ANGUS GRIGG, JONATHAN SHAPIRO & LISA MURRAY | Australian Financial Review
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.