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UBS loan to PNG government may have breached 15 laws

Botten & O'Neill
Oil Search's Peter Botten and Peter O'Neill - "The deal to purchase the Oil Search shares was irregular," says the PNG Ombudsman, and the loan that enabled it was "highly inappropriate and speculative"


SYDNEY - A $1.24 billion (K2.9 billion) loan arranged by UBS Australia for the government of Papua New Guinea may have breached 15 laws, according to the watchdog in Port Moresby, which labelled the deal "highly inappropriate" and "speculative".

The 332-page report compiled by the Ombudsman Commission of PNG outlines a series of possible legal and governance breaches by prime minister Peter O'Neill and is set to refocus attention on the role of UBS in providing the loan.

The Australian Financial Review has obtained a copy of the report, completed in December last year, but only handed to the speaker of parliament earlier this month. It has not yet been tabled in parliament.

Its release will put further pressure on Mr O'Neill who is clinging to power amid growing opposition to his leadership and is preparing to face a no confidence vote when parliament returns on 28 May.

The UBS loan was used by the PNG government to buy a 10% in Oil Search, which in turn used the money to buy into the Elk Antelope gas field that is being developed by France's Total.

"The buying of shares in a speculative market by the government using huge loans from a financial institution is highly inappropriate," the Ombudsman said.

It made adverse findings against the prime minister, two former ministers and a handful of senior bureaucrats.

The Ombudsman said the deal to purchase the Oil Search shares was "irregular" due to the lack of consultation with state agencies and the bypassing of parliamentary approval.

The report finds the K2.9 billion loan, extended in March 2014, should have been approved by parliament and may also have breached PNG's responsible lending laws and its overseas borrowing provisions.

The report lists a total of 15 laws potentially broken in the course of obtaining of the loan.

PNG is estimated to have lost K1 billion kina on the deal after being forced to sell out of Oil Search in September 2017, as the company's share price fell amid a broader slump in commodity prices.

UBS is believed to have made K280 million in fees and interest payments from the deal, which is now also under scrutiny from the Swiss regulator.

UBS declined to comment.

The PNG Ombudsman declined to verify the "final report" obtained by the Financial Review, but confirmed it had been delivered to the speaker of parliament. Metadata from the file shows the document was created in the Ombudsman's office.

Among dozens of other adverse findings, the report reveals the lawyer who witnessed the loan agreement was not a registered solicitor, potentially "rendering the entire contract documents questionable, wrong and improper".

It says less than two months after the deal was announced, lawyers acting for UBS wrote to the PNG government advising that if payments relating to the loan were not made the entire country could be in default.

That would have given UBS the right to sell the Oil Search shares and charge interest on the unpaid amount, while also threatening other loans extended to PNG.

The report points out then Treasurer Don Polye, who refused to sign off on the deal and ultimately resigned in protest, was not involved in the negotiations with Oil Search and UBS on the purchase and funding of the shares.

Mr Polye highlighted several issues, according to the report, including that it required parliamentary approval as it would push borrowings above the country's ceiling.

In a response to the Ombudsman's provisional findings, which was included in the final report, Mr O'Neill denied any wrongdoing and said the investigation was "fatally flawed".

The report detailed the circumstances surrounding the decision to purchase shares in Oil Search and for UBS to provide the funding for the transaction.

On 23 February 2014, Oil Search managing director Peter Botten met Mr O’Neill and acting treasury secretary Dario Vele and an agreement was struck to purchase shares in the company.

Two days later, UBS wrote to Mr Vele to outline the terms of engagement to act as sole advisor and arranger for the investment in Oil Search and related refinancing of a maturing loan provided by the Abu Dhabi sovereign fund.

UBS had been chosen ahead of several other banks to manage the refinancing of the loan.

On 26 February 2014, the prime minister wrote to Mr Botten to inform him of his willingness to purchase shares in the company.

The following day, Mr O’Neill wrote to UBS managing director Guy Fowler regarding its proposal to provide funding for the state in connection with the purchase of the Oil Search shares. That same day Mr Vele received a commitment letter from UBS.

Mr Botten announced his intention to step down as Oil Search managing director last week after nearly 25 years in charge of the company. Mr Fowler has announced his retirement from UBS.


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William Dunlop

Chris - I cut my hard teeth as a 12 year old on Nigel Tranter's novels containing great historical content.

My thanks to you on 'The Story of Scotland', available on Amazon Kindle. It's now in my library.

Their are parallels to be drawn between Dalradia, Caledonia Scotia and today's Papua New Guinea.

Peter  Sandery

I think you are onto something as I have been thinking along similar lines for some time. Thanks for the reference to "The Story of Scotland" I will order a copy now.

Joe Fernhout

Hello to Keith Jackson, Thanks so much for excellent work in PNG Attitude. I have written another article but ask that you would send me your email address so I can send directly to you.

My first and most significant article for PNG Attitude was 13 July 2017 on PNG LNG project and where is all the money going.

This new article I would ask that you publish is mostly a reprint of the article on Prime Minister's corruption in the 2014 Wild Cat misuse of funds using money from Asian Development Bank. Please send me your email address.

Joe is the nom de plume of a writer who is known to me. I have sent him my contact email - KJ

Bernard Corden

"One of the necessary accompaniments of capitalism in a democracy is political corruption" - Upton Sinclair

Chris Overland

I think that the fact that this article has attracted no comment at all until now speaks volumes for the state of mind of ordinary Papua New Guineans.

They are now so used to hearing about the skulduggery, corruption and malfeasance of their political leaders that they no longer react to evidence of even the most egregious bad faith, self interest or outright criminality.

I have recently read Nigel Tranter's lively book "The Story of Scotland", in which he relates in a non-academic and accessible way the centuries of chicanery, deviousness, vengeance seeking, theft and murder that are a feature of that country's historic heritage.

The Scottish ruling class devoted their time and energy to an endless real life version of The Game of Thrones, where they schemed and manoeuvred to seize the throne or, at least, achieve great influence over its current, usually hapless or despicable occupant.

All this was done, not for the public good, but in their interests and those of their fellow clansmen.

The ordinary Scot was a mere helpless bystander in this incessant struggle for power. Their interests were ignored and their role restricted to that of humble supplicants to the supposedly great and good.

They were, of course, expected to serve as soldiers in the endless succession of violent and bloody battles that were a feature of Scottish politics. Naturally, they bore the brunt of such battles, being cut down in droves.

Scotland's long and dreadful centuries of anguish only really shuddered to a halt when the country was, very unwillingly, brought into union with England. The internecine fighting died away if for no other reason that the Scots were united in their suspicion of the Sassenach southerners.

It is a great puzzle to me that the current crop of Scottish nationalists know so little of their own history that they seem to discount utterly the possibility that with independence may come the resumption of such struggles, although perhaps without the high casualties of the past.

The relevance of this to PNG is that it seems to me to have the same potential for sectarian, ethnic and tribal anarchy that beset Scotland for so long and which is stirring once more in places like Spain and Eastern Europe.

Even the powerful Chinese government is sufficiently concerned about signs of internal dissension amongst ethnic Uyghurs that it is busily incarcerating them is so-called re-education facilities. This latter name is merely a euphemism for prison camps.

I suppose that I may be rightly criticised for drawing too long a bow with my Scottish analogy.

After all, who can sensibly imagine the world reverting to the state of anarchy that existed only a very short time ago in those places that now count themselves bastions of humanity's highest levels of civilisation?

Well, I can for one. History is replete with examples of high civilisations falling suddenly and catastrophically into the abyss of social fragmentation and anarchy and there is no particular reason to think that we current lot of humans cannot repeat this process.

All we have to do to start the process is to ignore or set aside what we have hitherto regarded as the norm for our democratic governments. That is, that they will generally act honestly, conscientiously and mostly competently in the greater public interest.

It seems to me that the public expectation that governments will do this is the glue that holds our societies together.

As soon as we know or suspect that this is not the case, then what reason is there to support, however grudgingly, the whole notion that democratic political outcomes must be honoured?

The now long gone USSR ultimately failed, not because its government lacked power or even resources, but because it irretrievably lost its legitimacy as being genuinely interested in promoting the greater good of its population.

The USSR was eventually seen to be merely a vehicle for personal ambition, self interest and greed. The great hypocrisy that underlay Marxist Leninism finally became unsustainable and it collapsed, unloved and unmourned even by most of those who had once believed in it.

In a similar way, the Chinese finally understood the folly and even madness that underpinned Mao Zedong's notion of communism and jettisoned it for what they call socialism with Chinese characteristics and I prefer to call authoritarian capitalism.

Thus there is no reason for anyone to suppose that western neo-liberal capitalism cannot or will not collapse under the weight of its inherent contradictions.

PNG is especially vulnerable to such a collapse because it leadership has so spectacularly failed to create and sustain a state in which ordinary Papua New Guineans can plausibly believe that their needs and aspirations are truly front of mind for their leaders.

Of course, all this is mere speculation on my part and those who predict the future are invariably wrong. However, it is not fanciful to suppose that what I am pointing towards can actually happen if our collective stars align in unexpectedly malignant ways.

Whether such an alignment occurs is another matter but I would humbly submit that many of the prerequisites for such an event are already in place, as the AFR article all to graphically reveals.

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