UBS loan was an ‘unnecessary disaster’ for PNG and its people

The Commission of Inquiry into the UBS loan has finished but the Commission’s findings, contained in a fifteen volume report, have been locked away, at least for now. The Prime Minister has pledged the report will be presented to Parliament on 19 April and the findings made public after that. In the meantime, an assessment of the facts and the reliability of key witnesses written by the eminent lawyers assisting the inquiry (Senior Counsel Dr James Renwick CSC SC, Dr Dominic Katter and Levente Jurth) has been made available

The 2014 UBS loan was, for the State and the people of Papua New Guinea, ‘an unnecessary disaster’ say the lawyers assisting the recently completed Commission of Inquiry in the matter.

It was a disaster that was orchestrated by the then Prime Minister, Peter O’Neill.

Mr O’Neill’s decision to take out the A$1.39 billion loan was, say the lawyers, entirely voluntary and unnecessary and led to an ‘enormous loss of K862 million and the lost opportunity to put that money to better use’.

The loan was deemed necessary by the Prime Minister as he had determined the State should purchase a 10% stake in the publicly listed company Oil Search Limited.

His reasons for making that investment decision, which goes to the very heart of the whole debacle, remain in dispute.

O’Neill ‘not credible’

Counsel assisting the Commission of Inquiry have given a damning assessment of Peter O’Neill’s evidence.

Peter O’Neill has always publicly maintained that he wanted to purchase the Oil Search shares on behalf of the nation to forge a strategic alignment with one of PNG’s oldest and largest companies.

This claim, say the lawyers assisting the Inquiry, ‘was never convincing’ and ‘cannot withstand scrutiny’.

Carlo Civelli was the major recipient of funds from the UBS loan say counsel assisting the inquiry

The lawyers point to a large cache of evidence which they argue shows the real reason for the loan and the share purchase was to provide Oil Search with the cash it needed to buy a stake in the Elk/Antelope (Papua LNG) project from PNG LNG group of companies owned by the Swiss financier and founder of investment company Clarion Finanz AG, Carlo Civelli.

It was Civelli and his companies that ended up with A$1 billion from the monies borrowed from UBS.

Peter O’Neill has told the Commission of Inquiry he had no idea what Oil Search intended to do with the money, that he never discussed the price for the shares, and that he had never met Mr Civelli.

These claims simply ‘cannot be accepted’ say the lawyers assisting the inquiry and Mr O’Neill’s ‘asserted ignorance should be rejected’.

Mr O’Neill’s evidence is that there was never any discussion about Oil Search using the funds raised from the issue of the shares to purchase the PAC LNG Companies or an interest in PRL 15 and that he that he never discussed with Mr Botten the purchase price for the shares which were purchased as part of the UBS deal. You would reject this evidence.”

As well as calling on the Commissioners to ‘reject’ Mr O’Neill’s evidence on key issues, the lawyers also raise the question of what Mr O’Neill might be trying to hide.

“Mr O’Neill’s attempts to distance himself from PRL-15 (Papua LNG) are extraordinary and so unconvincing that they give rise to the question of whether he might be wishing to conceal something and if so, what.”

The lawyers point to the uncontested evidence of key witnesses including Oil Search Managing Director, Peter Botton, and then Acting Treasury Secretary, Dairi Vele, contemporaneous internal Oil Search documents and even the State’s own press release announcing the share purchase and the NEC submission signed by the Prime Minister himself, to support their conclusion that Mr O’Neill’s evidence is not credible and the Commission of Inquiry should reject it.

The Oil Search Annual Report for 2014 makes it very clear what the USB loan monies were used for.

Despite his denials, the lawyers say it is clear Peter O’Neill knew and intended that the monies that he arbitrarily decided the State should borrow from UBS (in what was a one-sided and unfair deal), would end upon the hands of Mr Civelli, a man that Peter O’Neill had met and had private discussions with on at least two occasions in the lead up to the deal.

“A notable feature of the evidence in this Commisison [sic] is that Mr O’Neill and to a lesser extent Mr Vele wished to distance themselves from any dealings with Mr Civelli. In the case of Mr O’Neill this involved false statements to the commission that he had never met or spoken to Mr Civelli in 2012/3 when Mr Maladina said he had done so. Critically the Commission can find that Mr O’Neill had spoken with Mr Civelli about Elk-Antelope. If Mr O’Neill’s denials were false as we submit they were, the question is why Mr O’Neill went to such lengths to deny it: a the very least it raises suspicions that such conversations may not have involved legitimate business dealings.”

O’Neill’s claims that he wanted the State to buy a stake in Oil Search as a strategic long-term investment in is also undermined, say the lawyers, by subsequent events. They say that once Oil Search had in March 2014, paid US$900 million to buy Mr Civelli’s interest in the Elk Antelope development licence, the Prime Minister evidenced an ‘almost immediate’ willingness for the State to sell its shares in Oil Search.

O’Neill’s rationale for the share purchase, say the lawyers, is also disputed in the evidence of the expert economists called on by the Commission to analyse the UBS loan transactions. The economists say they can find no strategic investment objective that could be served by the government’s purchase of the shares in Oil Search.

Follow the money

It is often said in investigative journalism and political debate that if you really want to understand the rationale behind a complex series of transactions or events then you should ‘follow the money’ and examine the financial transfers between the parties.

The phrase was first popularised in the 1976 film All the President’s Men which dramatised the Watergate scandal that brought down United States President Richard Nixon.

In the case of the UBS loan scandal, the Commission of Inquiry has followed the money borrowed by the State from UBS and found that much of it ended up in the hands of ‘entities under Mr Civelli’s control”.

Of the A$1.39 billion borrowed from UBS, A$1.2 billion was paid to Oil Search Limited in return for a 10% shareholding in the company. The rest of the money borrowed from UBS went straight back to the bank as a lump sum payment of the interest on the loan and bank fees.

From the A$1.2 billion received by Oil Search, A$1 billion (USD900 million) was used to buy the PAC LNG group of companies and its 22.8% interest in the Elk/Antelope Petroleum Exploration Licence (PRL-15).

“The State borrowed more than AUD 1.2 billion to fund its purchase of 149.39 million Oil Search shares at AUD 8.20 per share. Oil Search paid USD 900 million of that to various entities. In effect, the State’s purchase of Oil Search shares funded Oil Search’s purchase of PAC LNG companies, which in turn went to the beneficial owners of the entities listed below, which includes the PAC LNG companies.”

TABLE: Payments made by Oil Search to secure ownership of the PAC LNG companies.

Beneficiary Amount received (USD)
Pacific LNG Operations Ltd $582,542,245
Aton Select Fund Limited $186,026,644
Sawmill Trust (Bruce Hendry) $39,175,353
John J Mack $39,175,353
Polygon PNG LP $30,385,988
Papua’s Crude Investment $15,665,401
IPWI Partners LP $6,099,284
King & Spalding LLP $498,653
Baker Botts $335,000
Maples and Calder $96,087

All the above payments were made by Oil Search Limited from a USD account it held with Westpac PNG ‘shortly after 12 March 2014’.

Pacific LNG Operations Ltd is an offshore company registered in the tax haven British Virgin Islands. Carlo Civelli is one of four listed directors.

Pacific LNG Operations Ltd is registered in the British Virgin Islands – a secretive tax haven.

Aton Select Fund Limited is also an offshore company. It is registered in Mauritius.

Nothing is known about the Sawmill Trust or Bruce Henry. There is a John J Mack who is an investment advisor from the United States and former CEO of Morgan Stanley bank, but there is no evidence to say he is the same John J Mack listed as a beneficiary of the payments by Oil Search.

Polygon PNG LG is is another offshore company, this time registered in the Cayman Islands.

There is a company with the name Papua’s Crude Investment Ltd registered in Texas in the United States.

Nothing is known about IPWI Partners LP except that it was also listed as an investor in InterOil Limited in a 2005 filing with the US Securities and Exchange Commission.

King & Spalding LLP and Baker Botts are US based international law firms and Maples and Calder is a law firm based in the Cayman Islands. The small payments made to these three law firms are likely to be for legal fees for work done for the companies list above.

A bad deal

The decision to purchase a large stake in Oil Search limited and thereby provide it with the funds to buy into the Papua LNG seems to have been a decision made by Peter O’Neill as Prime Minister.

It was only after the decision had been made and publicly announced that the approval of the National Executive Council was sought.

Similarly, say the lawyers assisting the Commission of Inquiry, the decision to borrow the money from UBS AG was made by O’Neill and his acting Treasury Secretary Dairi Vele.

‘No formal process was utilised’ in the selection of UBS as the financier and there was no attempt to conduct an open tender process or to obtain considered independent and expert advice on the terms of the loan.

There were also breaches of the Public Finances (Management) Act, say the Commission lawyers, in the engagement of lawyers to draft and advise on the loan documentation and in the payment of fees to UBS.

As a result, it is argued, O’Neill signed off on a loan agreement that was unfair, unjust and unnecessarily costly for the taxpayer.

According to the lawyers for the Commission, the complex loan deal was ‘not well understood by the State and its in-house officials and advisors’ .

Most damningly, say the lawyers, the loan agreement ‘involved over-charging by UBS of approximately K456 million’.

The lawyers suggest the State should ‘ask for this money back and the Australian authorities should be asked to investigate and if appropriate take action’.

One of the reasons O’Neill signed the nation up to such a bad deal, say the lawyers, was because the government processes for the assessment of the UBS loan ‘were inadequate, uncoordinated and rushed’.

Those inadequate process culminated in an ambush of Ministers sitting on the National Executive Council:

“NEC/Cabinet process – and the benefits of debate and consideration it should bring – was undermined by the then Prime Minister O’Neill’s decision to put to the NEC a UBS Loan of enormous complexity, based on a cabinet submission which no other Cabinet member including the Treasurer had prior sight of.”

A breach of trust?

Having been so desirous at one time for the State to acquire a strategic long term stake in Oil Search, once the UBS loan money had been used by Oil Search to buy its stake in the Elk Antelope PDL from companies largely controlled by Mr Civelli, Mr O’Neill was in the next moment strangely wiling to sanction the sale of the Oil Search shares, say counsel assisting the Commission of Inquiry.

However, the sale of the shares did not happen straight away, despite the strong desire of Kumul Petroleum Holdings, which held the shares and the USB loan debt as the State’s nominee, to be rid of them. Instead the sale was delayed for some three years ‘for apparently non-commercial reasons’, say the lawyers.

The decision on when to sell, say the Commission lawyers, rested entirely with Peter O’Neill as the sole shareholder in KPHL, a share he holds as trustee for the State.

It was Mr O’Neill, say the Commission lawyers, who would not allow the shares to be sold until after the June 2017 elections.

This was despite an October 2015 decision that authorised KPHL to terminate the loans and dispose of the Oil Search shares and a January 2016 KPHL board decision to terminate the loans.

By delaying the sale of the shares until September 2017, after successfully being being re-appointed as Prime Minister, Mr O’Neill further extended the costs to the State and the loss to taxpayers, say the Commission lawyers.

Firstly, an additional $75 million was wasted when the loans had to be refinanced in 2016 when their initial term expired.

“If the State had not sought to refinance the loans in February 2016, and simply allowed them to expire according to their terms, the State’s loss would have reduced by between AUD74.4 and AUD75.1 million”.

The 2016 refinancing, say the lawyers was another contract that was not fairly priced ‘and favoured UBS’.

But then, by authorising the sale of the shares in September 2017, before the term of the new loans expired, Peter O’Neill caused a further loss to the State of $51 million say the Commission lawyers.

The reason Mr O’Neill delayed the sale of the shares, and thereby increased the losses to the State, say the Commission lawyers was that he was was waiting for the right political opportunity and that selling before the 2017 election was not seen as politically acceptable.

The Commission lawyers say that ‘when it was put to Mr O’Neill that he waited until he won the election to approve the sale of the Oil Search shares, he replied: “That is not quite true; no.”’.

Nonetheless, the lawyers have submitted that in first withholding and then giving his permission for the sale of the shares ‘for non-commercial purposes’, Peter O’Neill could have breached his Trustee duties. Counsel says this could justify a referral to the Ombudsman Commission under the Leadership Code and could also amount to conduct relevant to the Organic Law on the Independent Commission Against Corruption Law 2019.

Prime Minster James Marape has pledged that those responsible for the UBS loan debacle and heavy losses for the State will be held accountable.

The lawyers assisting the Commission of Inquiry have pointed a finger of blame very firmly at Mr O’Neill.

We now wait to see if the Commissioner’s agree with their learned counsel, and, if they do, whether Papua New Guinea’s justice system is capable of holding someone as powerful as Mr O’Neill to account.

Any attempt to mount a wider international criminal investigation, and bring to justice everyone who may have unlawfully benefited, will need a collaboration between multiple state parties. At the minimum the Australian government will need to be involved, but it could require the cooperation of a wider range of jurisdictions. Can Papua New Guinea authorities even hope to coordinate such an effort?