| Australian Financial Review | Extracts
SYDNEY - For the past four months, a royal commission into an eight-year-old deal most Australians have never heard of, in a country that rarely rates a mention, has been quietly chipping away.
Forced online by Covid-19, the inquiry into a $1.3 billion (K3.4 billion) loan extended by the Sydney office of UBS to the government of Papua New Guinea has heard from prime ministers, chief executives, a cabinet minister and top bureaucrats.
They have largely told the same story. The loan to finance a 10.1% stake in ASX-listed Oil Search was speculative, unconstitutional and highly inappropriate for a country with its public finances in a mess and its health outcomes similar to sub-Saharan Africa.
It has also been instructive in how Australian investment bankers and lawyers exploited the institutional weaknesses of a developing nation.
However, the PNG royal commission lacked a big reveal. Until Thursday.
Giving evidence from Washington, a derivatives expert who previously worked for the Securities and Exchange Commission in the US, put a number on UBS 'excessive profits' from the deal.
Dr George Oldfield calculated that UBS made $81 million (K210 million) more than was "appropriate" from a loan and options deal that was “overly complex” and lacking in transparency.
His firm, economic consultancy Brattle, broke this down to include $56 million (K145 million) in what he termed excessive interest.
He argued that UBS took no credit risk and hence, charging a sovereign nation interest rates of between 5.35% and 12% was excessive.
This goes to the idea that UBS made unseemly profits or “preyed on poor country like PNG” as the country’s former Treasurer, Don Polye, told the inquiry last month.
UBS was able to charge such high rates of interest because former PNG prime minister Peter O’Neill, for reasons that have never been fully explained, was determined to buy the stake in Oil Search.
Such was his determination, O’Neill was prepared to ignore the advice of his attorney-general and state solicitor, who said the deal was unconstitutional unless approved by parliament.
He was even prepared to sack his treasurer, Polye, and appoint himself to the position to ensure the necessary signatures were attached to the term sheet.
UBS, acting as both adviser on the deal and arranger of the loan, apparently was not bothered by this sheer number of red flags….
If (UBS) front the inquiry, the bank must justify a deal that looked terrible, long before a royal commission was convened and is estimated to have cost PNG $432 million (K1.1 billion).