Michael Nali Part 3: Climbing the Great Wall
This is the final instalment in a three-part profile of Michael Nali, the current Minister for Works and Implementation. Here we look at his unique private and public relationship with a Chinese state corporation implicated in a wide range of corruption and bribery scandals.
Nali was first elected to parliament in 1992. He is now in his fourth term as MP for the seat of Mendi in the Southern Highlands.
During a turbulent career, the MP for Mendi has faced two Leadership Tribunals, where he was accused of inciting a riot, misusing his position as a leader and misappropriating K510,000. Some of those allegations are still outstanding and have never been resolved.
Nali has also had a controversial role in one of Papua New Guinea’s largest real estate development, the Paga Hill Estate. You can read more on these issues in Part 1.
Alongside his political career, Nali has developed a number of high profile businesses. They have kept him connected to some very influential political figures when out of public office between 2007 and 2017. During that period Nali’s companies also benefited from high-value and sometimes controversial government contracts, as PNGi explored in Part 2.
We now turn our attention to Michael Nali’s unique business relationship with one of China’s largest State corporations, the China Railway Group (CRG). PNGi can reveal the Works Minister co-owns, in a private capacity, the company Nation Building Construction Limited with CRG, via one of its Papua New Guinea subsidiaries. This comes as CRG is being awarded massive construction contracts across Papua New Guinea.
CRG is a company with a chequered international record which has seen the Chinese state corporation implicated in numerous cases of corruption and malfeasance, including using bribery to obtain government contracts, and human rights abuses.
Despite its international record, CRG has been the beneficiary of some extraordinarily lucrative contracts with the O’Neill government. These contracts date back to at least 2013, and are valued at over K1 billion.
In addition, at the end of 2017, the PNG government has signed an agreement with CRG for road upgrades costing a staggering K13 billion. This contract will fall directly under the responsibility of Michael Nali as the Minister for Works.
Bribery and corruption
While Papua New Guinea is apparently happy to sign billion dollar deals with the China Railway Group, other countries, such as Norway and Scotland have been more circumspect.
At the end of 2014 the Norwegian state pension fund decided to disinvest from the China Railway Group. This decision was based on recommendations made by its Council of Ethics (CE) relating to China Railway Group’s national and international activities. The CE was of the view that the company ‘did not meet national or international standards regarding compliance and anti-corruption.’ You can read the full report here. It states:
the Council on Ethics recommended the exclusion of China Railway Group Ltd. due to an unacceptable risk that the company has been involved in gross corruption. According to information obtained by the Council there is a high degree of probability that CRG and a subsidiary paid bribes to government officials for contracts regarding construction of railways and housing projects (p17).
Of even more concern to the Norwegian Council of Ethics was that ‘CRG neither responded to the corruption allegations uncovered in the company nor did it seem to have implemented adequate measures internally to prevent corruption in the future’ (p17).
It notes ‘CRG and one of its subsidiaries have apparently bribed civil servants to secure contracts to build railways and housing projects. This is reflected in two Chinese legal rulings relating to the recipients of the bribes‘ (p201).
The Council of Ethics also draws attention to Chinese press reports that CRG was one of the companies being investigated and sanctioned internally by the Communist Party for having paid bribes (p.201).
Those receiving bribes evidently included Liu Zhijun, who was the Minister for Railways between 2003 and 2011. Liu Zhijun was convicted of having taken the equivalent of nearly $8 million in return for awarding railway contracts. The Council of Ethics notes that he is assumed to have received a far higher amount. Zhijun pleaded guilty and was sentenced to death (later commuted to life imprisonment).
This is only one among many instances of bribery exposed in the Council of Ethics report that points to CRG’s dubious way of doing business. For instance, the report also notes the bribery of state employees by CRG through illegal kick-backs to secure a major housing project. It also refers to legal rulings directly against CRG employees accused of taking bribes from other firms. This includes CRG’s former CEO (sentenced to 11 years prison) and a former head of construction (p206).
In 2016, Scotland withdrew from MOUs worth billions signed with CRG following public outcry, based in part on reports from Amnesty International.
Amnesty International revealed CRG’s subsidiaries and its joint ventures in the Democratic Republic of the Congo (DRC) were involved in human rights abuses and forced evictions.
In January this year, CRG’s subsidiary China Railway Construction Engineering Group Corporation (the parent company of China Railway Construction Engineering (PNG) Limited) was accused of using forged documents and a state authority seal, as well as providing false information to qualify to bid on a major construction project in China. This indicates that the illicit culturewithin the company may be alive and well.
China Railway Group and the Minister
The China Railway Group is not an ethical fit for Norway, Scotland or major human rights NGOs such as Amnesty International. It appears, however, to be of a high enough ethical standard for Michael Nali.
Nali formally established his personal business relationship with the China Railway Group during 2014. At the time he was out of public office, having lost two consecutive elections.
But he remained closely entwined with political heavyweights, including the Prime Minister, Peter O’Neill.
In March of 2014, Michael Nali registered a new company, Nation Building Construction Ltd[i]
Fifty-one percent of the shares in Nation Building Construction are owned by Michael Nali’s private company Simply Blue Collar Ltd. Simply Blue Collar lists its principal activity as ‘Property rental/lease, repair & maintenance.’[ii] Nevertheless, it has also benefited from at least K47 million in government construction contracts (see Part 2).
The other 49% of Nation Building Construction is owned by China Railway Construction Engineering (PNG) Limited (CRCE PNG). The latter is a local subsidiary of the China Railway Construction Engineering Group (CRCEG), which itself is a subsidiary of the China Railway Group (CRG).
As Nali owns just over 50% of the company, Nation Building Construction is registered as a locally owned company. It thus avoids a vetting process that foreign enterprises must go through.
The two directors of Nation Building Construction are Michael Nali and the Chinese national Sean Lau.
There is no information on file at the Investment Promotion Authority (IPA) about the activities of Nation Building Construction Ltd. It appears the company has not filed any annual returns since its inception (in apparent breach of the Companies Act). The only document publicly available is the application for registration.
PNGi has carried out a careful examination of IPA records and has traced seven active registered subsidiaries of China Railway Construction Engineering (PNG) Limited.[iii] We have not though been able to find any other example of a business partnership between CRCE PNG and a PNG individual or company.
We have also identified a further eight PNG registered companies that link back to the China Railway Group. Again there is no evidence of any local involvement in the ownership of those companies.
[i] Nation Building Construction Ltd, Application for registration of a company, IPA, registered by IPA on 19 December 2013.
[ii] Simply Blue Collar Ltd, Company Extract as of 20 June 2018 and Annual Return 2015, IPA.
[iii] CRCE Property Limited; CRCE Home Center Limited; CRCE Machinery Limited; CRCE Studio Ltd; CRCE Property Management and Maintenance Ltd; CRCE Consultants Limited; and Nation Building Construction Ltd.
Sean Lau or Sheng Liu?
Michael Nali and Sean Lau are the listed directors of Nation Building Construction Limited.
Sean Lau shares the same date of birth (29 July 1979) as the sole director of China Railway Construction Engineering (PNG) Limited, Sheng Liu.
Is Sean Lau an ‘anglicized’ version of the name Sheng Liu?
Sheng Liu is, or was, the sole director of all CRCE PNG subsidiaries in PNG.[v] Yet, the only instance we can find of the name Sean Lau being used in the IPA database is in relation to his partnership with Michael Nali.
[iv] Nation Building Construction Ltd, Application for registration of a company, IPA, registered by IPA on 19 December 2013 and China Railway Construction Engineering (PNG) Ltd, Consent and certificate of director signed 28 February 2009, IPA.
[v] CRCE Property Limited, Company Extract as of 20 June 2018, IPA; CRCE Home Center Limited, Historical Directorship as of 21 June 2018, IPA; CRCE Machinery Limited, Company extract as of 21 June 2018, IPA; CRCE Studio Ltd, Company Extract as of 21 June 2018, IPA; CRCE Property Management & Maintenance Ltd, Company Extract as of 21 June 2018, IPA; CRCE Consultants Limited, Company Extract as of 21 June 2018, IPA; CRCE First Development Limited, Company Extract as of 21 June 2018, IPA; China Railway Construction Engineering Group (PNG) Real Estate Co., Ltd, Historical Directorship, IPA; China Railway Construction Engineering Group (PNG) Real Estate Co., Ltd, Company Extract, IPA
Billion dollar deals
During 2017 Michael Nali was put in a difficult situation. China Railway Group, to whom he is wedded privately, was now entering into high value contracts with the government of Papua New Guinea.
Nali is responsible for signing these agreements in his capacity as Minister for Works.
In November 2017 it was announced China will fund over K14 billion worth of new infrastructure projects under agreements signed with the PNG government.
Almost 90% of the funds will be spent on the upgrading and sealing of over 1600 km of roads. This takes place in a high risk environment. Road building has been a frenetic space for procurement fraud and corruption.
It appears the China Railway Group will be a significant beneficiary of this major investment in roads. If we take into account the significant risk of corruption in PNG’s road procurement system, and China Railway Group’s own track record, this arrangement raises a serious red flag.
Then there is this.
The agreement for the road project was signed on the PNG side by the Minister for Works and Implementation Michael Nali, and the Works secretary David Wereh.
On the Chinese side, there are conflicting reports about exactly which company is the beneficiary of the new road contract. However, it seems all roads lead back to the same parent company, the China Railway Group.
The National newspaper reported that the road deal was signed by the President of the China Railway International Group Corporation Ltd (CRIG) Chen Shi Ping, and its vice president Wu Dongzheng.
CRIG is a wholly owned subsidiary of the China Railway Group.
On the other hand, the Post-Courier newspaper reported that the deal was signed by the President of the China Railway Group itself Zhang Zongyan, and the President of another subsidiary, China Railway Construction Engineering (CRCE) Bi Yanchun.
Both newspaper agreed though that the signing was witnessed by the Prime Minister Peter O’Neill and the Chinese Ambassador Xue Bing, among other important dignitaries.
Certain other details remain unclear, including how the projects will be financed, how the contracts have been priced and how the Chinese contractor, the China Railway Group, was selected.
However, from the media coverage it appears Michael Nali did not declare a conflict of interest when signing this contract with China Railway Group in his capacity as Works Minister.
Track record in PNG
This is though only the latest in a series of government contracts secured by the China Railway Group through its subsidiary China Railway Construction Engineering. From media reports, PNGi has been able to establish that China Railway Construction Engineering has been awarded at least six government contracts worth over K1 billion since 2013.
The list includes K53m for the renovation of NCDC City Hall in 2013[vi], the construction of a hydro power station in the Central Province in 2014, and over K600m for the initial earthworks and construction of the national judiciary complex.
The latest on the list is ‘the construction of an iconic multi-story building that will become the headquarters of PNG Ports‘.[vii] The value of that contract is currently unknown but is reported to include some form of ‘equity partnership’.
China Railway Group is also looking to extend its reach into New Ireland. In January this year, CRG’s subsidiary, China Railway International Group Corporation Ltd was reportedly in talks with the New Ireland government over its potential involvement in major projects, such as the Provincial Government Offices, Kavieng Foreshore development, New Ireland University, Kavieng Sports Stadium and a new Kavieng Market.
While China Railway Group may be the beneficiary of lavish contracts in PNG, it has not been entirely smooth sailing.
In August 2013, The National reported that China Railway Construction Engineering PNG was awarded a contract worth K263 million to build the 2015 Pacific Games Village. This was despite (i) the job allegedly being valued at only K190m; (ii) CRCE PNG not having been selected by the Central Supply and Tender Board as a top three contender; and (iii) CRCE PNG having been disqualified by the Tender Evaluation Committee.
Documents reportedly sighted by The National newspaper noted: ‘China Railway Construction Engineering failed to meet the annual turnover requirements and his (sic) failure to provide the working capital, liquid assets and/or credit facilities information, and no certificate of compliance to confirm payment of tax to the IRC, disqualifies him for further evaluation.’
When challenged about the contract in Parliament, Minister Tkatchenko claimed the company had been recommended by the Central Supply and Tender Board, contradicting the media story. Transparency International (TI), however, still lists the awarding of the contract as an ongoing and unresolved scandal.
TI has questioned the circumstances in which the government ignored the recommendations of the Central Supply and Tender Board. TI also argues there are ‘real risks‘ of finding later that ‘inducements were involved’ and that the company which won the inflated contract then sub-contracted the work to one of the companies that bid around 200 million and collected ‘70 million for basically no work’.
PNGi has not sighted any evidence to support either of these hypotheses. However, Minister Tkatchenko did tell Parliament the work on site was not being done by CRCE itself, but rather had been subcontracted to Curtain Brothers. Evidently the Chinese did not have sufficient staff or ‘procurements’ in country.
In 2015, CRCE PNG also completed renovations of PNG’s old parliament building at a cost of K180 million, under a contract awarded three years earlier.[viii] The cost and way the contract had been awarded had been criticized by some MPs, with other concerns being the cheap quality of the renovations.
The Managing Director of CRCE PNG, Sean Lau, blamed delays on the large number of Australian design companies involved as consultants in the project. He also told media that CRCE PNG had to lower its initial tender price of K170m in order to match the government’s budgeted allocation of K160m. Despite this price reduction it is reported the whole project still ended up costing the government K180 million.
[vi] M. Martin (2013), ‘NCD to get new, iconic City Hall,’ PNG Post-Courier, 29 August 2013.
[vii] PNG Ports ‘Ahoy’ magazine, December 2016 issue.
[viii] G. Kenneth (2015), ‘Old Parlt House facelift cost K180m,’ PNG Post-Courier, 7 August 2015.
Another CRG subsidiary in the spotlight
CRCE PNG is not the only China Railway Group subsidiary to have attracted criticism in the media.
In 2013, the Post Courier revealed that the National Executive Council ‘overlooked’ the Central Supply and Tenders Board in the awarding of a contract worth K1 billion to two Chinese companies – including China Railway International (CRI) – for rehabilitation work on the Highlands Highway.[ix] The NEC asked Central Supply and Tender Board to “correct the anomaly”, something the Post Courier was very critical of in its Editorial.[x]
In 2015, CRI came again in the spotlight in relation to the same contract. The Prime Minister reportedly said he was ‘running out of patience’ over delays and threatened to terminate the K560 million contract awarded to CRI.
I don’t like the way construction of that road is going. There is a possibility that we may cancel the contract. We can’t have sub-standard roads on the main highway. It must be done properly, to the highest standard that we are demanding.[xi]
Defending its work, the company replied that the PM had been ‘misinformed,’ and promised a comprehensive report to the Works department.[xii]
In 2017, it was announced the company had been awarded the contract for the project’s second phase.
[ix] ‘Error in contract CSTB requested by Cabinet to correct mistake,’ PNG Post Courier, 20 May 2013
[x] ‘Respect the CSTB as an institution,’ PNG Post Courier, 21 May 2013.
[xi] ‘Firm faces boot,’ Pacnews, 11 August 2015.
[xii] F. Kapin, (2015), ‘Highway contractor says PM has been misinformed,’ PNG Post-Courier, 12 August 2015.
The governance arithmetic presented here is simple.
The China Railway Group has been linked to a wide range of corruption scandals, linked to its alleged propensity to bribe officials in order to win contracts.
The Noweigan and Scottish governments have cut all ties to the firm. Amnesty International claims the Group is implicated in serious human rights abuses.
China Railway Group subsidiaries are receiving enormous contracts to construct roads throughout Papua New Guinea.
Road procurement has been highlighted as being deeply impacted by corruption.
We have, therefore, a high risk firm in a high risk sector.
Then to top it off, the Works Minister has a private business relationship with the Group. PNGi has been unable to find any public record where Michael Nali discloses this conflict of interest.
This is not the first time Michael Nali has benefited a private business partner through the execution of his public Ministerial role.
In Part I it was noted that he lobbied for the Paga Hill Land Holding Company in the NEC, at a time when he was commercially tied to two of its shareholders. Later, once he lost office, Nali acquired a 9% stake in the property development.
However, arguably of greatest concern are outstanding allegations of misappropriation that are still evidently to be tried by a Leadership Tribunal.
Would the Prime Minister back such a measure against a man who is his private business partner?
All of which reminds us why the authors of the Constitution recommended politicians cut business ties when they enter public life.
The conflicts it involves create a high risk environment for graft, favours and impunity.