PNGi INVESTIGATES

A Sweetheart Deal for Kinhill Kramer: The Poreporena Freeway Scandal

Those who forget history are destined to repeat it. Abuse of office, graft, and corruption was a disease that gripped Waigani in the 1980s. By the 1990s it was taking over the whole body politic. Forestry was the most obvious example. But it went deeper. 

In today’s PNGi Investigates we study one of the great scandals of the 1990s,  the Poreporena Freeway ‘sweetheart’ deal where gross abuse of power and mega-profits were uncovered by the Ombudsman Commission and a Commission of Inquiry led by Judge Graham Ellis.

On May 23rd 1990, Anthony Temo, then Minister for Transport, commissioned a ‘detailed engineering design for the Burns Peak Road’. A major transport infrastructure project was being proposed connecting east to west in Port Moresby, later called the Poreporena Freeway.

In the background, another type of design was being drawn up.

It was ‘a new initiative to involve the private sector in the financing and implementing [of] transport infrastructure projects’. Mega-profits was the goal. Taxpayers would foot the bill.

The Poreporena Freeway deal was devised by ministers and corporations in cosy personal relationships, in the darkness of secret negotiating rooms, where large chunks of state money was awarded to foreign investors and private corporations.  This is a game-plan that would resurface many times again as mega infrastructure projects became the troff in which many mouths would feed.

There is good reason for this. For the citizen the road or bridge seems a worthwhile venture that will make their life better. Members of the public are not in a position to know the market price of a highway or bridge – so they cannot judge value for money. They rely on government organs such as Central Supply and Tender Boards (now National Procurement Commission) to make this judgement on their behalf. If these organs are corrupted, or circumvented, then there is no protective mechanism ensuring value for money.

So big infrastructure projects have public appeal, but can easily be exploited to inflate rates of profit if public procurement is weak. Thus they have been a popular target for corporates in PNG.

The Poreporena Freeway is a story of how a Minister was able to ignore the law and award a highly unfavourable contract to Kinhill Kramer, which if it had not been terminated by a new government in 1992, would have cost taxpayers an extra K30 million above what was deemed to be the market price.

The Deal and the Players

In 1992  the National Executive Council (NEC) authorised the signing of a K65 million agreement for the construction of the Poreporena Freeway, a road that would connect the Port Moresby seaport to airport.

Two companies were given the job of carrying out this major, multi-million Kina infrastructure, Kinhill Kramer and Curtain Bros.

The deal was signed on a ‘turnkey’ basis. In normal circumstances the contractors design and build the road and the state turns up at the end and is given a ‘key’. The Poreporena deal, however, gave responsibility for the ‘design, operation and financing’ of the road to the companies which had been awarded the contract.

Without control over the financial terms of the deal the state was to be tied into a loan from the Australian government’s export credit agency EFIC (now Export Finance Australia) that, by the end of the loaning term, would have been K15-18 million higher than it needed to be.

The deal also included a 15% down payment, $10 million, to be paid to the contractors out of government budgets.

Written into the deal was a chain of command that had Frank Kramer, head of Kinhill Kramer, at the top. A man with ‘two hats’ acting on behalf of both the state and the companies at once.

 

Image: Lead negotiator and architect of the Poreporena deal. The man in the ‘driver’s seat’ was Anthony Temo the Minister for Transport from 1988-1992 under Prime Minister Sir Rabbie Namaliu’s government.

 

 

Image: Kinhill Kramer was the engineering arm of the project. The Executive Chairman was Frank Kramer, you may remember him from the Forgotten Middle Men. Kinhill Kramer is the past face of Kramer Ausenco that now has ex-PM Namaliu sitting on its board.

By late 1992, an Ombudsman Commission (OC) and a Commission of Inquiry (COI) had been set up to investigate the deal. PNGi quotes extensively from the published findings of both bodies in this report.

Under what conditions was such a deal authorised by the National Executive Council? And in what ‘mysterious and suspicious circumstances’ did the Minister for Transport negotiate the expenditure of this public money?

Addressing A Serious Traffic Problem

The  ‘particular geography of the city of Port Moresby’ in the 1980’s and 90’s gave ‘rise to a serious traffic problem’, ‘long and winding back road[s]’, ‘inconvenient route[s]’ and ‘congest[ion]’.

The Poreporena Freeway would have opened up the ‘Spring Garden Road network’ at ‘both ends’, ‘to form one arterial road’ (see map, points ‘A’ to ‘K’).

In June 1990 an advert appeared in the National Gazette calling for expressions of interest.

Leading negotiations was Mr Temo. The deal, he decided, was to be ‘developed [with the] rough involvement of the private sector’.

In April 1990, months before the advert went public, Temo wrote to the Secretary of the Department of Transport (DoT) and explained that ‘special tender procedures have been approved’ by the NEC so the road could be built in time for Port Moresby to host the South Pacific Games in 1991.

The COI suggests that Temo was working on the ‘mistaken belief’ that the NEC ‘can decide to override statutory requirements’, laid out in the Public Finances (Management) Act and the Public Works Committee Act. These laws required projects outline the ‘prospective public value of the work’ and consider ‘the capacity, experience, integrity and financial status of the tenderer’.

Had these considerations been observed, they would have likely landed taxpayers with a very different deal.

Nearly a year later in February 1991, Temo prepared a short-list of the interested companies in what was then called the Burns Peak Road. At the top was a company called Outlet Year Limited, one arm of the many-limbed Chinese Consortium that Temo negotiated with between February- December 1991. A period that gives us the first major indications of what special tender procedures would actually mean

Image: The Ministerial shortlist

The OC traces a ‘personal friendship’ that formed between Temo and Taiwanese businessman Mr Leo Moore, who had connections to businesses interested in ‘making large investments in Papua New Guinea’.

In February this friendship took Temo on a privately sponsored trip to Hong Kong and Taiwan where he was ‘wined and dined’ by the company he had shortlisted. Temo was hosted by Mr Leung of Outlet Year Limited and, ‘as it was Chinese New Year, much of the time was taken up in social activities’.

Temo did have the time, though, to sign an agreement on behalf of the ‘National Government’ with Mr Leung for the construction of an entirely different road. The deal he signed was for the ‘Southern Highlands-Gulf Road’, it was done without the knowledge or authorisation from the ‘government he was supposed to be representing’.

This negotiation style, the OC suggests, ‘breeds the atmosphere and environment ripe for bribery and corruption’.

This was not the only time Temo unofficially negotiated deals for Poreporena or ‘other national projects’. By his second trip to Hong Kong in July Temo seemed to favour a different arm of the Chinese Consortium, Topbay Investment Ltd.

But in order to make these negotiations legitimate they had to be authorised by the NEC.

Ministerial Committees in the usual course of business are established by the NEC. Not in this case. Allegedly in July 1991, Temo created the Ministerial Committee on Spring Garden Road, appointed himself chair, and used this new power to consider the shortlisted proposals he had prepared.

The OC had some difficulty figuring out which proposals exactly were considered at this meeting as ‘most of them were lost after they were left in the Minister for Transport’s office’.

One document that did manage to make its way to the OC is draft NEC submission, 17th July 1991, that showed how the DoT, officially, assessed the proposals.

Image: The evaluation methodology used by Ministerial Committee

Soon after, a later draft of this document was submitted to the NEC along with a paragraph that included some advice from Temo on budgeting:

In December 1991, however, Temo’s submission to the NEC was rejected for ‘non-compliance with procedural requirements, most notably that the views of the Department of Finance and Planning and the Department of the Attorney-General did not appear to have been sought’.

Arise Kinhill Kramer

Temo though was not deterred. And it appears, negotiations weren’t just being held with the Chinese Consortium. Back in May 1991, Kinhill Kramer had submitted a proposal in partnership with Japanese company Kumagai Gumi (of NPF scandal fame) to Mr Temo.

The financial deal involved a loan from the ‘Export-Import Bank of Japan, interest rate of 7.6%, a post-completion loan term of 5 to 8 years [and] a loan currency of Japanese Yen’. The total cost was K40 million.

Following his December 1991 setback, Temo  submits again to the NEC in February 1992, this time with only two options. The February 1992 submission suggests that ‘either the Chinese group’s idea or the Kinhill Kramer proposal could be chosen’.

Shortly before the NEC meeting, Kinhill Kramer, had dropped the Japanese group. With the noticeable absence of any construction company, Kinhill Kramer ‘alone had been accorded an opportunity to update its submission just prior to the NEC meeting at which selection of a successful consortium would be made’.

Its amended proposal offered a solution at a total cost of K65 million.

It is interesting to note that by the Department of Transport’s own criteria the Kramer proposal was given the ‘lowest possible ranking of “satisfactory” and that it was the only applicant to be so rated’ in the July 1991 shortlist.

The minutes of a meeting held at the Department of Transport earlier that year also suggested that Kinhill Kramer was ‘thought to be getting too much work in Port Moresby and developing a monopoly’.

These are the conditions against which Temo negotiated the submission that would be taken to the NEC on the 24th February 1992.

The OC concludes that ‘much of the blame must rest with the Minister for Transport’ who ‘consistently misused his Ministerial powers’ and his ‘actions, on a number of occasions, were grossly improper and wrong’.

The story, though, does not end here.

On 24th February 1992, the NEC accepted Kinhill Kramer as the ‘successful tenderer to finance construction of the Spring Garden Freeway’.

The proposal:

  • made Kinhill Kramer responsible for financing the project that the state was then liable to pay;
  • had not yet arranged or named a construction partner;
  • did not contain any definite financial proposal; and
  • named Kinhill Kramer Superintendent of the project, a role normally given to an independent person who can impartially monitor the project.

Back in September 1991 the World Bank had considered the Chinese Consortium’s proposal for a $50 million loan, a 10 year loan term, 3 year grace period and 0% interest rate. The World Bank advised that the project be subject to public re-tendering, citing a number of reasons including the ‘unrealistic and unworkable’ financial plan, the outstanding ‘land acquisition and environmental impact issues’ and the ‘unclear…technical parameters’ of the project itself.

The deal Kinhill Kramer put forward was a very different proposal, and yet all of these issues were still outstanding.

The NEC decision was made despite the fact that it had not passed through a ‘Supply and Tenders Board or Public Works Committee’ and was ‘against the advice of the World Bank, three Government Departments [Works, Finance and Planning, Attorney Generals] and the Resources Management Committee [20 February 1992]’.

In his COI statement, Frank Kramer claims that he ‘did not learn of the NEC decision’ until a week later. The COI questions the accuracy of this statement, when ‘a K65 million proposal by Mr Kramer is accepted by the NEC and no-one tells him for seven days? Human nature suggests otherwise, especially since several members of the NEC were regular visitors to Mr Kramer’s office for business and/or social purposes’.

In response to this decision the OC received ‘numerous allegations of bribery and corruption’. The OC says that these were ‘not supported by evidence’. No smoking gun could be located.

The OC does, however, ‘refrain from finding that there was no bribery or corruption…having considered all the circumstances which led to the decision and, in particular, the consistent failure to follow normal procedures, we cannot say that there was no corruption’.

Prime Minister Namaliu was unimpressed that the OC ‘create[s] an environment in which the reasonable mind could assume corruption’.

Image: PM Namaliu lashes out at the OC

Following his retirement from politics, Sir Rabbie Namaliu was made Chairman of Kramer Ausenco, the new face of Kinhill Kramer.

The NEC gave the Ministers for Transport, Finance and Planning, and the Attorney General’s (AG) office two months to finalise the terms of the deal. By late April 1992, the alarm bells had been rung and clear warnings were sent to Namaliu and the NEC.

An independent review of the deal carried out by Beca Gure Ltd was sent to the Department of Works on 23rd April, cautioning that ‘in its present form the proposed Contract is very heavily weighted in favour of the Consortium with few, if any, remedies open to the State in the event of unsatisfactory performance’.

A few days later, April 28th, the Minister for Works sent a letter to Namaliu expressing ‘serious concern… in respect of the current contract documentation’.

The next day, Secretary of the AG’s office issued a letter to Namaliu refusing to write a Letter of Legal Clearance, ‘warn[ing] of non-compliance with the provisions of the Public Finances (Management) Act; indicat[ing] a potential breach of section 209 of the Constitution… [The contracts] do not protect or appear to protect the best interest of the State’. Warnings that were ‘reinforced’ at NEC meetings.

On that same day the NEC met and gave the State Solicitor’s office nine days to finalise the deal.

Soon after, acting ‘in circumstances’ where the NEC had made it ‘clear that their advice’ was ‘not appreciated’, the Acting State Solicitor gave Legal Clearance.

On the 27th May 1992 at 10am, a signing ceremony was held at Government House for the Poreporena Freeway deal. Signed by the Governor-General, at the behest of the NEC, and on ‘behalf’ of the Independent State of Papua New Guinea.

How the Sweetheart Deal Works

The case that the deal was disadvantageous for the state is made clear by both the COI and the OC. Basic due diligence, done by multiple government departments and committees, had been flagging it for years. The Secretary for Works, in his letter to the Secretary of the PM’s Department, said ‘we strongly support your view that all projects should be government driven and not developer driven… “Sweetheart” deals are not in the country’s long term interests’.

The terms of the Poreporena deal do not seem to have been ‘government driven’ in the conventional sense.

Turnkey

In an updated model for turnkey deals, the state delegated responsibility for the financing of 85% of the deal to the contractors. The COI advises this ‘could only be regarded as permitting the best interests of the State to be, at best, the secondary objective of a private enterprise consortium’. The remaining 15% of the deal was a $10 million down payment, paid from state budgets, that the COI notes ‘even with the delayed execution of the agreement, fell due on 26 June 1992- the final day of voting in the national elections’.

Landowners

No landowners had been consulted when the deal was signed despite the fact that the road cut through 12 hectares of customary land.

Chain of command

The deal gave Kinhill Kramer two roles. One as Superintendent, acting as the ‘independent’ monitor on behalf of the state. The second was Project Manager to Curtain Bros, meaning that ‘should a difference arise between the government and its contractor, it would be a matter for resolution by the project manager who also happened to be the contractor’.

Financial terms

By the time the contract was signed the particulars of the financial terms were not included because they hadn’t been finalised with Kramer/Curtain’s chosen financiers, Australian government’s EFIC.

When the financial terms were arranged, it was through a short loan term and high interest rate that tied the state into a loan which was K15-18 million higher than other options. The state was then required to a) guarantee the loan, and b) pay it. See EFIC loan compared to other available options at the time:

EFIC (Export Finance and Insurance Corporation)Asian Development BankWorld Bank
Loan term13 years25 years25 years
Grace periodN/A5 years5 years
Interest rate (per annum)9.5%, fixed6.58%, variable7.72%, variable
Commitment fee00.75%0.75%
Total interest payableK65,370,746K49,812,952K46,613,796
 

The COI also draws attention to the fact that Kinhill Kramer had previously submitted a Technical Feasibility Report in April 1990 for the same road. Compared to the final proposal in February 1992, the numbers were cause for some ‘concern’.

April 1990February 1992
Relocation cost500,000750,000
Roadworks12,600,00024,250,000
Bridgeworks2,100,0007,000,000
Tunnel works16,250,00020,000,000
Traffic lights1,500,0002,000,000
Subtotal32,950,00054,000,000
Fees3,295,0006,000,000
Contingencies3,295,0005,000,000
Total 39,540,00065,000,000

The COI points out that the bridgeworks, from a ‘1990 figure of K2.1 million, had increased by 233% in less than two years to a February 1992 figure of K7 million, especially since the documents showed the same number of bridges and the same length of those bridges’.

The COI concludes that the financial terms of the Poreporena deal ‘create[d] an avoidable financial disadvantage to the State of not less than K30 million’. This includes the $10 million down payment, the loan from EFIC, +K15 million, and finally, the various taxation advantages awarded to the companies that would have cost the state ‘not less than K5 million’.

Had a general election not been called, these are the terms of the deal that would have resulted in a sizeable ‘gift’ from the state to Kinhill Kramer, Curtain Bros and EFIC.

The Cream then went Sour

Following elections in August 1992, the new NEC started the process of unwinding the damage, directing the preparation of a Termination Notice.

With the deal falling through, Frank Kramer wrote a series of Progress Certificates, ‘issued by Kinhill Kramer’, ‘certified as correct’ by ‘Kinhill Kramer’, claiming up to $US11,122,267.

Kramer also signed a letter as Superintendent on behalf of the state, addressed to the Kramer consortium, giving ‘permission’ that work ‘commence’ on the road before the termination of the deal. The COI notes that ‘it is not clear whether Mr Kramer went to the expense of a postage stamp or even used an envelope given that he was effectively writing a letter to himself…the only surprising aspect of this exchange of letters is that Mr Kramer took four days to reply to himself’.

By August, both the COI and the OC were investigating the conditions of the deal.

The COI had difficulty ‘in relation to political parties and their bank accounts’, ‘trying to ascertain who to serve and at what address’. To them it appeared that ‘either “secret” accounts are maintained or that the affairs of such organisations are at least partly conducted on a cash basis’. Such things ‘facilitate corruption and its concealment’.

Evidence was replete with ‘generalities’, ‘omissions’ and ‘contradict[ions]’. Though, one helpful bit of evidence they did get was Frank Kramer’s diary.

This was 1992. Almost thirty years later a much larger evidence base has lamentably accumulated demonstrating how public procurement is abused to facilitate mega-projects that are all about delivering mega-profits to the corporate sector, at the cost of ordinary Papua New Guineans.

We have seen for instance a Prime Minister’s (O’Neill) company win ADB funded infrastructure contracts under conditions where investigators pointed to fraud and manipulation. Then there is the example of the educational colleges contract awarded to a Chinese consortium after bribes were paid to Sir Michael Somare and his son. We have also seen increased illegal attempts to bypass public procurement process using BOT (Built Operate Transfer) contracts.

All of which points to the way infrastructure projects have become a convenient front for making improper profits at the expense of the public.