THE TOKAUT BLOG
UBS, Oil Search and the Forgotten Middle Men – The Short Version
In February 2014, Prime Minister Peter O’Neill committed the State to a disastrous purchase of a 10% stake in Oil Search Limited. That purchase was funded unlawfully says the country’s chief corruption watchdog, through a financially onerous loan from the Swiss-based banking group UBS.
Much has been written about the folly of the share purchase and the loan, the losses suffered by PNG as a result, and the unlawful actions of the then PM and others.
Much less attention has been paid to key beneficiaries: Oil Search Limited, UBS, and the middle-men – the lawyers, accountants and bankers who cooked up the deal and wrote the “massively controversial“ contracts that “stitched up” the PNG government.
The recently published Ombudsman Commission Report into the affair, highlights what it says are numerous irregularities and unlawful actions in which UBS itself and the middle-men – global law firms Ashurst and Norton Rose Fulbright, accounting firm KPMG, and the PNG based Pacific Legal Group and Pacific Capital Ltd – played a key role.
There is credible evidence the lawyers even wrote the key National Executive Council (NEC) Submission and they drafted Board resolutions for State-owned companies; all this allegedly without any approval or oversight from the Department of Justice, the Attorney General or the State Solicitor.
While Swiss regulators are reported to be conducting their own investigation into UBS and the new Marape government has ordered a full Commission of Inquiry, we wait to see if those investigations will hold the company executives, bankers and lawyers to account.
In the meantime, PNGi has conducted its own analysis of the role played by the elite class of professionals who helped execute this lamentable episode in PNG financial history.
Below is a SUMMARY of the findings from our FULL INVESTIGATIVE REPORT.
In 2014 the government of Peter O’Neill borrowed A$1.239 billion from the Union Bank of Switzerland (UBS) to fund the purchase of 149,390,244 shares in Oil Search Limited. The Ombudsman Commission says the share purchase and the loan were unlawful.
The investment was very timely though for Oil Search with commentators saying it was vulnerable to a potential take over and wanted a large injection of cash so it could buy a stake in the new Elk-Antelope LNG project.
It was in this context that Oil Search CEO Peter Botten and PNG PM Peter O’Neill met at the Grand Papua Hotel in Port Moresby on 23 February, 2014. There, “over a cup of coffee” says the OC, the two men agreed the State should buy a newly issued tranche of shares in Oil Search Limited.
Oil Search maintains that it was an innocent party; that it was the PNG government which approached Oil Search wanting to buy a stake in the company. Either way though, as experienced operators in PNG, Oil Search and its CEO must have known the government was going to have to take out a new loan to finance the purchase and such a commitment would need whole of government endorsement.
Not only was that endorsement was never obtained, O’Neill and Acting Treasury Secretary Dairi Vele, by-passed all normal government procurement and tendering processes, according to the OC.
HOW THE DEAL WAS STRUCTURED
PNG borrowed more than A$1.2 billion from UBS to buy 149 million newly issued shares in Oil Search Limited at a price of $8.20 per share.
For a cash strapped, heavily indebted country, the deal made no financial sense.
Indeed, to ensure they would get paid, UBS insisted on a pretty remarkable guarantee. This involved the sequestration of the State’s income stream from the Exxon-Mobil LNG project which was to be paid direct to UBS.
Although UBS and the middle-men made a lot of money out of the share placement and the associated loans, for PNG the deal was a financial disaster.
UBS is thought to have made about A$120 million in fees and interest, while PNG was forced to sell off the Oil Search shares as their value plummeted. All up, says the Australian Financial Review, the deal is estimated to have cost PNG about A$420 million (K1 billion).
As well as the loan repayment and interest, PNG paid a further $10.9 million in fees to UBS, and a further $1.6 million to professional service firms Ashurst, Norton Rose Fulbright and KPMG.
The losses for PNG did not end there. UBS was also given the right to purchase 20% of the PNG government’s Oil Search shares for a price 10% below what the government paid for them, “guaranteeing a loss in the order of $18 million” for the State.
It has been reported that at a 2014 Christmas party UBS’ Australian bankers boasted about the firm’s success that year, largely due to profits made on the PNG loan, profits made at the expense of PNG taxpayers.
Was UBS gouging profits from its client?
Robert Wyld, co-chair of the International Bar Association and a leading Sydney lawyer, said in 2015 it was “extraordinary” that UBS would approve such a huge, complex and costly deal.
It is also reported, some firms, like the American Bank Merrill Lynch, refused to get involved in the whole affair, citing the political risks and potential reputational damage as reasons for forgoing the rich bounty on offer.
THE MIDDLE MEN
While the Ombudsman Commission was unable to directly investigate companies and private individuals, during its inquiry the conduct of the international and local law firms and financial service providers inevitably came within its purview.
The legal firm Norton Rose Fulbright was advising Dairi Vele, together with their local counsel Pacific Legal Group. According to Vele, Norton Rose were responsible for drafting the ‘necessary documents, approvals and permissions that would be needed’. Those documents allegedly ran to 28 volumes in total and included the draft NEC Policy Submission.
This did not impress the OC:
The preparation of the NEC Policy Submission No. 67/2014 was highly irregular as such documents were prepared by Legal Firms and other Consultants previously engaged by Mr Vele and were not prepared by Government Officials nor were Government Officials involved in the preparation of these Documents for NEC.
UBS’s own lawyers, Ashurst, were also involved in some of the drafting work. They allegedly prepared the Draft Board Resolutions and other legal documents for the State owned Petromin, IPBC and the National Petroleum Company. The OC says these documents were “pre-empting the SOE Board‘s decision and resolutions”.
According to Dairi Vele, KPMG was brought in as part of the State‘s due diligence to provide independent advice on the structure of the loan for the purchase of Oil Search shares:
KPMG‘s role was to test the assumptions about the pricing auctions that UBS AG had developed and generally to ensure that UBS was providing good value for money to the State.
Vele says he also received advice about the transactions from Pacific Capital.
GREED, INCOMPETENCE OR WILFUL BLINDNESS?
Although the Ombudsman Commission was not empowered to investigate the conduct of those outside government, it did make a number of important findings that call into question the conduct of the beneficiaries and middle- men.
One of the most fundamental findings is that the proposal to borrow money through a UBS loan should have been presented to Parliament for approval, as required by Sections 209(1), 211 and 212 of the Constitution. This was also the advice given to the government by State Solicitor Daniel Rolpagarea.
The government’s failure to comply with these Constitutional requirements was one of the reasons given by Treasury Minister Don Poyle for his refusal to endorse the loan; a refusal which led to his sacking.
Yet Dairi Vele explicitly told the OC that the advice he received from Norton Rose Fulbright and Ashurst was that all the Constitutional requirements were being followed:
I had then been advised by Norton Rose Fulbright and by Ashurst that all processes had been and were being followed in accordance with S209 of the Constitution and the respective legislation that provides the mechanics for S209.
Perhaps this is simply a case of different legal interpretations, or Vele not accurately conveying the advice solicited to him by outside contractors. But the fact the whole process was not overseen by the Attorney General and State Solicitor has created a situation where legitimate questions can be asked about their conduct and advice.
The potential ramifications of the OC findings extend further. The Attorney-General Act 1989 states that for any legal issue affecting the conduct of the business of the State, advice shall only be provided by the Attorney General unless s/he authorises advice to be given by another person.
Attorney-General Kerenga Kua has ‘categorically denied’ that he was involved in the approval of the UBS loan and he did not approve the engagement of any of the legal firms who gave advice to the government.
If the OC is right, and the engagement of Norton Rose Fulbright, Ashurst and Pacific Legal Group was “wrong and illegal”, what burden of responsibility falls on the law firms to check that the Attorney General had given his approval?
Presumably these outside law firms must also have been aware that their services should have been publicly tendered? The OC concludes:
The five (5) Consultants; Norton Rose Fulbright of Australia, Pacific Legal Group Lawyers, Pacific Capital Ltd, Ashurst Lawyers and KPMG were all engaged by Mr Vele prior to the awarding of the contract by the CSTB and this was in breach of Section 40(1) of the Public Finance (Management) Act 1995 and Part 13, Division 4, Clause 13 of the Finance Management Manual.
Were none of these firms aware of these legal restrictions?
The Ombudsman Commission and State Solicitor also state the engagement of UBS as the Financial Advisor, Lead Arranger and Lender for the borrowing was done in breach of the public tender requirements of the Public Finance (Management) Act.
Were UBS and the lawyers advising them, Ashurst, aware of this legal requirement?
The Ombudsman Commission says the request for NEC to endorse a Certificate of Inexpediency (COI) to be issued by the CSTB “was a blatant ignorance of the procedural requirements of the procurement and tender process and abuse of the COI”.
Yet the evidence of Vele is that the request for the COI was made on the advice of Norton Rose. Were they aware that a COI was only valid if issued in cases of natural disaster, defence or health emergency or civil unrest? Were they aware that a COI could not legally be retrospective in its effect?
Given that the requirements of the Public Finance (Management) Act have been discussed in detail within National Court decisions, and are further detailed in the official Finance Instructions, it is not difficult for a lawyer to familiarise themselves with the rules.
The OC says the National Petroleum Company of PNG (Kroton) Ltd had “no legal foundation” and “did not have a sound Balance Sheet”. Were Norton Rose, Pacific Legal Group and Ashurst unaware of these facts, or has the OC gotten it wrong?
The OC report includes another startling revelation. Lawyer Karl Okuk, another ‘middle-man’ engaged by the Treasury Department, was not at that time registered as a practicing lawyer and was not legally entitled to act as a Commissioner for Oaths. Yet he witnessed the signing by the State of all the legal documents. According to the OC this was ‘improper’.
Did any of the other lawyers involved carry out due diligence checks?
The OC is also critical of the fact that documentation for the loan agreement with UBS was not all signed in one place, at one time, with all the parties present. Instead the government and State representatives signed the documents in Port Moresby and then sent them to Sydney where they were signed by representatives of UBS.
“This act alone exposed and put to risk Papua New Guinea’s independence and sovereignty”, says the OC. Was it queried by the expensive lawyers the State was relying on for advice?
While the government Ministers who sat in the NEC meeting on March 6, 2014, may have willingly signed off on the deal presented to them, others who were required to give their consent did voice concerns, if only in private.
The leaked Board Minutes from the National Petroleum Company of PNG show how the Directors felt their independence was being compromised.
The Chairman stated his concern the State had “bulldozed the transaction without regard for due process and without giving each State party, including NPCP, sufficient time to understand the nature of the transaction… and the full extent of its exposure”. “Such behaviour erodes and undermines the independence and credibility of the Board”, he said.
The Board were presented with a number of documents, including a draft Board Resolution and draft Power of Attorney which they were expected to approve. They noted the documents had been drafted by UBS’ lawyers, “Ashurst”.
The draft resolution included the statement:
“Each director present confirmed that he was of the view that the Transaction Documents and the transaction contemplated by them are directed to the greatest advantage of the people of Papua New Guinea”.
This was evidently too much for the Board to stomach. The directors unanimously insisted the offending phrase be removed from the resolution.
If it was obvious to Treasurer Don Polye, State Solicitor Daniel Rolpagarea and the Ombudsman Commission that the financing of the investment in Oil Search needed to be approved by Parliament, how could some of the regions top lawyers, accountants and financiers as well as the Managing Director of Oil Search been so unaware?
How could they not have noticed that the scheme they arranged and presented as a fait accompli, in 28 volumes of documents, breached as many as fifteen different laws?
Or is it the Ombudsman Commission that has gotten it all so profoundly wrong?
Prime Minister James Marape has ordered a Commission of Inquiry to try and get to the bottom of a deal which cost the nation A$420 million.
Such an inquiry could provide a unique opportunity for a deep dive into the ambiguous world of the middle-men, where so many of the commercial transactions – both large and small – that cost the PNG tax payer billions of dollars every year are arranged.
Unfortunately though, even a Commission of Inquiry does not have the power to compel witnesses in Australia to give evidence. Lets hope that those outside PNG who were instrumental in the whole UBS fiasco will give their full cooperation and not seek to hide behind jurisdictional boundaries, commercial confidentiality or lawyer client privileges.
Want to FIND OUT MORE? Read our full INVESTIGATIVE REPORT.