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
