perform due diligence in relation to NPF’s power to borrow;
(e) PNGBC’s analysis of the loan application was flawed;
(f) Mr Wright’s conduct in accepting the loan facility on behalf of the NPF board and authorising payment of the K375,000 establishment fee without consulting the board, was improper;
(g) The conduct of Mr Kaul and Mr Frank in applying the NPF seal to and executing the loan facility agreement without the authority of the NPF board, was improper conduct;
(h) The improper conduct and breach of duty by Mr Kaul and Mr Wright leave them open to personal liability for loss suffered by members of NPF and, in the circumstances, it is unlikely they could defend themselves against an action by claiming to have “acted in good faith”.

The inspector’s report goes on to describe how the cost of the project increased because of a successful kina fluctuation claim by Kumagai and how Mr Fabila, the new general manager of NPF, used this to justify an increase in the FDL.

They point out that Ministerial approval was for an increase to K55 million but that NPF exceeded this limit by obtaining from PNGBC, an increase to K59 million of which K58,122,757 had been drawn down by November 30, 1999.

The inspector’s report shows that when construction was completed in October 1999, the total costs incurred by NPF to develop and build the Tower amounted to K72,890,199.73 broken up as follows:

npf 54 image c

The inspectors comments on this table were:

“It will be noted that since the inception of the project in 1994 and up to September 1999, the expected overall cost of the development of the NPF Tower had increased tremendously, by as much as 2.43 times – from K30.0 million in August 1994; to K39.30 million in December 1995; to K48.14 million in September 1996; to K54.80 million in September 1997; to K58.03 million in January 1998; to K59.68 million in March 1998; and to K72.89 million (see Table 1 above) as at October 1999. This investigation notes that while the maximum development costs approved by the Minister was K50 million, actual development cost incurred amounted to almost K60 million. These exorbitant costs incurred in the project with no definite sign of profitability reflect the financial mismanagement and inefficiency by the involved NPF management and board.”

TO BE CONTINUED

National Provident Fund Final Report [Part 50]

October 14, 2015 1 comment

Below is the fiftieth 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 50th 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 4N Continued 

Preparation Of ACOM contract Involves Protracted Negotiations 

In his capacity as executive director of ACOM, Haro Mekere was in regular contact with Odata, which was calling for the release of “mobilisation costs” from ACOM even before there was a signed contract between ACOM and Odata.

Mr Mekere had been promised a trip to India paid by Odata to visit the company that would manufacture the mill. Mr Mekere put pressure on Herman Leahy, the NPF legal counsel, to draw up a simple turn key contract between ACOM and Odata but Mr Leahy insisted on briefing this out to Carter Newell lawyers to draw up a far more sophisticated and all encompassing document.

Mr Mekere then put forward a draft contract, which had been prepared by Odata for consideration. At Mr Copland’s insistence, Mr Mekere obtained a breakdown of Odata’s mobilisation costs in the form of an invoice.

Payments To Odata Through NPF’s Off-shore Account With WILSONS HTM In Breach Of Foreign Exchange Regulations 

The first payment of $A40,282.65 was paid on June 1, 1998 by using NPF’s account with its share brokers Wilson HTM to avoid the requirement for foreign exchange approval by BPNG. Mr Copland apparently authorised the payment, which was beyond his authority and Mr Wright gave instructions to Wilson HTM for payment from that account. Mr Wright and Mr Copland and also Wilson HTM should be referred to the Controller of Foreign Exchange to consider action against them for breach of BPNG foreign exchange regulations.

Mr Leahy refused to be rushed into the preparation of the contract and insisted that NPF’s initial equity contribution should be made subject to approval by the Minister for Finance, as it was now in excess of K500,000.

The commission finds that failure to seek and obtain Ministerial approval for the initial equity contributions was a breach by the board of trustees of section 61(2) of the PF(M) Act.

Misrepresenation To NPF Board Lead To Signing Of Contract Between ACOM And Odata Committing ACOM To Pay K1,500,000 To Odata 

Mr Wright also misled the board in November 1998, by setting a target date of early 1999 for pouring the first copra oil. At that time, there was no contract with Odata, no sub-contract for manufacturing the mill and no agreed funding in place.

By the beginning of November 1998, the contract was still not finalised (and negotiations were still continuing) and ACOM had not yet succeeded in obtaining a license from the CMB to export copra oil. On November 12, 1998, Mr Mekere advised the ACOM board that he held a completed contract document executed by Odata and sought approval for the chairman or a delegate to sign on behalf of ACOM.

Mr Mekere pointed out that the export licence had still not been obtained and that the contract should be made conditional upon the grant of that licence.

He also pointed out that ACOM had not yet obtained a bank loan to enable it to fund the project and meet the proposed commitments to Odata. He failed to recommend that the contract also be made subject to ACOM obtaining finance.

When the contract was signed by Mr Fabila on behalf of ACOM on about November 23, 1998, ACOM thereby became liable to pay Odata $US25,000 immediately and to find $US1,525,000 in the longer term. NPF met the first payment by cheque for K48,623.02 payable to Odata on November 25, 1998.

Breach Of Fiduciary Duty By Trustees And Mr Fabila and Mr Mekere 

It is likely that Mr Fabila and Mr Mekere, who witnessed the contract, are personally liable for losses suffered by NPF under this contract as it is doubtful they could claim “good faith” as they were clearly aware of the financial obligations being undertaken and of the lack of funds to meet it.

Likewise, all trustees in office at the time were in breach of their fiduciary duty by authorising management to execute this contract.

The trustees also face personal liability for all losses incurred by NPF as a direct result of entering into this contract.

Further Payments By NPF On Behalf Of ACOM To Odata Without NPF Board Approval 

On December 10, 1998, Mr Wright authorised the payment of a further K302,393 to Odata with no NPF board approval and well in excess of his financial delegation.

Mr Wright was in breach of his duty to the NPF board and could be personally liable for this amount. It brought NPF’s payments to Odata to K417,500 at that time. The NPF trustees may also be personally liable for not having controlled this unauthorised expenditure by Mr Wright.

On January 18, 1999, Odata claimed a further $US290,000, saying “we have already started implementing the project ahead of schedule”.

This amount was paid without question and with no project engineer in place to verify the work done.

There was no authority from the NPF board to advance this sum as “bridging finance” pending ACOM obtaining bank financing. NPF management and Mr Fabila and Mr Mekere were in breach of their duty and may be personally liable.

They must have known that the requisite NPF approval had not been given and they would not succeed in a “good faith” defence.

Similarly, the trustees failed in their fiduciary duty to the members of the fund to exercise control over management and this may expose each trustee to personal liability for this loss.

It is important to note that in January 1999, Mr Wright was forced to resign from the NPF and ACOM, amidst mounting criticism of his conduct as finance and investment manager for NPF. His position was filled temporarily by the unqualified and inexperienced Haro Mekere.

In his report to the ACOM board dated January 18, 1999, Mr Mekere understated the amount which had been paid to Odata (K417,000) by claiming only K380,000 had been paid.

On January 29, 1999, there was a further request from Odata, this time for K60,000 to be paid into the personal account of Odata director, Krishna Prasaad.

The amount was paid, without question, into Mr Prasaad’s personal account.

External funding: Bank Loan 

From February 1999, Mr Mekere sought the assistance of Deloittes to obtain a loan facility for ACOM, preferably from the Bank South Pacific (BSP).

Without any authority from the NPF board, he discussed a guarantee and the possibility of NPF providing security for the proposed facility.

Bridging Finance From NPF 

In April 1999, Odata demanded a further drawdown and threatened legal action.

In his April report to the NPF board, Mr Mekere sought board approval to advance between $US50,000 to $US100,000 by way of bridging finance for Odata to proceed with site preparation.

Request To PNGBC 

On April 15, Mr Fabila sought approval from PNGBC to advance K2.750 million to ACOM at ILR +2 per cent.

This was a time of extreme financial crisis for NPF itself, which was unable to meet its own massive borrower’s commitments to ANZ and PNGBC.

Mr Fabila’s uncritical support for this proposal was a gross breach of his fiduciary duties to the members of the fund.

Suspicions About Mr Mekere’s Motives In Supporting Odata

Mr Mekere’s continued active involvement to obtain funding for Odata is also highly questionable. At this time, it was not known that his own wife had been appointed to the board of the recently incorporated Odata (PNG) Ltd. The explanations given for this appointment are most unsatisfactory and Mr Mekere’s failure to disclose her appointment to either ACOM or NPF was improper conduct.

At this stage, Mr Mekere had become aware that Deloittes had revised cash flow projections for ACOM, which showed a clear cash deficit in the first two years and an overall cash deficit after six years. Mr Mekere’s failure to advise the NPF board of these unfavourable projections was another gross failure of his duty to give professional objective advice to the board. It again raises serious questions about Mr Mekere’s motivation.

NPF Board Guarantees BSP Loan Facility Of K3,150,000 T0 ACOM

On April 30, 1999, at a special meeting, the NPF board, without the benefit of any independent expert advice or professional analysis of the viability of ACOM and the copra oil process, resolved to guarantee a loan facility of K3,150,000 to be provided by BSP.

By passing this resolution at a time when NPF was in financial crisis, the board of trustees were in serious breach of their fiduciary duty to the members of the NPF.

At this time, the trustees had been well briefed about NPF’s acute cash flow problem and financial crisis.

The trustees were aware of the endeavours being made to sell off NPF’s investments to enable the repayment of the ANZ debt and of the attempts to reduce the burden of its crippling PNGBC loan facility.

The trustees must be severely criticised for following with such docility, the unsupported and fiscally irresponsible recommendation from Mr Fabila and Mr Mekere, to guarantee this BSP facility to ACOM, without seeking any independent investment advice.

The NPF sought Ministerial approval for this guarantee but it was “put on hold” by Secretary Tarata of the Department of Treasury.

Meanwhile, NPF paid an additional K157,977 to Odata on June 14, 1999, on the authority of Mr Fabila, without any board approval. Again, Mr Fabila faces personal liability for this breach of his fiduciary duty to safeguard the member’s funds. This brought the amount paid by NPF to Odata to K647,000.

Continuing Negotiations For BSP Loan Facility Without NPF Board Authority 

Throughout June and July 1999, Mr Mekere was involved in negotiations with BSP regarding the security that NPF would provide for the ACOM loan facility.

These discussions had no board authority whatsoever and were at odds with the endeavours of Rod Mitchell and PwC to stabilise NPF’s haemorrhaging debt problems.

The conditions imposed by the NPF board, as a prerequisite for providing bridging finance to ACOM pending finalisation of its proposed BSP loan facility, had not been met but Odata was continuing to ask for on-going funding.

Further Payments By NPF To Odata To Fund Construction Of The Mill 

At the NPF board meeting of July 29, 1999, the board approved payment of $US78,000 for Odata and the K31,500 loan processing fee for BSP. These amounts totalling K214,303, were paid by cheque to Odata on August 3, 1999.

ACOM Binds Itself In A Management Contract With Odata 

While the scramble to fund construction continued, with no project engineer to give independent verification of the funds being claimed by Odata, ACOM proceeded to bind itself into contractual arrangements with Odata for management of the project and marketing of the product.

At a special NPF board meeting on August 15, 1999, the ACOM management was authorised to “negotiate and finalise the contracts” for circulation to the board before signing.

This resolution was passed despite discussion among the trustees, which recognised the lack of expertise in either NPF or ACOM, to ensure the best price would be obtained.

This was another serious failure of the NPF trustee’s fiduciary duty to members of the fund and indicates their lack of awareness about the fiduciary duties they owed to the members.

By August 10, 1999, Mr Mitchell was expressing concerns about the project and successfully arranged for BSP to apply a strict deadline of August 31, 1999, for ACOM to satisfy the required conditions for granting the facility. The deadline was not met, although Mr Mekere attempted to obtain the loan facility, offering further securities to be provided by NPF, without board authorisation.

The documents in evidence indicate an increasing sense of urgency amounting almost to desperation, characterising Mr Mekere’s conduct.

BSP Loan Facility Negotiations Discontinued 

On October 28, 1999 Mr Mekere gave in, and on instructions, notified BSP that ACOM was not able to proceed with the loan facility.

NPF Withdraws Construction And Odata Sues ACOM 

On November 3, 1999, Mr Mekere formally advised the directors of ACOM that the NPF board “withdrew its commitment to construct the proposed 30 tonne per day copra processing facility . . .”. The letter also alleged that Odata was in breach of its contractual obligations to ACOM and that if this was redressed “NPF may revisit this investment in six months time”.

Odata subsequently claimed $US612,000 from ACOM for costs incurred under the contract. This was not paid and court proceedings have been instituted.

Findings In Accordance With Terms Of Reference 

The commissions findings are set out in the text of the report on Ambusa and at Paragraph 11 of that report. In summary:

(a) Mr Wright, Mr Mekere and Mr Fabila were in breach of their duty to the NPF board by putting forward a recommendation for the board to invest as a joint venture partner with Ambusa Pty Ltd, without carrying out any due diligence on Ambusa or Odata or the personalities involved and without instigating an independent expert analysis of the business proposal put forward by Ambusa, Odata and Mr Valu, Mr Ryan and Mr Gavuli;
(b) The NPF trustees failed their fiduciary duty by approving this investment in principle in December 1997 and then approving its implementation and investment of K400,000 in February 1998; and
(c) Both the management and the trustees continued to breach their duty to the NPF members throughout 1998 and 1999 by continuing to meet progress claims by Odata prior to finalising the turnkey construction contract and without appointing a project engineer to verify the claim for payment.

On several occasions, management authorised these payment to Odata without NPF board approval, knowledge or authority.

The NPF board of trustees accepted management’s recommendation that ACOM should execute the contract with Odata knowing that it would obligate ACOM to pay $US25,000 immediately and to provide long term funding of more than K3 million, with no protective “subject to finance” clause in the contract.

As a result of this foolish and poorly managed investment, NPF suffered actual loss in terms of payments to Odata, board fees and expenses and legal fees of more than K1.1 million.

NPF also faces potential liability to Odata in the outstanding court proceedings.

The trustees in office during this period were Brown Bai, Henry Fabila, Michael Gwaibo, John Paska, Abel Koivi, Vele Iamo and Tau Nana, all of whom were in breach of their fiduciary duty to the members of the fund.

All face potential personal liability for the losses incurred by NPF because of their serious failure to seek even basic expert advice and their failure to reprimand or control management for making repeated unauthorised payments.

The officers involved were Mr Fabila, who, as managing director, had both a common law duty to the board and a fiduciary duty to the members.

The other officers involved were Mr Wright and Mr Mekere.

These officers face personal liability for losses suffered by NPF generally by entering into the investment on the basis of their woefully inadequate investment advice and for the various payments made to Odata on their unauthorised direction. It is unlikely they would succeed in a defence of “acting in good faith”.

Executive Summary Schedule 4O Plantations and Agriculture Investments 

Introduction 

This introduction covers NPF’s investments in New Guinea Plantation Holdings Limited (NGPHL), New Guinea Plantations Limited (NGPL) Walmetke Ltd (Walmetke) and New Guinea Islands Produce Ltd (NGIPL).

These investments were made well before the period covered by this commission of inquiry. Very few records are easily available about the initial investments, which is outside the time frame of the commission’s terms of references.

The early history of this investment has been put together on the basis of available documents and from evidence given by Mr Robert Bolling (Transcript pp.5763-8) who was previously the finance manager of the company Kina Gilbanks.

TO BE CONTINUED

National Provident Fund Final Report [Part 49]

October 13, 2015 1 comment

Below is the forty-ninth 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 49th 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 4L Continued 

The Crocodile board allowed Mr Jewiss to hire staff and enter into construction and other contracts without being presented with a satisfactory business plan, detailed costing, management structure or an agreed source of funding.

Even worse, Crocodile had not secured the required registration, which would have enabled it to open a bank account and carry on business in Indonesia; nor had it obtained secure title to the land on which the hotel would be constructed.

Mr Jewiss and his key expatriate staff had not acquired the appropriate visas to permit them to work in Indonesia.

This failure required them to fly out of Indonesia and return every 60 days at great cost. As Crocodile had not obtained its PMA status, Mr Jewiss, assisted by Mr Wright, used a number of methods to transfer funds to Indonesia including:

  1. Carrying foreign currency travellers cheques to Indonesia (Exhibit CC354, CC358 Transcript p. 6155);
  2. Personal credit cards and bank accounts (Exhibit CC307, CC309, CC310 Transcript pp. 6270);
  3. Mr Goodfellow’s bank account (Exhibit CC367, CC338, CC345, CC 360-362, CC367 – Transcript p. 6150);
  4. DGJ trust account (Exhibit CC270-278, Transcript pp. 6145-6147);
  5. NPF’s Wilson HTM trading account (Exhibit CC322); and
  6. PT Cipta Boga Baya (Exhibit CC383A) Crocodile entered an agreement to use this company’s bank account and work under its (legal) umbrella.

These devices were not legal, secure or transparent. The use of NPF’s offshore account with Wilson HTM as a vehicle to send funds to Indonesia was particularly contentious. Approximately $US600,000 was sent this way in breach of PNG foreign currency regulations and without the knowledge of the NPF board.

The Crocodile board made several attempts to impose cost controls on Mr Jewiss and to persuade him to provide proper financial reporting. These attempts failed.

With Mr Copland as chairman of the Crocodile board and with trustees Tau Nana and Henry Leonard and Mr Wright and Mr Kaul as directors, there should have been ample feed-back to the NPF board regarding the Maluk Bay affairs but this was not the case.

The willingness of NPF trustees to support Mr Jewiss’s wild and ill thought out proposals without insisting upon a professional feasibility study, was a failure of the trustees’ fiduciary duty to the NPF members.

Concluding Comments On Crocodile

During the period under review, from January 1997 to December 1999, NPF expended approximately K7.4 million by way of loan and equity investments in support of Crocodile for no return.

The commission has not pursued this matter after December 1999 but has been informed by the current NPF management that Crocodile has redirected its business operations to PNG, that management is vastly improved and that proper cost controls and reporting procedures are in place.

The commission has been told that there are signs of profitability and that once this trend is firmly established the intention is to sell off Crocodile.

Executive Summary Schedule 4M Amalpak Limited

Forward

This is a summary of the report on Amalpak Limited (Schedule 4M) which is set out in Schedule 4M of the commissions report. Unless stated otherwise, paragraph numbers referred to in this report are references to paragraphs in Schedule 4M.

Original Investment in Amalpak Ltd

NPF’s first invested in Amalpak Ltd, then named Amalgamated Packaging Pty Ltd, by purchasing 30 per cent of its shares in August 1990, for a price of K2,268,000.

The purchase agreement contained a performance warranty, which was not honoured by the company.

The shortfall was quantified at K1.033 million which was repaid to NPF meaning NPF’s net purchase price was K1.235 million.

Other Shareholders 

The other shareholders were the Investment Corporation of PNG (30 per cent) and VisyBoard, the active foreign manager (60 per cent).

In October 1997, the company’s name was changed to Amalpak Limited (Amalpak).

Despite problems caused mainly by significant devaluation of the kina, which affected the cost of its raw materials, and other economic circumstances, the company remained moderately profitable for NPF, paying a total of K4000 per annum as directors’ fees for NPF’s two directors and reasonable dividends throughout the period under review.

Amalpak’s managing director reported monthly and it held directors meetings four times a year. Although NPF had two directors on the board, NPF management’s reports to NPF were limited to summaries of Amalpak management reports and the Amalpak, annual report. No discussions by NPF trustees were recorded in board minutes.

Value Of NPF’s Equity 

NPF’s equity in Amalpak was valued as follows:

npf 49 b

Findings 

NPF’s investment in Amalpak is an illustration of a prudent passive investment in a sound well-managed commercial enterprise. The company has regularly reported and regularly paid high dividends with no problems. Although overall profits were reduced owing to the devaluation of the kina, it has remained a moderately profitable company paying an average return of 16 per cent on the total cost of investment.

During the five-year period under review by the commission, the returns on NPF’s investment were:

npf 49 c

The history of this investment is in pleasing contrast to NPF’s loss making investments in high risk PNG resource stock and the other investments in which NPF aggressively sought to pursue a much more active role. No borrowed funds were used in the Amalpak investment.

In view of the uncontroversial nature of this investment from quarter to quarter, the quality of NPF management’s reporting to the NPF board was adequate, though it merely summarised the regular reports coming from Amalpak itself. In latter times the timeliness of NPF management’s reporting became a little bit confused.

Executive Summary Schedule 4N 

Investment in Ambusa Copra Oil Mill Ltd – Proposal On Behalf Of Ambusa Pty Ltd For NPF To Fund Ambusa Copra Oil Mill 

During the second half of 1996, Jai Ryan and Stanis Valu who were connected with Ulamona Sawmill in West New Britain Province, approached Mr Wright with a business proposal to establish a copra oil mill at Ambusa, WNBP.

Mr Valu claimed to represent a landowner group, which had been incorporated as Ambusa Pty Ltd. They had already been introduced by Mr Ryan to Odata Ltd of Canada, to supply a Copra Oil Mill through contacts in India, to construct the mill and then to manage it and market the product.

The group had unsuccessfully sought funding elsewhere and wished to apply to NPF to join with it as a joint venture investment. They provided Mr Wright with a detailed proposal/business plan which had been drawn up with the help of Odata.

Mr Mekere Prepares Proposal Utilising Odata’s Business Plan Without Any Due Diligence 

Mr Wright asked his junior, Haro Mekere, to examine the proposal and to work with Mr Valu and Mr Ryan to develop it into a draft proposal in a format suitable to place before the NPF board.

Mr Mekere told the commission that he summarised the 40-page business plan into a few pages accepting the claims and assumptions at face value.

The only due diligence performed was to talk with unspecified officers in the Copra Marketing Board (CMB), the Bank of Papua New Guinea (BPNG) and the Bureau of Statistics. In essence, a new joint venture company would be incorporated consisting of NPF and Ambusa Pty Ltd who would each hold 50 per cent of the shares.

Ambusa Pty Ltd would contribute the former Ambusa Copra plantations, said to have been valued recently at K400,000, as its contribution to the joint venture. NPF would match this by contributing K400,000 which would be used for start up costs.

The new company, Ambusa Copra Oil Mill Ltd (ACOM) would enter a “turnkey contract” with Odata to build and manage the mill and to market the product. It would seek and obtain external funding for this purpose by way of bank loan.

NPF Board Accepts Proposal Involving Turnkey Contract Between Ambusa Copra Oil Mill Ltd And Odata 

With virtually no due diligence, this proposal was put to and accepted in principle by the NPF board at the 110th meeting on December 11, 1997.

Management’s failure to perform due diligence and to carry out a professional analysis of the business plan, meant that the trustees did not have an adequate basis upon which to make a decision as to whether or not to invest in the project.

This was a failure by Mr Wright and Mr Mekere to perform their duty to provide professional investment advice to the board.

The trustees’ acceptance of management’s recommendation without insisting upon expert independent advice was a failure of their fiduciary duty to the members of the Fund.

Defects In NPF’s Due Diligence 

In evidence, Mr Mekere stated:

(a) The idea for the ACOM originated with Stanis Valu, and Clebus Gavuli, local landowners and owners of Ulamona Sawmill Pty Ltd and Jay Ryan, the manager of Ulamona Sawmill. Mr Ryan secured the participation of Odata Ltd (Canada) as project manager and they developed a business proposal for the purpose of obtaining funding;

(b) After seeking funding from various sources, they approached Mr Wright of NPF who delegated to Mr Mekere the task of preparing the project in a form suitable as a proposal for the NPF board;

(c) Mr Mekere said that his due diligence consisted of having some discussions with Jay Ryan, Stanis Valu, Clebus Gavuli and officers of the CMB and the BPNG. Otherwise, he merely summarised the business proposal, which had been presented to him. He then gave the proposal, in the NPF board format, to Mr Wright who placed it before the board;

(d) Mr Mekere admitted the following defects in the due diligence process:

  • No independent evaluation of the business proposal was done;
  • No analysis was done of the (doubtful) assumption that it would have tax exemption for five years as it was a pioneer industry;
  • No consideration was given as to whether NPF had the power to grant bridging finance;
  • He was not aware of the existence of investment guidelines so gave them no consideration;
  • He did not follow up on perceived factual errors in the proposal;
  • He accepted the claim that it was a simple process but had never visited a copra mill;
  • He did not check on the bona fides or the experience of Odata;
  • He had no idea of the techniques used to load copra oil and did not inquire;
  • He did not check on availability of monthly shipments;
  • He did not consider bulk storage facilities to store oil between shipments;
  • He claimed he intended to do a more thorough evaluation after the board had approved the project – but did not do so;
  • He did not verify the (false) claim that licensing requirements had already been approved;
  • No verification was done of the claim that K550,000 had already been spent on feasibility studies and initial costs;
  • He did not complete any engineering evaluation of equipment proposed to be purchased;
  • No check was done on Odata’s marketing experience or on the buyer allegedly under contract to Odata; and
  • No verification was done of the (false) statement that the plantation to be contributed by Ambusa as its 50 per cent equity in the joint venture had really been valued at K400,000.

(e) The due diligence by Mr Wright and Mr Mekere was woefully deficient. Because of his immaturity, the cause of this in Mr Mekere’s case may be attributable to inexperience and naivety. The commission takes a harsher view of Mr Wright, who was a qualified accountant and who was in charge of supervising Mr Mekere. The commission finds that his failure to ensure that even basic and simple checks were made to verify the claims in Ambusa’s business proposal, should be attributed to reckless indifference about his duty to the NPF;

(f) Because of their breach of duty to the NPF board, Mr Wright and Mr Mekere may be personally liable for any loss incurred by NPF resulting from their failure to exercise reasonable care. It is unlikely that they could rely on a defence of “acting in good faith”, particularly not Mr Wright; and

(g) The trustees who attended the 110th NPF board meeting and who voted in favour of approving the project in principle, failed in their fiduciary duty to the members of the fund by not insisting that proper due diligence was carried out, including an independent professional evaluation of the proposal before approving it in principle.

After the NPF board approved the project in principle in December 1997, Mr Mekere conducted a site visit.

Having no expertise in the copra oil industry, he made a woefully inadequate assessment of the plantation.

NPF Board Resolves To Participate In ACOM

At the 111th NPF board meeting on February 20, 1998, the board resolved to invest in the project as recommended.

Mr Mekere then arranged for a shelf company to be purchased which was registered as “Ambusa Copra Oil Mill Ltd” with David Copland as chairman, Robert Kaul as director, Haro Mekere as executive director and two nominees from Ambusa.

Mr Mekere then became the main driving force pushing the project along.

TO BE CONTINUED

National Provident Fund Final Report [Part 48]

October 12, 2015 1 comment

Below we continue the re-publication 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.

The Inquiry findings provide an unprecedented insight into the methods that are still being used today by the mobocracy that is routinely plundering our government finances. The inquiry uncovered for the first time how the Waigani mafia organise complex frauds using mate-networks, shelf companies, proxy shareholders, and a willing fraternity of lawyers, accountants, bankers and other expert professionals.

The Commission findings also reveal the one grand truth at the centre of all the corruption in Papua New Guinea: it is pure theft, no different from an ordinary bank robbery. However, if you steal the money by setting up, for instance, a bogus land transaction, the crude nature of the criminal enterprise is disguised to all but forensic experts, making it seem the perfect crime! 

NPF Final Report

This is the 48th 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 4L Continued 

4. APPROVALS had to be in place for the construction;
5. CROCODILE would accept a five per cent share in the project if MBI also injected capital into the project;
6. CROCODILE would provide loan finance provided it was given preferential repayment from the profits of the project.

These conditions were never fulfilled and by December 1997 they were completely overlooked by management and the boards of both NPF and Crocodile.

At the December 10, 1997, Crocodile Board meeting, the directors accepted a woefully inadequate feasibility study presented by Mr Jewiss and failed to have it reviewed professionally.

Then, without observing that the conditions previously imposed had not been met, the Crocodile Board approved participation in the project subject only to “satisfactory financial arrangements”.

At the NPF Board meeting on December 11, the board endorsed the decision of the Crocodile Board to proceed with the project, giving no thought to the financial arrangements.

In March 1998, with no source of funding in place, with no title to the land where the hotel was to be built and without any authority to carry on business in Indonesia, Crocodile signed a joint venture agreement with MBI. Mr Jewiss accepted the help of Nicolo Lolong, a former Indonesian Government official, to help guide Crocodile through the legal and bureaucratic requirements.

The arrangements with Mr Lolong were never properly finalised and this led to serious legal complications as Mr Lolong later refused to hand over land titles to Crocodile until his claim was paid.

South East Asian Financial Crisis

At this stage, in March 1998, the catastrophic impact of the South East Asian financial crisis on the Indonesian economy, currency and inflation was daily headline news. Neither Mr Jewiss, the Crocodile Board, the NPF management nor the NPF Trustees paused to critically assess the effect this crisis would have on the Maluk Bay investment. All parties were in gross breach of duty by this failure.

The Joint Venture 

The joint venture agreement was between Crocodile, MBI and MSP (a local company which would hold the land once it was acquired). A joint venture company was to be established as a foreign investment company under the laws of Indonesia. The partners investment in the company would be $US1.6 million consisting of $US1.12 million loan finance and $US480,000 in share capital to be contributed as follows:-

Crocodile – $US240,000
MBI – $US230,000
MSP – $US9,000.

The joint venture agreement also provided that Crocodile would provide a loan for working capital but did not specify how much (paragraph 7.5.4).

Crocodile immediately employed Mr Wilson and Mr Goodfellow (shareholders in MBI) to manage the construction of the hotel “in-house”, remunerated at $US12,000 per month. The Crocodile Board was not consulted about these critical decisions.

Findings 

(a) MR Jewiss failed to clarify Mr Lolong’s role and to enter into clear formal contractual relations with him;
(b) MR Jewiss failed to properly advise the Crocodile Board about the implications of the spreading Indonesian financial crisis and the Board of Crocodile was remiss in not seeking advice about the matter;
(c) THE joint venture agreement between Crocodile, MSP and MBI failed to specify the amount of the loan to be supplied by Crocodile;
(d) THE engagement of Mr Goodfellow and Mr Wilson to manage constructions at Maluk Bay in March 1998 was premature, as approval of the project was still subject to finance. The appointment was also made without Crocodile Board approval. As both men were friends of Mr Jewiss and shareholders in MBI, their appointment raises concerns of nepotism and impropriety;
(e) MR Jewiss and Mr Wright acted improperly in arranging finance for the Maluk Bay project through NPF without obtaining the formal approval of either the Crocodile or NPF Boards;
(f) THE methods of providing finance for Crocodile adopted by Mr Jewiss and Wright were unconventional, improper and secretive. This resulted in the NPF and the Crocodile boards losing control over Crocodile’s operations;
(g) THE use of NPF’s trust account with Wilson HTM was in breach of PNG foreign exchange regulations for which Mr Wright, Mr Jewiss and Mr Wilson HTM are personally liable;
(h) MR Jewiss’ denial of having knowledge of this arrangement at transcript p. 5566 was false and he should be referred to the Police Commissioner for prosecution.

In May 1998, Mr Fabila replaced Mr Kaul as general manager of NPF and he became a director on the Crocodile Board. Unfortunately, this did not strengthen the control over the management of Crocodile.

In June 1998, Mr Wilson, who was supervising the very early stages of the construction of the hotel, prematurely appointed a Ken Williams as general manager of the hotel, ostensibly to run a three month staff training program before the commencement of hotel operations (paragraph 7.6.5).

To satisfy the growing need for funds, Mr Jewiss and Mr Kaul increased the use of the Wilson HTM account, through which approximately $US600,000 of NPF funds was channelled to Indonesia, without the NPF Board’s knowledge or authority. This of course was illegal.

There was also at least one attempt to transfer funds by way of a false invoice prepared by Patrick Goodfellow at Mr Wright’s request – see paragraph 7.6.3 of the report (This invoice was apparently not used and the commission does not know if there were others).

With no financing plan in place, Crocodile management kept up the expenditure in the belief that NPF would foot the bills and that Noel Wright would find ways to achieve this. This process led directly to the loss of $US160,000 that was paid as a deposit on kitchen equipment when there were no funds to pay the balance owing (see paragraph 7.7.2).

Findings 

(a) MR Wright’s extensive use of NPF’s Wilson HTM’s money market account to transfer approximately $US600,000 to the PT Cipta Boga Baya bank account at Mataram, was illegal and completely without the NPF Board’s authority. It resulted in the boards of both the NPF and Crocodile being by-passed and indicates that both boards had lost financial control of their respective management teams;
(b) IT is clear that Mr Jewiss was party to this method of funding Crocodile;
(c) IN view of Mr Copland’s close connections with Mr Wright, as he was chairman of both boards, and as the evidence is that he kept himself informed of major management issues, the commission finds that Mr Copland must also have been aware that finance was being provided to Crocodile by this extra legal means, without board approval;
(d) CROCODILE suffered significant loss when large deposits were paid to purchase equipment when there were no funds to pay the balance of purchase moneys;
(e) NPF’s system of financial control was weak in that it enabled Mr Wright to misuse NPF’s account with Wilson HTM undiscovered, as there were no checks or balances in place.

Not surprisingly, these weak financial controls and unorthodox and secretive methods of providing funds, led to a budget blow out from the approved $US1.6 million to $US4.178 million.

At Mr Copland’s direction, Mr Wright visited Maluk Bay and performed an audit. His audit report was seriously inadequate and failed to highlight the following critical issues to the board, including:-

  • AN assessment of the local economy and the impact of the economic crisis;
  • DETAILS of the contractual arrangements;
  • THERE was no audit of the financial records;
  • THERE was no analysis of the project costs to date, including actual versus budget figures;
  • THERE was no management performance assessment;
  • THERE was no assessment of the business risks and
  • THERE was no update on the land title issue. (Paragraph 7.7.3)

In 1999, the NPF management and Trustees finally began tackling NPF’s financial crisis and enlisted the help of PwC. This exposed the fact that NPF management had been funding the Maluk Bay project by various means without the board’s knowledge.

Mr Jewiss was called before the NPF special board meeting on February 8, 1999. It was resolved to cease funding the Maluk Bay project and to review critical matters like land title, the joint venture agreements, using the Wilson HTM account to pay invoices and to require evidence of the $US50,000 equity contribution from the joint venture partners.

Unfortunately, the shut down of funding was so complete that a care and maintenance budget to protect NPF’s physical assets (including the partially completed hotel), was not provided. This resulted in damage and further loss.

Mr Maladina 

By this time, Mr Maladina was chairman of both the NPF and Crocodile Boards and his dubious influence quickly began to manifest.

In April, Mr Maladina unilaterally appointed a friend, Peter Petroulas, (of “Precise Strategies”) to review the Maluk Bay project.

During the review, Mr Petroulas began setting a scene to make continued NPF funding contingent on buying MBI out of the joint venture by buying 60 per cent of MBI shares for the low sum of $US1,000, claiming to be acting for “a powerful lobby group” close to the NPF.

Also in April, Mr Maladina, unilaterally and without the authority of the Crocodile Board, negotiated a new contract appointing his friend, Mr Barredo, as managing director of Crocodile on very favourable terms, including a grant of 150,000 Crocodile shares each year. The contract was approved by the NPF board but, to be valid, it required a resolution from the Crocodile Board. Mr Maladina, however, signed the contract himself, as chairman of Crocodile and illegally affixed the company seal to it.

Meanwhile, MBI’s interests were being looked after by its prominent shareholder and Crocodile employee, Keith Wilson. Completely without legal authority (but purporting to use a lapsed invalid power of attorney which had been granted for another purpose), Mr Wilson signed, on behalf of Crocodile, a variation to the joint venture agreement, which purported to commit Crocodile to provide all funding in the form of a loan.

The variation, which was very favourable to MBI, also provided that Crocodile would reimburse all shareholders for contributions to the purchase of land. This purported variation to the agreement is invalid (details in paragraph 7.9.3).

Findings 

(a) WHEN rejecting requests for further funding for Maluk Bay, the NPF Board was remiss in not providing even a care and maintenance budget to protect its investment;
(b) MR Maladina’s unilateral decision to appoint his friend, Peter Petroulas, to review the Maluk Bay project was improper, beyond his authority and amounted to nepotism;
(c) MR Jewiss falsely informed Mr MacKenzie of MBI that Crocodile intended to fund the entire project knowing that this was contrary to the agreement and that the Crocodile Board had not resolved to do so;
(d) MR Wilson improperly purported to sign an amendment to the joint venture agreement, favouring MBI, at the expense of Crocodile. As Mr Wilson had an interest in MBI, was not authorised by Crocodile to amend the agreement and had such a clear conflict of interest, his action was improper as well as being legally ineffective.

After ceasing as managing director in April 1999, Mr Jewiss was directed to try and finalise the land title issue at Maluk Bay. No one seemed to have “on the ground” overall responsibility for the Indonesian operations and, with no funding, things came to a standstill.

The private management agreement between Crocodile and Gary Jewiss Ltd was eventually terminated in August 1999.

Financial Controls And Funding Of Crocodile’s Activities In Indonesia 

Because of poor and incomplete records, some of which have not yet been returned to PNG, the commission has not been able to fully account for all funds expended on the Maluk Bay project.

The management and directors of Crocodile were in breach of their duties under the Companies Act 1997 in this regard. As NPF was the sole shareholder of Crocodile, the management and Trustees of NPF must also be held responsible for not ensuring that the Crocodile Board (comprised entirely of NPF Trustees and officers) exercised proper control over the Crocodile management and maintained ultimate financial control.

Commission staff have pieced together the financial history of Maluk Bay and the results of this task are detailed in paragraph 8 of the report. It sets out details of amounts transferred through the Wilson HTM account ($US991,773), through D&J Consultants ($US145,000), through Patrick Goodfellow ($US41,000), the Bank Negara Account of PT Cipta Boga Baya (the “umbrella” company utilised by Crocodile) ($US783,573), Garry Jewiss-rent ($US22,200), direct funding from NPF ($US81,357), funding from Crocodile in PNG (K1,851,958) and funding from the Cikobas catering contract ($US80,550).

Funds Expended On The Maluk Bay Project 

The various records show an investment of approximately K4.3 million in the Maluk Bay project, which has been written down to nil in the Crocodile books. See table below. (Transcript p. 6277)

npf 48 a

A funding statement to PT Cipta Boga Baya was obtained. Commission staff have traced the known transfer of funds from the various sources mentioned above. Our Staff also obtained credit notes to confirm that these funds were received by the specified banks. The commission finds that there was no “leakage” of funds prior to their receipt into Crocodile’s bank accounts in Indonesia.

TO BE CONTINUED

National Provident Fund Final Report [Part 47]

October 9, 2015 1 comment

Below is the forty-seventh 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 47th 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 4L Continued 

(c) The NPF trustees failed in their fiduciary duty to the members of the fund by not insisting upon performance of due diligence, a business risk appraisal and independent expert advice;
(d) NPF trustees and the management were remiss in not critically assessing the competency and integrity of the Crocodile management team;
(e) NPF trustees and the management failed their duty to the members in not assessing Crocodile’s need for further funding and where the funds would come from.

Maluk Bay Project 

When NPF acquired the business in January 1997, Crocodile’s company office, all its contracts and activities and all its prospects were in PNG. It was pursuing catering opportunities in Highlands Pacific Ltd (HPL), camps at Ramu and Freida River, Lihir Gold, OK Tedi Mining, Misima Mines and Trans Island Highlands.

Mr Jewiss, however, immediately after his appointment, developed plans to expand Crocodile into ventures in Indonesia. By February 1997, he had secured qualified approval from the Crocodile board to embark upon a project to construct a hotel at Maluk Bay, Sumbawa Island.

By April, he relocated himself and family to Bali, Indonesia where he was seeking various investment opportunities, particularly the purchase of land at Maluk Bay to build the hotel complex.

Mr Jewiss remained “located” in Bali and was focussing on various Indonesian ventures (particularly Maluk Bay), recruiting staff, sorting out land rights and other legal problems under Indonesian law and dealing with Indonesian bureaucracy and local authorities.

Neither he nor his key staff had visas allowing them to work in Indonesia so this meant they had to fly out and return every month. All this was most disruptive. It constituted a serious flaw in the overall management of Crocodile and its ‘mainstream’ PNG ventures suffered. It was also very costly.

Unauthorised Loans 

Between July and September 1997, NPF advanced K850,000 and then a further K250,000 to Crocodile as capital loans with no formal approval from the NPF board. This was authorised by Mr Wright (acting way beyond his authority). The requisite Ministerial approval was not sought and no loan documents were in place (Mr Leahy was asked to draw these up after the event).

Quite clearly, Mr Copland who as the active chairman of both boards must have known of these loans and Mr Wright and Mr Kaul were in gross breach of duty to the NPF board and members. When the NPF simply ratified these loans after the event, without taking steps to rationalise and control financial relationships between NPF and Crocodile, all the trustees involved were failing their fiduciary duties to the members of NPF.

This was not an equity investment requiring professional expertise that the trustees lacked. This was a matter of business loans and contracts of which several trustees had experience and their silence about what was happening is inexcusable.

Attempts By Crocodile Board To Impose Controls 

The Crocodile board was not entirely inactive however, it resolved not to continue with the loss making Kundu Catering division because of irregularities and it directed Crocodile management to impose cost controls in July 1997 (paragraphs 4.2 & 4.3). Crocodile management made no attempt to comply with these board directions.

On the request of Mr Copland, Mr Jewiss provided the Crocodile board with a proposed revised management structure. Although it was clearly inappropriate it was accepted by the Crocodile board and by NPF, Crocodile’s only shareholder.

Findings 

(a) Mr Wright and Mr Kaul acted improperly and in excess of their delegated authority by advancing “capital loans” of K850,000 and K250,000 to Crocodile without prior NPF board authority;
(b) When ratifying these loan payments NPF trustees failed to reprimand or openly address the serious breach of duty by Mr Wright and Mr Kaul;
(c) NPF failed to obtain Ministerial approval as was required by the PF(M) Act for the K850,000 loan;
(d) Mr Wright and Mr Kaul and possibly also the NPF trustees in office at the time who failed to inquire about Ministerial approval, may be personally liable to repay the amount of the loan to NPF;
(e) Crocodile management failed to implement cost controls as directed by the Crocodile board and the board failed to address this failure by management; and
(f) The Crocodile board failed to ensure an appropriate management structure was put in place to handle both domestic and international operations before commencing the Indonesian operations. The structure that was determined was inadequate.

At the Crocodile board meeting on October 27, 1997, there was concern about the cash flow problem. The minutes show that “it was noted that the managing director is not required on a full time basis in Indonesia. . .” and it was resolved that management focus its attention on the PNG operations (Mr Jewiss continued to reside in Bali, however).

At the NPF board meeting the next day, Mr Kaul advised that Crocodile was defaulting on interest payments to NPF. It was resolved to convert the loans to Crocodile into share capital. This was done without the requisite Ministerial approval (paragraph 4.4.10).

Crocodile management was not performing well and Crocodile was running at a loss. It is of concern therefore that Mr Jewiss provided the senior managers with a computer notebook each as a bonus.

Findings 

(a) Mr Jewiss failed his duty to the Crocodile board by not relocating and focusing his attention in PNG;
(b) The Crocodile board directors failed their duty under the Companies Act by not following up on their direction to Mr Jewiss and ensuring compliance;
(c) Crocodile management and the board failed to deal with Crocodile’s chronic cash flow problems (other than by turning to NPF);
(d) NPF management, particularly Mr Kaul and Mr Wright and the NPF trustees on the Crocodile board failed to fully advise the NPF board about Crocodile’s cash flow problem; and
(e) Mr Jewiss’s decision to grant a bonus to senior management was not justified by their (or Crocodile’s) performance.

Continuing Cash Flow Problems 

After Mr Fabila replaced Mr Kaul at NPF and on the Crocodile board in May 1998, the Crocodile cash flow problems continued, largely because of the financial drain caused by the Maluk Bay project. Crocodile was facing legal proceedings for a debt of $A356,524 it owed to one of its suppliers. In June 1998, PNGBC formally approved a loan of K2.9 million to Crocodile and part of the security was an unlimited guarantee from NPF. In this way, NPF’s exposure to the troubles of Crocodile was steadily increasing.

In late 1998, despite Mr Jewiss’s confident forecasts, the Crocodile board was concerned about poor performance, which Mr Jewiss blamed on delays in completing the Paiam warehouse. Mr Copland was expressing dissatisfaction with Mr Jewiss.

With the PNGBC K2.9 million loan not yet in place, NPF management extended bridging finance to enable Crocodile to meet payments due on the Paiam warehouse. This was arranged entirely without the knowledge or approval of the NPF board (paragraph 4.7.2).

To enable Crocodile to drawdown on the PNGBC K2.9 million facility, NPF gave a limited guarantee to PNGBC on September 4, 1998, (paragraph 4.7.3). Again, this was carried out without the approval of the NPF board through formal resolution, as required.

On September 14, 1998, Crocodile drew down K2.9 million on the PNGBC facility, using the funds to repay K2 million borrowed from NPF and retaining K900,000.

Although Crocodile continued to rely on NPF finance, its board still failed to critically review the business in order to rationalise its operations and reduce costs.

Findings

(a) The provision of bridging finance to Crocodile was made without the knowledge or approval of the NPF board. Mr Wright acted improperly and breached his duty to NPF in this matter. It is highly likely that the NPF managing director Mr Fabila was aware of the transaction. Also, Mr Copland, who was chairman of both boards and taking an active interest in the management of Crocodile must have been aware of the provision of bridging finance;
(b) Providing bridging finance is not a permitted investment under the NPF Act;
(c) NPF’s limited guarantee of the PNGBC K2.9 million loan facility to Crocodile, was not properly approved by NPF board resolution;
(d) Mr Jewiss failed to ensure some of the required essential conditions were included in the catering contract with Tolukuma Gold Mines;
(e) The Crocodile management and board failed to critically review Crocodile’s poor performance in order to reduce costs and rationalise the management of the business.

Falsley Inflated Profits 

Mr Jewiss’s report to the November meetings of the Crocodile and NPF boards used incorrect accounting procedures to show a net profit of K256,612, which was wrongly inflated by K208,333 (paragraph 4.8.1).

He also provided a five-year forecast projecting profits of K31.6 million which was made without any firm foundation.

1999 – Addressing The Problems 

With NPF now recognising its own desperate financial crisis and after the January 1999 departure of Mr Wright, NPF focussed critical attention on Crocodile and its mismanaged, loss-making, finance-draining ventures.

At the February 8, 1999 NPF board meeting, a false profit of K759,733 was reported for the year ending December 1998. Subsequent calculations, using the correct accounting procedures, showed it was really a loss of K600,590.

Mr Fabila, Mr Maladina and Mr Tamarua were installed as directors of Crocodile. At this meeting, management informed the NPF trustees for the first time that NPF had funded payments to the Paiam warehouse builder and, importantly, that secret payments from Wilson HTM’s offshore NPF account had been paid to fund Maluk Bay by Mr Wright, without the NPF board’s knowledge or approval (paragraph 4.9.1).

Appointment Of Ram Business Consultants 

Soon after his appointment to the Crocodile board in February 1999, Mr Maladina, without any authority to do so, unilaterally appointed Ram Business Consultants as investigators and as the independent internal auditor of Crocodile. This was contrary to normal procedures, which required the consent of the Auditor- General as well as approval by the NPF board.

PNGBC now tightened up on its temporary K1.8 million overdraft facility to Crocodile, converting it to a loan.

Findings 

(a) The appointment of Ram Business Consultants was made without the Auditor-General’s consent and was in breach of standard procedures;
(b) In light of evidence linking Mr Maladina with Ram Business Consultants in other matters, the commission finds that this appointment amounted to improper conduct by Mr Maladina and was nepotistic.

By April 1999, attempts to replace Mr Jewiss with Mr Barredo as manager of Crocodile were being hatched by Mr Maladina and Mr Leahy (paragraph 4.10). It resulted in Mr Jewiss being terminated as manager at the end of April 1999, and the complete cancellation of his employment contract in August 1999.

After Mr Jewiss was terminated as manager in late April, Mr Maladina, as chairman of Crocodile, and without any authority to do so, unilaterally signed a contract of employment for Mr Barredo on extremely favourable terms. The terms included a grant of K150,000 of Crocodile shares per annum, which would soon have given Mr Barredo control of the company (On August 24, 1999, Mr Maladina disclosed his unilateral action to the NPF board which resolved that Mr Barredo’s contract should be reviewed by NPF management and then placed before the Crocodile board for approval. This never happened).

As sole shareholder in Crocodile, the NPF trustees could and should have reprimanded Mr Maladina for unilaterally signing the contract.

Findings 

(a) The NPF board’s appointment of Mr Barredo as managing director of Crocodile was not valid, as the Crocodile board did not approve it;
(b) Mr Maladina had no authority to sign the contract of appointment on behalf of the Crocodile board;
(c) Mr Barredo’s contract was vastly overgenerous. The inclusion of a grant of K150,000 worth of Crocodile shares per annum would give him effective control of Crocodile in a short period;
(d) Mr Maladina’s appointment of Mr Barredo was improper and nepotistic;
(e) Mr Maladina’s negotiations with the IPI landowners were conducted without consulting with or obtaining the approval of either the Crocodile or NPF boards;
(f) Crocodile management’s failure to ensure that title to the Paiam warehouse land had been satisfactorily resolved before outlaying substantial expenses was a major failure of duty.

Mr Maladina’s actions regarding Mr Barredo constituted one of the grounds leading to the board’s vote of no confidence in him on October 8, 1999, which led to his suspension as chairman of NPF.

In November 1999, PNGBC showed its concern about Crocodile’s apparent inability to pay its debts when it converted an existing overdraft facility into a loan of K1.8 million, guaranteed by NPF. This was then taken over by NPF and converted to a further equity investment in Crocodile.

Findings 

The fact that NPF was obliged to go further into debt with PNGBC to save Crocodile from financial collapse, at the same time as NPF was selling down the bulk of its equity portfolio at a huge loss to extricate itself from debt to ANZ Bank, emphasises the folly of NPF’s heady involvement in remote catering through its unwise investment in Crocodile.

Maluk Bay Project 

A major factor contributing to Crocodile’s losses was its protracted involvement in the project to build a resort complex at Maluk Bay, Sumbawa Island, Indonesia and this was made a separate term of reference for this inquiry (Term of Reference 1(m)).

The Maluk Bay project is dealt with in detail in Part 2 of the Crocodile Report at Schedule 4L, paragraphs 6 to 9.

Background 

Very soon after NPF acquired Crocodile in January 1997, employing one of the former owners Mr Jewiss as executive manager, Mr Jewiss met up with a former friend and workmate Keith Wilson who was planning to build a small bar and grill at Maluk Bay, Sumbawa Island, Indonesia with a group of his friends.

They had incorporated a company called Maluk Bay Investments Ltd (MBI) for the purpose. Three of the group were employed by Cikoba Konseptama Bangunmutra (Cikoba), which was an Indonesian company operating on Sumbawa Island. Mr Jewiss saw possibilities for a larger hotel complex to serve the needs of nearby mining communities. He saw the possibility of Crocodile participating in the venture and became enthusiastic; believing it would also open the door for catering contracts with the nearby mining companies, whose staff, he believed, would use the hotel for rest and recreation.

After Mr Jewiss and MBI agreed to participate in a joint venture to construct and run the hotel, Mr Jewiss put his proposal to the Crocodile board meeting on February 27, 1997. The board requested more information before making a decision.

Mr Jewiss then falsely informed MBI that Crocodile had agreed to invest $US1 million. Mr Jewiss then took up residence in Bali with his family. The commission assumes that Mr Jewiss enjoyed the life style on Bali, which was also in the vicinity of Sumbawa Island, as there was no valid “business reason” for him to move there.

At the Crocodile board meeting on May 5, 1997, Mr Jewiss reported vaguely about securing four catering contracts in Indonesia but provided no details. Without having received any firm information about the Maluk Bay project, the Crocodile board approved a budget of $US1.3 million, subject to “the numbers, guarantee, costing and other details”. The “numbers, guarantee, costing” never materialised yet Crocodile then proceeded into the project, being “drip-fed” with funds from NPF.

Crocodile seemed to benefit from the relationship with Mr Jewiss’ new friends from Cikoba when that company awarded a catering contract to Crocodile. The contract was never properly formalised, however, and this led to later difficulties and Crocodile lost K200,000 when Cikoba failed to pay its debts.

At the Crocodile board meeting in July 1997, the board approved, in principle, Crocodile’s participation in the Maluk Bay project but subject to the satisfaction of a number of prior conditions:-

  1. Crocodile would not commit to the project until the design, costing and budget had been finalised and provided by the joint venture partner (i.e. MBI);
  2. Any excess over the $US1.3 million guarantee costing would be borne by the joint venture partner;
  3. The joint venture partner would obtain the land title;

TO BE CONTINUED

National Provident Fund Final Report [Part 46]

October 8, 2015 1 comment

Below is the forty-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 46th 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 4J Continued 

Findings 

(a) The BSP investment was performing well as a high dividend long-term investment with good capital growth potential;
(b) Mr Wright’s reassessment of the value of NPF’s BSP shares should have been supported by a professional review;
(c) Mr Wright gave unprofessional investment advice to sell-off the BSP investment based on extraneous matters; and
(d) The trustees were in breach of their fiduciary duty in uncritically accepting Mr Wright’s advice and resolving to sell NPF’s BSP investment without obtaining independent advice about the decision to sell or the price offered.

Investment In 1998 

Finalisation of the sale to DFRBF was protracted and in the meanwhile, BSP’s results continued to be very favourable. Mr Kaul clearly favoured holding onto the BSP shares and to await the results of a valuation that was being carried out by Coopers & Lybrand.

By the time Minister Lasaro finally approved DFRBF’s request to buy the BSP shares from NPF on September 1, 1998, the DFRBF had decided the price was too high and withdrew from the proposed sale.

While Mr Wright sought legal advice regarding a possible breach of contract by DFRBF, the NPF board adopted a positive view of the situation and decided instead to participate in a K15 million rights issue by BSP, which, together with a relaxation of the BPNG’s prudential guidelines, would free BSP to offer larger loans.

Misleading Conduct By Mr Wright 

Not only did Mr Wright change his mind about the need to sell-off the BSP shares, he went ahead and acquired 333,333 shares in the new issue before seeking the NPF board’s approval.

At the November 6, 1998, NPF board meeting, Mr Wright sought the board’s approval for this purchase, deliberately not informing the board that the transaction had already been completed. This deliberately misleading conduct was improper.

Mr Wright also wrongly advised the trustees that the transaction would not require Ministerial approval as it was valued at K999,999, which was just below the K1 million level already approved by the Minister in June 1995 for transactions which would not require Ministerial approval.

This advice was wrong because the dispensation from seeking Ministerial approval for transactions valued under K1 million, applied only to transactions involving shares listed on authorised stock exchanges. The BSP shares were unlisted so the Minister’s approval was required for transactions above K500,000.

Findings 

(a) The management and the trustees, failed in their fiduciary duties where independent advice was not obtained and no critical appraisal of the proposal to purchase further BSP shares, was performed (Exhibit B96);
(b) Mr Wright and Mr Kaul failed in their fiduciary duty by misrepresenting to the board that they were requesting board approval to purchase 333,333 shares on November 6, 1998, when in fact they were requesting ratification of the 333,333 shares already purchased without board authority on October 29, 1998;
(c) Mr Wright and Mr Kaul failed in their fiduciary duty as they had acted beyond their authorised financial delegation limit by committing the funds prior to obtaining the board’s approval;
(d) Mr Wright failed in his fiduciary duty to the board when he misrepresented to the board that the K1 million limit approved by the Minister, covered NPF’s investment in BSP. However, the dispensation only applied to the purchase and sale of shares listed on approved stock exchanges and the BSP shares were not listed on any stock exchange;
(e) The trustees failed in their fiduciary duty to the members when they failed to obtain Ministerial approval for the transaction thereby contravening Section 61 of the PF(M) Act.

Investment In 1999 

Resignation Of Mr Wright And Engagement Of PwC

Mr Wright was forced to resign in January 1999 and the then recently appointed managing director Henry Fabila, appointed PriceWaterhouse Coopers (PwC) to review NPF’s investments. On March 8, 1999, Mr Marshall of PwC reported to the NPF board that NPF was facing huge unrealised losses and a severe cash flow crisis.

Proposed Sale Of BSP Shares

It was decided to try and sell the BSP shares and notes which were professionally valued by PwC at K5 to K5.90 and K4.25 to K5.20 respectively, which put the total value of NPF’s holdings in BSP at K8 million. NPF then offered 1,192,661 BSP shares to Finance Pacific for K6.5 million. The NPF board also resolved to offer to sell its Government Roadstock, worth K62 million, to Finance Pacific.

Mr Peter O’Neill’s Involvement 

Finance Pacific, of which Peter O’Neill was then executive chairman, then made a package offer to buy the whole of NPF’s Government Roadstock as well as all of its BSP shares for K59.5 million, provided that NPF could obtain an extension of the Government’s expired guarantee of the Roadstock.

It was proposed that the sale would be to the Motor Vehicle Insurance Trust, which was part of the Finance Pacific Group.

The sale price of K59.5 million was exactly equal to the outstanding amount NPF owed to the PNGBC, which was also part of the Finance Pacific Group and so this proposed sale would clear that debt.

Mr Mitchell has given evidence that he was informed by Mr O’Neill and the new NPF chairman Jimmy Maladina, that the purchase of the Government Roadstock was dependent on the sale of NPF’s BSP shares (which would increase Finance Pacific’s holding in BSP to 30 per cent of its issued capital).

In view of the commission’s finding that Mr O’Neill was implicated with Mr Maladina in the NPF Tower fraud and received part of the illegal proceeds, the commission regards this proposed transaction between NPF and Finance Pacific with suspicion.

The sale, however, did not proceed because NPF had not succeeded in obtaining an extension of the Government’s guarantee of the Roadstock before Mr O’Neill was removed from the position of executive chairman of Finance Pacific.

Dividend Income BSP dividend payment history

According to BSP’s historical financial performance schedule, included in its 1999 Annual Report, the bank’s operating profit after tax had grown from K2.984 million in 1993 to K19.570 million in 1999, with 1999 being a record high (Exhibit B141).

As per the 1999 annual report, the total dividend paid between 1995 and 1999 was as follows:

npf 46a

BSP dividends received by NPF

BSP have confirmed that NPF was paid a total dividend of K2,358,082 for the years 1995 to 1999.

Director’s Fees

Directors fees and allowances paid to NPF’s representative directors on the BSP board, Mr Kaul and Mr Fabila successively, were correctly paid into NPF’s accounts.

Concluding Comments

The fact that the BSP investment has been profitable for NPF is due entirely to BSP’s successful management qualities and is not due to NPF’s investment policies or skills. It is probably fortunate that NPF never acquired sufficient equity in BSP to enable it to significantly influence BSP’s management policies.

The investment survived two misguided attempts by NPF to sell it.

Looking below the profitable surface of this dividend producing investment, we see Mr Wright acquiring notes without board authority and giving false and misleading information to the board when retrospectively seeking board approval for what he had already done. Once again, we find that the Board of Trustees failed to maintain control over management.

Executive Summary Schedule 4K Westpac Bank (PNG) Ltd, SP Holdings Ltd and Toyota Tsusho (PNG) Ltd 

Introduction 

The NPF investment in these three PNG companies has been relatively small but profitable in terms of capital gain and dividends.

After their initial investments, there were no further transactions during the period 1995 to December 31, 1999, and the investments have not been the subject of report or discussion at any board meeting.

The initial investments in these companies was as follows:

npf 46b

The unrealised gains made by NPF in these investments at December 31, 1999, are in the ranges as follows:

  • Westpac bank – between K669,600 and K1,103,600;
  • SP Holdings – between K748,000 and K1,468,000; and
  • Toyota Tsusho — between K34,931 and K120,074.

In addition to the significant capital gains made on these investments for the years 1995 to 1999, NPF earned the following in dividend income:

  • Westpac bank – K1,135,375;
  • SP Holdings – K600,000; and
  • Toyota Tsusho – K140,266.

NPF’s investment in these companies is clearly consistent with more traditional investment philosophies of provident funds in most countries.

The full details of these investments are set out in the report.

Executive Summary Schedule 4l Crocodile Catering (PNG) Ltd And Maluk Bay Investment

Introduction

In late 1996, the NPF was approached by representatives of the Crocodile Group of companies, which specialised in remote site catering in Australia and PNG.

The Australian company, Crocodile Pty Ltd (Crocodile Australia) was in financial difficulties and the principals wished to sell off its interests in Crocodile Catering (PNG) Ltd (Crocodile) in order to pay off the debts of Crocodile Australia and to enable them to obtain repayment of personal loans given by them to Crocodile Australia.

In January 1997, prior to obtaining the required Ministerial approval under the Public Finances (Management) Act 1995 (PF(M) Act), NPF acquired the share capital of Crocodile for K300,000.

In the period from January 1, 1997, to December 31, 1999, NPF then invested (in net terms) a further K7.4 million in the form of both equity and loan capital.

Crocodile performed very poorly because of:

  • an apparent lack of management skills, particularly with regard to financial management skills, with the few profitable catering contracts managed by Crocodile “dragged” down by loss making contracts and a high administrative overhead structure (examples included at Transcript pp. 7166, 7208-9, 7290-7294, 7335-7338);
  • a lack of attention to financial results and a failure to initiate appropriate corrective action in a timely fashion (examples included at Transcript pp. 7199-7200, 7202, 7208, 7220, 7242, 7280, 7288);
  • an ineffective board of directors and poor corporate governance (examples included at Transcript pp. 7188-7189, 7192, 7307-8);
  • managing director Garry Jewiss living in Indonesia to the detriment of effectively managing the PNG operations (see report on Maluk Bay);
  • unfavourable economic conditions; and
  • a continued investment in Crocodile without properly appraising this investment Transcript pp. 7177- 7178, 7261, 7091.

Crocodile recorded accounting losses every year from 1996 to 1999 and by December 31, 1999, there was a net unrealised loss of K7.4 million. Source: NPF accounting records/Crocodile accounting records (Exhibit CC700A). See table 3:

npf 46c

Summary of Crocodile financial performance as reported by financial statements in the period 1997 – 1999

npf 46d

Source : NPF accounting records/ Crocodile accounting records (Exhibits CC808B & 959). 

Acquisition Of Crocodile

The due diligence performed by Mr Wright was inadequate in that there was no:-

  • search into the background of the company and its directors;
  • legal due diligence conducted; and
  • financial appraisal of Crocodile’s catering and associated contracts.

Consequently, the information presented to the NPF board at the 104th NPF board meeting on December 9, 1996, was inadequate as a basis for an investment decision because:-

  • It failed to mention Crocodile’s obligations to finance, construct and operate a warehouse at Paiam;
  • Placer had provided free freight from Lae to Porgera and this artificially increased apparent net profits;
  • NPF had no understanding of Crocodile’s business strategy;
  • NPF did not assess Crocodile’s management team;
  • NPF did not assess Crocodile’s business risks;
  • NPF did not conduct a rigorous audit (including the commerciality of the contracts);
  • NPF did not assess its ability to own and manage a remote site catering business or the appropriateness of doing so; and
  • NPF did not consider the future funding requirements of the business and whether it would call upon NPF for funding.

NPF management, particularly Mr Wright and Mr Kaul, failed their duty to properly brief the board and the trustees failed their fiduciary duty to the members, by acquiring this business without insisting upon proper due diligence and analysis beforehand.

As sole shareholder, NPF appointed the following people as directors on the board of Crocodile: David Copland (chairman); Robert Kaul; Noel Wright; Tau Nana; Henry Leonard with Kenneth Frank as corporate secretary.

The practice was to hold Crocodile meetings at NPF headquarters the day before the scheduled NPF meeting.

From the start, it became apparent that it was a mistake to have appointed Mr Jewiss as manager, as he had few managerial and organisational skills and was extremely poor at consulting with and reporting to the Crocodile board.

To try and strengthen financial control, Crocodile’s former financial controller, Ray Barredo, was retained. This did not work and NPF was frequently called upon to make direct injections of financial support.

During 1997, Crocodile struggled to finance and organise the required warehouse at Paiam. It was eventually funded by a PNGBC loan guaranteed by NPF. The cost was about K4 million.

Findings 

(a) NPF breached the PF(M) Act by entering the contract to acquire Crocodile before Ministerial approval had been given;
(b) NPF management, particularly Mr Wright, failed its duty to the NPF board by not performing due diligence on Crocodile prior to buying the company and by failing to critically appraise the business prospects and risks of becoming sole owner and manager of a remote site catering business;

TO BE CONTINUED