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• ROYAL COMMISSION OF INQUIRY

  INTO PROCESSES AND PROCEDURES

  FOLLOWED BY THE GOVERNMENT OF PAPUA NEW GUINEA

  INTO OBTAINING THE OFF-SHORE LOAN

  FROM THE UNION BANK OF SWITZERLAND AND RELATED TRANSACTIONS

  OUTLINE OF FINAL SUBMISSIONS BY COUNSEL ASSISTING

  24 February 2022

  May it please the Commission, we now make our closing submissions. This will take the best
  part of a day. Our aim is to say something of the background to the inquiry, its conduct, and
  scope and then proceed to submit key findings of fact and recommendations that we say should
  be made, thereby providing further natural justice and procedural fairness.1

  We emphasise to those listening that these are submissions by Counsel Assisting which you,
  Commissioners, may or may not yourselves make, especially having heard submissions, due in
  the next 2 weeks ie. by 10 March, from persons affected who have leave to appear.

  1
  This has also been provided in questioning of witnesses.

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• What follows should be read with the opening statements we have earlier made.

  Establishment of the Commission

  This Commission of Inquiry was established by instrument dated 30 August 2019, amended in
  October 2021, both made under the Commissions of Inquiry Act. It followed the tabling in the
  National Parliament in May 2019 of the December 2018 Final Report of the Ombudsman
  Commission.2 In the circumstances outlined in the opening remarks period in December last
  year,3 the terms of reference were amended and further time provided to complete the hearings
  and the report.

  The Ombudsman Commission investigation had commenced in or about March 2014, shortly
  after the approval by the National Executive Council (NEC) for the State to enter into a loan
  agreement with the Union Bank of Switzerland (Australian Branch) (UBS) for AU1.39 billion to
  purchase approximately 149 million newly issued shares in Oil Search Limited, which before its
  recent takeover by Santos Ltd, was a long-established Papua New Guinea oil and gas exploration
  company listed on both the Papua New Guinea and Australian Stock Exchanges.

  The Ombudsman Commission’s investigation was slowed by various applications to the
  Supreme Court to resolve challenges to its jurisdiction by interested persons.

  2
  An Investigation into the alleged improper borrowing of AUD1.239 billion loan from the Union Bank of
  Switzerland, Aktiengesellschaft (Australia Branch) to purchase 149,390,244 Shares in Oil Search Limited and
  improper tender and procurement of consultants in relation to the borrowing.
  3
  ‘(a) Despite the efforts and the cooperation and assistance provided by many witnesses, up to the end of the August
  hearings, there remained matters which seemed to warrant further consideration.
  (b) That situation arose, unfortunately, due to a number of factors outside of the control of the Commission, in
  particular, delays occasioned by the late and incomplete production of important documents by a number of relevant
  persons and entities.
  (c) The need to consider documents produced at a very late stage (and since then, even more has been produced).
  (d) A desire to provide one further and final opportunity to hear from key witnesses who had not yet provided
  evidence, including those in jurisdictions outside of Papua New Guinea.
  (e) Continued complications caused by the Covid 19 Pandemic.’

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• On assuming office as Prime Minister, the Honourable James Marape MP undertook to establish
  a commission of inquiry to investigate the facts surrounding the transaction. The Prime Minister
  at the time of the UBS transactions, the Honourable Peter O’Neill CMG MP, has told the
  Commission that he supported its establishment and work.

  In our submission, it is significant that both the current and former Prime Ministers have
  supported the work of this Commission and also have recently agreed with some of the
  recommendations which we now put forward.

  Jurisdiction

  The jurisdiction of the Commission is set out in the Commissions of Inquiry Act 1951.

  It is important to appreciate what the Commission can and cannot do. The Commission has the
  power to summons any person to attend the Commission to give oral evidence on oath (ss.6 and
  7).

  The Commission also has the power to summons the production of documents (s.6).

  It is an offence to fail, without reasonable excuse, to comply with a summons to give oral
  evidence or produce documents (s.9) or to give false evidence (s.10A) or to act in manner which
  amounts to contempt of the Commission (s.11).

  However, the Commission, as a commission of “inquiry”, is not an investigative agency with the
  kind of powers extended to those institutions with power to conduct investigations into criminal
  conduct and other offences.

  Relevantly:

  · the powers of the Commission do not have extra-territorial application and cannot
  compel oral evidence or the production of documents outside Papua New Guinea;

  · the Commission has no power to establish a taskforce to conduct investigations
  (although in a more limited sense the Minister may appoint “persons with the
  appropriate technical or professional expertise to assist the Commission”: s.4A(2));

  · the Commission cannot seek the assistance, nor resources, of counterparts in other
  jurisdictions – there is no comity of commissions of inquiry of the kind enjoyed by
  Courts or law enforcement agencies;

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• · the Commission cannot issue or obtain a Court-ordered warrant to enter and search
  premises or seize documents or other records (for example, computer hard drives) or to
  use an interception device; the Commission also cannot make arrests;

  · the Commission has no ready access to data matching services with other authorities or
  bodies.

  Rather, the function of the Commission is to inquire into any matter of public welfare (s.2),
  assemble the facts using the powers available to it and report on its proceedings and the results of
  its inquiry (s.15) – that is, answer its terms of reference – for tabling in Parliament (s.17).

  It is then the function of other relevant investigative and law enforcement agencies in Papua New
  Guinea to investigate and prosecute conduct within their respective jurisdictions utilising the
  wider powers referred to above, for example, the Ombudsman Commission and Public
  Prosecutor (breaches of the Leadership Code), Public Prosecutor and the police (breaches of the
  Criminal Code or prosecutions of other offences) or ICAC (prosecution of corrupt conduct,
  including official corruption).

  Hearings

  The Commission began hearings soon after its establishment, however many factors delayed its
  progress, including the world-wide Covid-19 pandemic (which began in early 2020 and still
  continues), delays in finding further suitable persons who could undertake the work and who had
  no conflicts of interest, and thus, were to be found overseas, and obstructive approaches towards
  the Commission by some persons and entities with relevant information and documents. We
  continue to thank the many persons who did assist the Commission, in private and in public, and
  especially those under no legal compulsion to do so.

  We will later say something about the recalcitrant witnesses and entities, but we say this now
  about the State’s former bankers and lawyers who declined to appear in person or remotely by
  video: the Commission only had powers of compulsion over those within the Independent State,
  but as a nation State it is not defenceless, and both Mr Marape and Mr O’Neill have expressed,
  to you, Commissioners, in their oral evidence, their support in principle of our recommendation,
  that such persons or entities should be banned, if necessary by law, from doing any work for 5
  years for the State or its emanations.

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• Following many directions hearings and return of summonses, and also the tragic death of
  former Commissioner Gilmour and the subsequent appointment of Commissioner White, and the
  appointments of those assisting, the principal hearings involving witnesses began in March 2021
  and continued, intermittently, until August 2021, following which amended terms of reference
  were subsequently issued. Hearings re-commenced in December 2021, continued in late January
  2022 and this month. Following today’s final submissions from Counsel Assisting and any
  responses by those with leave, the report is due by 31 March 2022.

  Especially because of Covid, the hearings have been conducted from APEC Haus, but with some
  counsel and some witnesses (and one Commissioner), at times, being located elsewhere and
  participating by video-link. Although this is not the traditional approach, it has created real and
  practical advantages: indeed we submit that it has been a resounding success. Thus, there has
  been a very large saving in the accommodation costs and travel expenses for witnesses, and
  those assisting, who have not had to travel to and from Port Moresby, some on multiple
  occasions. Persons who had covid-caused travel and health restrictions have still been able to
  appear. The hearings, which have been entirely in public, have been live-streamed on Facebook
  (with recordings placed on the Commission’s website), sometimes attracting more than 1000
  viewers at a time on the livestream. The Commission has been able to have witnesses from
  many overseas locations, sometimes, as in the case of experts, from multiple overseas locations
  simultaneously. We submit this has proved to be a flexible, practical and efficient model which
  should be used in the future.

  We later have some submissions as to amendments that might be made to the Commissions of
  Inquiry Act.

  The Commission has engaged experts to assist it. We acknowledge the detailed work of the
  Brattle Group who have provided significant financial analysis of the complex transactions
  which are the focus of this Commission. There has been nothing in the hearing which has cast
  any doubt on their assumptions, analysis or conclusions. Their reports should be accepted in
  their entirety. We shall return to their reports.

  Terms of Reference

  The Terms of Reference set out the Commission’s purpose, jurisdiction and the questions which
  must be dealt with.

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• The instrument containing the Terms of Reference for this Commission begins with a brief
  explanation followed by the Terms of Reference:

  The objective of the Commission of Inquiry is to inquire into and establish facts
  surrounding:

  1. The decision by the Government to obtain the loan funding of USD1.3 billion;

  2. The decision to seek off-shore loan and the decision to select Union Bank of
  Switzerland as the preferred financier;

  3. Individuals and entities who were instrumental in the negotiation (the middlemen
  involved) for and on behalf of the State, how were they engaged and how much
  were paid as fees for their services as brokers and negotiators;

  4. Whether breaches of mandatory Constitutional requirements have occurred and
  the conduct on the part of Leaders and persons involved in the deal.

  The ultimate objective of the Commission of Inquiry is to establish whether there were
  breaches of PNG laws and Constitutional requirements in the process of negotiation and
  approval of the UBS Loan, and also establish whether PNG as a country had suffered as
  a result of this off-shore deal, and whether the persons involved in the deal can be held
  accountable for their conduct.

  Those Terms of Reference may be grouped under a list of financial transactions, following, and
  then key issues:

  (a) Orogen Minerals Merger with Oil Search Limited in 2002;

  (b) PNG LNG Project;

  (c) IPIC Loan;

  (d) UBS Loan of AUD1.39 billion to the State in 2014;

  (e) Purchase of Oil Search Shares by the State in 2014;

  (f) Elk/Antelope PRL-15 Transaction by Oil Search in 2014;

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• (g) Sale of Oil Search Shares by a State-Owned Enterprise in 2017;

  (h) Sovereign Wealth Fund;

  (i) Who is responsible?

  (j) Who benefited?

  (k) What should be done: recommendations.

  Role of the Commission of Inquiry

  The Commission is directed to investigate, and establish, the facts relating to these financial
  transactions, their lawfulness and propriety, the nature of the conduct of those involved in them
  and the consequences for the State and the people of Papua New Guinea.

  The Terms of Reference require that this Commission ‘shall, so far as reasonably possible,
  inquire into, make findings and report on’ a list of matters designated by paragraph headings (a)
  to (gg) inclusive. Given time and Covid constraints and the limits of voluntary co-operation by
  those located off-shore, we submit that the inquiry has indeed gone ‘as far as reasonably
  possible’: yet your report may well lead to others taking action.

  The Commission is charged with making findings and recommendations arising out of its
  findings. We make two important submissions about what is involved.

  • First, the Commission is not reviewing the Ombudsman Commission report which was
  the catalyst for the establishment of this Commission

  • Second, as this Commission is an inquiry, not a court of law, it cannot make
  determinations of the legal rights and obligations of any persons or entities either within
  Papua New Guinea or elsewhere. Nor may it make binding determinations on legal
  issues, including those relating to constitutional matters. But it does not transgress those
  limits when, as we submit it should, the Commission expresses an opinion as to how laws
  should be construed.

  1. History, the Constitution, and key legal structures

  1.1 Answering the Terms of Reference requires some understanding of fundamental matters
  of Constitutional law and practice, and statute law, especially such as concern the

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• commercial exploitation of natural resources, the potential role of the State in that regard,
  and parliamentary control of borrowing by the executive government of the day.

  1.2 The Inquiry’s initial phase of evidence involved obtaining evidence on these topics from
  some of the founders of the Constitution of the Independent State and contemporary
  experts: we refer you to the opening in March last year, and the evidence, particularly
  that of two key founders, Chief Dr John Momis GCL and the Right Honourable Sir Chief
  Julius Chan GCL GCMG KBE (who of course later became Prime Minister).

  1.3 Dr Momis in his evidence said that the founders such as himself saw the need to have:

  “…very strong parliamentary committees to make sure that non-ministerial members of
  Parliament would also keep a check on the government, make their contribution and at
  the same time you have got to allow the government, that is the National Executive
  Council, to take initiatives, knowing that they are being watched and they would not just
  do things without taking into account the importance of the benefits to the nation”.4

  1.4 Papua New Guinea became the Independent State in 1975 and the Constitution then came
  into force. By reflecting both spiritual and material links of the citizens to the country’s
  land and resources, the Constitution is unusual, and perhaps unique. Thus, its preamble
  states, in terms which must be continually borne in mind in this inquiry:

  “All persons in our country have the following basic obligations to themselves and their
  descendants, to each other and to the Nation …

  (d) to protect Papua New Guinea and to safeguard the national wealth, resources and
  environment in the interests not only of the present generation but also of future
  generations”

  and additionally, declares that

  ” … all citizens have an obligation to themselves and their descendants, to each other
  and to the Nation to use profits from economic activities in the advancement of our

  4
  Chief Dr John Momis GCL, oral evidence; transcript (29 April 2021) at page 173.

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• country and our people, and that the law may impose a similar obligation on non-citizens
  carrying on economic activities in or from our country.”

  State borrowing

  1.5 It is not uncommon for countries from within the Commonwealth of Nations to have
  constitutional provisions requiring parliamentary approval for government borrowing and
  expenditure. So it is here. In the Independent State the key provision is s 209(1) of the
  Constitution, which provides:

  (1) Notwithstanding anything in this Constitution, the raising and expenditure of finance
  by the National Government, including the imposition of taxation and the raising of loans,
  is subject to authorization and control by the Parliament, and shall be regulated by an
  Act of the Parliament.

  1.6 The Ombudsman Commission’s report on the UBS Loan concluded that s 209(1) was not
  complied with in the case of the borrowing arrangements entered into by the State, as
  later that year novated to a State-Owned entity, Kumul Petroleum Holdings Limited
  (KPHL), concerning the UBS Loan of AUD 1.239 billion in 2014. The Commission
  received much evidence and submissions on this topic. For reasons we will come to, we
  submit you should not make the same findings that s 209 was transgressed.

  Exploitation of Papua New Guinea natural resources, law and practice

  1.7 The Independent State is rich in many natural resources, among them the valuable, and
  internationally marketable, commodities of petroleum and liquefied natural gas (LNG).

  1.8 National Goal 4 in the Constitution concerns natural resources and the environment of
  Papua New Guinea. It states:

  ” 4. Natural resources and environment.

  We declare our fourth goal to be for Papua New Guinea’s natural resources and
  environment to be conserved and used for the collective benefit of us all and be
  replenished for the benefit of future generations.

  WE ACCORDINGLY CALL FOR—

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• (1) wise use to be made of our natural resources and the environment in and on the land
  or seabed, in the sea, under the land, and in the air, in the interests of our development
  and in trust for future generations; and

  (2) the conservation and replenishment, for the benefit of ourselves and posterity, of the
  environment and its sacred, scenic, and historical qualities; and

  (3) all necessary steps to be taken to give adequate protection to our valued birds,
  animals, fish, insects, plants and trees.”

  1.9 On this point, Dr Momis said in his evidence that:

  ” … the fourth National Goal and Directive Principles apply to natural resources and
  environment, … These provisions make clear – in a manner unusual, and perhaps unique
  to a national constitution – that the protection and management of natural resources are
  matters of the greatest importance.”[5]… Papua New Guineans are very closely related to
  natural resources, environment. In fact, their relationship has an eschatological
  dimension to it, in other words, both spiritually important and of course materially
  economically also important so it has a double base. People of Papua New Guinea are
  very close to their resources.”

  1.10 The proper role of the government in a capitalist system was spoken of at-length by the
  witnesses who gave evidence in the first phase of hearings. They spoke of four main
  governmental functions, namely:

  (a) the traditional and essential role of government to make good policies and laws
  that create an environment that is conducive for business growth but without direct
  government intervention, while the government focuses on provision of quality
  public services such as in education, health and law and order;”6

  5
  Supplementary Statement of Chief Dr John Momis (Exhibit “K.2”) at page 2, WIT.0088.0004.0001.
  6
  Statement of Sir Michael Somare (Exhibit “B”), page [5], WIT.0001.0002.0002; Sir Charles Lepani’s statement
  (Exhibit “C”) on page 2, WIT.0008.0003.0003.

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• (b) the government raises tax revenue from private businesses to fund public goods
  and services;7

  (c) the government regulates business in order to achieve proper exploitation of labour
  and natural resources and to promote equitable distribution of economic benefits;8
  and

  (d) the government invests in public and private business enterprises.9

  1.11 There was no dispute over the first, second and third functions. The fourth attracted
  different views from witnesses.

  1.12 Although Grand Chief Sir Michael Somare passed away before he could give oral
  evidence, the Grand Chief’s testamentary evidence supported direct government
  investment. He referenced his time as Prime Minister when the government invested
  heavily in State-Owned Enterprises (SoE’s) which were managed by the then
  Independent Public Business Corporation (IPBC). These SoE’s included PNG Power
  Ltd, Air Niugini Ltd and PNG Ports Ltd. IPBC also managed the State’s investment in
  private business ventures such as the State’s 17.6% stake in Oil Search and a 19.4% stake
  in the PNG LNG Project.10

  1.13 In contrast Sir Julius Chan stated that ordinarily government should stay out of business
  because it involves a lot of risks.11 However, the notion that government ought to be
  involved in business is a good idea, as long as the government mitigate risks”.

  7
  Statement of Sir Charles Lepani (Exhibit “C”) on page [2], WIT.0008.0003.0003; Statement of Dr Osborne
  Sanida (Exhibit “E”) at paragraphs [28] and [31] to [32] on page [5], WIT.0009.0002.0001.
  8
  Statement of Sir Charles Lepani (Exhibit “C”) on page [2], WIT.0008.0003.0003.
  9
  Sir Michael Somare’s statement (Exhibit “B”) at page 8 to 11] WIT.0001.0002.0002, oral evidence of Chief Dr
  John Momis on 29 April 2021; transcript at page 164, Sir Charles Lepani’s statement (Exhibit “C”) at page 2
  WIT.0008.0003.0003, oral evidence of Dr Osborne Sanida; transcript at pages 182-183 (29 April 2021), oral
  evidence of Dr Lawrence Sause; transcript at pages 310 to 311(13 May 2021)
  10
  Statement of Sir Michael Somare (Exhibit “B”) at pages 8 to 11, WIT.0001.0002.0002.
  11
  Statement of Sir Julius Chan (Exhibit “H”), paragraphs [24] to [46], pages 3 to 5, WIT.0002.0004.0002; oral
  evidence of Sir Julius Chan; transcript at pages 282 to 285 (12 May 2021).

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• 1.14 Dr Osborne Sanida of the Papua New Guinea National Research Institute said this:12

  “… the Government has been involved in economic affairs in the terms of trying to affect
  what happens in the economy as well as been involved in economic or business activities
  through the SoE’s and interest in the large projects … . The State, on the one hand,
  promotes the role of the private sector as the ‘’engine of growth’’ but on the other hand,
  also interferes in the economy by being involved in businesses in addition to running the
  public –sector affairs of the nation. Ideally, the main focus of the State should be on
  ensuring that public affairs/Institutions are functioning effectively and efficiently to
  provide a conducive environment for the private sector to perform its role as an engine of
  growth. However, there is a question as to whether or not the people are getting
  maximum benefit from all the economic and business activities. In my view, one of the
  reasons that governments get involved in business is the perceived view that the private
  sector is not doing enough for the people.”

  1.15 In our submission, you can find that there was general agreement amongst witnesses that
  under the capitalist free market economic system operating in the country, government
  appropriately tends to avoid involvement in private businesses, but if it considers it
  necessary to intervene in private business as an investor itself, it can do so, provided, and
  we emphasise the following proviso, any risks inherent in private business investment are
  managed properly so as to avoid losses.13

  1.16 Examples of government investment in natural resource development projects through
  equity participation includes the following models:

  (a) Government directly taking up equity in a joint-venture company with
  multinational companies such as the Porgera Gold Mine and OK Tedi Mining Ltd;

  (b) Government taking over a joint-venture company after purchasing shares of
  another joint venture partner, such as Ok Tedi Mining Ltd;

  12
  Statement of Dr Osborne Sanida, (Exhibit “E”), paragraphs [21] to [27] at pages 3-4, WIT.0009.0002.0001..
  13
  Statement of Dr Waine (Exhibit “F”) at page 5, WIT.0039.0005.0007.

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• (c) Government taking up shares in a multinational company that operates the
  project, such as Bougainville Copper Limited; and

  (d) Government buying shares in a multinational corporation that is involved in a
  joint-venture with other multinational corporations to conduct a resource
  development project such as the proposed Papua LNG Project.

  1.17 The witnesses ‘broadly’ agreed that where business involves investment risks, the
  government must be cautious in engaging in business ventures and only undertake such
  investments using public funds after a thorough assessment of risk has been undertaken.
  The State obtaining loans to finance its equity or shares under any of the above models
  increases that risk and extra prudence is then required. Some witnesses expressed the
  view that the State should not be involved in a purely private business enterprise
  involving multinational companies in which the State does not hold any controlling
  interest14 because the risks are too high.

  1.18 This evidence sets the historical context for the events the Commission is inquiring into.
  The Terms of Reference of this Inquiry focus on a number of petroleum and LNG
  transactions in which the Government of Papua New Guinea and its agencies were
  involved.

  1.19 Before coming to those we mention some key legal provisions.

  1.20 There are laws such as the Mining Act 1992 and the Mineral Resources Authority Act
  2005 designed to prevent the improper exploitation of natural resources,15 and also to
  ensure that the State can participate in the commercialisation of its natural resources.16

  1.21 The Oil and Gas Act 1988:

  14
  See also Statement of Sir Charles Lepani (Exhibit “C”) at page 7, WIT.0008.0003.0003; statement of Sir Julius
  Chan (Exhibit “H”) at pages 3 to 5, WIT.0002.0004.0002; oral evidence of Sir Julius Chan; transcript at pages 284
  to 288, 12 May 2021; oral evidence of Dr Sanida; transcript at page 321 (13 May 2021).
  15
  See Mining Act 1992; Mineral Resources Authority Act 2005; Oil and Gas Act 1998, pt IV; Environment Act 2000
  s 4; Unconventional Hydrocarbons Act 2015.
  16
  See Oil and Gas Act 1998, s 165.

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• (a) creates a licensing regime of five categories of licence including Petroleum
  Development Licence (PDL) and a Petroleum Retention Licence (PRL), 17

  (b) imposes a duty to compensate traditional landowners affected by the exploitation
  of natural resources, and

  (c) preserves an optional participating interest – the ‘back-in rights’ – for the
  Independent State in all petroleum and liquefied gas projects.

  1.22 Thus, s 165(1) of the Oil and Gas Act provides for ‘back in rights’ in these terms: The
  State has the right (but not the obligation) to acquire, directly or through a nominee, all
  or any part of a participating interest not exceeding 22.5% in each petroleum project.

  1.23 Where the State exercises this right, affected landowners are granted royalties or equity
  out of the State’s interest in the project.18 Historically, the State has opted to exercise this
  right through a State nominee.

  1.24 It is important to note that there are a number of different ways the State (and we include
  in this SoE’s) can participate in large petroleum/LNG projects.

  1.25 As already noted, some witnesses stated that the State has no role at all to play in such
  projects, beyond the traditional role of governments to provide an economically and
  politically stable State, which delivers public services as needed, and allows miners and

  17
  The licences are as follows:
  Petroleum Prospecting Licence, which provides exclusive rights to explore for oil and gas, and to complete the
  necessary appraisal processes to determine whether the resource is commercially viable; 17
  Petroleum Development Licence, which provides exclusive rights to explore for, appraise, recover and sell
  petroleum and liquefied natural gas;17
  Petroleum Retention Licence, which provides exclusive rights to explore, appraise gas fields and, with authorisation,
  carry out drill stem tests for appraisal of a petroleum pool;17
  Pipeline Licence, which is required to construct, alter or reconstruct a pipeline which is used for transport of
  petroleum or liquefied natural gas;17 and
  Petroleum Processing Facility Licence, which is required to construct or operate a petroleum or liquefied natural gas
  processing facility.
  18
  Oil and Gas Act 1998, ss 167 and 168.

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• their workers to operate safely. (No-one in this Commission has argued for the
  theoretical alternative that the State should itself operate all aspects of petroleum/LNG
  projects.)

  1.26 Rather, in this inquiry, the debate has been between two available approaches, namely:

  (a) exercising (and paying for) the back in rights under s 165 of the Oil and Gas Act,
  so that when the LNG begins to be exported and sold, the State shares directly in
  profits made under the licence; or

  (b) Buying shares in a company which itself owns the licence, so that it receives such
  dividends as the company chooses to declare from time to time: there being no
  guarantee as to the amount or frequency of dividends.

  1.27 Another debate in this inquiry has been the role of the Sovereign Wealth Fund which is
  provided for by existing laws but not yet established. In the 4th Report by the Brattle
  Group, they said this:

  In general, Sovereign Wealth Funds can be designed to achieve several different
  purposes. Often these include: a) smoothing out volatile revenues in order to insulate
  spending programs from fluctuations, such as those caused by volatile commodity prices;
  and b) investing surplus revenues for use later (including possibly much later, to facilitate
  “intergenerational equity”). If a fund is mostly trying to smooth out volatile revenues, it
  is likely to invest mainly in low-risk, low-return assets such as bonds issued by
  governments with very strong credit ratings (such as the USA or Japan). Such
  investments generally hold their value from one year to the next but do not generate high
  returns over the long term. If a fund is mostly investing for the long term, it is more likely
  to invest in equities: although the value of equities is volatile, returns over the long term
  tend to be much higher than returns from investing in bonds. Thus the investment
  mandate of a Sovereign Wealth Fund will depend on whether it is mostly trying to invest
  surplus revenues for the long term or is mostly trying to smooth out volatile revenues to
  support current spending. The former will have relatively low and relatively stable
  returns, while the latter will have higher returns that are more volatile.

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• 1.28 We heard some important evidence on this topic from Professor Sir Tim Besley CBE of
  the London School of Economics, an expert on developing economies, and Mr David
  Murray AO, former Chairman of the Board of Guardians of Australia’s Sovereign
  Wealth Fund, the Future Fund. We shall have more to say about this topic later on.

  2. Key Persons and Events

  2.1 Let me now mention some key persons and events.

  People

  2.2 The Prime Minister the Honourable James Marape MP

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• 2.3 The Right Honourable Grand Chief Sir Michael Somare GCL GCMG CH CF SSI

  2.4 Mr Arthur Somare;

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• 2.5 The Honourable Peter O’Neill CMG MP, the former Prime Minister;

  2.6 Mr Dairi Vele, relevantly the former Director of the Gas Production Coordination Office,
  Secretary and Acting Secretary of the Department of Treasury;

  2.7 Mr Wapu Sonk, CEO of Kumul Petroleum Holdings;

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• 2.8 Mr Carlos Civelli

  2.9 Dr Clement Waine, former Secretary and Acting Secretary of the Department of Public
  Enterprises and State Investments;

  2.10 Mr Ben Micah, former Minister for Public Enterprises and State Investments;

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• 2.11 Mr Anthony Latimer, former partner at NRFA;

  2.12 Mr Steven Moe, former Senior Associate at NRFA;

  2.13 Mr Vittorio Casamento, former Senior Associate at NRFA;

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• 2.14 Mr Paddy Jilek, UBS;

  2.15 Mr Mitchell Turner, UBS;

  Companies

  2.16 Oil Search is a company which since 17 December 2021 has been merged with Santos
  Limited and is now part of the Santos Group, but before that has for many years described
  itself as ‘the largest single investor in [Papua New Guinea]’. For at least that reason, and
  because from time-to-time the State or its SoE’s have been significant shareholders in Oil
  Search, it has had significant economic and political influence in Papua New Guinea: but
  we are not thereby suggesting such influence was bad or inappropriate. For a long time
  Mr Peter Botten AC CBE was its CEO: its local representatives included the director Mr
  Gerea Aopi.

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• 2.17 In 2002, Orogen Minerals Limited (Orogen) which was a publicly listed company in
  which Mineral Resources Development Company (MRDC) (a 100% State owned
  company) held 51% of the shares – merged with Oil Search. Orogen was created by the
  State to hold the State’s private investments in the mineral resource sector.

  2.18 UBS AG is a Swiss multinational investment bank and financial services company
  founded and based in Switzerland. The Australian branch of UBS AG was engaged as
  both financial advisor and financier to the Independent State on the UBS loan. UBS
  continues to operate out of Sydney, Australia and is not compellable by the Commission
  to provide evidence. UBS provided some assistance to the Commission, producing
  certain relevant documents, providing a statement of its view of relevant facts and
  answering specific questions from the Commission.19 Despite requests, it did not make
  any current or former UBS employees available to give evidence.

  2.19 Norton Rose Fulbright is an international law firm. The Sydney office of the Firm, Norton
  Fulbright Australia (NRFA), was engaged as a legal advisor for the State on the UBS
  Loan. NRFA was engaged on a number of other matters throughout 2012 and 2013.
  These related matters included:

  (a) advising on the establishment of a ‘Temasek style’ enterprise to own and operate
  certain SoE’s and hold certain investments for the State;20

  (b) the IPIC Exchangeable bonds refinancing; and

  (c) advising on the enabling legislation and regulations necessary to give effect to the
  Sovereign Wealth Fund and drafting such legislation and regulations.21

  19
  Statement by UBS AG, Australia Branch, 4 August 2021, UBS.0001.0002.0007; Supplementary Information from
  UBS AG Australia Branch – Response to questions from COI Solicitors Assisting received on 6 August 2021, 9
  August 2021, UBS.0001.0003.0001.

  20
  WIT.0015.0001.0691 at 0691 [2.2].

  21
  WIT.0015.0001.0691 at 0693 [2.5(3)].

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• 2.20 The lawyers who were asked to give evidence in this inquiry (who declined) were Mr
  Latimer, Mr Moe and Mr Casamento.

  2.21 KPMG is a multinational network of professional firms providing audit, tax and advisory
  services. It advised the State on the UBS Loan.

  SoE’s

  2.22 We mentioned that various SoE’s have been created to participate in petroleum and
  liquefied natural gas projects. The main relevant entities for the purpose of this
  Commission are as follows:

  2.23 The key executives include Mr Wapu Sonk the inaugural CEO of Kumul Petroleum
  Limited, who still holds that role.

  Two LNG projects

  2.24 Commissioners, you will recall that two LNG projects are central to the work of the
  Commission, namely:

  (a) The PNG LNG Gas Project; and

  (b) The variously named Papua LNG/ PACLNG / Elk Antelope project.

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• 2.25 As explained in the opening submissions in March last year, the PNG LNG Project is one
  of the most significant natural resources undertaken in Papua New Guinea. Operated by
  ExxonMobil, the PNG LNG Project has already contributed some USD19 billion to the
  development of Papua New Guinea’s economy.

  2.26 The PNG LNG Project stretches across the Hela, Western, Southern Highlands, Gulf and
  Central provinces. Gas for the project is primarily produced from the Juha, Hides and
  Angore gas fields before it is transported by pipeline for storage and liquefication at
  facilities located north-west of Port Moresby. The liquefied natural gas is then loaded
  onto ships for export.

  2.27 The PNG LNG Project produces approximately 6.9 million tonnes of liquefied natural gas
  each year,22 which is exported throughout Asia.

  2.28 The project is structured as an unincorporated Joint Venture.23

  2.29 Gas for the project is sourced from seven different gas fields, and nine PDL’s.24

  2.30 This project is central to the Commission’s Terms of Reference.

  2.31 The other gas project of relevance to this inquiry was known initially as the Elk-Antelope
  gas field. It is located to the west of Port Moresby. It was discovered in 2007 by
  InterOil, an oil and gas explorer. InterOil subsequently partnered with the French
  company Total which purchased a 60% interest.

  2.32 We now turn to some key transactions: the IPIC exchangeable bonds and the UBS Loans.

  2.33 As we said in opening last March:

  In 2009, the late Grand Chief Sir Michael Somare, the first Prime Minister of the
  Independent State, was again Prime Minister … [and], seeking to finance the

  23
  Between ExxonMobil, Oil Search Limited, Santos, JX Nippon Oil & Gas Exploration, and the Independent State,
  through Kumul Petroleum Holdings Limited and Mineral Resources Development Company Limited.
  WIT.0014.0001.0003 at .0005.
  24
  WIT.0014.0001.0003 at .0006.

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• Independent State’s share of capital investment in the LNG Project, pledged, among other
  assets, its 14.7% stake in Oil Search to raise a large sum: AUD1.7 billion. However, the
  Oil Search shares were not worth AUD1.7 billion and so they were pledged against their
  future projected value in a deal with the International Petroleum Investment Company
  (IPIC) [a foreign Sovereign Wealth Fund]. Among other matters, it was initially
  proposed that IPIC agree that the Independent State would have the rights to buy back
  the shares in 2014, provided that the Independent State could then raise the money to do
  so. But the eventual agreement was more one-sided than that, with IPIC having the
  option of keeping the shares.

  2.34 When the bonds came due in 2014 the agreement was for IPIC to take the shares unless
  there was an agreement otherwise. The government did not seriously attempt to obtain an
  extension until it was too late, and despite its desire to retain the shares, IPIC held on to
  the Oil Search shares including the shares the government or its SoE’s had previously
  owned, thus leaving the State with a situation it had not faced since the Orogen merger
  that is, owning no shares in Oil Search. Former Prime Minister O’Neill said this was
  unacceptable so he persuaded his government to make the entirely optional decision to
  ask Oil Search to issue 10% of its share capital to the State in what we call the UBS loan.
  Oil Search agreed as it allowed it to purchase the PacLNG group that held a 22.8%
  interest in the Elk-Antelope field.

  2.35 The new Oil Search shares and the UBS Loan were swiftly transferred to the SOE, Kumul
  Petroleum.

  2.36 The evidence, in our submission, is that Kumul Petroleum didn’t want the shares or the
  large UBS Loan debt but for years it could not obtain the permission of its Trustee, Mr
  O’Neill, to sell the shares.

  2.37 The so called ‘vital strategic interest’ of the State in owning Oil Search shares, which was
  the stated justification for the UBS Loan, in our submission, having regard to the
  evidence, ceased to be vital when the shares were eventually sold, after the election which
  returned Mr O’Neill’s government, in 2017. If Mr O’Neill first withheld and then gave
  Kumul Petroleum permission to sell the shares for non-commercial purposes, as Mr Sonk
  says he did, that would in our submission, be a potential breach of his Trustee’s duties

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• and as we later submit, could be a leadership Tribunal matter and thus would justify
  referral by this inquiry to the Ombudsman Commission; it could also, in our submission,
  amount to conduct relevant to the Organic Law on the Independent Commission Against
  Corruption Law 2019.

  2.38 Be that as it may, there can be little doubt that, unlike the IPIC Exchangeable bonds
  which provided the only realistic way for the State to exercise its valuable back in rights,
  and was cost effective, the UBS Loan was, for the State and its people, an unnecessary
  disaster – and we use both words unnecessary and disaster deliberately.

  2.39 It was entirely voluntary – there being no prior obligation to take out the loan; and
  entirely unnecessary – the stated rationale – continued ownership of a strategic parcel of
  Oil Search shares- was never convincing, and cannot withstand scrutiny in view of the
  almost immediate desire, following the UBS Loan in March 2014, and its novation to
  Kumul later that year, of both Kumul and Mr O’Neill for an early sale of the shares,
  which did not happen until 2017 for apparently non-commercial reasons. The disaster
  was the enormous loss of K862,000,000 (AUD 340m) and the lost opportunity to put that
  money lost to better use. A far better financial decision would have been to use money
  saved by not entering into the UBS Loan to establish the Sovereign Wealth Fund, to
  otherwise invest through back in rights which give direct access to profits of a petroleum
  licence, or to pay down debt rather than being beholden to a company for its dividend
  decisions.

  2.40 The complex UBS Loan was not well understood by the State and its in-house officials
  and advisers, but it turns out to have involved over-charging by UBS (above its separately
  declared fees) of approximately K456,000,000 (AUD180 million) – the State should in
  our submission ask for this money back and the Australian authorities should be asked to
  investigate and if appropriate take action.

  2.41 The governmental processes for the assessment of the UBS Loan were inadequate,
  uncoordinated and rushed.

  2.42 The 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

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• Loan of enormous complexity, based on a cabinet submission which no other Cabinet
  member including the Treasurer had prior sight of.

  2.43 We now turning to the sub-paragraphs of the Terms of Reference.

  3. TOR (A): What was the reasoning behind the decision by the Morauta Government
  to approve the sale of Orogen Minerals to Oil Search Limited?

  3.1 The background to this topic is as follows: the Mineral Resources Development Company
  (MRDC) was established in 1975 as a 100% State owned company to hold and manage
  the State and landowners’ equity interests in mineral and petroleum development projects
  in the State. In 1996, through a successful Initial Public Offering, MRDC launched a
  subsidiary company, Orogen Minerals Limited (Orogen), and listed it on the Australian
  Stock Exchange. MRDC offered a 49% stake in Orogen to the public and retained 51%.

  3.2 On 21 January 2002, Oil Search and Orogen announced a proposed merger. It was also
  announced that the State had indicated its support for the merger.25 Mr Botten’s evidence
  was that it was Oil Search who was approached by the State and asked whether it would
  be interested in putting forward a merger proposal with Orogen.26

  3.3 The merger terms were AUD0.45 and 1.2 Oil Search ordinary shares for each Orogen
  share. This valued Orogen at AUD632 million or AUD1.97 a share, 22% higher than the
  pre-announcement share price of AUD1.62 a share.27 The proposed merger would result
  in MRDC holding approximately 18% of the Oil Search shares.28

  3.4 On 21 March 2002, the then Prime Minister, The Right Honourable Sir Mekere Morauta
  KCMG, announced that NEC had endorsed a recommendation to accept the merger offer
  by Oil Search for Orogen.29

  25
  Company announcements – Text version – ASX.
  26
  Further Statement of Peter Botten dated 27 January 2022 [7], WIT.0021.0006.0001.
  27
  Company announcements – Text version – ASX.
  28
  OSL.0022.0001.0001 at .0011.
  29
  OSL.0022.0001.0259 at .0627.

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• 3.5 At a Orogen shareholders meeting held in Port Moresby on 26 March 2002, 99.5% of the
  votes cast were in favour of the merger.30

  3.6 On 3 April 2002, the merger (by way of Scheme of Arrangement) was approved by the
  National Court.31

  3.7 As to the reasoning for the merger, the board of Orogen considered that the shares in the
  company were trading at a significant discount to their underlying value. Accordingly,
  they examined various options to maximise value for shareholders. The board noted that
  the Oil Search offer represented a premium on Orogen’s share price and that the merger
  was, in their view, the best way to unlock value in the company.32

  3.8 As noted, the proposed merger offer by Oil Search was supported by NEC, for the
  principal reason that it was the best way to move the “Gas-to-Queensland project” ahead
  and at the same time allow the State to participate in the project’s upside. 33

  3.9 ABN-AMRO, the State’s advisors, advised in favour of the proposed merger on the basis
  that it would assist Oil Search to move the Papua New Guinea Gas Project forward and
  allow the State to retain its exposure to the project.34 Similarly, Grant Samuel &
  Associates, who were engaged by Orogen to act as an independent expert to advise on the
  proposed merger, advised that the proposed merger was in the best interests of Orogen
  shareholders as the offer represented a premium to the recent Orogen share price and the
  merger would enable the company to participate in attractive growth opportunities,
  including the Papua New Guinea Gas Project.35

  3.10 From Oil Search’s perspective, Orogen was a “very profitable company”. Oil Search saw
  the proposed merger as an opportunity “to bring more value, not only to the Oil Search

  30
  Company announcements – Text version – ASX.
  31
  Company announcements – Text version – ASX.
  32
  Company announcements – Text version – ASX.
  33
  OSL.0022.0001.0259 at .0627.
  34
  WIT.0016.0005.0007.
  35
  OSL.0022.0001.0001 at .0082.

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• shareholders but also to the [Papua New Guinean] Government”.36 In this regard, Mr
  Botten stated:37

  One of the factors that contributed to the discount of the Orogen share price to the
  underlying value of its assets was the majority ownership of the company’s shares by the
  State and associated market concerns relating to the State’s intentions in relation to
  future ownership, the independence of the Board and the preparedness of the State to
  permit new equity to be raised to finance new development projects.

  3.11 At the time of the merger, Mr John Francis Kaupa was the Managing Director and Chief
  Executive Officer of Orogen.38 Mr Kaupa described the acquisition of Orogen by Oil
  Search as “a very unfortunate and sad day for Papua New Guinea”. Mr Kaupa was
  concerned about the State’s decision to support the merger. In particular Mr Kaupa was
  critical of the merger, given the financial strength of Orogen and his view that the Oil
  Search offer undervalued Orogen.39

  3.12 Mr Kaupa said his attempts to discuss his concerns with the then Prime Minister Sir
  Mekere Morauta were “thwarted” and the attempts of Orogen’s board of directors to meet
  with the State were “spectacularly unsuccessful” as he was told to do his job and facilitate
  the acquisition and not to question the State’s decision to sell. 40

  3.13 However, we submit that this evidence is not of great significance as, ultimately, Mr
  Kaupa (along with the other directors) recommended that Orogen shareholders vote in

  36
  Transcript, Gerea Aopi, 28 July 2021, p 2261.
  37
  Further Statement of Peter Botten dated 27 January 2022 [7], WIT.0021.0006.0001.
  38
  Statement of John Francis Kaupa dated 19 May 2021 [4]-[5], WIT.0096.0002.0003.
  39
  Evidence of John Francis Kaupa T1886 (24 June 2021); Statement of John Francis Kaupa dated 19 May 2021 at
  [11]-[12], WIT.0096.0002.0003; Statement of John Francis Kaupa dated 22 July 2021 at [17]-[20],
  WIT.0096.0002.0003.
  40
  Statement of John Francis Kaupa dated 19 May 2021 at [13]-[17], WIT.0096.0002.0003; Evidence of John
  Francis Kaupa T1887 (24 June 2021).

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• favour of the merger,41 and there was then overwhelming support for the merger and the
  courts approved it.

  3.14 So, in our submission, the submission as to TOR (A) is that the reasoning behind the
  decision by the Morauta Government to approve the sale of Orogen Minerals to Oil
  Search Limited was that provided by the NEC minutes, namely that ‘it was the best
  way to move the “Gas-to-Queensland project” ahead and at the same time allow the
  State to participate in the project’s upside’, a justification which was backed up by
  the advice of ABN-AMRO and Grant Samuel, and by the overwhelming support by
  shareholders for the merger.

  4. TOR (B): Were alternative structures / transactions considered? If so, why were
  these rejected?

  4.1 In November 2001, the State approached Santos Limited (Santos) to invite the company
  to make a bid for Orogen.42

  4.2 On 20 March 2002, Santos announced that it was considering making a takeover offer for
  Orogen at a case price of AUD2.00 per share, which would value Orogen at AUD642
  million.43

  4.3 The proposal by Santos was considered by the NEC on 19 March 2002 but rejected on the
  advice of ABN-AMRO on the basis that the Oil Search offer was the better option
  given:44

  (a) the cash consideration for the Santos proposal was still significantly below the
  underlying fundamental value of Orogen;

  (b) the Santos proposal was below the underlying fundamental value of the Oil Search
  offer;

  41
  OSL.0022.0001.0001 at .0057.
  42
  Company announcements – Text version – ASX.
  43
  Company announcements – Text version – ASX.
  44
  WIT.0016.0005.0007.

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• (c) the Santos proposal had a number of unattractive conditions; and

  (d) the Santos proposal would give Santos blocking rights over the PNG Gas Project.

  4.4 On 21 March 2002, Orogen announced that it had not received a formal takeover proposal
  from Santos and that its board recommended to shareholders that, in the absence of any
  superior offer, they should vote in favour of the merger between Orogen and Oil Search.45

  4.5 The board of Orogen also considered a number of other alternatives to the merger with
  Oil Search but considered that the Oil Search offer was the best option for the company.46

  4.6 The advice to the State from ABN AMRO also considered (but recommended against)
  various other proposals.47

  5. TORs (C) – (D) – Impact

  5.1 The most notable impact of the merger was that Oil Search and the State (directly or
  through SoE’s) grew ever ‘closer’ in their dealings, and the large shareholding by the
  State/SoE’s in Oil Search came to be regarded by some at least as the normal course of
  events.

  5.2 Oil Search was the biggest company in the Independent State. It was not unreasonable
  for it to have a close relationship with the Independent State in the ordinary course of its
  business. That relationship became complicated with the State’s large shareholding in Oil
  Search as it had a direct interest in its success.

  6. TORs (E) – (K) : The PNG LNG Project

  Overview of the PNG LNG Project

  45
  Company announcements – Text version – ASX.
  46
  OSL.0022.0001.0001 at .0010.
  47
  WIT.0016.0005.0007 at .0027-0028.

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• 6.1 The PNG LNG Project is one of the most significant (if not the most significant) natural
  resource projects in the Independent State.48

  6.2 In July 2007, the companies involved presented the State with a proposal to develop
  natural gas reserves in the Southern Highlands by transporting it to an LNG processing
  plant in the Central Province for international export.49 The rationale for the proposal was
  that the aggregate natural gas reserve was large enough to warrant the large costs
  associated with extracting, processing and piping the product; but each individual reserve
  was not.

  6.3 This led to significant negotiations between those companies and the State and a number
  of agreements being entered into in 2008 and 2009. The principal agreements were
  executed in May 2008.

  6.4 The Final Investment Decision for the PNG LNG Project was made on 8 December 2009
  and this immediately resulted in the commencement of comprehensive construction
  activities. Construction of the PNG LNG Project was completed by about April 2014.
  Gas production started around that time and the first gas export from the PNG LNG
  Project was on 25 May 2014.50

  6.5 Since its first export in 2014, the PNG LNG Project has exported approximately 7 million
  tonnes of LNG per year. The total capital expenditure by the project sponsors in the
  construction and commissioning period from 2010 to 2014 exceeded USD19 billion.

  48
  The PNG LNG Project is an integrated system of gas production, processing, liquefication and storage facilities
  stretching across the Independent State. It comprises gas fields and production facilities in Hela, Southern Highlands
  and the Western Province connected by some 700 kilometres of pipelines to the liquefication and storage facilities in
  the Gulf of Papua. The PNG LNG Project has the capacity to produce about 7 million tonnes of LNG each year.
  The gas is exported to international markets from the Gulf of Papua. The income is to be distributed amongst the
  PNG LNG Project equity holders (which includes the Independent State-owned companies). The PNG LNG Project
  was initiated by companies including ExxonMobil, Nippon Oil, Oil Search and Santos.

  49
  Policy Submission 73/2008 dated 20 May 2008, [3], WIT.0014.0007.0300.

  50
  Statement of Peter Graham dated 9 June 2021, Exhibit YY, WIT.0072.0003.0002.

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• 6.6 The PNG LNG Project has produced significant revenue for the State, through KPHL.

  6.7 The principal agreement entered into for the Project is known as the Gas Agreement. It
  was made under sections 184 and 185 of the Oil and Gas Act and sets out the terms by
  which the State could exercise its back-in rights to become an equity participant in the
  PNG LNG Project.

  6.8 Through the Gas Agreement, the State acquired a 19.4% interest in the PNG LNG
  Project. The State had to find the substantial means to fund that involvement initially of
  its equity interest but subsequently its share of the development costs. The State’s total
  financing exposure to the PNG LNG Project was approximately USD 3 billion
  comprising equity financing of USD1 billion and project financing of USD2 billion. At its
  time, it was the largest fundraising that the State had ever attempted.

  6.9 It was this significant need for finance which directly led to what is known as the IPIC
  Exchangeable Bond transaction. That transaction links to paragraphs 1(e) to (k) of the
  Terms of Reference, which we now address.

  7. TOR 1(E): How the State Financed its Equity Participation in the PNG LNG Project

  7.1 The submission, in summary, as to this TOR is that the State financed its equity
  participation through the IPIC Exchangeable Bond Transaction.

  7.2 This was as agreed between IPBC and International Petroleum Investment Corporation
  (IPIC), a state-owned entity from Abu Dhabi. IPIC was a passive investment company
  involved in administering Abu Dhabi’s sovereign wealth fund, rather than an active
  commercial or trading organisation.

  7.3 The Exchangeable Bond Transaction sought to leverage IPBC’s ownership of General
  Business Trust assets and, in particular, the 17.6% shareholding that IPBC then held in
  Oil Search. IPBC had become the state’s nominee to hold the Oil Search subsequent to

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• the merger of Oil Search and Orogen pursuant to the IPBC Act 2002.51 The key concepts
  of the transaction were as follows:

  (a) IPBC was to issue exchangeable bonds to IPIC. Fundamentally, IPIC would pay
  money to receive the bonds and at maturity, after 5 years, take IPBC’s
  shareholding in Oil Search as repayment. It is critical to understand this aspect.

  (b) At the time of the transaction, the Oil Search share price was about AUD4.33, but
  it was predicted to rise. This was because Oil Search was a participant in the PNG
  LNG Project and its share price was likely to rise as the Project progressed.

  (c) In order to raise sufficient funds to participate in the Project and to take advantage
  of the forecast rise in Oil Search’s share price, the value of the bonds was
  calculated not by reference to Oil Search’s then share price but to an agreed future
  price of AUD8.55. This enabled IPBC to raise AUD1.681 billion. This was
  significantly more than it could have raised from a simple loan secured against the
  current value of the Oil Search shares.

  (d) IPBC would use the funds generated from issuing the bonds principally to fund its
  equity participation in the PNG LNG Project. The funds were placed in
  quarantined US dollar and Australian dollar accounts for that purpose and to meet
  interest payments on the bonds.52

  (e) IPBC would keep the dividends paid on the shares up to a certain limit, after which
  the excess would be held in the quarantined accounts.

  (f) On maturity, the bonds would be exchanged for IPBC’s entire shareholding in Oil
  Search. When that happened, if:

  51
  Section 7(a) of the IPBC Act 2002 provided that IPBC were to act as trustee of the Trusts [including the General
  Business Trust] and hold assets and liabilities that have been vested in or acquired by it, on behalf of the State. IPBC
  were registered as shareholders of Oil Search in March 2004.

  52
  Bond Deed Poll Annexure A, cl. 17, WIT.0056.0006.0021

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• (i) the Volume Weighted Average Price of the shares over a certain period of
  time was less than AUD8.55 a share, IPBC was obliged make up the
  shortfall in cash;

  (ii) if the Volume Weighted Average Price of the shares was greater than
  AUD8.55 a share, IPIC would only receive shares totalling the face value
  of the bonds and IPBC would keep the remainder of the shares. 53

  (g) IPIC also had early exchange rights. From 40 days after the bonds were issued
  until 10 days before maturity, IPIC could exchange the bonds for IPBC’s
  shareholding in Oil Search.54 On this early exchange, IPIC would receive all of the
  shares (even if the share price was above AUD8.55), but would not receive a cash
  payment if the share price was below AUD 8.55. The effect of this was to transfer
  the upside of the shares above AUD8.55 to IPIC as if the shares rose above that
  price, IPIC could take all of them.

  (h) The risk of having to make up the shortfall was the principal risk that IPBC took in
  the transaction.

  (i) IPBC was required to pay interest to IPIC at the rate of 5% per annum.55 About
  AUD390M of the funds raised by the bonds was placed in escrow to meet the
  interest payments as they fell due so that no further payments would be needed.

  (j) The Oil Search shares were held by an escrow agent for the duration of the bond to
  protect IPIC’s redemption rights. Also, IPBC was not permitted to grant security
  over any of the assets of the General Business Trust to secure financing debt
  unless it offered the same or equivalent security to IPIC.56

  53
  Bond Deed Poll, Annexure A, cl 7.5 WIT.0056.0006.0021

  54
  Bond Deed Poll Annexure A, cl 10.1 WIT.0056.0006.0021

  55
  Bond Deed Poll Annexure A, cl. 6, WIT.0056.0006.0021 [To be tendered]

  56
  Bond Deed Poll Annexure A, cl. 15, WIT.0056.0006.0021 [To be tendered]

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• (k) Subject to certain conditions, IPIC could exchange the bonds for IPBC’s
  shareholding in Oil Search before maturity, but it never sought to do so.

  (l) IPBC had the option to redeem the bonds but this depended on the average share
  price being above 130% of AUD8.55 (ie. the very high price of AUD11.115) for
  20 or more trading days during a period of 30 consecutive trading days. The price
  of the shares never gave rise to this option and, if it had, it is more likely that, by
  that point, IPIC would have already sought the early exchange of the shares.
  IPBC’s option to redeem early was, therefore, unlikely ever to be usable.

  (m) Neither IPIC nor IPBC had the right to seek a cash substitute for the shares.

  7.4 Over the years, some individuals expressed views showing a very significant
  misunderstanding about the exchange rights in relation to the shares and how the
  transaction was to end. Some people said that IPIC did not have a legal right to take the
  shares at maturity, or that IPBC had a right to repay IPIC in cash and so retain the shares.
  Neither is correct. IPIC was entitled to the shares on maturity. This was as IPBC and the
  NEC, which approved the transaction, intended and there was no misunderstanding about
  this at the time of the transaction. There was also no misunderstanding in the NEC during
  2012 and 2013.57 We submit you should be sceptical of those such who suggest they had
  that misapprehension at the relevant times.

  7.5 This exchange right was a conscious choice by IPBC and the NEC when each approved
  the transaction. In particular, IPBC was clear in its understanding that the shares would be
  transferred to IPIC on maturity of the bonds. Crucially, IPBC did not envisage that there
  ever would be an option to buy the shares back as IPBC would not have had the capacity
  to borrow the necessary sums to do so. Whilst the transaction would result in IPBC losing
  its investment in Oil Search, including any dividends flowing from the shares, this was
  considered an acceptable price to pay to obtain the much greater revenues that would
  ultimately flow from the PNG LNG Project.

  57
  NEC Decision 63/2012 (March 2012), WIT.0016.0001.0316, NEC Decision 117/2013 (April 2013)
  WIT.0016.0001.0331.

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• 7.6 Anyone in Government circles who said that IPIC was legally obliged to return the shares
  to IPBC – such as Mr O’Neill – were mistaken. There should not have been any confusion
  about this. On 25 November 2008, a joint press release was issued by IPIC, the State and
  Oil Search announcing the deal. The release explained that, subject to certain conditions,
  IPIC would be acquiring the State’s shareholding in Oil Search.58

  7.7 Mr O’Neill’s misunderstanding or lack of recollection of the IPIC transaction in 2013 is all
  the more surprising as he was a member of the NEC which approved it. In truth this
  evidence of Mr O’Neill is not credible, in our submission, for the additional reason that
  Mr Vele, who discussed the refinancing of the bonds with Mr O’Neill, was clearly not
  under the same misapprehension.

  8. TOR 1(f): Whether due and proper legal and administrative processes were followed
  to obtain the loan to finance the State’s equity participation in 2009, including but
  not limited to:

  (i) How was the process commenced?

  (ii) How was IPIC selected?

  (iii) What process was utilised?

  (iv) What were the terms of the Loan from IPIC?

  1(f)(i): How was the process commenced?

  8.2 The history of the State’s consideration of how to find its equity share in the PNG LNG
  Project is complicated by a number of factors:

  (a) There were three organisations involved and a degree of competition between
  them as to how and through which entity the Project should be financed, so:

  58
  WIT.0027.0001.0538

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• (i) Petromin appears to have considered itself to have been the most likely
  participant in the Project given its role in holding the State’s oil and gas
  assets.

  (ii) The Treasury necessarily had a role in advising on funding of such
  magnitude.

  (iii) IPBC, the eventual participant, originally had no interest in being involved
  nor notion that it might become so. However, it held assets which could be
  leveraged to raise the funds needed and, in particular, it held a substantial
  number of Oil Search shares. This was how it became involved and,
  ultimately, the holder of the State’s interest in the PNG LNG Project.

  (b) Two further complications were the question of how much money needed to be
  raised and when the money needed to be available to find the State’s equity
  interest. Financial close was not until December 2009 but the State needed to have
  its funding in place by September 2009.

  (c) The transaction also needs to be seen in its context. At the time that the finance
  was being sought, the world was in the midst of the global financial crisis. This
  presented significant challenges in raising funds.

  (d) The State was seen as being the weak link amongst the Project participants in
  raising funds. If the State succeeded in obtaining the funds at an early stage, it was
  thought that this would add momentum and credibility to the project.

  8.3 The Treasury started to take financial advice about funding the project in August 2007,
  using Lazard Freres. Lazard’s involvement continued through to the time that the NEC
  approved the IPIC Exchangeable Bond Transaction. The Treasury continued to seek
  funding alternatives even after the NEC had approved the deal.

  8.4 The Commission has less information about the steps that Petromin took to seek finance.
  An Oil Search document of May 2008 notes that ENI, the Italian oil and gas company,
  through Petromin, had approached the then Prime Minister to purchase the State’s
  shareholding in Oil Search. It is also understood that Petromin sought finance from Japan
  and South Korea.

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• 8.5 For IPBC, the process commenced in late 2007 or early 2008. Oil Search approached
  IPBC about a proposal to use its shareholding in Oil Search to assist in raising the funds
  to pay for the State’s equity interest. This was the origin of the exchangeable bonds
  proposal. It appears that UBS, acting for Oil Search, may have had the original idea
  although they were not involved in the subsequent negotiations about it.

  8.6 Oil Search was itself a participant in the PNG LNG project and it therefore had something
  to gain by assisting the State in finding this funding. In addition, UBS had been engaged
  by Oil Search as advisors as Oil Search was seen as a possible takeover target. The State’s
  shareholding represented a significant impediment to a potential takeover. It may have
  been that Oil Search had an interest in ensuring that IPIC became the holder of that
  substantial shareholding, sufficient to deter potential takeover bids, as its style was to be a
  passive investor. IPIC’s involvement would also have enhanced Oil Search’s business
  prospects in the Middle East. It is clear that Oil Search had already discussed the concept
  of the exchangeable bonds with IPIC before raising it with IPBC.

  8.7 IPBC attended initial meetings in Dubai and Abu Dhabi in early 2008 with Oil Search and
  IPIC to discuss the proposal. It then reported to the Gas Committee about it. The Gas
  Committee directed IPBC to examine the proposal and consider whether it was in the
  State’s interests and was feasible.

  8.8 IPBC obtained legal advice from Freehills Lawyers and financial advice from Goldman
  Sachs JBWere.

  8.9 Therefore, the submission as to this TOR, as to how the process to obtain the
  Exchangeable Bond Transaction commenced, is that the idea of it originated with
  Oil Search. Oil Search raised it with IPBC and introduced IPBC to IPIC.

  1(f)(ii) How was IPIC selected?

  8.10 Goldman Sachs JBWere were initially engaged on a fact-finding mission in April 2008 to
  familiarise themselves with the proposal.

  8.11 On 13 May 2008, the NEC approved the IPBC appointing advisors and undertaking
  further analysis and work to finalise the funding offer in consultation with the Treasury

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• before this would then be put before the NEC for approval. It also directed the Ministerial
  Committee on Gas to assess other financial options for the NEC’s consideration.59

  8.12 Goldman Sachs JBWere and Freehills largely ran the negotiations with IPIC. There was
  another meeting between representatives of Goldman Sachs JBWere, IPBC and IPIC on
  17 June 2008 in Singapore.60 Mr Botten, Mr Aopi and Oil Search’s CFO sought to attend
  that meeting but IPBC refused to allow them to do so. Their attendance was not thought
  appropriate as they were not a party to the proposal.61

  8.13 Goldman Sachs JBWere’s advice was that the IPIC Exchangeable Bond Transaction was a
  good structure for the State. If the PNG LNG Project completed, it was likely the Oil
  Search shares would go up in price. This was a factor in the decision about the reference
  price for the Oil Search shares in the deal. The price was reached through negotiation.
  Oil Search estimated that on production of first gas, its share price would be AUD12.50.
  IPBC had a figure between AUD8.25 and AUD8.70. The final figure of AUD8.55 was
  agreed between IPBC and IPIC.62

  8.14 IPBC also tried to get the term of the bonds to match as closely as possible with Exxon’s
  estimate of when the project would be completed and first gas delivered. This was the
  most important factor in determining the length of the bond. It too was a matter for
  negotiation and agreement with IPIC.63

  8.15 Throughout the negotiations, briefings for the State were held in Goldman Sachs
  JBWere’s office in Sydney. Generally at least four ministers were present. They were

  59
  NEC Decision 82/2008, WIT.0026.0001.0722

  60
  PwC Report, “Transaction Review Project Kumul”, p7 WIT.0056.0005.0001

  61
  PwC Report, “Transaction Review Project Kumul”, p43 WIT.0056.0005.0001 and Affidavit of Glenn Blake, 20
  December 2021, [23-24] Exhibit WWW WIT.0092.0001.0001

  62
  Affidavit of Glenn Blake, 20 December 2021, [29] Exhibit WWW WIT.0092.0001.0001

  63
  Affidavit of Glenn Blake, 20 December 2021, [31] Exhibit WWW WIT.0092.0001.0001

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• usually the Minister for State Enterprise, the Treasurer, the Minister for Planning and Mr
  O’ Neill as the Minister for Public Services.

  8.16 In about August 2008, Backwell Lombard approached Mr Glenn Blake, the managing
  director of IPBC, with an alternative proposal from JP Morgan. Mr Blake rejected this
  proposal.

  8.17 Commercial terms for the Exchangeable Bond Transaction appear to have been agreed by
  12 September 2008. On that date, Goldman Sachs JBWere produced a document titled
  “Project Kumul – Post Negotiations Debrief Discussion Materials” reporting on the key
  terms.64 Mr Hogan of Goldman Sachs JBWere presented that document to the MCES and
  the directors of IPBC on that day.65

  8.18 The paper explained the key commercial terms agreed between the parties and provided
  Goldman Sachs JBWere’s evaluation of the transaction:

  (a) The terms were very attractive and offered a compelling source of financing. They
  exceeded what could be obtained in an on-market transaction.

  (b) There was a benefit in having funding certainty at that point given market
  volatility.

  (c) There was no recourse to the State.

  (d) IPBC and the State could consider alternatives, in particular a broader process to
  sell the Oil Search shares.

  (e) At that point, the IPIC transaction (absent any debt solution), economically and
  strategically, looked to be a better alternative for raising funds than an outright sale
  of the Oil Search shares via a broader process.

  64
  Project Kumul – Post Negotiations Debrief Discussion Materials WIT.0026.0001.0741

  65
  Minutes of IPBC board meeting of 13 September 2008 WIT.0026.0001.0770

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• (f) However, this was predicated on Oil Search shares remaining around the current
  levels prior to settlement (that is, the date upon which the bonds would be issued).

  (g) Using the Oil Search shares to fund the interest in the PNG LNG Project only
  made sense if IPBC held that interest – because it held the shares.

  (h) IPIC had introduced IPBC and the PNG LNG Project to six commercial banks.
  They had shown some interest in providing debt finance in the future for the PNG
  LNG Project.

  (i) It was unlikely that “concessional” funding would be delivered, however pressure
  should continue to be applied to obtain this.

  (j) As the bond was not a clean exit from Oil Search, there was a residual exposure to
  Oil Search’s performance during the life of the bond. This was partly mitigated by
  Oil Search’s value being linked to the PNG LNG Project.

  (k) To mitigate the market risk to which the transaction was naturally exposed, the
  State and IPBC should move as quickly as possible to decide if they wish to
  proceed along this path.

  8.19 The IPBC Board as a whole was first briefed66 on the proposal at a board meeting on 13
  September 2008.

  8.20 In our submission, the Commission should be surprised that the IPBC board had not been
  briefed about the proposal at an earlier date. It is the case that the IPBC board was in
  some disarray throughout 2008. There was no board meeting between December 2007
  and August 2008. In part this was because the board was inquorate as the government had
  not appointed sufficient directors. Mr Arthur Somare was then the minister responsible
  for making the appointments. In August 2008, the board could have been informed about
  the proposal but this was not done. Instead, the appointment of advisors for the State’s
  participation in the PNG LNG Project was tabled but not discussed. The minutes record

  66
  WIT.0026.0001.0770

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• the shortage of members on the board and the volume of matters to be deliberated meant
  that the meeting would deal with urgent matters only.

  8.21 An additional issue is that two of the directors, Mr Aopi and Mr Baliki, appear, in our
  submission, to have been appointed to the IPBC board in contravention of section
  11(4)(b)(vi) of the IPBC Act as it then stood as both were employees of a business
  enterprise in which IPBC held an interest. Mr Baliki was an employee of BSP. Mr Aopi,
  who was appointed as the chair of IPBC, was a director of Oil Search, which is a
  particular concern. The evidence suggests that he did declare his conflict of interest but
  that he remained present when the exchangeable bonds proposal was being discussed. In
  our submission, he should not have been present. It created the risk and certainly the
  perception that IPBC’s confidential deliberations about the proposal would be reported
  back to Oil Search.

  8.22 The confusion over the constitution of IPBC’s board allowed the Treasury later to assert
  that IPBC’s decisions in relation to the exchangeable bonds were invalid. Legislation was
  required to correct the position. The Liquefied Natural Gas Project (State Participation)
  Act 2008 was introduced, which retrospectively repealed the relevant subsection of the
  IPBC Act and sought to expunge any invalidity.67

  8.23 In our submission, it is inexcusable for the government not to have complied with its own
  legislation in appointing Mr Aopi and Mr Baliki to the IPBC board. It is equally
  concerning that neither of them turned down the appointment on the basis that it was
  prohibited by legislation. When offered the position, they should have read the IPBC Act
  to understand the organisation that they were joining and this should have alerted them to
  the issue.

  8.24 Returning to the September board meeting, Mr Hogan of Goldman Sachs JBWere again
  presented the Project Kumul document.68 The minutes of the meeting record that:

  67
  First Statement of Anthony Yauieb 28 July 2021, [105] Exhibit BBB, WIT.0104.0002.0239

  68
  Minutes of IPBC board meeting of 13 September 2008 WIT.0026.0001.0770

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• (a) Mr Aopi declared his conflict of interest. The minutes record that Mr Aopi would
  stay in the meeting for Mr Hogan’s presentation but leave the meeting whilst the
  directors deliberated upon it. It was also recorded that he would not participate in
  the board’s decision on the proposal.

  (b) Mr Hogan informed the board that there had been “extensive” negotiations with
  IPIC that had resulted in the terms contained in the paper.

  (c) Mr Blake commented that Petromin posed a threat to the Oil Search shares and
  that this impacted upon the PNG LNG Project. The IPIC transaction was essential
  to protect the Oil Search shares from acquisition.

  (d) Mr Tosali, a nominee of the Treasury on the board of IPBC, questioned the
  serviceability of the coupon on the bonds and asked that Goldman Sachs JBWere
  should prepare a model that would show the merits of the transaction as against an
  outright sale of the Oil Search shares.

  (e) After Mr Hogan had left the meeting, the board questioned Goldman Sachs
  JBWere’s appointment. Mr Blake explained that Oil Search had been the source of
  the transaction. Subsequent discussions had led to the appointment of a financial
  adviser. Of the firms considered, Goldman Sachs JBWere was not conflicted and
  had experience of matters in Papua New Guinea. Mr Tosali expressed concern
  that the IPBC board had not been involved in Goldman Sachs JBWere’s
  appointment and asked about the fees to be paid to them.

  (f) Mr Blake responded that confidentiality meant that management had made the
  appointment, with the board to ratify this at the appropriate time. Mr Blake added
  that Freehills had been requested to ascertain what market rates were and that
  Goldman Sachs JBWere would be paid only to market rates.

  (g) The board noted that Lazard had been engaged as financial advisors to the State
  and that any financing options put together by the Treasury as an alternative to the
  IPIC transaction should be considered. It was recorded that there were “lengthy
  discussions in the nature of concerns that the Department of Treasury had on the
  IPIC Transaction”.

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• (h) These concerns were noted but the board resolved to recommend the IPIC
  transaction to the NEC, subject to the Treasury being accorded the opportunity to
  comment on it. The board also ratified the appointment of Goldman Sachs
  JBWere.

  8.25 Thus, by this point, it is clear that the Treasury did not support the exchangeable bonds
  proposal.

  8.26 In addition, Petromin had been pursuing its own course to obtain funding. It appears that
  the government had not provided any clear guidance by this point as to who should be the
  State’s nominee for the Project. It may have been that the government wished to see
  which entity would find funding first before making such a decision. However, under the
  Gas Agreement, the government was required to decide on the nominee by November
  2008.

  8.27 On 25 September 2008, then Prime Minister Sir Michael Somare wrote to Petromin69
  stating his reasons for preferring the IPBC proposal.

  8.28 The letter noted that the Prime Minister was convinced that of Petromin and IPBC, IPBC
  was better placed to be the State nominee. The letter also noted that he had directed that
  the IPBC proposal be put to the NEC. The Prime Minister urged all State entities work
  together with Goldman Sachs JBWere and IPBC to conclude the transaction. The letter
  notes that it superseded previous letters, in particular his letter dated 4 September 2008 to
  the Minister for Public Enterprises.

  8.29 Prime Minister Michael Somare also wrote to Ministers Pruaitch, Tiensten, Duma and
  Arthur Somare in the same terms. The purpose of the letter (which is undated) was to
  inform the Ministers of recent decisions made by the Prime Minister concerning the PNG
  LNG Project: “Basically, the decisions seek to address misunderstandings that may have
  been inadvertently created during the course of the year…”.

  69
  WIT.0027.0001.0506

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• 8.30 On 6 October 2008, Mr Arthur Somare wrote to Treasurer Pruaitch,70 noting the IPIC
  transaction was in its final stages of approval and inviting the Treasury’s detailed
  comments as soon as possible, providing a draft copy of the submission to the NEC which
  was to be presented at an MCES meeting the following day.

  8.31 On 10 October 2008, Mr Tosali71 gave a presentation to the MCES emphasising that
  financial close was not until December 2009 and the State was not required to provide
  equity until September 2009, and that the PNG LNG Project had not been subject to open
  competition or legal advice on the negative pledge. The presentation noted that Lazard
  and the State had been approached by numerous lenders and had commenced soliciting
  proposals.72

  8.32 On 10 October 2008, the MCES issued a directive instructing the Treasury to report to the
  MCES on 24 October 2008 with all financing alternatives so that the MCES could make a
  decision and recommendation to the NEC.

  8.33 By this time, Backwell Lombard had taken their JP Morgan proposal to the Treasury. It
  was not accepted.

  8.34 On 16 October 2008, Lazard wrote to the Prime Minister stating that they could see no
  basis for curtailing the competitive assessment and review process, and that they saw
  significant disadvantage to the State in doing so. They noted also that “time was on our
  side” and encouraged the Prime Minister to reinstate the assessment and review process.73

  70
  WIT.0104.0002.0095

  71
  Transcript, Wapu Sonk, 5 August 2021, p2621.

  72
  Presentation to the MCES “Financing of the State’s Entitlement in the PNG LNG Project” dated 10 October 2008
  WIT.0104.0002.0037

  73
  Letter Lazard Freres to Prime Minister, 16 October 2008, WIT.0104.0002.0173

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• 8.35 On 20 October 2008, policy submission 167/2008 was produced for the NEC.74 It was
  signed by Mr Pruaitch and Mr Tiensten.

  8.36 The purpose of the submission was to seek the NEC’s approval of the terms that had been
  negotiated.

  8.37 The key points made in the submission were:

  (a) The State’s total financing exposure to the PNG LNG project was approximately
  USD3 billion comprising project financing of USD2 billion and equity financing
  of USD1 billion, making this the largest investment in the State’s project financing
  history.

  (b) In return, the State stood to benefit from its equity interest to about USD850
  million annually in addition to tax receipts. There were also substantial indirect
  benefits including generating jobs and accelerating economic growth and
  underpinning the future socio-economic growth and development of the State. In
  comparison, the State currently received USD16 million annually in dividends
  from its shareholding in Oil Search.

  (c) IPIC was regarded as a long-term strategic investor which was unlikely to launch a
  takeover bid for Oil Search with whom it already had a close association through
  Oil Search’s ventures in the Middle East. IPIC saw PNG as an attractive
  investment destination and considered the exchangeable bond transaction to be the
  beginning of a long-term presence in the region.

  (d) The involvement of IPIC would support the commercial value and position of Oil
  Search as the State’s strategic partner in long-term development of the hydrocarbon
  sector.

  (e) The involvement of IPIC and access to Abu Dhabi’s financing institutions was
  essential to create competitive tension with PNG’s traditional financing

  74
  NEC Submission 167/2008 dated 20 October 2008 [22] Exhibit BB, Annexure T, WIT.0027.0005.0216

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• institutions. This would benefit the State’s commercial and development financing
  over the long-term.

  (f) The difference between the revenue currently received through the Oil Search
  shareholding and the revenues anticipated from the PNG LNG Project meant that
  it made more sense to monetise the Oil Search shares to finance the State’s full
  equity interest in the PNG LNG Project as opposed to selling down some of the
  State’s equity in the project to raise the finance. Maintaining the full equity interest
  was also consistent with the Government’s policy not to cheaply sell off assets but
  to add value to them.

  (g) Mr Pruaitch further explained the State’s reasons for not raising the finance by
  selling down the State’s interest in the PNG LNG Project in his supplementary
  affidavit of 30 July 2021.75 In summary, there was no financial need to do so.
  Consistently with its policy, the State wanted to benefit fully from the PNG LNG
  Project. Further, selling down the stake would create risks with the landowners
  who were looking for a greater share of equity from the State’s current interest in
  the project and might create doubt about the State’s commitment to the PNG LNG
  Project amongst the partners in the PNG LNG Project.

  (h) The nature of IPIC as a passive investor would allow the State to maintain its
  relationship with Oil Search.

  (i) A direct sale of the Oil Search shares would have opened the door to a takeover
  bid for Oil Search.

  (j) There should be no impact on the State’s finances from the proposed transaction.

  (k) The price at which the State was securing its equity interest in the PNG LNG
  Project was favourable in comparison to the value attributed by financial analysts
  to AGL’s 3.6% share of the PNG LNG Project in its equity sale process.

  75
  Supplementary affidavit of Patrick Pruaitch dated 30 July 2021, Exhibit ZZ.1, WIT.0028.0004.0003

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• (l) The State’s dividend stream was unencumbered (although the Commission notes
  that this was not in fact the ultimate outcome of the transaction, nor was this
  statement consistent with a summary of the transaction prepared by Freehills).

  (m) The bond was compelling given the global credit squeeze and the expectation that
  the financial crisis would continue for at least the next year. It would be very
  difficult for the State to raise capital in its own right from capital markets or
  financial institutions.

  (n) The revenues from the PNG LNG Project would assist the State in exercising its
  back in rights in relation to other resource projects in the future.

  (o) The Government was seen to be the weakest link in raising equity for the PNG
  LNG Project. The transaction would add certainty to the overall project financing
  efforts.

  (p) There was no need to sell-down the State’s equity to finance reduced equity from
  the proceeds of that sale when the returns from the PNG LNG Project were
  extremely attractive and the transaction allowed the State to fund its full equity
  participation at effectively no cost.

  (q) Further, it was in the best interests of the State to preserve the value of its 19.4%
  stake in the Project so as to enable it to deal effectively with the Benefit Sharing
  Agreement process which could threaten the entire PNG LNG Project. Having the
  full stake would assist the State in negotiating the imminent issue of additional
  equity demanded by resource owners and pipeline communities.

  8.38 The submission also considered why the transaction should be concluded as soon as
  possible:

  (a) The primary motive was to bring certainty to the PNG LNG Project given that the
  State was regarded as the weakest link so far as equity was concerned. This was
  particularly relevant as dealings with debt financiers and rating agencies was
  intended to start in November 2008.

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• (b) Delaying the transaction might put the transaction itself at risk. The State could not
  control the market.

  (c) Securing the deal would also support Oil Search’s share price. This was ultimately
  in the State’s interest.

  (d) The Treasury’s comments were important but further delay was unwarranted. The
  Treasury had been part of every step of the negotiation process. Further, the
  Treasury had a concrete financing option that was as conclusive and developed as
  exchangeable bond transaction.

  8.39 The submission described and discussed the terms of the proposed transaction:

  (a) The submission was clear in explaining IPIC’s rights to obtain the Oil Search
  shareholding and IPBC’s liability to make up any shortfall if, at the time of
  exchange, the Oil Search share price was below AUD8.55.

  (b) The submission stated that Oil Search dividends were excluded from the
  quarantine account. This was not correct. Rather, if dividends exceeded a certain
  threshold, the excess would be paid into the quarantine account. The Freehills
  document drew attention to the fact that dividend payments might be divided
  between the parties in some circumstances. The incorrect statement in the
  submission may have been derived from a draft of a Goldman Sachs JBWere
  presentation to the NEC dated 22 October 2008, which included the same
  misstatement.76 The Goldman Sachs JBWere presentation appears to have formed
  the basis for much of the NEC submission.

  (c) The submission explained the separate Australian and US dollar quarantined
  accounts and that the majority of the funds raised by the bonds would be converted
  into US dollars.

  76
  PNG LNG Project State’s Equity Financing, “Exchangeable Bond Option” Presentation to the National Executive
  Council 22 October 2008, WIT.0097.0005.0213

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• (d) The submission stated that, on current modelling, the 5% coupon could be met by
  IPBC and the funds raised from issuing the bonds would be sufficient to cover the
  State’s equity-based capital expenditure in the PNG LNG Project. It was possible
  that there would be a residual fund of AUD500 million but this was highly
  sensitive to foreign exchange and interest rates.

  8.40 The submission also noted some risks in the transaction:

  (a) IPIC was undertaking legal due diligence to obtain comfort that IPBC would
  continue to hold the state’s shareholding in Oil Search during the term of the
  transaction. IPIC needed to be certain that IPBC would be the State’s nominee for
  the PNG LNG Project. This would require changes to be made to legislation.

  (b) The deadline for the State to determine its nominee under the Gas Agreement was
  November 2008 and there was still competition between Petromin and IPBC as to
  which of them should take that role. The Prime Minister’s letter of 25 September
  2008 informed Petromin that IPBC was better placed to do this and started the
  process of obtaining the State’s approval for this. Presenting the exchangeable
  bond transaction proposal to the NEC was a step in that process. The NEC needed
  to make an immediate decision on this issue as, without it, IPIC might pull out of
  the transaction.

  8.41 The submission noted that the transaction had the support of the Prime Minister and key
  economic ministers including the Ministers for Treasury and Finance, the Minister for
  National Planning and District Development and the Minister for Public Enterprise. There
  was also support from the Minister for Public Service and the Minister for Petroleum and
  Energy. The submission was signed by Mr Pruaitch and Mr Tiensten.

  8.42 In its concluding section, the NEC submission noted that:

  Cabinet should note that based on all available information, the exchangeable bond
  transaction being pursued by IPBC in consultation with the Department of Treasury, the
  Department of National Planning, key ministers, the Ministerial Economic Committee,
  the Prime Minister, and Cabinet, is the only serious financing option available to the
  Government at this point in time

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• 8.43 On 21 October 2008, Mr Tosali wrote a lengthy letter to Mr Blake setting out the
  Treasury’s objections to the proposed transaction.77 The letter was copied to a number of
  people including the Prime Minister, Deputy Prime Minister, Mr Arthur Somare, Mr
  Pruaitch and the members of the MCES. The main points of objection to the transaction
  were that:

  (a) would give IPIC the right to acquire the Oil Search shares at an unknown time up
  to 5 years in the future at a price which would be the lower of AUD8.55 and the
  then market price. If the price was below AUD8.55, IPBC would be required to
  make a cash payment. If the price was below AUD5.50 at maturity, the State
  would have insufficient funds left from the transaction to finance its involvement
  in the PNG LNG Project and would need to raise further finance.

  (b) The Oil Search shareholding was a significant asset of the State.

  (c) The State was exchanging a liquid asset for an illiquid one and losing the
  diversification of assets that the shareholding in Oil Search represented.

  (d) Whilst Oil Search currently paid very low dividends, they were likely to improve
  in the future as a result of the PNG LNG Project. The PNG LNG Project itself
  would not generate a return to the State until 2015, resulting in a loss of revenue in
  the intervening period.

  (e) The transaction might increase the risk of Oil Search being taken over, including
  by IPIC.

  (f) The transaction was being entered into before the funds were needed and the bonds
  would need to be redeemed before the State started to receive any income from the
  PNG LNG Project.

  (g) There had not been open competition for the financing. It would be better for the
  State to establish and maintain competition for the financing for as long as
  possible. The State did not require committed finance until September 2009 and

  77
  Letter, Department of Treasury to IPBC 21 October 2008, WIT.0056.0006.0762

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• would not need to actually have the funds until financial close on the PNG LNG
  Project. It was too early to say what the total PNG LNG Project cost would be.

  (h) A delay in obtaining finance would not affect the credibility of the PNG LNG
  Project given the other participants involved and the growing demand for LNG.

  8.44 In summarising its position, the Treasury strongly recommended that the State should:

  continue to evaluate all financing proposals, including the Bonds…There is sufficient
  time to carry out a traditional evaluation of financing alternatives…

  8.45 A presentation was made to the NEC by Goldman Sachs JBWere on 23 October 2008 on
  the exchangeable bonds option.78

  8.46 The NEC approved the exchangeable bonds proposal at its meeting on 23 October 2008,
  as recorded in NEC Decision 223/2008.79 The meeting also determined that the State’s
  shareholding in Oil Search should continue to be held by IPBC and that IPBC would be
  the State’s nominee for the PNG LNG Project.

  8.47 On 24 October 2008, IPBC’s board discussed and then approved its entry into the
  exchangeable bond transaction.80 Mr Tosali was represented at the meeting by Mr
  Yauieb. Remarkably, he stated that the Minister for Treasury (his own Minister) had not
  given the Treasury Department a hearing at the NEC meeting on the previous day and he
  therefore requested that the Treasury’s objections be recorded in the minutes of the
  meeting. The objections were in the nature of the exchangeable bond transaction not
  being an appropriate financing option to fund the State’s equity. Mr Yauieb was advised
  that the Treasury had previously been given the opportunity to comment on the
  transaction by 19 September 2008, but had failed to do so and so the board had proceeded
  to recommend the exchangeable bond transaction to the NEC. At this point in the

  78
  PNG LNG Project State’s Equity Financing “Exchangeable Bond Option” Presentation to the NEC 22 October
  2008, WIT.0097.0005.0213

  79
  NEC Decision223/2008 Exhibit BB Annexure R, WIT.0027.0005.0174

  80
  Minutes of IPBC board meeting 24 October 2008, WIT.0026.0001.0789

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• discussions, the board apparently waited to have sight of the NEC decision 223/2008 of
  the previous day before passing resolutions to enter into the exchangeable bond
  transaction. Mr Aopi left the meeting whilst resolutions were being put to the board and
  resolved.

  8.48 And so that is how IPIC was selected.

  8.49 On 23 November 2008, IPBC and IPIC entered into the exchangeable bond transaction.
  The bonds were issued in March 2009.

  8.50 Remarkably, the Treasury continued to explore alternative financing options despite the
  fact that IPBC had already entered into the exchangeable bond transaction, as approved
  by the NEC.

  8.51 It is also important to note Mr Blake’s evidence that IPBC never saw itself as a long-term
  holder of the interest in the PNG LNG Project because the plan was that the revenues
  generated by the project should go into a sovereign wealth fund. Once the fund was
  established, the revenues from the project would either pass through IPBC into the fund
  or be held by a different entity altogether.81

  1(f)(iii) What process what utilised?

  8.52 While the process for its election was somewhat disorganised and ad hoc it was infinitely
  more careful, thoughtful and appropriate than that leading up to the UBS Loan. The
  following matters deserve emphasis:

  (a) IPBC, the Treasury and Petromin all had professional advice to assist them in
  trying to identify potential sources of finance. There are no grounds for criticising
  the advisors’ work so that, at that level, each entity’s process was as would
  normally be expected.

  (b) It is clear from Sir Michael Somare’s undated letter sent in September 2008, that
  there had been a degree of confusion about who should be the State’s nominee on

  81
  Affidavit of Glenn Blake, 20 December 2021, [46] Exhibit WWW, WIT.0092.0001.0001

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• the Project. This may well be because the State simply did not know who the
  nominee should be and that it was the IPBC exchangeable bonds proposal which
  forced a decision. As that proposal provided some certainty in a very uncertain
  financial context, it is easy to understand that it became the catalyst for deciding
  who the State’s nominee should be.

  (c) Whilst there was disagreement and a degree of competition between Petromin, the
  Treasury and IPBC, this may have been helpful rather than destructive. Certainly,
  Mr Blake, the managing director of IPBC, gave evidence that he did not feel in
  competition with Petromin and had a very good relationship with its CEO. To the
  extent that there was disagreement, this reflected a testing of the market and the
  options available to the State; a ground upon which the exchangeable bond
  transaction has been criticised in the past.

  (d) The transaction also received significant consideration by the MCES and the NEC.
  It is notable that the MCES gave the Treasury a further opportunity to submit a
  competing proposal. It is also Mr Blake’s evidence that IPBC looked for
  alternative proposals, including approaching Exxon Mobil for finance and
  receiving a proposal from JP Morgan via Backwell Lombard.

  8.53 We again emphasise that there is a marked and unfavourable contrast between the largely
  careful process preceding, and the time taken for the State to deliberate over, the IPIC
  Exchangeable Bond Transaction, and the few hours that the NEC was permitted to
  consider the UBS loan and the purchase of Oil Search shares in 2014.

  8.54 Nevertheless, particularly because of the State’s limited resources, it is clear that a more
  efficient process could have been to have a single set of advisers testing the market and
  considering the best way forward.

  1(f)(iv) What were the terms of the Loan from IPIC?

  8.55 The State did not obtain a loan to finance its equity participation in the PNG LNG Project.
  The exchangeable bonds were not a loan although in some respects they were similar to
  one.

  8.56 The main terms of the bonds have already been explained.

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• 8.57 This Commission retained financial experts, the Brattle Group, to consider the terms of
  the exchangeable bonds. They did this in the first report that they submitted to the
  Commission in July 2021.

  8.58 Brattle’s largely favourable observations on the objective of the transaction and alternative
  means of achieving it are as follows:

  (a) The aim of the transaction was to raise the funds required to enable the State to
  participate to the full extent of its equity interest in the PNG LNG Project.

  (b) At the time of the IPIC transaction, the State’s interest in the PNG LNG Project
  was worth between USD3 and 5 billion. Its share of the equity funding was likely
  to be about USD1 billion.

  (c) Selling about one fifth of the State’s equity interest in the PNG LNG Project would
  have been likely to have raised sufficient funds to pay for the equity contributions
  attributable to the remaining four-fifths.

  (d) The State could also have sought to sell its entire interest rather than seek to
  participate in the PNG LNG Project, but Brattle do not know whether a sale of
  such magnitude would have been achievable at that time.

  (e) It is unlikely that the State could have funded its participation by issuing sovereign
  bonds given the economic climate of the time.

  (f) The State would not have been able to raise sufficient funds from concessional
  loans from multi-lateral organisations.

  8.59 In relation to these points, the Treasury did initially favour the State selling its entire
  interest in the PNG LNG project and benefiting from it solely through tax and royalties.
  However, when it appreciated that the government wished the State to have a direct
  interest in the project, it accepted this and considered other alternatives. This included
  selling part of the State’s interests to finance the equity funding for the remainder.

  8.60 There was apparently no detailed consideration of issuing a sovereign bond at the time.
  Given the global financial crisis at that time, this is not surprising.

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• 8.61 Goldman Sachs JBWere gave advice to IPBC about concessional funding and considered
  that it would not raise sufficient funds.

  8.62 Brattle’s views on the terms of the IPIC transaction are:

  (a) From March 2009 to March 2014, the State was exposed to the downside risk of
  the Oil Search share price, and the upside risk up to AUD8.55, but it had
  transferred to IPIC all of the upside in the Oil Search shares above AUD8.55.

  (b) A fair interest rate for such an exchangeable bond would have been lower than the
  fair rate on a regular bond which did not give the lender the benefit of the upside in
  the Oil Search share price above AUD8.55.

  (c) The interest rate on the bond was fair if IPIC assessed the credit risk of IPBC
  failing to pay a required cash top-up as non-negligible, but was too high if IPIC
  perceived there to be no such risk. It is not known what assessment IPIC in fact
  made of this credit risk.

  (d) To illustrate the magnitude of the relationship between credit risk and fair pricing,
  Brattle valued the bonds at the time the bond documentation was executed. If there
  was no credit risk, so that it was certain that IPBC would pay any cash top up
  required on maturity, the bonds were worth 119% of face value. Conversely, if it
  was certain that IPBC would not pay any cash top up that might be required on
  maturity, the bonds were worth 69% of face value. In Brattle’s view, issuing the
  bonds for 100% of face value was consistent with fair pricing of a bond with a
  non-negligible degree of credit risk. Further, Brattle concluded that the
  circumstances of the transaction made it reasonable to assume that IPIC did
  consider there to be a non-negligible credit risk and that, on that basis, the bonds
  were fairly priced.

  8.63 On the basis of Brattle’s views, it is submitted that the terms of the exchangeable
  bonds were commercially reasonable and not unfair to the State.

  9. TOR 1(g): Who were the legal and financial advisors engaged in the IPIC
  exchangeable bond transaction

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• 9.1 IPBC received legal advice from Freehills and financial advice from Goldman Sachs
  JBWere.

  10. TOR 1(h): Were legal and administrative processes followed to engage in any legal
  and financial advisors?

  10.1 The Commission received evidence on this question from Mr Glenn Blake, the managing
  director of IPBC at the time.

  10.2 Freehills were on a panel of law firms used by IPBC at the time.

  10.3 IPBC sought KPMG’s assistance in finding a suitable financial advisor. KPMG were
  instructed to identify a financial adviser based in Sydney that had global capacity and was
  of high calibre. KPMG recommended that IPBC should consider engaging Goldman
  Sachs JBWere and this is what transpired.

  10.4 Mr Blake also gave evidence that KPMG was engaged to model the anticipated revenue
  flows from the PNG LNG Project.82

  10.5 Freehills and Goldman Sachs both started work on the matter in early 2008. Goldman
  Sachs JBWere were initially engaged on a fact finding mission in April 2008 to
  familiarise themselves with the proposal. Initially, their engagement was on a month-to-
  month basis. IPBC did not need NEC authority for this. 83

  10.6 On 13 May 2008, the NEC approved the IPBC appointing advisors and undertaking
  further analysis and work to finalise the funding offer in consultation with the Treasury
  before this would then be put before the NEC for approval. It also directed the Ministerial
  Committee on Gas to assess other financial options for the NEC’s consideration.84

  10.7 An IPBC board meeting was held on 20 August 2008. The appointment of advisors for
  the State’s participation in the PNG LNG Project was tabled but not discussed. The

  82
  Affidavit of Glenn Blake, 20 December 2021 [26], Exhibit WWW, WIT.0092.0001.0001

  83
  Affidavit of Glenn Blake, 20 December 2021, [21] Exhibit WWW, WIT.0092.0001.0001

  84
  NEC Decision 82/2008, WIT.0026.0001.0722

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• minutes record the shortage of members on the board and the volume of matters to the
  deliberated, led to the board agreeing that the meeting would deal with urgent matters
  only.

  10.8 On 29 August 2008,85 the NEC noted Statutory Business Paper No. 87/2007 and:

  (a) noted the appointment of Goldman Sachs JBWere as the IPBC advisors on the
  funding;

  (b) noted the appointment of Freehills Lawyers as the IPBC’s probity advisors; and
  then

  (c) approved the fee structure for those advisors.

  10.9 The NEC decision attaches a summary of the fee structure for Goldman Sachs JBWere
  but not Freehills. The structure was:

  (a) 1% of the gross proceeds of any bond or exchangeable offering or sale of assets;

  (b) 0.1% of the aggregate loan facility to be agreed with IPIC;

  (c) 0.5% of the aggregate facility limit of any investor introduced by Goldman Sachs
  to PNG;

  (d) 0.4% of the aggregate facility limit of any other loan facility or other capital
  raising executed as part of the financing.

  10.10 Mr Blake noted that NEC approval was necessary at this point because Goldman Sachs
  JBWere’s remuneration included success fees.86

  10.11 The minutes of an IPBC board meeting on 13 September 2008 record that the board of
  IPBC ratified the appointment of Goldman Sachs JBWere on that date. Mr Simon Tosali,
  an ex officio member of the board as the Secretary of the Treasury at the time, raised

  85
  NEC Decision 189/2008 was made at Special Meeting No: 30/2008 WIT.0027.0001.0498

  86
  Affidavit of Glenn Blake, 20 December 2021 [21], Exhibit WWW, WIT.0092.0001.0001

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• concerns at the meeting that the board had not been part of the appointment process. Mr
  Tosali also questioned the level of fees that would be paid to Goldman Sachs JBWere.87

  10.12 The Commission does not have any evidence to show the board of IPBC was involved in
  appointment of Goldman Sachs JBWere and Freehills, the selection of IPIC or the
  negotiations with IPIC until the proposal was put to them at the meeting on 13 September
  2008. The evidence suggests that within IPBC, the transaction and the appointment of
  advisors was led by Mr Blake.

  10.13 In the result:

  (a) The fees paid to Freehills for their work on the Exchangeable Bond Transaction
  were AUD1.136 million.

  (b) The fees paid to Goldman Sachs JBWere were AUD16.895 million.88

  11. TOR 1(i): What was the rationale for allowing payment to be made by an election of
  either cash, or the mortgaged Oil Search shares or a combination of both?

  11.1 The exchangeable bonds did not permit payment to be made by an election of cash or
  shares or a combination of the two. Also, the Oil Search shares were not the subject of a
  mortgage in a technical legal sense although they were held in an escrow account to
  preserve them for the maturity of the bond.

  11.2 The bonds could be redeemed in the following ways as noted to an extent above:

  (a) Prior to maturity:

  (i) from 40 days after the bonds were issued until 10 days before maturity,
  IPIC could exchange the bonds for IPBC’s shareholding in Oil Search.89 On
  this early exchange, IPIC would receive all of the shares (even if the share

  87
  Minutes of Meeting No. 1 of 2008 of the Board of Directors of IPBC WIT.0026.0001.0730

  88
  PwC Report, “Transaction Review Project Kumul”, p21 WIT.0056.0005.0001

  8989
  Bond Deed Poll Annexure A, cl 10.1 WIT.0056.0006.0021

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• price was above AUD8.55), but would not receive a cash payment if the
  share price was below AUD 8.55. Acting rationally, IPIC would not
  exercise this right unless the relevant average share price was above
  AUD8.55 and therefore able to redeem the bonds in full. Had the share
  price risen to that level, it is likely that IPIC would have chosen to exercise
  its early exchange rights in order to obtain the full Oil Search shareholding
  rather than wait until maturity when, under the mandatory exchange
  provisions, it would only be entitled to take shares up to the face value of
  the bonds. In the event, however, the Oil Search share price did not provide
  this opportunity.90

  (ii) after the payment of the sixth interest payment date, 15 October 2011,
  IPBC had the option to redeem the bonds but this depended on the average
  share price being above 130% of AUD8.55 (ie. AUD11.115) for 20 or more
  trading days during a period of 30 consecutive trading days.91 If IPBC
  sought to redeem the bonds, it only needed to provide shares to the face
  value of the bond but needed to redeem all of the bonds. The share price
  never reached this level;

  (iii) Importantly, if IPBC chose to seek early redemption, IPIC had 25 business
  days following receipt of notice of the desire to redeem in which to decide
  whether to exercise its rights to an early exchange. It is almost inevitable
  that IPIC would have exercised its rights to an early exchange in that
  circumstance because the shares would have reached a value (130% of
  AUD8.55) that would redeem the bonds in full and leave some upside for
  IPIC;

  90
  Brattle 1, [114], Exhibit VV, WIT.0132.0001.0002

  91
  Bond Deed Poll, Annexure A, cl 7.2 WIT.0056.0006.0021

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• (iv) The effect of this is that whilst IPBC had the right to seek to redeem the
  bonds early if the share price rose sufficiently, it is unlikely that it would
  ever have been able to exercise that right.

  (b) On maturity, the bonds would be exchanged for IPBC’s entire shareholding in Oil
  Search. When that happened, if:

  (i) the Volume Weighted Average Price of the shares over a certain period of
  time was less than AUD8.55 a share, IPBC was obliged make up the
  shortfall in cash;

  (ii) alternatively, if the Volume Weighted Average Price of the shares was
  greater than AUD8.55 a share, IPIC would only receive shares totalling the
  face value of the bonds and IPBC would keep the remainder of the shares;92

  (iii) IPBC did not have a right to seek to redeem the bonds in cash at maturity.

  11.3 In summary, given the conditions attached to either party’s early exchange rights, it was
  likely that the exchangeable bonds would run to maturity. At that point, they would be
  redeemed through IPIC taking IPBC’s holding in Oil Search up to the value of the bonds
  and IPBC paying any shortfall between the share price at that point.

  11.4 The rationale behind IPBC’s agreement to this appears to be an acceptance that IPBC
  would never have the funds to be able to redeem the bonds in cash. Its best option was
  therefore to enter into a transaction which might be likened to a deferred sale of the
  shares. This allowed it to take advantage of any increase in the price of the shares during
  the period of the bonds.

  11.5 In February 2014, IPIC issued the Mandatory Exchange Notice. It received the State’s Oil
  Search shares and IPBC was required (after litigation) to pay AUD74 million.

  12. TOR 1(j): What was the rationale for allowing the mortgaged Oil Search shares to
  be used in payment of the Loan?

  92
  Bond Deed Poll, Annexure A, cl 7.5 WIT.0056.0006.0021

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• 12.1 In our submission, it has always been clear that the exchange of Oil Search shares as the
  means for redeeming the bonds was mandatory under the terms of the IPIC Exchangeable
  Bond Transaction.

  12.2 The rationale for the exchangeable bonds appears to have been that:

  (a) It was considered at the time to be the best way of leveraging IPBC’s most
  significant asset, namely the Oil Search shares. The shares were low in value at the
  time that the transaction was negotiated, but were considered likely to rise (and in
  fact did so) during the term of the bonds as the PNG LNG Project advanced.
  Although interest was payable on the bonds, it was considered that this would be
  more than compensated by the likely increase in the value of Oil Search’s shares
  which meant that the deferred sale that the exchangeable bonds represented was
  better than an immediate sale of the shares in 2008.

  (b) Whilst the Commission has not confirmed this (and it would be likely to be
  information only available within IPIC), it seems likely that the fact that the bond
  would be partially or fully redeemed against the Oil Search shares reduced the
  interest rate sought by IPIC by removing some risk for IPIC. It may also have
  increased the amount that IPBC could raise from the bond.

  (c) The exchange right was a conscious choice by IPBC and the NEC (which included
  Mr O’Neil) when each approved the transaction. Whilst the transaction would
  result in IPBC losing its investment in Oil Search, including any dividends flowing
  from the shares, this was considered an acceptable price to pay to obtain the much
  greater revenues that would ultimately flow from the PNG LNG Project.

  (d) There were limited alternatives for raising the significant sums required given the
  global financial crisis at the time and that the sum was too big to be raised through
  concessional loans. There were also concerns about the delays that might arise
  with concessional loans.93 Neither Petromin nor the Treasury were able to present
  a competing offer at the time that the IPIC Exchangeable Bond Transaction was

  93
  PwC Report, “Transaction Review Project Kumul”, p40 WIT.0056.0005.0001

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• being considered by the NEC that matched it in terms of the amount that it would
  raise and the certainty of delivery.

  (e) Whilst the funds were raised some time in advance of when they were needed, this
  is explicable on the basis that the funding of the State’s equity participation would
  add credibility to the PNG LNG Project and a concern that in the economic
  climate of the time, the IPIC transaction might prove to be the only option
  available and one that might not be available at a later date.

  13. TOR 1(k): Whether IPIC has the sole election as to method of payment in
  satisfaction of the State Loan from IPIC, and if so what was the rationale for giving
  IPIC the right of sole election to either accept cash, the mortgaged Oil Search shares
  or a combination of both

  13.1 IPIC did not have a right of election as to the manner in which the exchangeable bonds
  would be dealt with on maturity. They were to be exchanged for Oil Search shares using a
  reference price of AUD8.55 with IPBC being obliged to make up any shortfall between
  the actual price of the shares at that date and AUD8.55.

  14. When and what decision did IPIC make on the repayment of the Loan?

  14.1 It appears that up until the end of 2013 or early 2014, IPIC may have been open at least in
  principle to discussion about accepting cash to redeem the bonds or refinancing (ie
  extending) the bonds rather than proceeding with the mandatory exchange. This was for
  example IPIC’s stated position at a meeting in Abu Dhabi on 30 October 2013.

  14.2 It is not known at what precise point after that IPIC’s position changed, but, by 13
  February 2014, it had rebuffed the State’s belated attempt to meet with it in Abu Dhabi
  and, on that day, it issued the formal notice to require the exchange of the shares for the
  bonds.

  Other issues

  The Currency Risk

  14.3 The bond was paid in Australian dollars and interest was payable in Australian dollars.
  However, the payments for the PNG LNG Project were required to be made in US

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• dollars. In addition, the funds were being received some considerable while before they
  were needed. These factors created a currency risk.

  14.4 Mr Vele criticised the IPIC transaction on the basis that it created a currency risk that was
  not well managed and in particular the timing of the exchange into US dollars. He noted
  that during the period after the exchange, the Australian dollar went on a “once in a
  generation ride” reaching highs in excess of USD1.10.

  14.5 Mr Vele also questioned whether it was necessary to exchange all of the Australian
  dollars into US dollars. Whilst the cash calls on the equity contributors to the PNG LNG
  Project would be in US dollars, much of the underlying expenditure on the project would
  be in Australian dollars.94

  14.6 But the currency risk was recognised at the time. The evidence is that Goldman Sachs
  JBWere had tried to negotiate for the loan to be in US dollars as that was to be the
  currency of the capital expenditure on the PNG LNG Project. However, IPIC required
  the transaction to be in Australian dollars as this was the currency of Oil Search’s share
  price.95

  14.7 IPBC received advice from Goldman Sachs JBWere about how to deal with the currency
  risk. Over a period of months in the lead up to the bonds being issued, it considered that
  advice and ultimately, it decided to follow the course that its financial advisor proposed.

  14.8 In our submission, nothing adverse arises in relation to currency risk. The risk was
  understood, IPBC took advice which it considered and then followed.

  Investment of the bond funds until needed

  14.9 A similar issue arose from the funds being received long before they were needed for the
  PNG LNG Project. This created the need to try to enhance the value of the funds

  94
  Affidavit of Dairi Vele, 26 April 2021 p25-26, Exhibit QQ WIT.0014.0007.0001

  95
  PwC Report, “Transaction Review Project Kumul”, p10 WIT.0056.0005.0001

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• received to minimise the risk that there might be a shortfall against the sums required to
  fund the State’s interest in the PNG LNG Project.

  14.10 IPBC and its advisors recognised this need. IPBC approached Goldman Sachs JBWere
  about the rates that they might offer on the investment of the funds until the funds were
  needed at financial close. Goldman Sachs advised that the conservative risk profile
  needed for the funds did not warrant using any of their investment products. IPBC then
  looked at other banks for rates to invest. Mr Blake’s recollection was that they approached
  Westpac, Commonwealth Bank of Australia and to other banks.96

  14.11 In our submission, there is nothing untoward in the manner in which IPBC dealt with this
  issue.

  The Treasury’s opposition and other funding alternatives

  14.12 The Treasury opposed the proposed transaction on a significant number of bases in its
  letter of 21 October 2008, outlined above.

  14.13 PricewaterhouseCoopers were engaged by the Treasury years later in 2011 to review the
  IPIC Exchangeable Bond Transaction. The PwC report provides further information
  about the Treasury’s views on the transaction.97 Relevantly, the report states that:

  (a) Treasury’s initial view was that the State should not take up its equity position in
  PNG LNG Project given the risks and costs involved. It prepared a comparison
  which demonstrated that the projected tax receipts would be twice as much as the
  PNG LNG Project’s equity dividends. However, the government’s determination
  to maintain a stake in the project, consistent with its policies, meant that the
  Treasury directed its attention to supporting the government’s ambition.

  (b) Between October and mid-December 2008, the Treasury sought to evaluate the
  various financing options that might be available. This was despite the
  exchangeable bonds being approved in October 2008 and the agreement being

  96
  Affidavit of Glenn Blake, 20 December 2021, [36] Exhibit WWW WIT.0092.0001.0001

  97
  PwC Report, “Transaction Review Project Kumul”, p12 WIT.0056.0005.0001

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• signed in November 2008. However, the PwC report states that none of the
  options considered by the Treasury allowed the equity to be fully funded. Some of
  the options considered included:

  (i) discussions with concessional lenders such as the Japanese bank for
  International Cooperation, the Asian Development Bank (ADB), the
  European Investment Bank (EIB) and the World Bank;

  (ii) talking to possible strategic equity investors such as Nippon Oil, LNG
  Japan and Shell;

  (iii) evaluating the proposals put forward by IPBC and Petromin, and

  (iv) considering limited domestic financing through the market or direct budget
  support.

  (c) Whilst it was clear that the equity finance would not be required until late 2009,
  the MCES believed that it would be an advantageous to the State to raise the
  finance at an earlier date and decided that it needed to make a decision on the
  source of finance by 24 October 2008. It then told the Treasury that it would only
  consider proposals that would enable the State to take up its full direct interest in
  the PNG LNG Project and would not result in the State taking on additional debt.

  (d) These requirements reduced the options available considerably and effectively
  precluded the Treasury from pursuing any further options. The Treasury then
  presented four options to the MCES that were immediately available:

  (i) a combination of ADB and EIB debt of USD400m, state budget funding of
  USD230, international bond issue of USD600 million and domestic bond
  issues for any cost overruns;

  (ii) a Japan Bank for International Cooperation proposal whereby the State and
  other Project sponsors would sell up to 5% of the PNG LNG Project to a
  Japanese party with JBIC financing the State’s participation in the PNG
  LNG Project on concessional terms;

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• (iii) an international oil and gas company would enter into a transaction with the
  State which would allow the State to take up its full entitlement in the PNG
  LNG Project and retain its shareholding in Oil Search. The international oil
  and gas company would finance the State’s equity on favourable terms;

  (iv) the State assignee would enter into a joint venture with the oil and gas
  company with the State holding the majority position and the company
  paying the State for its equity in the joint venture. The company would fund
  the balance if the proceeds from the sale of the State’s interest was
  insufficient to fund the balance of the State’s interest.

  (e) The PwC Report noted that one of the oil and gas company options involved an
  major oil and gas company acquiring control of Oil Search and then assisting the
  State to finance its equity involvement in the PNG LNG Project. That commitment
  would be up to a maximum of USD 650 million and would be secured only against
  the State’s interest in the PNG LNG Project. The financing would be repayable
  over four years following first production and carry an interest rate equal to the
  blended PNG LNG Project debt. The price to be offered for the Oil Search shares
  was at a significant premium to the then prevailing share price.

  (f) The Treasury’s proposal was presented to the MCES but it was not supported
  despite the Treasury considering it to be a better proposal than the exchangeable
  bonds. The Treasury reported to PwC that they did not receive a clear explanation
  for the rejection of the proposal but one of the grounds was a concern that Oil
  Search might fall into the hands of a foreign entity. PwC noted Mr Aopi’s position
  as the chair of IPBC and as an employee of Oil Search in this context, but without
  drawing any inferences from this.

  14.14 In summary, the Treasury had been operating on the basis of a longer timescale to raise
  the funds. The Treasury’s timescale was governed by when the funds would be needed.
  The MCES appears to have been guided by a concern, in a challenging economic
  environment, to seize the opportunity presented by the exchangeable bond transaction.
  This was not only to secure funds that might not otherwise be available but also to inject
  credibility and momentum into the PNG LNG Project.

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• 14.15 A notable feature of the Treasury’s work is the apparent disagreement between the
  Minister and his department. Mr Tosali is recorded in minutes of IPBC’s board meeting of
  24 October 2008 as stating that the Minister, Mr Pruaitch would not let him speak at the
  NEC meeting on 23 October 2008. It is unsatisfactory that there was a disagreement
  between the Minister and his department in Cabinet, a position which also arose albeit in
  a different fashion in relation to the UBS Loan discussed below. But in the PNG system,
  as in the Westminster system more generally, disagreements between Ministers (who are
  elected) and Departments (whose officers are not) are generally resolved in favour of the
  former.

  Conclusions

  14.16 Save for Treasury, there was little disagreement as to whether the State should participate
  in the PNG LNG Project. According to the PwC Report, the Treasury was initially
  against the idea based on the costs and risks involved. Its modelling suggested that it may
  have been financially better for the State to sell its equity stake and simply receive tax
  royalties and other indirect benefits as the PNG LNG Project proceeded. It does not seem
  that the Treasury’s view was explored in detail given the government’s determination to
  participate in the PNG LNG Project. The Treasury then focused on exploring the best
  options for how to do that.

  14.17 There was much more debate about how the State should finance its participation in the
  PNG LNG Project.

  14.18 In our submission, the decision to enter into the exchangeable bond transaction was a
  rational and justifiable decision in the circumstances then prevailing which would (and
  did), over the long term, generate greater revenues for PNG than the shareholding in Oil
  Search and in providing the State with an equity interest in its most significant resource
  project. The State took a risk that the Oil Search share price would rise over time to
  eliminate or reduce any shortfall that it might have to pay to IPIC at maturity but the
  prevailing view at the time was that the share price would rise, not least as a result of Oil
  Search’s involvement in the PNG LNG Project, and it did.

  14.19 As Oil Search was itself a participant in the PNG LNG Project, it was not unreasonable
  for the State to consider that its share price would be likely to rise over the term of the

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• bonds as the well regarded PNG LNG Project advanced. Indeed, at the date of maturity
  of the bonds, the share price was over AUD8.55, although it had not been above that price
  for sufficiently long to avoid the need for IPBC to make a top up payment to IPIC at that
  point.98

  14.20 Alternative ways of raising the funds were put to the State but rejected; it would appear
  for the reasons set out in policy submission 167/2008.

  14.21 In our submission, viewed overall, the IPIC Exchangeable Bond Transaction received
  appropriate levels of review and scrutiny before being approved by the NEC.

  14.22 However, as noted, the process by which the State obtained funding for its entry into the
  PNG LNG Project was somewhat inefficient.

  15. UBS Loan

  15.1 We now turn to the genesis and detail of the UBS Loan which is complex.

  98
  Brattle 1, [114] Exhibit VV WIT.0132.0001.0002

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• 15.2 We begin by saying something about the collar loan concept. Collar loans are complex
  but are standard products within the banking industry. These loans are commonly used
  when the sum lent is used to purchase shares which then provide the security for the
  lender. The essence of the loan is that it is generally structured so that the lender has no
  risk of default by the borrower. This is done by ensuring that all of the interest is paid at
  the outset of the loan, having the shares as collateral and using options. As will be seen,
  the options provide the ‘collar’ which gives this type of loan its name.

  15.3 In 2014, the stated purpose of the loan was to enable the State to buy about 10% of shares
  in Oil Search. The purchase price was $8.20 a share but of course, there was market risk
  about how the share price would move over the two year period of the loan, as
  occurred. No doubt UBS would have conducted some extremely complicated modelling
  about how to design the collar element of the loan, and in particular what strike prices to
  use in the options. This modelling will have been done using a mathematical model
  called Black Scholes. This model is in widespread use in the banking industry. It
  includes assumptions about how a share price might move over time and requires inputs
  to be made about the expected volatility of the share price in question. As a result of this,
  whilst the banks generally use the same model, the variable inputs and assumptions will
  often lead to different outcomes.

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• 15.4 The modelling allowed UBS to provide the State with not only the loan but a series of put
  options, one for each share purchased. Each option had a date upon which it could be
  exercised and a ‘strike price’ for the shares to which it related. The put options allowed the
  State to sell or ‘put’ the shares to UBS at the strike price if, at the date that the option was
  to be exercised, the share price was below the strike price of the option.

  15.5 The strike prices of put options and the amount of the loan were calculated so that the
  total amount that UBS would lend would be equivalent to the strike prices of all of the put
  options. The effect of this was that if the share price fell below the strike price of the put
  options, the options would provide the State with the means to repay UBS in full. This
  had two important effects:

  (a) First, it meant that the State did not need to worry about finding funds to repay the
  loan. If it just allowed the loan to mature according to its terms, the loan would be
  repaid.

  (b) Second, it meant that UBS had no exposure to the State as a credit risk from the
  loan because repayment was assured through the put options. In other words, it
  did not have to worry about whether the State would be able to repay the loan.

  (c) If a lender has no exposure to the borrower’s credit risk, as in this case, the interest
  payable on the collar loan should be at or close to the risk free rate, because the
  lender has no significant credit risk. As will be seen, that did not happen here with
  UBS charging unwarranted interest of about AUD 56 million..

  15.6 The put options therefore provided a floor for the loan as far as the State was
  concerned.

  15.7 In return for the protection provided by the put options, the State provided a call option
  for each share to UBS. As with the put options, each call option had a date upon which it
  could be exercised and a ‘strike price’ for the share to which it related. The call options
  allowed UBS to buy or ‘call’ for the shares from the State at the strike price if, at the date
  that the option was to be exercised, the share price was above the strike price of the
  option.

  15.8 The call option therefore provided a ceiling for the loan.

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• 15.9 For each share, there is a put option and a call option with the same expiry date. Together,
  the puts and calls provide a notional collar of protection for both parties.

  15.10 A relevant phrase in this context is to describe an option as being ‘in the money’. A put
  option is in the money when the market price of the share is below the strike price of the
  option so that the borrower makes a gain by putting the share on the lender for more than
  the share is then worth. A call option is in the money when the market price of the share
  is above the strike price of the option so that the lender makes a gain by calling for and
  obtaining the share for less than it is then worth.

  15.11 If an option is in the money, the difference between the value of the share in the market
  and the strike price of the option is said to be the ‘intrinsic value’ of the option. The
  intrinsic value therefore varies with the share price.

  15.12 If at any option date, the share price is between the put and call options, neither option
  can be exercised. The share is still sold to repay the loan and the excess above what is
  needed to repay the loan (which is the strike price of the put option) is returned to the
  borrower.

  15.13 What has just been explained describes the position in relation to a single share. To
  illustrate the complexity of the UBS loan, it should be remembered that each share had its
  own put and call option. There were therefore 137 million put options and 137 million
  call options. The dates upon which the options could be exercised spread over a period of
  some months towards final end date of the loan and the options had a range of different
  strike prices. With so many options, many of the strike prices and exercise dates were the
  same.

  15.14 The significance of this is that it is beyond the abilities of borrowers to be able to fully
  understand the risks involved in the option structure unless they have the assistance of a
  highly sophisticated financial advisor who can conduct their own Black Scholes
  modelling to test the fairness involved in the options structure proposed: as UBS would
  have, and as the Commission has through the unchallenged work of Brattle. In particular,
  this modelling was necessary in order to check that the pricing of the collar loan was fair.
  The State did not have or obtain the ability to do this and was vulnerable to being

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• overcharged as a result. But it is clear that the State, notably Mr Vele, did not appreciate
  this risk.

  15.15 A further relevant term is ‘nil premium’. The State was told by UBS that the collar option
  structure was nil premium. Its normal meaning in this context (and there was no
  suggestion it was not being used in its normal meaning by UBS) meant that nothing was
  payable to UBS for providing the collar option structure and that the downside protection
  that the State received from all of the put options was equal to the value of the upside
  protection that UBS received from all of the call options. That is, nil premium in this
  context was a clear representation by UBS that it was not separately profiting from the
  pricing of the option structure over and above its declared fees. Again, the State had no
  ability to verify this. This matters because, far from being nil-premium, the premium or
  excessive profit UBS made in this regard was substantial at about $25 million, but it
  never told the State this.

  15.16 Two other concepts should be mentioned.

  (a) The first is hedging. Although UBS had no exposure to the State as a credit risk, it
  was possible that at the maturity of the loan, it would be left holding shares that
  were worth less than the principal that it had lent to the State. UBS traded Oil
  Search shares in the market to hedge against or mitigate this risk.

  (b) The second is value. In the Brattle report, there are frequent discussions about
  value being transferred by one party to the other. A transfer of value is not
  necessarily a transfer of money at that point. It describes a transaction between the
  parties at a different price to what Brattle considered to be a fair price. Thus, for
  example, if, as Brattle advise, the collar loan option structure was not nil premium
  and was unfairly slanted against the State so that the call options that UBS
  received were worth more to a potential purchaser than the put options that the
  State received, this would represent a transfer in value from the State to UBS at the
  date that the transaction took place. As the loan matured, that transfer of value
  might then be realised depending on how the options came to be exercised at that
  point. The value could also have been realised in other ways, including selling the
  options in the market.

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• 15.17 In summary, the key points are these:

  (a) once the loan was created, and interest paid in advance, as it was, the State had
  nothing further to pay and had no risk of defaulting;

  (b) this meant that UBS had no exposure to the State’s credit risk,

  (c) the State had no ability to understand the fairness of the option structure;

  (d) the nil-premium statement was untrue, quite misleading and expensive for the
  State.

  16. TOR (L): Why and when did the State commence the procedures to obtain a loan
  regarding the debt to IPIC and/or purchase Oil Search shares

  16.1 The State first decided to initiate discussion with IPIC and to investigate options for
  refinancing the IPIC Bond on 14 March 2012.99 Although the NEC decision does not
  record why the decision was made, a number of witnesses gave evidence to the
  Commission that it was thought important to the State to remain a shareholder of Oil
  Search.

  16.2 But no steps were taken in relation to initiating discussion with IPIC or to investigate
  options for refinancing the IPIC Bond until after the 2012 election.

  16.3 In the second half of 2012, the then Minister for Public Enterprise and State Investments,
  Mr Ben Micah, had initial discussions with and engaged Backwell Lombard Capital to
  provide advice on the IPIC Bond.100

  16.4 On 5 December 2012, IPBC formally retained NRF to provide legal advice on the IPIC
  Exchangeable Bonds.101 NRF’s engagement letter records retaining the Oil Search shares
  as the objective of the engagement.102

  99
  NEC Decision NG 63/2012, WIT.0016.0001.0316.
  100
  Letter Backwell Lombard Capital to Minister Micah dated 16 October 2012, WIT.0155.0001.1624
  101
  Affidavit of Dairi Vele, 26 April 2021 at [189] and exhibit DV16, Exhibit QQ, WIT.0014.0007.0001
  102
  WIT.0015.0001.0691.

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• 16.5 The first meeting with IPIC did not occur until on or about 15 March 2013.103 It was
  apparently promising in relation to the possibility of the State refinancing the IPIC Bond
  and regaining ownership of the Oil Search shares.104 The second meeting occurred on or
  about April 20013. Dr Waine’s evidence was that IPIC’s attitude towards the refinancing
  had changed by this meeting and it required the IPIC Bond to be redeemed within two
  weeks. The State did not have the funds to meet this deadline.105

  16.6 Despite this imperative, no further engagement with IPIC appears to have occurred until
  September and October 2013. In the meantime, the evidence before the Commission
  suggests that there were a number of parallel processes including:

  (a) IPBC’s efforts through Mr Kumarasiri who was appointed as Managing Director
  of IPBC on 5 April 2013.106 These included:

  (i) in early April 2013, a Goldman Sachs proposal;107

  (ii) engagement with Helmsley Capital.108

  (b) proposals by Shell, Marubeni and others to Mr Kramer and Mr Sonk.109

  (c) Minister Micah’s engagement of Backwell Lombard Capital on 31 May 2013 as
  Lead Manager and Arranger in consultation with his advisors on a non-exclusive
  basis;110

  103
  An email from Mr Paki to Mr Latimer of 15 March 2013, copied to Dr Waine, stated that as at that date, Dr
  Waine and Mr Kumarasiri were in Abu Dhabi with Mr Botten: NRF.001.001.2153
  104
  Transcript, Dr Clement Waine, 11 February 2022, page 4055; see also Supplementary Statement of Dr Clement
  Waine dated 11 February 2022, Exhibit SSSS, WIT.0039.0007.0001.
  105
  Transcript, Clement Waine, 6 August 2021, page 2632-5
  106
  NEC Decision No. 117 of 2013, NRF.001.001.2368
  107
  NRF.001.001.2245
  108
  Transcript, Dr Clement Waine, 11 February 2022, p 4058.
  109
  Email, R Paki to A Latimer, 3 April 2013, Re: Goldman Sachs IPBC Overview, NRF.001.001.2273
  110
  Letter Minister Micah to Backwell Lombard, 31 May 2013, WIT.0155.0001.1597

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• (d) engagement with UBS by Mr Vele and his adviser and former business partner Mr
  Mortensen;

  (e) the IPIC Bond Review Committee and its near relative the IPBC internal review
  committee;

  (f) the Bank of Papua New Guinea’s review.

  16.7 These processes were duplicative and inefficient: but, critically, they focused on
  something other than an acquisition of newly issued shares from Oil Search.

  16.8 In a formal sense, the State commenced the procedures to obtain the UBS Loan to
  purchase the Oil Search shares on or about 23 February 2014 following a meeting
  between then Prime Minister Peter O’Neill, Mr Vele, Mr Botten and Mr Aopi, whose
  recollections vary.

  17. TOR (M): whether legal and administrative processes were followed regarding the
  loan from UBS including but not limited to:

  (i) How was the process commenced?

  (ii) How was UBS selected?

  (iii) What process was utilized?

  (iv) What were the terms of the loan?

  What processes have been utilised in the past to obtain loans?

  Section 209

  17.1 Before turning to the factual evidence before the Commission, this TOR raises for
  consideration section 209 of the Constitution and particularly the Loans (Overseas
  Borrowings) No 2 Act.

  What view was taken in 2014 about what s 209 and the Loans (Overseas Borrowings) No 2
  Act required?

  17.2 On 5 March 2014, Mr Vele wrote to Mr Rolpagarea, as State Solicitor, requesting that he
  review the documents relating to the proposed UBS transaction and “provide clearance”

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• before the documents went to the NEC on 6 March 2014.111 The documents were
  provided to the State Solicitor by Pacific Legal Group earlier on 5 March 2014.112

  17.3 Later on 5 March 2014, the State Solicitor replied to Mr Vele’s letter. The State Solicitor
  advised that “section 209 of the … Constitution also requires the Parliament’s approval be
  obtained for this Bridge and Collar Loans which totals up to Australian dollars 1.225
  billion through the budgetary process.”113

  17.4 On 6 March 2014:

  (a) Prime Minister O’Neill announced a proposal to the NEC for the purchase of
  149,390,244 million Oil Search shares for AUD1.239 billion, funded by UBS; and

  (b) the NEC advised the Governor General to approve the UBS loan pursuant to
  section 2(1) of the Loans (Overseas Borrowings) Act 1976.114

  17.5 On 7 March 2014, Mr Vele wrote to the State Solicitor communicating to him the NEC
  decision and requesting the State Solicitor’s “legal clearance”.115

  17.6 On 9 March 2014, the State Solicitor replied to Mr Vele’s letter. In his reply, the State
  Solicitor advised that the appropriate person to execute loan agreements on behalf of the
  State was the Minister for Treasury pursuant to section 2(7) of the Loans (Overseas
  Borrowings) (No. 2) Act 1976. Mr Rolpagarea reminded Mr Vele of the statements in
  relation to the transaction raised in his 5 March 2014 letter. The State Solicitor stressed
  the need to comply with section 209 of the Constitution, but, given the urgent nature of
  the transactions, approved the Minister for Treasury to execute the documents.116

  17.7 On 10 March 2014:

  111
  Statement of Daniel Rolpagarea dated 22 June 2021, Annexure B, WIT.0019.0004.0001.
  112
  Statement of Daniel Rolpagarea dated 22 June 2021, Annexure A, WIT.0019.0004.0001.
  113
  Statement of Daniel Rolpagarea dated 22 June 2021, Annexure C, WIT.0019.0004.0001.
  114
  Advice from NEC to Governor General (WIT.0019.0002.0392).
  115
  Statement of Daniel Rolpagarea dated 22 June 2021, Annexure D, WIT.0019.0004.0001.
  116
  Statement of Daniel Rolpagarea dated 22 June 2021, Annexure E, WIT.0019.0004.0001.

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• (a) the State Solicitor advised the Governor General to execute the UBS transaction
  documents upon receipt of advice from the NEC;117 and

  (b) the IPBC board approved the execution of the Payment Direction Deed by NPCP
  while noting the State Solicitor’s advice in respect of section 209 of the
  Constitution.118

  17.8 On 26 March 2014, Mr Vele sent a letter to the State Solicitor regarding the section 209
  constitutional approval for the UBS transaction. The letter requested confirmation in
  writing of the advices given and steps taken by the Office of the State Solicitor to obtain
  the necessary authorisation of the National Parliament under s 209(1) of the
  Constitution.119

  17.9 On 27 March 2014:

  (a) the the State Solicitor replied to Mr Vele’s letter;120 and

  (b) the NPCP board met and discussed the UBS transaction and the advice received
  from external counsel including concerns about the application of section 209 of
  the Constitution. The NPCP company secretary, Mr Rogen Wato, sent a text
  message to Mr Steve Lewin, an external lawyer, regarding this concern. Mr Lewin
  responded “reaffirming his view that the State/UBS Loan transaction has not been
  in breach of s 209 of the Constitution” but asked that management obtain a second
  opinion and provide it to the NPCP board.121

  17.10 In his reply of 27 March 2014, the State Solicitor advised that section 209 approval could
  be obtained retrospectively and that this was appropriate for the UBS transaction, as it
  was impracticable for NEC to call Parliament at the time it made its decision, due to the

  117
  Letter from Rolpagarea to PNG Governor General WIT.0019.0003.0030.
  118
  Statement of the Honourable Don Poyle dated 1 June 2021 WIT.0051.0008.0045.
  119
  Letter from Dairi Vele to Daniel Rolpagarea: section 209 – Constitution of the Independent State of Papua
  New Guinea NEC Decision No 79/2014 State Acquisition of Shareholding in Oil Search Ltd and Consequential
  Borrowing WIT.0007.0004.0844.
  120
  Letter from Daniel Rolpagarea to Dairi Vele WIT.0007.0004.0751.
  121
  Minutes of Meeting No 2 of 2014 – Held on 27 March 2014 at 9.14 AM WIT.0036.0001.0284

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• urgency of the matter. The State Solicitor also noted section 212 of Constitution,
  regarding expenditure without prior Parliamentary approval. Ultimately, the State
  Solicitor advised that Parliament may invoke its power under section 212 “to facilitate the
  transaction” that had by then already been entered into. He advised it was important that
  the approval by Parliament be expressed to have retrospective effect.

  17.11 On 19 May 2014, former Treasurer Don Polye filed an application in the Supreme Court
  of Justice pursuant to section 18(1) of the Constitution seeking declarations that, on the
  proper interpretation and application of section 209 of the Constitution and the Organic
  Law on the Sovereign Wealth Fund 2012 (PNG), the executive actions of the Prime
  Minister and NEC in entering into the UBS transaction without Parliamentary approval
  (which Polye had opposed) were unconstitutional and illegal and that the transaction was
  illegal and unenforceable against the State.122 That application appears to have been
  discontinued in 2017.123

  17.12 On 5 September 2014, Mr Pruaitch, as the new Treasurer, made a Ministerial Statement to
  Parliament in relation to the UBS transaction and tabled the relevant transaction
  documents.124

  17.13 On 18 November 2014, Treasurer Pruaitch presented the 2014 Supplementary Budget and
  the 2015 National Budget to Parliament. Mr Pruaitch said: “the O’Neill-Dion
  Government made the decision to purchase 10.1 per cent stake in Oil Shares as part of the
  2014 Supplementary Budget in accordance with Section 209 of the Constitution we have
  appropriated for interest payments.”125

  What is the proper construction of s 209 and relevant legislation

  17.14 We have earlier submitted that this Commission cannot make binding determinations on
  parties as to the meaning of the Constitution or any other law. But that does not mean the

  122
  WIT.0035.0001.5718.
  123
  Letter Don Polye to the Commission of Inquiry, 18 July 2020, p 3 WIT.0051.0002.0001.
  124
  Hansard, 5 September 2014, pp 2-10, WIT.0014.0012.0015.
  125
  Hansard, 18 November 2014, pp 3-30, WIT.0014.0015.0088.

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• Commission should not express its considered view of their meaning in answering the
  questions posed by the terms of reference and making recommendations accordingly.

  17.15 We thus submit the proper construction is as follows.

  Constitutional provisions

  17.16 Section 109(1) of the Constitution invests the Parliament with power, subject to the
  Constitution, to make laws for the peace, order and good government of Papua New
  Guinea and the welfare of the People. Section 109(2) provides that: “Acts of the
  Parliament, not inconsistent with the Constitutional Laws, may provide for all matters that
  are necessary or convenient to be prescribed for carrying out and giving effect to this
  Constitution”.

  17.17 Sections 209-210 and 212 of the Constitution relevantly provide:

  209. Parliamentary Responsibility

  (1) Notwithstanding anything in this Constitution, the raising and expenditure of finance
  by the National Government, including the imposition of taxation and the raising of loans,
  is subject to authorization and control by the Parliament, and shall be regulated by an
  Act of the Parliament.

  (2) For each fiscal year, there shall be a National Budget comprising—

  (a) estimates of finance proposed to be raised and estimates of proposed
  expenditure by the National Government in respect of the fiscal year; and

  (b) separate appropriations for the service of that year in respect of—

  (c) the services of the Parliament; and

  (d) general public services; and

  (e) the services of the Judiciary; and

  (f) such other supplementary Budgets and appropriations as are necessary.

  …

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• (3) Before any Budget or appropriation is prepared for submission to the Parliament, the
  National Executive Council shall consult with any appropriate Permanent Parliamentary
  Committee, but this subsection does not confer any right or impose any duty of
  consultation after the initial stages of the preparation of the Budget or appropriation.

  210. Executive initiative

  (1) The Parliament shall not provide for the imposition of taxation, the raising of loans
  or the expenditure of public moneys of Papua New Guinea except on the
  recommendation of the Head of State, acting with, and in accordance with, the
  advice of the National Executive Council.

  (2) Subject to subsections (3) and (4), Parliament may reduce, but shall not increase or
  re-allocate, the amount or incidence of, or change the purpose of, any proposed
  taxation, loan or expenditure.

  …

  212. Revenue and expenditure without prior approval

  (1) If at the beginning of a fiscal year the Parliament has not made provision for public
  expenditure by the National Executive or expenditure by the Parliament or the
  Judiciary for their respective services for that year, the National Executive, the
  Parliament or the Judiciary, as the case maybe, may, without authorization other
  than this section but in accordance with an Act of the Parliament, expend amounts
  appropriated out of the Consolidated Revenue Fund for the purpose not exceeding
  in total one-third of its respective budgeted expenditure during the immediately
  preceding fiscal year.

  (2) The authority conferred by Subsection (1) lapses when the Parliament has made
  provision for the public expenditure for the fiscal year in question, and any
  amounts expended by virtue of that subsection are a charge against the expenditure
  so provided for and shall be properly brought to account accordingly.

  17.18 Part 2 of Schedule 1 of the Constitution contains various provisions relating to the
  interpretation of the Constitution. Similarly, section 24 states that certain material may be

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• used as aids to interpretation of the Constitution, including, relevantly, the Final Report of
  the pre-Independence Constitutional Planning Committee dated 13 August 1974.

  17.19 Section 2(1) of the Loans (Overseas Borrowings) Act 1973 relevantly provides that:

  The Head of State, acting on advice, may, on behalf of the State, borrow from or through
  overseas financial institutions, in such manner and on such terms and conditions as are
  agreed on by the Head of State, acting on advice, and the institutions, sums not exceeding
  in total the sum of K65,000,000.00 or the equivalent in other currencies, for [various
  listed purposes].

  17.20 Section 2(1) of the Loans (Overseas Borrowings) (No. 2) Act 1976 is in similar terms,
  although one of the listed purposes for borrowing is “the purchase of equity in
  companies” and the limit for the sum borrowed “shall be such that the total value of
  overseas commercial debt which will be owed by the State after any borrowing shall not
  exceed 125% of the estimated internal revenue for the year in which the borrowing takes
  place except only as a result of any bridge financing and subject to Subsection 2(b)”: see
  section 2(3).

  17.21 Section 2(8) requires the Minister to cause a copy of the loan agreement to be laid before
  the Parliament for its information “[a]s soon as practicable after the execution of a loan
  agreement”.

  17.22 The Loans (Overseas Borrowings) (No. 2) Act 1976 appears to have been enacted because
  the view was taken that the borrowing authority in the Loans (Overseas Borrowings) Act
  1973 had been exhausted, although the 1973 Act continues in force.126

  17.23 Sections 35 and 36 of the Public Finances (Management) Act 1995 are also relevant and
  provide as follows:

  35. Restrictions on borrowing

  126
  Statement of David Crichton Frecker dated 29 January 2022 [21], Exhibit EEEE, WIT.0143.0001.0001.

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• (1) The State may not borrow money except under and in accordance with an Act of
  the Parliament.

  (2) Moneys borrowed under Subsection (1) from whatever sources shall not exceed
  the limit provided for by the Central Banking Act 2000.

  (3) All debt charges for which the State is liable in respect of loan moneys shall be
  charged on the Consolidated Revenue Fund.

  36. Advances and overdrafts

  (1) The Minister may, for and on behalf of the State, borrow moneys–

  (a) from such domestic and external sources; and

  (b) on such terms and conditions,

  as the Head of State, acting on advice, approves, in order to meet temporary deficiencies
  in revenue in a fiscal year.

  (2) Moneys borrowed under Subsection (1) from whatever sources shall not exceed
  the limit provided for by the Central Banking Act 2000.

  (3) The principal and interest on moneys borrowed under Subsection (1) shall be
  charged to the Consolidated Revenue Fund and are payable from the Fund.

  17.24 The limit provided for in the Central Banking Act 2000 is K100,000,000.00 (or such other
  adjusted amount as agreed by the Governor and National Executive Council from time to
  time and published in the National Gazette for the sole purpose of taking into account
  movements in the general level of prices in Papua New Guinea): see section 55(4)(a).

  17.25 There has been limited judicial consideration of s 209.

  17.26 In Mairi v Tololo, Secretary for Education [1976] PGSC 9; [1976] PNGLR 125 (15 April
  1976) there was a challenge to the imposition of a fee of K400 per pupil for students
  attending multi-racial schools in the Independent State. In the course of determining that
  there was no power to impose the fee under the Education Act 1970, it was held, in the
  context of examining section 209 of the Constitution, that “[t]o render imposition of tax
  for the raising of revenue constitutional, the statutory grant of power must be clear and

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• unambiguous and the circumstances bringing it into operation sufficiently clear” (Prentice
  DCJ and Williams J) and that section 209 required “clear authorization by Parliament”
  (Frost CJ).

  17.27 Papua New Guinea Forest Industries Association Inc v Tomuriesa [2017] PGSC 24;
  SC1601 (1 September 2017) was a proceeding concerning the validity of section 121 of
  the Forestry Act 1991. The Supreme Court held: “The vesting of wide and ambiguous
  taxation powers on the Executive to make decisions on essentials of the imposition of
  taxation in the form of a levy of the type found in s 121 … cannot be Constitutionally
  justified”. Rather, section 209 of the Constitution required “the essentials of imposition
  of taxation to be determined by an Act of the Parliament”. However, the Court also held
  that section 209(1) of the Constitution did, in principle, permit a statute to authorise a
  revenue system outside of the National Budget framework found in section 209(2).

  17.28 Then Treasury Secretary, Mr Vele, stated in evidence that: “The process for loans from
  the private sector is the Loans (Overseas Borrowing No 2) Act 1976”, and that “[a]ll types
  of Loans must also have Section 209 of the Constitution authorisation by way of the
  budgetary process”.127 Further, where a loan is negotiated, executed and drawn down in
  the same year, the authorisation for the purposes of section 209 is obtained by way of a
  supplementary budget.128

  17.29 Mr Vele said that the Parliament did not need to approve the UBS transaction before it
  was entered into. Significantly, Mr Vele conducted an analysis of 288 external loans to
  the State and could not find one in which the loan terms and conditions were approved
  prior to its execution. We submit that none was of the consequence or size of the UBS
  Loan. Mr Vele considered that loans could be executed and then subsequently approved
  in the following National Budget.129

  17.30 Mr Vele stated that in 2014 he followed the advice of Ashurst and Norton Rose that the
  “mechanics” of section 209 were contained in the Loans (Overseas Borrowings) (No. 2)

  127
  Affidavit of Dairi Vele sworn 5 August 2021 [57]-[58], Exhibit MMM, WIT.0014.0015.0012.
  128
  Affidavit of Dairi Vele sworn 5 August 2021 [67]-[68], Exhibit MMM, WIT.0014.0015.0012
  129
  Transcript, Dairi Vele, 24 June 2021, p 1908.

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• Act 1976 and that by fulfilling the requirements of this statute the requirements of section
  209 were also complied with.130 He said he followed the advice of the State Solicitor of 5
  March 2014 that Parliamentary approval could be obtained through the budgetary process
  and that such approval could be given after the relevant NEC decision.131

  17.31 The State Solicitor’s advice referred specifically to the case of Tomuriesa in support of
  the proposition that statutes for the purposes of section 209 should not seek to restrict the
  exercise of overall financial control by Parliament. In the State Solicitor’s view:132

  The Act(s) of Parliament referred to in Section 209 prescribe in detail the requirements
  and processes for revenue generation activities or expenditure within the broad limits set
  by Parliament for any given year. These Acts of Parliament include inter alia: the Public
  Finance (Management) Act 1995 (PFWIA), the Loans (Overseas Borrowings) Act
  Chapter 133 (Loans Act), and the National Procurement Act 2018 (NPA), and are applied
  depending on the aspect of Section 209 which it regulates.

  … The Loans Act is the principal Act of Parliament that exists for the purposes of Section
  209(1) regarding the obtaining of loans…

  In summary, the Parliament sets the parameters for the activities of the Executive by
  passing Acts of Parliaments to regulate activities prescribed under Section 209, through
  legislation such as the Loans Act. The Parliament further exercises continuous control
  and authorization by scrutinizing annual budget submissions and by passing annual
  Appropriation Acts, whereby it sets ceilings on certain revenue generation activities and
  expenditure.

  17.32 The State Solicitor further stated in oral evidence that “borrowing or the expenditure by
  the State must first be approved and authorized by parliament and then it can be processed
  through the legislation”.133 The State Solicitor noted that section 4 of the Loans
  (Overseas Borrowings) (No. 2) Act 1976, which provides “All payments of principal and

  130
  Affidavit of Dairi Vele sworn 26 April 2021 [559]-[560], Exhibit PP, WIT.0014.0007.0001..
  131
  Affidavit of Dairi Vele sworn 26 April 2021 [563], Exhibit PP, WIT.0014.0007.0001.
  132
  Statement of Daniel Rolpagarea dated 28 July 2021 pp 2-3 [5]-[7], Exhibit OO.2, WIT.0019.0005.0003.
  133
  Transcript, Daniel Rolpagarea, 23 June 2021, p 1823.

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• interest and other charges payable under a loan agreement shall be made out of the
  Consolidated Revenue Fund”, indicated that even if a loan was effected under that statute
  it still had to be reflected in the Budget process.134

  17.33 In relation to the possibility of retrospective approval, the State Solicitor’s view was that
  “Outside of Section 212, I am of the view that prior parliamentary approval is mandatory
  for all matters concerning revenue raising and expenditure.”135

  17.34 In relation to the UBS transaction, the State Solicitor’s view was that it “ought to have
  been pre-approved by Parliament during the 2014 budgetary process” and that the
  requirements of section 209 were not complied with.136

  17.35 Dr Kalinoe, the Secretary for Justice, agreed with the State Solicitor’s approach and
  interpretation of the law, specifically including the State Solicitor’s advice of 27 March
  2014.137

  17.36 Former Attorney-General the Honourable Kerenga Kua noted that s 209 of the
  Constitution begins with the phrase “notwithstanding anything else in the Constitution or
  elsewhere”, which he took to mean that whatever the Loans (Overseas Borrowings) No 2
  Act 1976 states, the Constitution overrides and prevails.138 He considered that the
  “minimum requirement of section 209 … is the retention of the power to approve or reject
  [a] particular loan … done by a law made by parliament once all the preparatory work is
  done and brought to the parliament for approval”.139 Mr Kua’s view was that
  retrospective approval pursuant to section 212 of the Constitution was possible in limited
  circumstances, not including borrowings or revenue raising for the purposes of
  commercial investment purposes.140

  134
  Transcript, Daniel Rolpagarea, 23 June 2021, p 1824.
  135
  Statement of Daniel Rolpagarea dated 28 July 2021 [10], Exhibit OO.2, WIT.0019.0005.0003.
  136
  Statement of Daniel Rolpagarea dated 28 July 2021 [18]-[19], Exhibit OO.2, WIT.0019.0005.0003.
  137
  5.05.14 Dr Lawrence Kalinoe_Brief Attorney General.pdf (WIT.0019.0002.0506)
  138
  Transcript, Kerenga Kua, 18 June 2021, p 1512.
  139
  Transcript, Kerenga Kua, 2 August 2021, p 2522.
  140
  Transcript, Kerenga Kua, 2 August 2021, p 2523.

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• 17.37 Mr Kua considered that section 209 had been breached in the context of the UBS
  transaction. His view was that if the State wanted to proceed with the UBS loan, it should
  have brought a bill urgently before the parliament and sought parliamentary approval,
  irrespective of the urgency of the transaction (and that the urgency of the transaction did
  not allow the State to bypass constitutional and statutory procedures). This may have
  involved the urgent recalling of Parliament.141

  17.38 Other witnesses also gave their views as to whether the UBS transaction complied with
  section 209 of the Constitution. Prime Minister Marape stated that in 2013 there should
  have been an indication to the Parliament as to the transaction which was to occur in
  2014.142

  17.39 Mr Pruaitch143 and Mr Yauieb144 were of the view that section 209 was not complied
  with.

  17.40 Mr Lupari said that retrospective Parliamentary approval was possible.145

  17.41 Mr O’Neill considered that the UBS transaction was an investment and therefore did not
  fall within the scope of section 209.146 Mr O’Neill’s view was that investments and
  expenditure by State Owned Entities were not required to be approved by Parliament.147

  Our submissions on statutory and constitutional construction

  17.42 The key provision is s 209(1) which states:

  Notwithstanding anything in this Constitution, the raising and expenditure of finance by
  the National Government, including the imposition of taxation and the raising of loans, is

  141
  Transcript, Kerenga Kua, 18 June 2021, pp 1517-1518.
  142
  Transcript, James Marape, 21 June 2021, p 1643.
  143
  Affidavit of Patrick Pruaitch sworn 28 June 2021, pp 13-14 [75]-[77], Exhibit ZZ, WIT.0028.0003.0002.
  144
  Statement of Anthony Yauieb dated 28 July 2021, pp 12-15 [47]-[59], Exhibit BBB, WIT.0104.0002.0239.
  145
  Transcript, Isaac Lupari, 2 August 2021, p 2506.
  146
  Transcript, Peter O’Neill, 17 June 2021, p 1493.
  147
  Transcript, Peter O’Neill, 17 June 2021, p 1494.

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• subject to authorization and control by the Parliament, and shall be regulated by an Act
  of the Parliament.

  17.43 It will be noticed that:

  (a) Section 209(1) is a provision which applies ‘Notwithstanding anything in this
  Constitution’;

  (b) It concerns ‘the raising and expenditure of finance by the National Government,
  including the imposition of taxation and the raising of loans’ ;

  (c) It provides that such activity is ‘subject to authorization and control by the
  Parliament’ and mandates that such matters ‘shall be regulated by an Act of the
  Parliament’.

  17.44 We respectfully adopt the approach to construction enunciated in the statement and
  evidence to you by the very experienced Papua New Guinea and Australian lawyer,
  David Frecker, as follows:

  (a) section 209 of the Constitution is a general statement of constitutional principle
  about the supremacy of Parliament in all matters pertaining to taxation and the
  control of public finances;

  (b) it must be balanced with the function of the executive government to manage
  finances in a responsible manner (see section 210).148

  (c) no additional authorisation by Parliament is required if there is to be a new loan
  which is authorised by and under an existing Act of Parliament, and similarly a
  specific loan is not required to be included in or pre-approved by the National
  Budget prepared for each fiscal year.149 (He was only aware of one instance where
  the Parliament had passed a specific Act to authorise a specific loan, being the

  148
  Statement of David Crichton Frecker dated 29 January 2022, p 3 [14], Exhibit EEE, WIT.0143.0001.0001.
  149
  Statement of David Crichton Frecker dated 29 January 2022, p 5 [17], Exhibit EEE, WIT.0143.0001.0001.

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• Loans Act 2011 which gave authority for the State to borrow an amount to fund its
  participation in the PNG LNG Project.150)

  (d) the State has the power under section 209(1) of the Constitution to raise loans and
  that power can be exercised in the manner set out in the Loans (Overseas
  Borrowings) (No. 2) Act 1976, which provides for matters required for carrying
  out and giving effect to s 209. That is, the Loans (Overseas Borrowings) (No. 2)
  Act 1976 was an “Act of the Parliament” within the meaning of the phrase
  “regulated by an Act of the Parliament” in section 209(1).151 This Act deals
  specifically with borrowing from overseas commercial institutions.152

  (e) the UBS transaction was thus validly entered into by the State under the Loans
  (Overseas Borrowings) (No. 2) Act 1976.153

  (f) the requirement in the Act for the relevant loan agreements to be laid before
  Parliament “as soon as practicable after execution” (see section 2(8)) meant that
  the loan agreements were required to be laid before Parliament without
  “unreasonable delay”.154 He considered that, in circumstances in which Parliament
  had sat for more than a couple of days in a period from March to November, a
  delay over this period in laying documents before Parliament would not be
  consistent with section 2(8) of the Loans (Overseas Borrowings) (No. 2) Act
  1976.155 [However, we would add, this may breach section 2(8) but it could hardly
  retrospectively invalidate the loan: if there is a remedy for breach of the tabling
  requirement it apparently lies in parliamentary scrutiny].

  150
  Transcript, David Frecker, 2 February 2022, p 3567.
  151
  Statement of David Crichton Frecker dated 29 January 2022, p 6 [27], Exhibit EEE, WIT.0143.0001.0001;
  Transcript, David Frecker, 2 February 2022, p 3571-3572.
  152
  Transcript, David Frecker, 2 February 2022, p 3567.
  153
  Statement of David Crichton Frecker dated 29 January 2022, p 6 [25], Exhibit EEE, WIT.0143.0001.0001.
  154
  Statement of David Crichton Frecker dated 29 January 2022, p 6 [25], Exhibit EEE, WIT.0143.0001.0001.
  155
  Transcript, David Frecker, 2 February 2022, p 3568.

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• 17.45 Mr Frecker also noted that the Constitution does not specifically require a referral of a
  loan of significance to the Public Accounts Committee (whose function is to review
  matters of public finance), 156 and he was not aware of any instances where the Public
  Accounts Committee has had loans referred to it, nor held public hearings.157

  17.46 The view Mr Frecker enunciates and which we adopt also corresponds with almost
  invariable State practice since Independence.

  17.47 In our submission you can thus conclude that in your (necessarily non-binding) opinion, s
  209 was not breached in relation to the UBS Loan. However, it is submitted that you
  should make recommendations designed to ensure that there be greater legal procedural
  safeguards, including the statutory amendment to require both State Solicitor and
  Attorney-General confirmation as to the Constitutional and statutory validity of a
  commercial loan over a specified monetary threshold.

  17.48 The other matter of specific recommendation concerns the easy avoidance of the statutory
  borrowing limits on the State by novating the UBS loan to Kumul Petroleum prior to the
  next budget: we recommend amendments to avoid a reoccurrence.

  17.49 We now turn to some factual questions.

  How was the process commenced?

  17.50 The process of obtaining a loan from UBS to acquire new Oil Search shares commenced
  on 21 February 2014. On that date Mr Vele met with Mr Botten and Mr Aopi in Sydney.
  Mr Vele said that the State expected to received funding from UBS for the purchase of

  156
  Statement of David Crichton Frecker dated 29 January 2022 [20], Exhibit EEE, WIT.0143.0001.0001.
  157
  Transcript, David Frecker, 2 February 2022, p 3566.

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• Oil Search shares.158 On 22 February 2014 Mr Turner sent Mr Vele a briefing paper for
  meeting with Prime Minister O’Neill and the subsequent meeting with Mr Botten.159

  17.51 On 23 February 2014, Prime Minister O’Neill and Mr Vele met with Mr Botten and Mr
  Aopi in Port Moresby. At this meeting Mr O’Neill said that the State wished to retain at
  least a 10% shareholding in Oil Search, and asked if Oil Search would issue shares to the
  State as a placement, as part of Oil Search’s capital raising to fund its acquisition of an
  interest in PRL-15.

  How was UBS selected?

  17.52 UBS appears to have been selected by Mr Vele and Prime Minister O’Neill as the
  financier for the purchase of new Oil Search shares as it had been chosen as the preferred
  financier for refinancing the IPIC Exchangeable Bond.160

  17.53 On 27 February 2014, Prime Minister Peter O’Neill wrote to UBS AG to advise that the
  commercial terms proposed by UBS were “expected to be acceptable to the State” but
  were subject to an approval process.161

  17.54 On the same date, Oil Search announced to the ASX that, subject to approvals, the State
  would purchase 149 million new shares at AUD 8.20, for a total of AUD 1,225 million.
  Once this purchase was complete, the State would have a 10.1% shareholding in Oil
  Search.162

  158
  See, e.g., Statement of Peter Botten dated 14 June 2021, Exhibit JJ, WIT.0021.0003.0001; Email A Latimer to D
  Vele, 22 February 2014, Re: PM briefing paper, NRF.001.001.5052

  159
  Email M Turner to D Vele, 22 February 2014, Re: PM briefing paper, NRF.001.001.5054, attaching
  NRF.001.001.5055.

  160
  Affidavit of Dairi Vele dated 26 April 2021, p 42 [280], p 43 [284], Exhibit PP, WIT.0014.0012.0011.

  161
  P O’Neill letter to UBS, 27 February 2014, UBS.0001.0001.0029.

  162
  Oil Search ASX Announcement, 27 February 2014, ASH.002.008.6760.

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• 17.55 Mr Vele also issued a press release.163

  What process was utilised?

  17.56 No formal process was utilised.

  What were the terms of the loan?

  17.57 The UBS Loan comprised two interdependent loans:

  (a) the ‘Collar Loan’; and

  (b) the ‘Bridge Loan’.

  17.58 The Collar Loan was for an amount of AUD 1.011 billion, being AUD 904.56 million for
  the purchase of the Oil Search shares and approximately AUD 106 million for interest.

  17.59 Its terms included:

  (a) a term of two years;

  (b) a stated interest rate of 4.95%. However, all of the interest was paid up front rather
  than over the life of the loan, which was equivalent to 5.3% every 12 months in
  arrears;

  (c) the State providing sufficient security for the AUD 1.011 billion (in Oil Search
  shares and put options);

  (d) UBS providing the State with 137 million put options (one per share) with an
  average strike price of AUD 7.38 per share;

  (e) the State providing UBS with 137 million call options with an average strike price
  of AUD 10.00 per share.

  (f) UBS was given title to the shares held as collateral as part of their hedging
  programme but the parties shared dividends in agreed amounts.

  163
  Press Release, 27 February 2014, WIT.0064.0002.0370.

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• 17.60 The Bridge Loan was for an amount of AUD 335 million and was used to pay AUD 14.6
  million in fees and expenses and to purchase 39.1 million Oil Search shares.164 Of these
  shares, 12.4 million were used as collateral for the bridge loan. The remainder were
  collateral under the collar loan

  17.61 Its terms included:165

  (a) an initial term of 6 months, but could be extended once at the State’s option for a
  further 6 months;

  (b) an initial interest rate spread of 5.5% over BBSY, increasing to 6.5% after 3
  months, then to 7.5% after 6 months and finally to 9.5% after 9 months;

  (c) an establishment fee of 2% (of the total amount available to be borrowed), and an
  extension fee of 1.5% (of the amount then borrowed).

  17.62 The Brattle Group summarised the UBS Loan as follows:166

  (a) the effect of the options was that the State’s exposure to the Oil Search share price
  was limited for the shares covered by the options (about 92%). Up to the expiry of
  the options (two years), if the share price fell significantly, the State’s maximum
  exposure on the shares covered by the options was AUD 0.82 per share, and the
  State’s maximum upside if the share price rose significantly was AUD 1.80 per
  share. These sums are the difference between the average put option strike price
  and the average call option strike price and the price at which the State acquired
  the shares;

  (b) the Independent State was fully exposed to share price movements on the
  remaining 8%.

  164
  Payment Direction Deed, clause 2, UBS.0001.0001.0608; Brattle Group, p 50 [146], WIT.0132.0001.0002.

  165
  Brattle Group, p 50 [148] – [149], WIT.0132.0001.0002.

  166
  Brattle Report, p 7 [20], WIT.0132.0001.0002

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• (c) the State pledged all of its Oil Search shares as security for the money it borrowed
  from UBS;

  (d) as a result of the hedging in the collar, UBS had reduced exposure to Papua New
  Guinea credit risk: even if the Oil Search share price fell, the put options in the
  collar loan would most of the total principal outstanding under both loans to be
  repaid.

  What processes have been utilised in the past to obtain loans?

  17.63 Mr Vele gave evidence before the Commission that there “are essentially two types of
  foreign loans being firstly loans from multilateral partners and secondly loans from the
  private sector.”167

  17.64 The process for obtaining loans from multilateral partners is governed by the Loans and
  Assistance (International Agencies) Act 1971, whereas the process for obtaining loans
  from the private sector is governed by the Loans (Overseas Borrowing No 2) Act 1976.168

  17.65 This legislation regulates the process for obtaining the respective loans, not the
  authorisation of expenditure. Authorisation is governed by s209 of the Constitution.

  17.66 Mr Vele provided the below outline of the ordinary process for obtaining a foreign loan:

  (a) Treasury together with Department of National Planning (DNP) identifies funding
  need;

  (b) Treasury and DNP then seek approval to negotiate loans from the Treasurer;

  (c) the Treasurer then sponsors an NEC submission for approval by NEC;

  (d) Treasury together with the Office of the State Solicitor then negotiates the funding;

  (e) the loan is executed in accordance with the provisions of the governing legislation;

  167
  Affidavit of Dairi Vele dated 5 August 2021, WIT.0014.0016.0012 at 0022, [55], Exhibit MMM.

  168
  Affidavit of Dairi Vele dated 5 August 2021, WIT.0014.0016.0012 at 0022, [56] – [57], Exhibit MMM.

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• (f) the loan is tabled before Parliament as soon as practicable following execution;
  and

  (g) a provision is made in the Budget papers for the loan and expenditure for the year
  in which it is intended to be used.169

  17.67 As evidence of this process, Mr Vele provided a table summarising some 30 project loans
  obtained by the State from the previous 10 years.170 The examples provided by Mr Vele
  were “multilateral partner” loans administered and therefore not comparable to the UBS
  Loan which was a loan between the State and a private commercial entity.171

  17.68 It is submitted that in these circumstances, little weight can be given to Mr Vele’s
  evidence on processes followed for prior loans as none were governed by the Loans
  (Overseas Borrowings No 2) Act 1976.

  17.69 The Commission also received evidence from Mr John Leahy whose then firm, Leahy
  Lewin Lowing & Sullivan, was engaged to provide advice on Papua New Guinea law to
  IPIC in the IPIC Exchangeable Bond transaction.

  17.70 Mr Leahy gave evidence that he was “generally uncomfortable with relying on the
  Overseas Borrowings Legislation” for the purposes of satisfying the requirements of s209
  of the Constitution.172

  17.71 Accordingly, the Liquefied Natural Gas Project (State Participation) Act 2008 was
  drafted and laid before Parliament. This legislation was drafted specifically to authorise
  the IPIC Exchangeable Bond transaction and accordingly, set out key elements of that

  169
  Affidavit of Dairi Vele dated 5 August 2021, WIT.0014.0016.0012 at 0022-0023, [60] – [65], Exhibit MMM.

  170
  Affidavit of Dairi Vele dated 5 August 2021, WIT.0014.0016.0012 at 0130, Annexure DV-18, Exhibit MMM.

  171
  Transcript 12 August 2021, TS3203.14-3206.12 (XXN of Hon Don Polye MP by Ms Twivey-Nonggorr).

  172
  Witness Statement of John Edmund Leahy dated 2 February 2022, WIT.0144.0001.0001 at 0004, [22].

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• transaction such as a nominee of the State acquiring an interest in the PNG LNG
  Project.173

  18. TORs 1(n) and (o) The rationale as to why the State determined to buy shares in Oil
  Search in 2014 and when the decision was made to purchase the Oil Search shares.

  18.1 It is convenient to consider Term of Reference (n) – the rationale as to why the State
  determined to buy shares in Oil Search in 2014, and Term of Reference (o) – when the
  decision was made to purchase the Oil Search shares – together.

  18.2 Mr Botten gave evidence in his Further Statement dated 27 January 2022 that “[d]uring
  most of 2011 and early 2012 the PNG Government and PNG Petroleum Minister publicly
  admonished InterOil for its recalcitrance in moving the PRL-15 development ahead” and
  that “given the importance of PRL-15 and the PNG Government’s concerns about the lack
  of progress, there would have been many discussions between representatives of Oil
  Search and representatives of the PNG Government about PRL 15 prior to 22 February
  2014.”174

  18.3 This evidence is largely uncontested, except by Mr O’Neill, who gave evidence (which we
  say cannot be accepted) that he had no knowledge of Oil Search’s intention to purchase
  an interest in PRL-15 until 2014.175

  Q: But your evidence remains that you simply did not know about what Oil Search were
  going to do with the UBS loan monies which purchased the Oil Search shares and in
  particular you did not know about it that they were going to buy an interest in the Elk
  Antelope?
  A: Quite frankly I was a bit disappointed that this information did not come to
  government’s notice or particularly at leadership level. It could have been discussed at

  173
  Witness Statement of John Edmund Leahy dated 2 February 2022, WIT.0144.0001.0001 at 0004, [23] – [25].

  174
  Further Statement of Peter Botten, 27 January 2022, page 9 [52] WIT.0021.0006.0001.

  175
  Transcript, Peter O’Neill, 17 June 2021, p.1468; Transcript, Peter O’Neill, 7 February 2022, p. 3765.

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• the lower levels but if I had known that this was a transaction being discussed on the
  sides it would have been a different conversation.176(emphasis added)

  18.4 In mid-2012, Oil Search and Total decided to make a joint bid to acquire an interest in
  PRL-15.177

  18.5 During the period from 2012 to 2014, Oil Search “engaged in negotiations with several
  parties, including InterOil and the Pac LNG companies, concerning a possible acquisition
  of an interest in PRL 15”.178 This period commenced with a joint bid by Oil Search and
  Total, made on 17 August 2012,179 to January 2014 when the negotiations between
  InterOil and Oil Search stalled as a result of InterOil insisting on “increased consideration
  terms”.180

  18.6 Throughout 2012 and 2013 the NEC approved several decisions authorising various
  representatives of the State to negotiate the refinancing of the IPIC Exchangeable Bonds.
  None of these NEC Decisions proposed or contemplated a new or additional purchase of
  Oil Search shares.181 Mr O’Neill in his appearance before the Commission indicated that
  the NEC Decisions were very clear and were aimed at retaining the Oil Search shares held
  by IPIC under the Exchangeable Bonds.182

  18.7 However, evidence before the Commission indicates that an on-market purchase of Oil
  Search shares was being contemplated as early as 8 August 2013. The Background Notes
  prepared by then Acting Secretary of Treasury Mr Vele and Mr Mortensen for

  176
  Transcript, Peter O’Neill 7 February 2022, p. 3765.

  177
  Further Statement of Peter Botten, 27 January 2022, page 7 [44]–[46], [51]–[52] WIT.0021.0006.0001.

  178
  Further Statement of Peter Botten, 27 January 2022, page 9 [55] WIT.0021.0006.0001.

  179
  Further Statement of Peter Botten, 27 January 2022, page 9 [55](a) WIT.0021.0006.0001.

  180
  Further Statement of Peter Botten, 27 January 2022, page 9 [55] (a)–(j) WIT.0021.0006.0001.

  181
  NEC Decision NG 63/2012, WIT.0016.0001.0316; NEC Decision 117/2013, WIT.0016.0001.0331; NEC
  Decision 241 of 2013, WIT.0016.0001.0394.

  182
  Transcript, Peter O’Neill, 9 August 2021, pp.2916-2917; Transcript, Peter O’Neill, 9 August 2021, p.2914.

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• prospective financial advisors / financiers as part of the IPIC Exchangeable bonds
  refinancing identified one of the key priorities of the State as:

  Securing a State Equity position in Oil Search after the maturity date of the
  Exchangeable Bonds of somewhere between 10.1% and 19.99% of the total issued
  capital of Oil Search.

  This can most obviously be achieved in one of two ways:

  • Securing agreement with IPIC in respect of the repurchasing of all or part
  of the Exchangeable Bonds; or
  • By making on-market acquisition of Oil Search shares during the period
  leading up to Bond maturity. [emphasis added by us in bold]

  18.8 On 13 August 2013, Mr Ben O’Dwyer of Backwell Lombard Capital together with his
  lawyer met with Messrs Vele, Mortensen and Latimer at the NRFA offices in Sydney.
  During this meeting Mr Vele is reported to have said that he and Mr Mortensen were of
  the opinion that buying new shares on market would be better than refinancing the IPIC
  Exchangeable bonds.183

  18.9 On 23 September 2013, an internal Oil Search email, later sent by Mr Botten to the Oil
  Search Board, also drew attention to a shift in thinking taking place in the State. Mr
  Botten then went on to say that Mr Vele had “…openly canvassed the use of money to
  support an acquisition by Oil Search of an interest in Elk Antelope for the issuance of
  shares to the State” and that this “would be preferable to the State rather than necessarily
  dealing with IPIC.”184 There is no reason why this contemporaneous record should not be
  accepted.

  183
  Statement of Mr Ben O’Dwyer dated 10 February 2022, WIT.0155.0009.0592 at .0608 [107(h)];
  Contemporaneous file note of meeting between Mr Ben O’Dwyer and Messrs Vele, Mortensen and Latimer
  WIT.0155.0002.0050 at 0051.

  184
  Draft email prepared by Diana Danielson on behalf of Peter Botten and later circulated to Oil Search Board, 23
  September 2013, OSL.0007.0001.1190.

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• 18.10 Dr Waine, in his supplementary statement to the Commission also recounted that:

  “In or around September 2013, I attended the offices of Pertusio Capital Partners
  (Pertusio Capital) to meet with Mr Lars Mortensen. Mr Mortensen had invited me there
  to discuss a proposed purchase of new Oil Search shares. This was the first time I became
  aware that a purchase of new Oil Search shares was being considered. At this meeting
  Mr Mortensen provided me with a report he had prepared regarding this proposed
  purchase.”185

  18.11 Mr Vele denies this allegation, but has instead indicated he was exploring all options
  available to the State.186 But Mr Vele was unable to explain why a number of witnesses
  before the Commission provided contemporaneous evidence contradicting his own
  version of events. In our submission his recollection on this is incorrect.

  18.12 Further, in his statement dated 8 February 2022, Mr Kumarasiri gave evidence that “on
  multiple occasions Dr Waine and Mr Sonk raised the possibility of Oil Search issuing
  new shares for the Independent State to purchase.”187

  Oil Search acquisition of Elk-Antelope and associated financing

  18.13 Between September 2013 and February 2014, as we outlined earlier, a number of parallel
  processes were taking place in an effort to refinance the IPIC Exchangeable Bonds.

  18.14 The Commission has received evidence that in November 2013, Oil Search engaged
  Goldman Sachs to consider financing the potential acquisition of PRL-15. Three options
  were identified:188

  (a) the acquisition of the PAC LNG companies; or

  185
  Supplementary Statement of Dr Clement Waine dated 11 February 2022, WIT.0039.0007.0001 at 0003, [30].

  186
  Transcript, Dairi Vele, 11 August 2021, p.2999; Transcript, Dairi Vele, 11 August 2021, p.3018.

  187
  Statement of Bamanu Arachchige Wasantha Kumarasiri, 8 February 2022, page 6 [56] WIT.0055.0002.0001.

  188
  Further Statement of Peter Botten, 27 January 2022, page 10 [57] (a)–(c) WIT.0021.0006.0001; see also
  Statement of Peter Botten, 14 June 2021, page 3 [28] WIT.0021.0003.0001.

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• (b) a back-to-back agreement with InterOil whereby InterOil would purchase the PAC
  LNG companies and then sell to Oil Search part of the PAC LNG companies’
  interest in PRL 15; or

  (c) partnering with ExxonMobil or Total to acquire InterOil’s interest.189

  18.15 From 3 January 2014 to 8 January 2014, internal Oil Search emails distributed copies of a
  document titled “1312xx Purchase of interest in PRL15 TOTAL v21 OSL
  Proposed.docx”. This is a draft press release titled “Oil Search to Acquire 19.35% Interest
  in PRL 15 (Elk/Antelope)” was dated December 2013. The three copies of this document
  which were distributed each state under ‘Acquisition Financing’:

  “Oil Search intends to fund the acquisition and associated future commitments
  with existing available liquidity. A new USD[X]m short-term debt facility has been
  arranged to fund the acquisition costs. The Company is evaluating options to
  refinance this facility in the future, including the potential for an equity offering. If
  an equity offering is undertaken, it is Oil Search’s intention to utilise a pro rata
  renounceable entitlement offer to all shareholders.”190

  18.16 On 29 January 2014, an internal Oil Search email sent to Oil Search’s Board of Directors
  attached a board pack titled ‘ 140129 – Project Heron – Draft Valuation Impact – Final &
  Cover Note’. The Board Pack, dated 29 January 2014, states under “Project Heron
  Financial Assumptions” that AUD900m would be raised by a placement with share price
  set at AUD8.20 per share, but no longer mentions Oil Search taking on its own short-term
  debt facility to fund the acquisition.191

  18.17 This latter document demonstrates a shift from Oil Search’s view in December 2013/early
  January 2014 that the PRL-15 acquisition would be funded by Oil Search taking on its

  189
  Further Statement of Peter Botten, 27 January 2022, page 10 [57] (a)–(c) WIT.0021.0006.0001.

  190
  OSL.0019.0003.7797; OSL.0019.0003.7808; OSL.0019.0003.7933; OSL.0019.0003.7944;
  OSL.0019.0003.8974.

  191
  OSL.0002.0011.1142; OSL.0002.0011.1145.

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• own short-term debt facility, to a view that the acquisition would be funded entirely by a
  share placement. While the document does not name the prospective purchaser of the
  shares, it is notable that the share price is set at AUD8.20/share, being the price which the
  State specifically negotiated with Oil Search.

  18.18 In February 2014, Oil Search and PAC LNG commenced negotiations during which Mr
  Carlo Civelli said to Mr Botten “words to the effect that the Prime Minister [Mr O’Neill]
  and PNG Government supported the transaction”.192 Mr Botten said this “was consistent
  with conversation that [Mr Botten] had with the Prime Minister [Mr O’Neill] in which
  [Mr O’Neill] supported the engagement of Oil Search with the PAC LNG companies as a
  means to address an impasse that had arisen between the PAC LNG companies and
  InerOil as a result of a reluctance on Mr Civelli’s part to sell the PAC LNG companies to
  InterOil”.193

  18.19 Notwithstanding Mr Botten’s evidence, Mr O’Neill’s oral evidence was that he had no
  knowledge of how Oil Search would use the funds received through the eventual share
  placement to the Independent State.194 That evidence of asserted ignorance by the former
  Prime Minister should be rejected.

  18.20 Mr O’Neill’s evidence must be rejected in light of the contemporaneous Oil Search
  documents already cited and the following:

  (a) the State’s own press release from 27 February 2014, which stated:

  The State looks forward to maintaining a material shareholding in Oil Search with
  a view to participating in the additional upside of Oil Search’s existing projects
  and the Elk-Antelope project.195

  192
  Further Statement of Peter Botten, 27 January 2022, page 9 [56] WIT.0021.0006.0001.

  193
  Further Statement of Peter Botten, 27 January 2022, page 9 [56] WIT.0021.0006.0001.

  194
  Transcript, Peter Botten, 7 February 2022, 3764.

  195
  Press Release by Secretary of Treasury Vele, 27 February 2014, WIT.0064.0002.0370.

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• (b) Oil Search’s press release from 27 February 2014, which discussed the share
  placement and PRL 15 acquisition, and stated:

  We are delighted to have reached an agreement with the PNG Government to
  facilitate their continued investment in the Company. There remains strong
  alignment between Oil Search and the PNG Government, with Oil Search
  regarded as a key player in driving the future development of the country’s
  abundant gas resources.196

  (c) Oil Search’s press release from 12 March 2014, which discussed the share
  placement and PRL 15 acquisition, and stated:

  We welcome the continuation of the Government shareholding in Oil Search,
  underscoring our alignment with the State through the next phase of oil and gas
  development in Papua New Guinea.197

  (d) Mr O’Neill’s public statement in 2017 that:

  The Government’s intervention to buy shares in Oil Search had a positive
  influence in the direction Oil Search has taken and boosted investor confidence in
  Papua New Guinea.

  …

  The Government and Oil Search have continued co-operation and mutual interests
  across a range of activities in Papua New Guinea. Oil Search has an outstanding
  reputation delivering for its shareholders, and has been an extremely responsible

  196
  Oil Search Press Release enclosing PNG Press Release, 27 February 2014, WIT.0064.0002.0369.

  197
  Oil Search Press Release confirming completion of share placement to PNG, 12 March 2014,
  OSL.0002.0005.5201.

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• corporate citizen, investing millions of Kina in social development programs that
  help people around Papua New Guinea.198

  (e) Mr O’Neill’s statement in 2017 that the purpose of State’s acquisition of new Oil
  Search shares in 2014 was done “to secure our interest in the biggest employer and
  biggest taxpayer in our country and protect our national interest”.199

  Mandatory Exchange Notice and subsequent negotiations

  18.21 On 13 February 2014 IPIC issued the Mandatory Exchange Notice, confirming IPIC’s
  irrevocable election to exchange the Exchangeable Bonds into Ordinary Shares.200
  Accordingly, the O’Neill Government was faced with the long foreshadowed reality that it
  would shortly lose all of the State’s Oil Search shareholding for the first time since the
  merger of Orogen Minerals in 2002. This event led directly to the UBS loan. The State’s
  justification for obtaining a large new Oil Search shareholding – said to be strategic –
  remains unconvincing even given the evidence of those who spoke of the significant
  position that Oil Search then held in the eyes of the people of Papua New Guinea. This
  position is best summarised by Mr Botten in his further statement when he said:

  The depth and magnitude of Oil Search’s contribution over the years to PNG’s economic
  and social development, and its promotion and advocacy of PNG, has resulted in
  longstanding relationships with local communities, landowners, businesses and
  successive PNG Governments.201

  198
  Pacific Islands Report, ‘PNG PM Dismisses Claims That The Divesting Of Shares In Oil Search Limited Cost The
  Gov A Major Loss’, 25 September 2017, WIT.0036.0006.0151.

  199
  https://www.thenational.com.pg/pm-defends-shares-sale/.

  200
  Mandatory Exchange Notice, 13 February 2014, OSL.0002.0007.2678.

  201
  Further Statement of Peter Botten dated 27 January 2022, WIT.0021.0006.0001 at p.15 [92].

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• 18.22 Mr O’Neill in his appearance before the Commission also emphasised the important role
  played by Oil Search in filling gaps where successive Governments were not able to
  deliver services such as health care and education in remote communities.202

  18.23 On 14 February 2014, Mr Botten provided the Oil Search board of directors with an
  update on the Independent State’s progress in refinancing the IPIC Exchangeable Bonds.
  In this email Mr Botten noted:

  The Prime Minister has expressed a strong interest in remaining a shareholder of
  OSH and is keenly interested in potentially receiving shares in any potential
  capital raising carried out as part of an Elk Antelope transaction. This is
  especially relevant if he is unable to buy back the shares from IPIC. He has the
  financing to do this from UBS. He has been informed of the very low probability
  of PNG being successful in any buy back from IPIC.203

  18.24 Again, there is no reason why this contemporaneous note by Mr Botten should not be
  accepted.

  18.25 On 14 February 2014, Mr Jilek of UBS responded to an email from Mr Botten of Oil
  Search following the issuance of the mandatory exchange notice stating:

  Thanks. I am inclined to encourage the government to engage nevertheless, to test
  their desire to hold the entire bloc.204

  18.26 On 21 February 2014, Mr Botten and Mr Aopi of Oil Search met with Mr Vele and then
  Governor of Bank of Papua New Guinea Loi Bakani in Sydney. At this meeting Mr Vele
  explained that the State was not able to refinance the IPIC Exchangeable Bonds and noted

  202
  Transcript, Peter O’Neill, 17 June 2021, pp. 1444-1445.

  203
  Email P Botten to K Constantinou, F Harris, G Aopi, A Kantsler, R Lee, B Philemon, K Spence and Z
  Switkowski, IPIC Update, 14 February 2014, OSL.0007.0001.0647.

  204
  Email P Jilek to P Botten, Re: Fwd: Update, 14 February 2014, OSL.0007.0001.0855.

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• the State would be willing to fund the PRL-15 purchase through an acquisition of new Oil
  Search shares. Mr Vele stated that the State expected to receive funding from UBS AG.205

  18.27 In the days following this meeting Mr Vele would receive a number of emails from UBS
  AG providing draft loan documentation for the proposed financing and a term sheet.206

  18.28 On 23 February 2014, Mr Botten met with Prime Minister O’Neill, Mr Vele and Mr Aopi
  in Port Moresby. At this meeting Mr O’Neill stated that the State wished to retain at least
  a 10% shareholding in Oil Search, and asked if Oil Search would issue shares to the State
  as a placement, as part of Oil Search’s capital raising to fund its acquisition of an interest
  in PRL-15.207

  18.29 Mr Botten said that the AUD8.20 share price was negotiated by Mr O’Neill in Port
  Moresby on or around 23 February 2014:
  At the time of the meeting I thought that the price of AUD8.20 per share was negotiable,
  given that the market price at the time was substantially higher than AUD8.20 per share.
  It subsequently became clear that the Prime Minister and State were not going to move
  from AUD8.20 per share.208

  18.30 Mr Botten’s assertion that the State negotiated Oil Search down to the AUD8.20 share
  price necessarily implies one of two possible scenarios:

  (a) that the AUD8.20 share price was negotiated with the State by 29 January 2014
  (hence why it appears in the Board Pack from same date); or

  205
  Statement of Peter Botten dated 14 June 2021, WIT.0021.0003.0001 at p 5, [50-51].

  206
  Email M. Turner to D. Vele, Financing Authority Diligence, 22 February 2014, NRF.001.001.5059; Email M.
  Turner to D. Vele, FW: Proposed scope of work for the Big 4 quote request, 22 February 2014, NRF.001.001.5094;
  Email M. Turner to D. Vele, Bridge Facility Term Sheet, 23 February 2014, NRF.001.001.5062; Engagement Letter,
  25 February 2014, ASH.003.008.0001.

  207
  Statement of Peter Botten dated 14 June 2021, WIT.0021.0003.0001 at pages 5–6, [54]–[55].

  208
  Statement of Peter Botten, 14 June 2021, page 6 [56] WIT.0021.0003.0001.

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• (b) that Oil Search were open to making the placement at AUD8.20 per share from
  January 2014 onward, and that the negotiations were an opportunity to see if the
  State would pay more than that amount.

  18.31 On the morning of 25 February 2014, Mr Botten, Mr Aopi and Mr Vele met at the Grand
  Papua Hotel. Mr Aopi gave evidence that:

  To the best of my recollection, at that meeting I was told that Prime Minister
  O’Neill was maintaining his position that he wanted the State to take a placement
  of Oil Search shares which would give it an interest of approximately 10% in Oil
  Search, and that State would pay AUD8.20 per share.209

  18.32 At 6:30pm on 25 February 2014, Mr Botten, Mr Aopi and Mr Vele met at the Grand
  Papua Hotel. At this meeting Mr Vele reiterated that Mr O’Neill was maintaining the
  position that the State wanted to acquire approximately 10% of Oil Search shares at
  AUD8.20 per share.210

  18.33 On 26 February 2014, Mr O’Neill sent a letter to Mr Botten formally expressing the
  Independent State’s interest in investing an amount of AUD1.225 billion at a subscription
  price of AUD8.20 per share before 10 March 2014.211

  18.34 On 27 February 2014, the State and Oil Search issued separate press releases,212 the
  release of which was coordinated,213 confirming:

  (a) that Oil Search would be acquiring a 22.835% interest in PRL-15/Elk-Antelope;

  209
  Statement of Gerea Aopi dated 16 June 2021, WIT.0059.0003.0001 at p.3, [24]; OSL.0017.0001.0043.

  210
  Statement of Gerea Aopi dated 16 June 2021, WIT.0059.0003.0001 at pp.3-4, [25]; OSL.0017.0001.0043.

  211
  OSL.0001.0001.5671.

  212
  WIT.0007.0005.0036; WIT.0027.0001.0630.

  213
  NRF.001.001.5576 attaching NRF.001.001.5578

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• (b) that this acquisition would be funded through a placement of 149.39 million Oil
  Search shares to the State; and

  (c) noting the IPIC Exchangeable Bonds had been the subject of a Mandatory
  Exchange Notice so that an exchange of the relevant Oil Search shares then held
  by IPBC would occur as prescribed under the Exchangeable bonds.

  NEC Decision

  18.35 On 6 March 2014, the NEC through NEC Decision 79/2014214 formally approved:

  (a) for the State to acquire 149,390,244 shares in Oil Search Limited;

  (b) for the State to borrow AUD1.239 billion from UBS AG (Australia Branch),
  initially comprising two facilities (an AUD335 million bridge loan facility and an
  AUD904 million collar loan facility); and

  (c) for the State to engage UBS as its advisors on the financing and acquisition of Oil
  Search shares.

  This marked the formal decision by the Government of the day to enter into the UBS
  Loan and purchase the Oil Search shares.

  Findings

  18.36 According to Mr O’Neill, the rationale for the State’s purchase of Oil Search shares in
  2014 was what he perceived to be the strategic alignment between the government and
  one of PNG’s oldest and largest companies with a broad presence throughout the State’s
  resources industry. He was adamant, too, that the purchase had nothing to do with PRL-
  15.

  18.37 It is submitted that it is open to the Commission to reject the rationale put forward by Mr
  O’Neill for the following reasons:

  214
  NEC Decision 79/2014 WIT.0016.0001.0610.

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• (a) The submission to the NEC on 6 March 2014 makes it clear that the NEC and
  therefore Mr O’Neill who signed the submission, knew that Oil Search was buying
  into PRL-15 and that this was how the State’s funds were going to be used.

  (b) The Government thought that the Oil Search share price was likely to rise and
  noted that the share price had reacted positively to the news that Oil Search would
  participate in PRL-15.

  (c) By December 2015, Mr O’Neill and the NEC had given broad authority to KPHL
  to deal with the shares; this included selling them. This demonstrates that by this
  time, the government had no interest in remaining a long term shareholder in Oil
  Search for all of the broader benefits that it had been thought that such a
  shareholding would bring. It is easy to infer that the reason for the change of
  position was because the real purpose of the share purchase had been completed,
  namely providing the means of enabling the sale of the PAC LNG Companies to
  Oil Search.

  (d) If the State was intending to be a long-term shareholder at the 10% level, it would
  be expected that it would seek a board position in order to have more influence
  over, and knowledge concerning, a company with which it sought strategic
  alignment. This does not appear to even being considered.

  18.38 It is therefore submitted that it is impossible to disconnect the State’s purchase of Oil
  Search shares from Oil Search’s acquisition of an interest in PRL-15. Leaving aside the
  question of whether it is appropriate for the State to invest in listed companies, there is
  nothing inherently wrong in the State’s finances being used in a way that promotes the
  development of one of its resources. This is particularly so when the State would have
  back-in rights to take a stake in the resource in due course.

  18.39 At T1470 on 17 June 2021 and again on T3765 on 7 February 2022, Mr O’Neill was
  questioned about what would have happened had he known that Oil Search were going to
  purchase an interest in PRL15 with the money provided by the Independent State in the
  UBS Loan. At T1470, Mr O’Neill gave evidence that he was:

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• …certainly sure that it will be a different transaction and if I had knowledge of
  that that particular discussions going between Oil Search and Elk Antelope
  partners, PNG government would have reviewed its position.

  18.40 At T3765, Mr O’Neill further stated:

  I would have negotiated with Oil Search, InterOil or Elk Antelope to buy their
  shares in the PNG LNG Project because that project was ongoing. Combining
  these two projects would have given us a better sizeable interest in the current
  existing development so it would have been a different transaction, we would have
  had a different conversation but what has happened, has happened.

  18.41 It would be expected that Mr O’Neill as the then Prime Minister would be fully
  conversant with developments over PRL-15 and be actively involved in trying to
  accelerate the exploitation of the resource. Mr Vele was certainly aware of what was
  going on.

  18.42 In those circumstances, Mr O’Neill’s attempts to distance himself from PRL-15 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. For example:

  (a) At T3761 on 7 February 2022, Mr O’Neill was referred to an email from Mr
  Botten of 14 February 2014 [OSL.0007.0001.0647] in which it was stated that
  Prime Minister O’Neill was keenly interested in potentially receiving shares in any
  potential capital raising carried out as part of an Elk-Antelope transaction. Mr
  O’Neill said that there was absolutely no reason why “we” would want to be part of
  that transaction. We say why not? And more to the point, this is exactly what the
  State then did.

  (b) At T3764, he said there was never any discussion about Oil Search using the
  money to buy Elk-Antelope yet the submission that he signed on 6 March 2014
  expressly mentions this.

  (c) Mr Maladina gave clear evidence that, despite Mr O’Neill’s denials at T3763, he
  had attended two meetings at which Mr O’Neill and Mr Carlos Civelli were
  present and Mr O’Neill and Mr Civelli had private conversations at each. Ms

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• Amputch’s evidence denying this should not be accepted given that she is a close
  business associate of Mr O’Neill and telephoned him immediately after she
  received the Commission’s summons and no-one sought to challenge Mr Maladina
  by cross-examination.

  (d) At T4148, Mr Vele said that he would have discussed Oil Search’s potential
  acquisition into PRL-15 with Mr O’Neill after the ill-fated trip to Abu Dhabi in
  February 2014. He believed that Mr O’Neill would already have been aware of
  rumours about this as he himself had been. At T4149 , he was surprised that Mr
  O’Neill said that he was not aware of the rumours.

  18.43 It is submitted that balance of the evidence suggests that a significant driver of the
  transaction, perhaps the dominant one, may have been to assist in ensuring that the PAC
  LNG companies were bought out of PRL-15 and Oil Search take over their interests in the
  resource.

  18.44 If the Commission were to accept Mr O’Neill’s rationale, it would then be submitted that
  the rationale does not stand scrutiny and was not clear or strong enough to be used to
  justify a loan of more than $1.2 billion that the State had no means to repay.

  18.45 Brattle considered this in their first report. They took the view that a strategic investment
  in relation to shares is one where the investor expects an additional return over and above
  the ordinary return that all investors in those shares would receive through dividends and
  share price appreciation. They then noted that the material that they had reviewed did
  not explain how owning Oil Search shares would provide value to Papua New Guinea
  over and above any dividends and share price appreciation that the State might receive
  (and which all other Oil Search shareholders would receive). Brattle concluded that a
  significant objective for the Government was to benefit from dividends and/or a rising Oil
  Search share price. If the Government had a strategic investment objective, the documents
  they reviewed did not explain why or how the proposed shareholding would influence Oil
  Search behaviour to the benefit of Papua New Guinea. Further, if the Government’s
  objective included holding more than 10% of the shares in Oil Search, as they stated, it
  failed to maintain this holding after about a month of acquiring the shares.

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• 18.46 Further, there was no need for the State to seek to participate indirectly in PNG resource
  projects through holding shares in Oil Search when it had the means to have a direct
  interest in the project through back-in rights.

  18.47 We submit that in relation to Term of Reference (o) it is open to the Commission to find
  that:

  (a) by August 2013, parties acting on behalf of the State, including Mr Vele, were
  considering an acquisition of new Oil Search shares and that Mr Vele in fact
  preferred this option over the refinancing of the IPIC Exchangeable Bonds;

  (b) a decision (albeit unofficial) to issue a new placement of Oil Search shares had
  been made before February 2014, and certainly before the Mandatory Exchange
  Notice was issued on 14 February 2014;

  (c) that the decision to purchase the Oil Search shares was made on either 23 February
  2014 or 27 February 2014 before the NEC meeting on 6 March.

  19. TOR 1(p) The rationale as to why the State determined to utilize the UBS Loan to
  purchase Oil Search shares

  19.1 Between 2012 and January 2014, the State conducted a tender process with a number of
  prospective financiers to refinance the IPIC Exchangeable Bonds. In August 2013, Mr
  Vele flew to Sydney to meet with prospective financiers from amongst others JP Morgan,
  Morgan Stanley and UBS.

  19.2 On 16 August 2013, following those meetings Mr Latimer sent emails to the prospective
  financiers to update them on next steps. Representatives from JP Morgan and Morgan
  Stanley received identical emails noting that they could expect a response within a
  week.215 Mr Jilek of UBS, on the other hand, received an email requesting a formal
  engagement letter.216

  215
  NRF.001.001.3693; NRF.001.001.3694.

  216
  NRF.001.001.3697.

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• 19.3 On 22 August 2013, Mr Jilek wrote to Mr Latimer and advised that he had spoken with
  Mr Vele who had “made it pretty clear that we are likely to be appointed formally
  following his meeting with the PM”.217

  19.4 As identified earlier, between August 2013 and December 2013 a number of parallel
  processes considered proposals from potential financiers, including UBS, Citibank, ANZ
  Barclays and Helmsley Capital.

  19.5 On 13 February 2014, IPIC issued the Mandatory Exchange Notice confirming it had
  elected to exchange the Exchangeable Bonds for the State’s ordinary shares in Oil
  Search.218

  19.6 As noted earlier:

  (a) on 14 February 2014, Mr Botten provided the Oil Search board of directors with
  an update on the Independent State’s progress in refinancing the IPIC
  Exchangeable Bonds.219

  (b) On 21 February 2014, Mr Botten and Mr Aopi of Oil Search met with Mr Vele and
  then Governor of BPNG Loi Bakani in Sydney. At this meeting Mr Vele explained
  that the State was not able to refinance the IPIC Exchangeable Bonds and noted
  the State would be willing to fund the PRL-15 purchase through an acquisition of
  new Oil Search shares. Mr Vele stated that the State expected to receive funding
  from UBS AG.220

  19.7 On 22 February 2014, Mr Vele received an email from Mr Mitchell Turner of UBS AG
  advising that the Independent State could finance the acquisition of the Oil Search shares
  by borrowing pursuant to the Loans (Overseas Borrowings) (No.2) Act utilising the

  217
  NRF.001.001.3856.

  218
  Mandatory Exchange Notice, 13 February 2014, OSL.0002.0007.2678.

  219
  Email P Botten to K Constantinou, F Harris, G Aopi, A Kantsler, R Lee, B Philemon, K Spence and Z
  Switkowski, IPIC Update, 14 February 2014, OSL.0007.0001.0647.

  220
  Statement of Peter Botten dated 14 June 2021, WIT.0021.0003.0001 at p 5, [50-51].

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• authorised purpose of “purchasing equity in companies”. The advice included a
  requirement that the decision be ratified by a decision of the NEC.221

  19.8 On 23 February 2014, Mr Turner of UBS sent Mr Vele, Mr Mortensen and Mr Latimer a
  briefing paper for the meeting with Mr O’Neill and subsequent meeting with Mr Botten.
  UBS had drafted it in a way that could be used as a base for a subsequent NEC
  submission. Mr Jilek was copied into the email.222

  19.9 On 23 February 2014, Mr Botten met with then Prime Minister O’Neill, Mr Vele and Mr
  Aopi in Port Moresby. At this meeting Mr O’Neill stated that the State wished to retain at
  least a 10% shareholding in Oil Search, and asked if Oil Search would issue shares to the
  State as a placement, as part of Oil Search’s capital raising to fund its acquisition of an
  interest in PRL-15.223

  19.10 The Commission has heard evidence relating to the conduct of UBS during the IPIC
  Exchangeable bonds refinancing tender process:

  (a) circumventing the tender process by obtaining IPIC Exchangeable bonds
  transaction documents224

  (b) of the tendering parties, they were the only ones who requested the independent
  financial advisors to IPBC be excluded from the presentation of their refinancing
  proposal;225

  (c) objecting to the need to participate in a tender process;226

  221
  Email M. Turner to D. Vele, Financing Authority Diligence, 22 February 2014, NRF.001.001.5059.

  222
  NRF.001.001.5061

  223
  Statement of Peter Botten dated 14 June 2021, WIT.0021.0003.0001 at pages 5–6, [54]–[55].

  224
  NEC Policy Submission – draft (Kumarasiri/Waine); Email P Jilek to A Latimer, PNG, 22 August 2013,
  NRF.001.001.3856.

  225
  Affidavit of Igimu Momo dated 17 December 2021, WIT.0141.0001.0001 at page 9, [64].

  226
  Affidavit of Igimu Momo dated 17 December 2021, WIT.0141.0001.0001.

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• (d) making threatening phone calls to the State’s decision makers;227 and

  (e) making threats to parties acting on behalf of the State that should UBS not be
  selected “UBS will have to look at its other options in terms of the IPIC Bond” and
  that this “may not be a benefit for the State”.228

  Findings

  19.11 It is open to the Commission to find that:

  (a) from 16 August 2013 parties acting on behalf of the State, including Mr Vele, Mr
  Latimer and potentially Mr O’Neill, considered UBS to be the favoured financier
  for the IPIC Exchangeable bonds refinancing;

  (b) the State did not engage in a tender process to evaluate proposals from prospective
  financiers in relation to the purchase of 149.39 million shares in Oil Search;

  (c) UBS’ threatening conduct throughout the tender process whilst not an overriding
  consideration by parties acting on behalf of the State may have featured in the
  decision-making process; and

  (d) the State determined to use the UBS Loan to acquire the Oil Search shares because
  UBS following the issuance of the Mandatory Exchange Notice encouraged parties
  acting on behalf of the State to engage with Oil Search regarding an on-market
  purchase of shares.

  20. TOR 1(q): Whether legal and administrative processes were followed to buy Oil
  Search shares in 2014.

  20.1 Section 40(1) of the Public Finances (Management) Act 1995 (PNG) requires that tenders
  must be publicly invited and contracts let for the purchase or disposal of property or
  stores or the supply of works and services the estimated cost of which exceeds a
  prescribed amount. However, section 40(3)(b) provides an exception to section 40(1),

  227
  Supplementary Statement of Dr Clement Waine dated 11 February 2022, WIT.0039.0007.0001 at page 4, [41].

  228
  Email C Waine to B O’Dwyer enclosing email chain, RE: IPIC, 21 October 2013, WIT.0155.0001.2525.

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• where a Supply and Tenders Board certifies that the inviting of tenders is impracticable or
  inexpedient.

  20.2 Section 117 of the Public Finances (Management) Act 1995 allows for the issuing of
  Financial Instructions, not inconsistent with the Act, as to any matter prescribed by the
  Act to be so provided for, or that are necessary or desirable for carrying out or giving
  effect to the Act and in general for the better control and management of public moneys
  and public property.

  20.3 Financial Instruction 1A/05 (“Supply and Tenders Board Operations”) are such Financial
  Instructions. Clause 11.1 of this relevantly provides that a certificate of inexpediency
  cannot be issued retrospectively to cover a contract already executed. Clause 11.2
  provides that a certificate of inexpediency will only be issued in situations where a
  declared natural disaster, defence emergency, health emergency, or situation of civil
  unrest exists, and procurement processes must be undertaken urgently to remedy the
  situation. Clause 11.2 further provides that: “Lack of forward planning by departments is
  no longer acceptable. Departments must now be planning their major procurements in a
  timely manner”.

  20.4 Schedule 2, clause 3 of the UBS side letter229 and the Bridge Facility Agreement230
  included as a condition precedent the issuing of a certificate of inexpediency.

  20.5 On 6 March 2014, Mr Vele wrote to the Chairman of the Central Supply and Tenders
  Board (CSTB), Mr Philip Eludeme, requesting that the Chairman urgently consider and
  approve the enclosed request for certificate of inexpediency to cover the advisory fees of
  Pacific Legal Group and Pacific Capital Limited up to a limit of K9,000,000, and to UBS,
  Ashurst, Norton Rose Fulbright and KPMG limited to AUD14,555,759.231

  229
  NRF.001.003.5499.
  230
  NRF.001.003.5690.
  231
  Letter D. Vele to P. Eludeme, Financial Accommodation for The Independent State of Papua New Guinea (the
  State), 6 March 2014, WIT.0019.0002.0435.

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• 20.6 The request for certificate of inexpediency was a pro forma document. There was a
  section titled “reason for certificate”, which listed the four grounds in clause 11.2 of
  Financial Instruction 1A/05 as boxes to be ticked. However, none of the boxes were
  ticked. In the request, the explanation for urgency was expressed as that the State had
  until 4pm on Thursday 6 March to approve a share placement and until 5pm on Thursday
  6 March for the relevant documentation to be executed, failing which the State would not
  secure a shareholding and would be exposed to costs of up to AUD18,000,000.232

  20.7 On 7 March 2014, the CSTB met and resolved to issue the certificate of inexpediency.
  The minutes of the meeting noted that the CSTB “is satisfied that all process have been
  followed and the award was made in accordance to the Provisions of the Public Finance
  (Management) Act”. The decision was not expressed to be conditional. The State
  Solicitor was not present at this meeting but his alternate, Deputy State Solicitor Jeklin
  Talonu, was present.233

  20.8 On 10 March 2014, Mr Eludeme wrote to Mr Vele explaining that the CSTB had
  approved the issue of certificates of inexpediency in respect of the local and international
  advisors but qualified the approval by noting that it was subject to the State Solicitor’s
  clearance and receipt of the original authority to pre-commit.234

  20.9 On 12 March 2014, the Acting Board Secretary of the CSTB, Mr Babaga Naime, wrote to
  the State Solicitor seeking advice in relation to the certificate of inexpediency.235

  20.10 On 20 March 2014, the State Solicitor wrote to Mr Naime declining to give the required
  legal clearance for the certificate of inexpediency on the basis that it was not requested for

  232
  WIT.0019.0002.0438
  233
  Minutes of CSTB meeting no. M-0/14, 7 March 2014, WIT.0023.0001.0028, p 6 (8.5).
  234
  Letter P. Eludeme to D. Vele, Application for certificates of inexpediencies for the engagement of financial, legal
  and technical advisors in connection with the purchase and related financing of the purchase by the State, 10 March
  2014, WIT.0019.0004.0038.
  235
  Letter D. Vele to D. Rolpagarea, Request for issuance of legal clearance – CSTB Col 02/14 – application for
  certificate of inexpediencies for engagement of financial, legal and technical advisors in connection with the
  purchase of shares in Oil Search Limited and related financing of the purchase by The State of Papua New Guinea,
  12 March 2014, WIT.0019.0002.0431.

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• one of the four grounds listed in the relevant Financial Instructions and could not be
  issued retrospectively to cover a contract that had already been performed. However, he
  advised that: “Treasury and the Central Bank may consider paying for the services
  rendered by the Consultants on a Quantum Meruit basis,” and noted: “the payment for
  legal services should be done in consultation with the Attorney General.”236

  20.11 On 28 March 2014, Mr Eludeme wrote to Mr Vele attaching the letter from the State
  Solicitor dated 20 March 2014 and noting that the certificate of inexpediency cannot be
  issued nor could the CSTB retrospectively approve the payments of services for the
  engagement of the consultants. Mr Eludeme advised instead that: “The engagement and
  payment of legal services from private firms must be done in consultation with the
  Attorney General. Payment for the provisions of legal services should be made on
  Quantum Meruit basis provided the State is fully satisfied with the services rendered.”237

  20.12 On 3 April 2014, the CSTB met and resolved to rescind its decision to engage the
  consultants in reliance on the State Solicitor’s advice in relation to the certificate of
  inexpediency.238

  20.13 On 10 April 2014, Mr Eludeme wrote to Mr Vele advising of the CSTB’s rescission of its
  decision and advising that this “effectively nullifies the issuance of the Certificate of
  Inexpediencies for these engagements.”239

  236
  Letter D. Rolpagarea to B. Naime, RE: Request for Issuance of Legal Clearance – CSTB Col 02/14 – Application
  for Certificates of Inexpediency for engagement of Financial, Legal and Technical advisors in Connection with the
  Purchase of Shares in Oil Search Limited and related Financing of the Purchase by the State of Papua New Guinea,
  20 March 2014, WIT.0025.0001.0190, p 4 (18).
  237
  Letter P. Eludeme to D. Vele, Legal clearance for applications for certificates of inexpediencies for the
  engagement of financial, legal and technical advisors (x3) in connection with the purchase and related financial
  advice of the proposed purchase of shares in Oil Search by the State, 28 March 2014, WIT.0025.0001.0203.
  238
  Minutes of CSTB meeting no. M-05/14, 3 April 2014, WIT.0025.0001.0194, p 6 (8.7).
  239
  Letter P. Eludeme to D. Vele, Rescinding award of contracts and nullifying issurance [sic] of inexpediencies for
  the engagement of financial, legal and technical advisors (x3) in connection with the purchase and related financial
  advice of the purchase of share in Oil Search by the State, 10 April 2014, WIT.0023.0001.0046.

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• 20.14 Mr Vele incorrectly contended that that the CSTB had an “unfettered discretion” to issue
  a certificate of inexpediency if it determines that it is inexpedient or impracticable to
  require a tender process. He also contended that the Financial Instructions which limit the
  grounds on which a certificate of inexpediency can be issued are inconsistent with the
  Public Finances (Management) Act 1995.240

  20.15 It is submitted that clauses 11.1-11.2 of Financial Instruction 1A/05 are not inconsistent
  with the Public Finances (Management) Act 1995. It is not inconsistent with section
  40(3) of the Public Finances (Management) Act 1995 for Financial Instructions to be
  made which prescribe the grounds on which the CSTB may certify that the inviting of
  tenders is impracticable or inexpedient. This facilitates the better control and
  management of public moneys and public property.

  20.16 Further, in Robmos Ltd v Punangi [2008] PGNC 70; N3372 (14 May 2008) (a case cited
  by the State Solicitor in his advice dated 20 March 2014), the relevant Financial
  Instructions were in issue and there was no suggestion or finding that they were invalid.241
  The National Court also held that the Financial Instructions have “similar force and
  effect” as the Public Finances (Management) Act 1995.

  20.17 It is clear that the issuing of the certificate of inexpediency by the CSTB on 7 March 2014
  was done contrary to clauses 11.1-11.2 of Financial Instruction 1A/05. This is because:
  a) there was no declared natural disaster, defence emergency, health emergency, or
  situation of civil unrest in existence; and b) it was effectively issued retrospectively. The
  request for the certificate was also deficient and should have been recognised as such.

  20.18 Further, there was no power in the Public Finances (Management) Act 1995 for the CSTB
  to issue a conditional certificate of inexpediency, to the extent that it purported to do.

  21. TOR (r) What role did Papua New Guinean and international legal and financial
  advisors play in relation to the UBS Loan

  240
  Affidavit of Dairi Vele sworn 26 April 2021, WIT.0014.0007.0001 [521].
  241
  See in particular Robmos Ltd v Punangi [2008] PGNC 70; N3372 (14 May 2008) [58]-[59], [61], [63].

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• UBS

  21.1 As noted earlier, the Australian branch of UBS AG was engaged as both:

  (a) the State’s sole financial advisor and sole lead arranger (on 25 February 2014) in
  relation to:

  (i) the management of the State’s investment in Oil Search; and

  (ii) associated matters flowing from the issuance of the 2009 IPIC
  Exchangeable Bonds in respect of the State’s shareholding.242

  (b) exclusive arranger of the financing facility to the State (27 February 2014).243

  21.2 As previously mentioned, an expert report prepared by the Brattle Group indicates that
  over the life of the UBS loan, 2014-2016, the Independent State paid an estimated
  AUD336,300,000 to UBS.244 The Brattle Group further assessed that the loan involved a
  transfer of AUD174,800,000 in value from the State to UBS (excluding fees).245

  21.3 The two key personnel involved on behalf of UBS were Patrick “Paddy” Jilek and
  Mitchell Turner. Both were the persons named in the “Key Man Provision” in clause 8 of
  the advisory mandate letter and were identified as “Senior Team Members”.

  242
  Letter UBS AG, Australia Branch to Dairi Vele, 25 February 2014, WIT.0015.0001.1425.

  243
  Commitment letter – financial accommodation for the Independent State of Papua New Guinea, 27 February
  2014, WIT.0015.0001.1063.

  244
  Exhibit PPP, Third Brattle Report to the Commission of Inquiry into the UBS Loan, WIT.0132.0003.0002 at
  0037, [111].

  245
  Exhibit PPP, Third Brattle Report to the Commission of Inquiry into the UBS Loan, WIT.0132.0003.0002 at
  0039, [116].

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• 21.4 Mr Turner was a witness to the execution of the financing mandate letter, and both Mr
  Turner and Mr Jilek were also involved in the financing engagement by UBS.246 Each
  declined repeated invitations to give evidence.

  21.5 It is noted that clause 9(b) of the advisory mandate letter contained an acknowledgement
  on behalf of the State that UBS may engage in various activities notwithstanding that a
  conflict of interest exists or may arise. Clause 9(c) referred to the creation of “permanent
  or ad hoc arrangements/information barriers … for the purposes of managing conflicts of
  interest … where appropriate”. However, there does not appear to be any evidence of
  such arrangements or information barriers being used in the circumstances of UBS’s
  engagement by the State. Finally, clause 12 provided, in effect, that it was not the
  intention of the parties to create a fiduciary relationship between them.

  21.6 There were similar provisions in the financing mandate letter, including an
  acknowledgement by the State that UBS may provide financial advisory services to the
  State and that conflicts of interest may arise (and a consent by the State to such activity),
  and an exclusion of any fiduciary relationship.

  21.7 Both engagement letters were governed by the law of New South Wales. In New South
  Wales, a party in the position of an investment bank such as UBS may, by contract,
  exclude or modify the operation of any fiduciary duties: Australian Securities and
  Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) [2007]
  FCA 963; (2007) 160 FCR 35, 77 [278]-[281], 82 [323].

  21.8 However, regardless of whether UBS effectively excluded any fiduciary duties it had to
  the Independent State, it is clear from UBS’s involvement as both advisor and financier
  and the involvement of key UBS personnel on both engagements that the State’s was not
  receiving proper and independent advice and representation in relation to the UBS loan.
  This no doubt lead to the poor financial outcome to the State from the loan.

  246
  See, for example, WIT.0099.0007.0034; WIT.0099.0007.0037; WIT.0099.0007.1196; ASH.002.003.7510;
  ASH.002.001.5327.

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• NRFA

  21.9 On 6 March 2014, NRFA was retained to advise the State on the UBS Loan. Despite
  requests from its former client for the production of all relevant documents including
  retainers, NRFA did not produce the relevant retainer to the Commission.

  21.10 No evidence has been provided to the Commission that a public tender process was
  utilised before the awarding of work to NRFA under any of the above identified retainers.

  21.11 No evidence has been provided to the Commission about the amount paid to NRFA for its
  work under the various retainers. The UBS Loan documentation247 indicates that a
  payment of AUD600,000 was made to NRFA from the total amount borrowed for the
  Bridge Facility.

  Anthony Latimer

  21.12 Mr Anthony Latimer was a key advisor to the State and the NRFA partner responsible for
  much of the legal work in respect of UBS Loan transaction.

  21.13 In his appearance before the Commission, Mr Jimmy Maladina outlined Mr Latimer’s
  history in the Independent State:

  … The family, we have known him for a longer period of time because his parents
  used to run a plantation up in Goroka, Eastern Highlands Province early in the
  ’50s and the ’60s. And my dad used to operate in Goroka and I was born in
  Goroka so that family connections were there. They used to run a Latimer
  Plantation in the Bena Bena region of Goroka, Eastern Highlands. So, that
  connection – I do know the family longer than that but professionally about 10
  years from 2014.’248

  247
  Bridge Facility Agreement – Drawdown Notice, WIT.0015.0002.1265 at 1266.

  248
  TS2506.8-14 (2 August 2021).

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• 21.14 Mr Latimer had also previously been a Partner with Corrs Chambers Westgarth and had
  advised on a number of transactions in the State.249

  21.15 Mr O’Neill when pressed on the role played by Mr Latimer in the UBS Loan transaction
  commented that:

  He would have been advising some of our departments and of course our SoE’s but
  not directly to government.250

  21.16 This is a very limited articulation of Mr Latimer’s role. As will be established Mr
  Latimer’s involvement with the UBS Loan was extensive.

  21.17 Mr Latimer is no longer a partner with NRFA. Mr Latimer is based in Australia and is not
  a compellable witness. Given Mr Latimer’s integral role in the UBS Loan the Commission
  made a number of requests for Mr Latimer to appear on a voluntary basis to give
  evidence. Mr Latimer through his lawyer Mr Yeldham of KWM confirmed receipt of
  those requests but did not appear before the Commission.

  Involvement of NRFA following MEN

  21.18 While NRFA was formally retained on 6 March, evidence before the Commission
  indicates that it was involved in the UBS Loan transaction immediately following the
  issuance of the Mandatory Exchange Notice on 14 February 2014.251

  21.19 Mr Latimer accompanied representatives of the State including Governor of BPNG Loi
  Bakani, Mr Vele and Mr Botten and Mr Aopi of Oil Search to Abu Dhabi in February
  2014 to meet with IPIC and discuss the Exchangeable Bonds.252

  249
  TS1906.22-25 (24 June 2021).

  250
  TS1447 (17 June 2021).

  251
  Mandatory Exchange Notice, 13 February 2014, OSL.0002.0007.2678.

  252
  Affidavit of Dairi Vele dated 26 April 2021, WIT.0014.0007.0001 [276].

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• 21.20 From 22 February 2014, Mr Latimer engaged with Mr Vele and other representatives of
  the State regarding the below:

  (a) providing advice on a briefing paper prepared for Mr Vele by UBS253 in advance
  of Prime Minister O’Neill’s meeting with Mr Botten including:

  (i) that UBS recommended the State appoint NRFA as its legal advisors;

  (ii) the State should obtain a term sheet from UBS to ensure terms of funding
  were clear;

  (iii) the State should not commit to a deal with Oil Search until funding was in
  place;

  (iv) the need to identify possible funding risks flowing from other financing
  arrangements;

  (v) querying whether the State would be able to obtain the required approvals
  in the following week.254

  (b) corresponding with Mr Vele noting the urgency of transaction completion;255

  (c) preparing draft NEC submissions regarding the appointment of UBS as financial
  advisor and NRF as legal advisor;256

  (d) engaging KPMG to provide advice on the UBS financial modelling;257

  253
  Email M Turner to D Vele, 22 February 2014, RE PM Briefing Paper, NRF.001.001.5054.

  254
  Email A Latimer to D Vele, 22 February 2014, RE: PM Briefing Paper, NRF.001.001.5052.

  255
  Email A Latimer to D Vele, 26 February 2014, RE: PNG – letter and announcement attached URGENT,
  NRF.001.001.5334.

  256
  NRF.001.001.4090.

  257
  Email A Latimer to M Blake KPMG, 26 February 2014, PNG State – Proposed scope of work,
  NRF.001.001.5248.

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• (e) advising the State on the draft term sheet;258

  (f) advising on draft transaction documents;259

  (g) together with PLG, Mr Maladina and Mr Chang co-ordinating steps required for
  the State to execute the agreements;

  (h) coordinating meetings between Mr Mortensen, UBS and KPMG.260

  21.21 On 26 February 2014, NRFA sent an email to Mr Vele and Mr Mortensen providing
  initial advice on the Term Sheet for the Collar financing transaction.261 Subsequent to this
  other NRFA solicitors took a larger role in the drafting of transaction documents and
  coordination of execution.

  NRFA engagement with the Commission

  21.22 It is necessary at this stage to address the conduct of NRFA and their legal representatives
  King Wood Mallesons (KWM) with regard to their interaction with this Commission.

  21.23 The Terms of Reference made it very clear that all SoE’s were duty bound to cooperate
  with the Commission.

  21.24 Those Terms of Reference were made available to KWM on 15 March 2021.262

  258
  Email A Latimer to D Vele, 24 February 2014, RE: Bridge facility term sheet, NRF.001.001.5087.

  259
  NRF.001.002.7597.

  260
  Email A Latimer to C Roberts, 28 February 2014, KPMG Meeting, NRF.001.001.6565.

  261
  Email T Hoser to D Vele and L Mortensen, 26 February 2014, Project Kumul – Bridge and Collar Financing
  Transaction – Norton Rose Fulbright comments, NRF.001.001.5225.

  262
  Letter Solicitors Assisting to A Dietz of NRFA, 15 March 2021, COU.0001.0001.0001.

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• 21.25 Despite initially indicating their willingness to assist, NRFA through KWM consistently
  stalled and delayed the work of this Commission. NRFA had been retained under a
  number of retainers between 5 December 2012 and 6 March 2014.263

  21.26 It became apparent that:

  (a) the records held by NRFA were not kept in an appropriate matter with documents
  from all three retainers becoming intermingled;264 and

  (b) the records held by NRFA did not adequately identify their client.265

  21.27 KWM requested that a client authority be provided for each retainer. The Commission
  attended to same and provided copies to the KWM. Even so, KWM continued to withhold
  disclosure despite instructions to the contrary. KWM then wrote to the signatories seeking
  to confirm that they had indeed signed the client authorities.266

  21.28 In August 2021, after 5 months of the Commission seeking the production of the
  documents, NRFA through their solicitors KWM produced the relevant documents. It is
  worth noting however, that these documents:

  (a) were provided during the August 2021 hearings of this Commission (which at the
  time were scheduled to be its last);

  (b) were not provided in accordance with the Commission’s document production
  protocol; and

  (c) failed to include key metadata significantly complicating the review processes.

  Pertusio

  263
  Letter T Toemoe to D Kavanamur, 14 April 2021, COU.0001.0001.0033.

  264
  Letter T Toemoe to Solicitors Assisting, 3 June 2021, COU.0001.0001.0168.

  265
  Letter T Toemoe to Solicitors Assisting, 30 April 2021, COU.0001.0001.0115.

  266
  Letter T Toemoe to D Manau, 19 May 2021, COU.0001.0001.0153.

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• 21.29 Pertusio Capital Partners Limited (Pertusio Capital) is a company incorporated in the
  Independent State.267 Pertusio Capital was formed “as an investment advisory business
  and investment holding company”.268

  21.30 The company was incorporated on 1 July 2009, with Lars Mortensen as its sole Director
  and Shareholder.269 Mr Mortensen is presently based in Australia and is not a
  compellable witness. At the request of the Commission he appeared before the
  Commission to give evidence.

  21.31 In March 2010, Nathan Chang became a Director of Pertusio Capital, and on 16
  November 2011 became a Shareholder.270 Mr Chang is presently based in Australia and is
  not a compellable witness. At the request of the Commission he appeared before the
  Commission to give evidence.

  21.32 Mr Vele, following work on the establishment of Kroton No. 2 Limited which later
  became Kumul Petroleum Holdings Limited (the Independent State’s holding company
  for its participating interest in the PNG LNG Project)271, left the public service to join
  Pertusio Capital with the goal of building “a strong investment advisory business”.272
  From November 2011 until 31 March 2012, Mr Vele was a Director and Shareholder of
  Pertusio Capital.273

  21.33 However, emails provided to the Commission by NRF indicate that Mr Vele, despite
  supposedly leaving Pertusio Capital, continued to use his Pertusio Capital email address

  267
  Statement of Nathan Chang dated 21 June 2021, WIT.0095.0004.0001 at 0002, [2].

  268
  Statement of Lars Rune Mortensen dated 21 June 2021, WIT.0100.0002.0001 at 0003, [9].

  269
  View Local Company (ipa.gov.pg).

  270
  Statement of Nathan Chang dated 21 June 2021, WIT.0095.0004.0001 at 0002, [2].

  271
  Statement of Nathan Chang dated 21 June 2021, WIT.0095.0004.0001 at 0002, [3].

  272
  TS.1674.5 (21 June 2021)

  273
  Affidavit of Dairi Vele sworn 29 April 2021, WIT WIT.0014.0009.0011 at 0018, [42].

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• in August 2013 in correspondence with Mr Latimer, NRF and Mr Mortensen.274 Further,
  the necessary documents reflecting Mr Vele’s cessation as shareholder and director were
  not lodged until April 2014.275

  21.34 In August 2013, Mr Vele, as a member of the recently formed IPIC Bond Committee,
  requested that Mr Mortensen accompany him to meetings in Sydney with several
  international investment banks to discuss proposals to act as advisors and arrangers to the
  State in its endeavours to retain a significant shareholding in Oil Search.276 Mr Mortensen
  stated that following his involvement with the bank meetings in August 2013 his role was
  limited to providing ad hoc advice to Mr Vele until February 2014, when he was brought
  back in to advise on the UBS Loan.

  21.35 Mr Chang was absent from the Independent State in 2013 and was generally aware of but
  had limited involvement in the work performed by Mr Mortensen.277 Mr Chang returned
  to the State in early 2014. Mr Chang described his role between February and March of
  2014 as “assistance with transaction management in Port Moresby in support of the
  Treasury and under instructions from Acting Secretary for Treasury, Mr. Dairi Vele” in
  relation to the UBS Loan.278

  21.36 However, there was no evidence of a formal contract ever being entered into between the
  State and Pertusio Capital.

  274
  NRF.001.001.2761; NRF.001.001.3597; NRF.001.001.3664; NRF.001.001.3683; NRF.001.001.3740;
  NRF.001.001.3794; NRF.001.001.3797; NRF.001.001.3808; NRF.001.001.3824; NRF.001.001.3840;
  NRF.001.001.3848; NRF.001.001.3858; NRF.001.001.3861; NRF.001.001.3877; NRF.001.001.3883;
  NRF.001.001.3886; NRF.001.001.3886; NRF.001.001.4040; NRF.001.001.4087; NRF.001.004.2455;
  NRF.001.004.2616; NRF.001.004.2995; NRF.001.004.3093; NRF.001.004.3098; NRF.001.004.3115.

  275
  WIT.0155.0001.2966; WIT.0155.0001.2979.

  276
  Statement of Lars Rune Mortensen dated 21 June 2021, WIT.0100.0002.0001 at 0005 [18], Exhibit II.

  277
  Statement of Nathan Chang dated 21 June 2021, WIT.0095.0004.0001 at 0002, [7].

  278
  Statement of Nathan Chang dated 21 June 2021, WIT.0095.0004.0001 at 0002, [10].

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• 21.37 Pertusio Capital were included in the certificate of inexpediency, but when this was
  revoked were ultimately paid K1.25 million based on Mr Vele’s quantum meruit
  assessment. This payment was paid directly by Pacific Legal Group to Pertusio Capital.279

  21.38 There is a question about whether Mr Vele as a former director and shareholder should
  ever have been involved in approving Pertusio Capital’s fees when he became a public
  official.

  Pacific Legal Group

  21.39 Pacific Legal Group Lawyers (‘PLG’) is a law firm based in Port Moresby, Papua New
  Guinea.

  21.40 Mr John Beattie, the managing partner of PLG, appears to have been the primary point of
  contact with Mr Latimer and Mr Maladina, holding discussions with both to discuss the
  nature of the transaction and the role that PLG was to play in regard to same.280 This was
  a pattern that was continued when it came to determining amounts to be paid to the
  relevant advisors and how invoices were to be issued to the Independent State. Mr
  Maladina testified that the three discussed an appropriate amount to be charged by Mr
  Maladina and how that would be presented to the Department of Treasury.

  21.41 On 26 February 2014, Mr Moe of NRF sent an email to Mr Beattie, the Managing Partner
  of PLG and requested PLG provide an opinion, from a Papua New Guinea law
  perspective, on the proposed UBS Loan under the Loans (Overseas Borrowings) (No. 2)
  Act.281 The email from Mr Moe contained a thread of emails including an advice offered
  by Mr Frecker of Ashurst. The understanding of Mr Beattie was that “PLG was
  requested to review the advice from Ashurst and advice NRFA if the advice was in

  279
  Letter from Nathan Chang to the Commission dated 19 January 2022, pp 2-3, WIT.0095.0006.0006.

  280
  Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
  [13]).

  281
  Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0002
  [7]) [Exhibit RR]; Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021
  (WIT.0099.0006.0001 at 0002 [8]); NRF.001.001.5206.

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• order”.282 On 27 February 2014, Mr Beattie responded to Mr Moe and confirmed the
  advice from Ashurst was in order.283

  21.42 Shortly after 26 February 2014, PLG was engaged by NRF following discussions between
  Mr Beattie, Mr Latimer and Mr Maladina.284

  21.43 Messrs Beattie and Asigau identified two relationships that were key to PLG being
  engaged in the matter. The first was:

  … a long standing association with Anthony Latimer and NRF. PLG has acted as
  agents for NRFA on various transactions and matters prior to and after the UBS
  loan transaction.285

  21.44 The second key relationship was with Mr Maladina, who is variously referred to as a
  Consultant with and client of PLG.

  21.45 As PLG was engaged by NRF, and not the Independent State directly, a formal tender
  process under the PFMA was not required. No formal retainer or letter of engagement
  has been provided to the Commission. Mr Beattie in his sworn statement noted:

  282
  Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
  [9]) [Exhibit RR].

  283
  Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
  [12]) [Exhibit RR]; Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021
  (WIT.0099.0006.0001 at 0003 [13]); NRF.001.001.5925.

  284
  Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
  [14]) [Exhibit RR].

  285
  Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
  [15]) [Exhibit RR].

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• I do not recall any formal retainer being signed with NRFA in respect of the
  transaction. The instructions were issued and accepted on the basis of the existing
  association between PLG and NRFA.286

  21.46 Without a formal letter of engagement the scope of PLG’s engagement is unclear. Mr
  Asigau understood that PLG was engaged to act as NRF’s “PNG legal advisors on the
  transaction”.287 Mr Beattie, characterised the role played by PLG as “town agents in
  certain aspects of the transaction … ”.288 Records of correspondence provided to the
  Commission indicate that PLG took a more active role than town agents, liaising with
  lawyers for UBS, and advising NRF on compliance with laws of the Independent State.

  21.47 By reference to the contemporaneous documents, PLG’s role in the transaction included:

  (a) between 1 and 6 March 2014, reviewing and providing commentary and advice
  from a Papua New Guinea law perspective transaction documents including but
  not limited to:

  (i) Bridge Facility Agreement;

  (ii) Security Trust Deed;

  (iii) Specific Security Deed;

  (iv) Participant Sponsorship Agreement;

  (v) Payment Direction Deed;

  (vi) Subscription Agreement; and

  286
  Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0004
  [17]) [Exhibit RR].

  287
  Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021 (WIT.0099.0006.0001 at 0003,
  [18]). [EXHIBIT M]

  288
  Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
  [16]) [Exhibit RR].

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• (vii) Board Resolutions.289

  (b) liaising generally with NRF regarding same;290

  (c) attending meetings with Secretary Vele, Mr Mortensen, Mr Chang, Mr Maladina,
  Mr Latimer and Mr Jilek, at the PLG offices to discuss same;291 and

  (d) on 5 March 2014, Mr Asigau delivering a letter dated 4 March 2014, enclosing
  copies of transaction documents to State Solicitor.292

  21.48 Secretary Vele understood PLG to be local counsel for NRF. However, as NRF did not
  have an office in the Independent State at that time “our dealings with them were both as
  external counsel – foreign counsel and domestic counsel”.293

  21.49 On 20 March 2014, despite being engaged by NRF, PLG issued an invoice in the amount
  of K1,600,000.00 to Secretary Vele.294 The invoice did not set out specific hours worked
  by individual lawyers, although it is unclear whether this was required by the Department
  of Treasury prior to making payment. When examined on the reasoning behind the
  decision to issue invoices to the Independent State for payment rather than NRF, Mr
  Asigau observed:

  “It would be a little bit impractical for the client to pay our fees to Norton Rose in
  Australia and then for Norton Rose Australia to then send the money back to us. It

  289
  Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021 (WIT.0099.0006.0001 at 0004,
  [22]). [EXHIBIT M]

  290
  Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021 (WIT.0099.0006.0001 at 0004,
  [24]). [EXHIBIT M]

  291
  Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021 (WIT.0099.0006.0001 at 0004,
  [24]). [EXHIBIT M]

  292
  Affidavit in Response to Summons of Emmanuel Asigau sworn 9 June 2021 (WIT.0099.0006.0001 at 0005,
  [28]). [EXHIBIT M]

  293
  TS254.1-4 (30 April 2021).

  294
  WIT.0014.0015.0056.

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• would not make much sense to do that based on the effect issues that we would
  have.”295

  21.50 Of the K1.6 million paid to PLG by the Independent State, K1 million was paid directly
  to Mr Maladina296 for his role in referring work to the firm. PLG was paid K600,000 for
  approximately 3 weeks work.

  Mr Maladina

  21.51 Mr Maladina was a consultant lawyer with PLG during the relevant period of the UBS
  Loan.297 In his capacity as consultant, Mr Maladina was billed by PLG for use of office
  space, employed his own staff and paid for his own overheads.298 Mr Maladina was also
  a source of referrals for and, at times, a client of PLG:

  PLG has also had an association with Jimmy Maladina, who from time to time,
  has acted as a source of referred matters for various clients and as a consultant on
  transactions in which the firm was involved. Mr Maladina was at the time and is
  currently a client of PLG.299

  21.52 Mr Maladina’s involvement in the UBS transaction stemmed from a pre-existing
  professional relationship with Mr Latimer of NRFA. Mr Maladina described himself as
  Mr Latimer’s “point man” and “his contact in Port Moresby”.300

  295
  TS1572.21 (18 June 2021).

  296
  TS2270.21 (28 July 2021).

  297
  Affidavit in Response to Summons of Jimmy Maladina sworn 22 June 2021 (WIT.0101.0003.0002 at 0003 [3])
  [EXHIBIT III]

  298
  TS2501.26-30 (2 August 2021).

  299
  Affidavit in Response to Summons of John Donald Beattie sworn 13 June 2021 (WIT.0110.0003.0001 at 0003
  [15]) [Exhibit RR].

  300
  TS2507.35 (2 August 2021).

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• In or around late [September]301 2013 Mr Latimer approach[ed] me to see if we
  could work together if his firm North Rose Lawyers was successful in getting the
  mandate to work for the State of PNG on matters generally regarding the
  refinancing of the IPIC bonds from the Arabs.

  During these discussions I recommended that his firm, North Rose Lawyers
  engage the legal services of PLG as the local firm to advice on PNG Laws.302

  21.53 In his statement to the Commission, Mr Maladina described his role in the transaction:

  As a consultant with PLG I attended meetings and reviewed documents on the UBS
  transaction in consultation with Norton Rose Lawyers before these advices were
  provided to the State of PNG.

  … I verily believe that my role was purely providing legal advice in conjunction
  with PLG on the local laws and presenting the transaction documents before the
  State Solicitor for his advice and legal clearance.

  This is the extent of the role I played as a consultant in the UBS transaction.303

  21.54 Mr Beattie, appearing before the Commission described Mr Maladina’s role “ … as a
  consultant in a liaison type arrangement between the State agencies, UBS team, lawyers
  involved and other parties”.304

  21.55 Contemporaneous records of correspondence provided by PLG and NRF indicate that Mr
  Maladina’s role included:

  301
  TS2510.4-6 (2 August 2021).

  302
  Affidavit in Response to Summons of Jimmy Maladina sworn 22 June 2021 (WIT.0101.0003.0002 at 0004 [9-
  10]) [EXHIBIT III]

  303
  Affidavit in Response to Summons of Jimmy Maladina sworn 22 June 2021 (WIT.0101.0003.0002 at 0004 [12-
  14]) [EXHIBIT III]

  304
  TS.2461.17-18 (30 July 2021).

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• (a) reviewing and providing commentary on transaction documents to NRF through
  Messrs Beattie and Asigau305 and providing approvals of draft transaction
  documents;306

  (b) providing internal PLG advice on general transaction requirements;307

  (c) coordination with Secretary Vele and others in relation to the State’s conditions
  precedent;308

  (d) briefing Prime Minister O’Neill on progress of the UBS loan together with
  Secretary Vele;309

  (e) correspondence with and delivery of documents to the State Solicitor for his legal
  clearance;310

  (f) correspondence with Ashurst and UBS regarding requirements for contract
  completion;311

  (g) together with Nathan Chang attending to the logistics of the signing of various
  transaction documents by representatives of the Independent State;312 and

  305
  NRF.001.001.7065; NRF.001.001.6871

  306
  NRF.001.003.2935.

  307
  NRF.001.001.7064.

  308
  ASH.002.009.2313; NRF.001.001.6615.

  309
  NRF.001.001.7070;

  310
  NRF.001.004.3085; WIT.0099.0007.1100;

  311
  ASH.002.009.2930.

  312
  ASH.002.002.7438 at 7439; NRF.001.003.2932; NRF.001.003.4739

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• (h) notifying Prime Minister O’Neill that payments under the UBS Loan would be
  made monthly, requesting use of Oil Search dividends for use as first payment.313

  21.56 While it might be the case that Mr Maladina was not formally employed as a lawyer he
  was still exerting some control over the advice issued by PLG. Mr Maladina’s own
  evidence indicates that prior to PLG issuing a legal opinion or correspondence relating to
  “other practical issues … as to matters on UBS transaction either John or Emmanuel
  always consults me before they move things or release them from the office, yes”.314
  However, as Messrs Beattie and Asigau were the lawyers on record, all correspondence
  was issued in their names.

  21.57 Between 10 May 2013 and 31 December 2014, Mr Maladina was the holder of a
  restricted practicing certificate under the Lawyers Act 1986.315 Mr Maladina gave
  evidence he was nominally employed by Twivey Lawyers for the purposes of his
  unrestricted practising certificate.316 Mr Maladina does not appear to have provided any
  legal advice directly to NRF, rather issuing advice to a Partner of PLG who then provided
  it to NRF.

  21.58 Evidence before the Commission indicates that in April or May of 2014, upon payment of
  its K1.6million invoice, PLG paid K1 million to Mr Maladina. Mr Maladina gave
  evidence that the payment from PLG would have been paid to either Flavalea Limited or
  Property and Investment Consultant Limited.317 Mr Maladina is the sole Director and

  313
  NRF.001.004.3145.

  314
  TS2517.37-39 (2 August 2021).

  315
  Exhibit III.2 (WIT.0101.0004.0003); Exhibit III.3 (WIT.0101.0004.0004).

  316
  TS2677.1-10 (6 August 2021).

  317
  TS2503.27 (4 August 2021).

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• Shareholder of Flavalea Limited318 and a director and shareholder of Property and
  Investment Consultants Ltd.319

  21.59 This payment has been described as being both a referral fee and a fee for services. Mr
  Maladina in his appearance before the Commission noted that the figure was arrived at
  following discussions with Messrs Latimer and Beattie. Mr Maladina estimates his fees
  were between K900,000 and K1.2 million: ” … we agreed on a fixed figure, a ball park
  figure of a million kina and that is why I rendered that fee to Pacific Legal Group. I have
  no problems I believe I earned that money.”320

  21.60 Mr Maladina gave evidence that his hourly rate in 2013/2014 was between K1,000 and
  K,1500 per hour.321 Mr Maladina stated that he no longer holds records of the time spent
  on the matter. However, it appears accurate time records were not kept as Mr Maladina
  indicated ” … I do estimations sometimes and I put it on a weekly basis into the record …
  “.322

  KPMG

  21.61 KPMG was initially contacted on 26 February 2014 by Mr Latimer of NRFA with a
  proposed scope of work. Mr Latimer noted:

  “In essence the State is requesting KPMG to advise the State on a monetised collar
  currently being contemplated by the State.”323

  318
  View Local Company (ipa.gov.pg).

  319
  View Local Company (ipa.gov.pg).

  320
  TS2511.35-40 (4 August 2021).

  321
  TS2550 (4 August 2021).

  322
  TS2513.23-24 (4 August 2021).

  323
  Email A Latimer to M Blake (part of broader internal KPMG email chain), 26 February 2014, PNG State –
  Proposed scope of work, KPM.0001.0001.0804 at 0806.

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• 21.62 Later that day Mr Blake advised Mr Latimer that Mr David Heathcote the Head of
  KPMG’s Transaction Services business would lead the KPMG team on this matter.324

  21.63 Mr Mortensen of Pertusio Capital was also involved in instructing KPMG and gave
  evidence that KPMG was engaged because of:

  … the need to have the financial modelling of the collar loans validated from the
  logic and accuracy plus also validating some of the work that had been done in
  relation to pay-off diagrams. Pay-off diagrams being what happens in the Oil
  Search share price become XYZ during the tenure. So, KPMG’s involvement there
  was to provide that sign off or as to logic and accuracy of the modelling as well as
  some analysis of the consequences of various collars as well as various exposed
  outcomes.325

  21.64 On 28 February 2014, representatives of KPMG, Mr Mortensen and Mr Latimer attended
  the UBS offices in Sydney to review the collar loan facility.326

  21.65 On 4 March 2014, KPMG issued a formal engagement letter to Secretary Vele, later
  executed on 6 March 2014.327 The engagement letter identified KPMG’s scope of work
  as:

  (a) reviewing the terms of the Collar and associated bridge loan to provide a summary
  to the Department of Treasury; and

  (b) providing analysis of:

  324
  Email M Blake to A Latimer (part of broader internal KPMG email chain), 26 February 2014, RE: PNG State –
  Proposed scope of work, KPM.0001.0001.0804 at 0806.

  325
  TS2662.42-TS2663.7 (3 August 2021).

  326
  Email C Roberts to A Latimer, 28 February 2014, RE: KPMG meeting, NRF.001.001.6562; Email V Casamento
  to J Ng, 28 February 2014, RE: Finance docs – UBS Bridge Facility NRF.001.001.6609; KPMG engagement letter
  executed by Mr Vele, 6 March 2014, KPM.0001.0001.0087; TS2662.42 – TS2663.7.

  327
  KPMG engagement letter executed by Mr Vele, 6 March 2014, KPM.0001.0001.0087.

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• (i) any downside price protection imbedded in the Collar;

  (ii) any potential value foregone imbedded in the Collar under various agree
  scenarios;

  (iii) commercial and economic risks associated with the Collar;

  (iv) the effective cost of financing for the Department of Treasury implied
  through the Collar under various agreed scenarios; and

  (v) the pricing mechanics of the Collar and comment on the comparison to
  “fair market value” (taking into account notional size and market liquidity).

  21.66 KPMG was required to complete the above scope of work between 28 February 2014,328
  when they were notified they would be engaged, and 6 March 2014 when they provided
  their final advice.329 Internal KPMG correspondence indicates that, given the short time
  frame, their advice was limited to a high level commentary of the UBS Loan.330

  21.67 The Independent State paid KPMG AUD166,221.00 for the work completed.331 These
  funds were paid out under the Bridge Facility Agreement – Drawdown Notice.332

  21.68 No public tender took place as required by the PFMA. The Commission has not been
  provided with evidence of the criteria on which KPMG was evaluated prior to their
  engagement. No evidence has been provided to the Commission that inquiries were made
  with any other financial advisory firm.

  22. TOR 1(s): Which individuals or organisations benefitted from the UBS Loan or
  related transactions.

  328
  KPM.0001.0001.0800.

  329
  KPM.0001.0001.0197; KPM.0001.0001.0198.

  330
  NRF.001.002.5425.

  331
  KPM.0001.0001.0071; NRF.001.002.7826.

  332
  Bridge Facility Agreement – Drawdown Notice, WIT.0015.0002.1265 at 1266.

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• 22.1 The following parties benefited in the ways set out below. The notion of ‘benefit’ does
  not connote inappropriateness unless otherwise stated.

  22.2 Oil Search. The transaction enabled it to buy the PAC LNG companies. However, it had
  alternative plans to raise the finance necessary for these acquisitions. The UBS Loan and
  associated placement of shares with the State was therefore not its only route into PRL-
  15.

  22.3 UBS. UBS amply benefited from the UBS Loan through fees charged to the State, the
  payment of interest and inappropriately from the unfair pricing of the loan and the
  misleading nil premium representations. Its fees for the March 2014 transactions
  amounted to AUD28.4 million. UBS also benefited from the refinancings in December
  2014 and February 2016 (although it did not charge fees for those transactions) as well as
  from the ultimate sale of the shares in September 2017. Its excessive or overcharging
  amounts to AUD180 million as explained in detail by Brattle which should be repaid.

  22.4 The State’s advisers. The State’s advisers received significant fees for their work on the
  transaction. Some of these fees appear to be out of proportion to the work done by the
  advisers concerned:

  22.5 KPMG were paid AUD166,221.

  22.6 NRFA were paid AUD600,000.

  22.7 Pacific Legal Group were paid K1.6 million. At the time, this was about AUD678,000
  and therefore more than NRFA was paid for a lesser role in the transaction. Of this sum
  K1 million was paid to Jimmy Maladina. There is no evidence of work by him that
  would justify a fee of this amount although he sought to explain it by saying that it
  reflected a longer period of work that just work on the transaction. He said that he agreed
  his fee with Mr Latimer of NRFA and Mr Beattie of Pacific Legal Group.

  22.8 Pertusio Capital was paid K1.25 million.

  22.9 Mr Vele was authorised by the State to pay these fees using a quantum meruit assessment.
  Mr Vele admitted in his evidence that he did not understand what this required and simply
  paid the advisers the fees that they had requested. For Pacific Legal Group, there was no

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• fee agreement and no information provided with the invoice to explain how it was
  calculated yet Mr Vele approved it without question. In our submission, the fees seem to
  have been agreed without reference to time spent on the matter. Mr Vele failed to assess
  them on a proper quantum meruit basis. In any event we repeat our earlier submission
  about the unfortunate perception of Mr Vele, as a public official, personally authorising
  payment to his former business partners, when others could have done so.

  22.10 Ashurst. Ashurst provided legal advice to UBS but their fees were paid by the State by
  being included in the Bridge Loan. Ashurst were paid AUD812,500.

  23. TOR: 1(t) What would the State’s (and its government owned enterprises) financial
  positions have been had the UBS loan to purchase Oil search shares and the
  purchase of oil search had not been entered into?

  23.1 Brattle have assessed the total loss to the State as AUD340.3 million. This is made up of
  the AUD336.3 million that they identified in their third report and a further AUD4 million
  of professional fees incurred by KPHL of which Brattle was unaware until Mr Sonk gave
  evidence of this.

  23.2 The principal loss of AUD336.3 million arises as follows, with numbers in brackets
  showing payments to the State:

  Item AUD million

  Bridge Loan interest payments 22.0

  Dividends (23.2)

  March 2014 Bridge Loan extension fee 5.0

  Funds from Letter of Credit 270.3

  Front Collar Additional Consideration 97.4
  Amount

  Unwind payment from February 2016 (35.1)
  Collar Loan

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• Total 336.3

  23.3 The loss can also be shown in another way, looking at what it would have cost the State to
  hold the Oil Search shares if the transactions with UBS had been fairly priced. In Brattle’s
  opinion, the State actually paid a net AUD80.9 million to UBS, but if the transactions had
  been fairly priced the State would have received AUD94.0 million from UBS. Thus the
  transactions in aggregate transferred AUD174.8 million of value from the State to UBS.

  Item AUD million

  Purchase Oil Search shares at AUD8.20 1,225

  Fair value of the UBS transactions (94.0)

  Value transferred to UBS 174.8

  UBS Bridge Loan fee 11.7

  UBS advisory fees 16.5

  Other fees 3.1

  Sell Oil Search shares at AUD6.70 (1000.9)

  Total 336.3

  23.4 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, giving a total loss of between AUD261.2 million and
  261.9 million plus whatever proportion the AUD4 million of KPHL professional fees
  would still have been incurred.

  23.5 If the State had allowed the February 2016 loan to expire according to its terms rather
  than closing it out in September 2017, the loss to the State would have been AUD51
  million less, giving a total loss of between AUD285.3 million plus whatever proportion
  the AUD4 million of KPHL professional fees would still have been incurred.

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• 23.6 If the State had not entered into the UBS loan and avoided these losses, and those funds
  could have been put into an operational sovereign wealth fund, from Brattle’s fourth
  report, it would appear that they would have generated a return of between 2% and 9%.

  Sovereign Wealth Fund

  23.7 Evidence before the Commission indicates that the establishing legislation for a Papua
  New Guinea Sovereign Wealth Fund has already been passed by Parliament. However,
  few steps have been taken in the past 7 years to implement that legislation and get a
  Sovereign Wealth Fund operational.

  23.8 The Prime Minister, the Honourable James Marape MP gave evidence before the
  Commission that it is his Government’s policy to make the Sovereign Wealth Fund
  operational when possible. 333 The Prime Minister noted however that administrative
  requirements for the establishment of the Trust and the appointment of the Sovereign
  Wealth Fund Board have not yet been attended to. A priority for the State was ensuring
  that it “set up a solid structure for the Sovereign Wealth Fund”. 334

  23.9 The Prime Minister’s predecessor, Mr O’Neill, in his evidence to the Commission also
  endorsed the State taking steps to implement the Organic Law on Sovereign Wealth
  Funds. 335

  23.10 In this regard, the Commission received important evidence from Professor Sir Tim
  Besley and Mr David Murray AO. Professor Besley is presently a Professor at the London
  School of Economics with expertise in economic policy formulation. Mr Murray has had
  a significant career in the Australian banking industry culminating in 13 years as the CEO
  of Commonwealth Bank of Australia and being later appointed the inaugural Chair of the
  Australian Sovereign Wealth Fund (called the Future Fund) and he also served as Chair of
  the International Forum of Sovereign Wealth Funds.

  333
  Transcript 31 January 2022 of the Prime Minister the Hon James Marape MP, TS3539.18.

  334
  Transcript 31 January 2022 of the Prime Minister the Hon James Marape MP, TS3541.37-38. .

  335
  Transcript, Peter O’Neill, 7 February 2022, p 3752.

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• 23.11 Professor Besley and Mr Murray agreed that the Sovereign Wealth Fund did present an
  opportunity for the State. However, they did note some potential challenges.

  23.12 Mr Murray noted that significant amount of time had passed since the Organic Law on the
  Sovereign Wealth Fund was first approved by Parliament and that the position of the
  State had changed. In 2015, it was customary for countries in the position of Papua New
  Guinea for money to flow into a stabilisation fund which would smooth the budget due to
  the fluctuating nature of commodity prices. Then money would flow from that fund into a
  savings fund. 336

  23.13 Since that time a number of complicating factors have arisen in Papua New Guinea
  including:

  (a) Government debt as a proportion of GDP has risen significantly;

  (b) it has a B- credit rating implying a very high interest rate premium; and

  (c) it has a real bond rate of 6%.337

  23.14 Each of these factors, Mr Murray, noted would necessitate the Government first
  prioritising fiscal consolidation, repayment of debt and restating fiscal policy. 338

  23.15 Both Professor Besley and Mr Murray observed that the position of the State’s
  institutional framework on the corruption index needed to be addressed to ensure
  international credibility.

  23.16 Professor Besley also noted that to improve overall condition it would be key for the State
  to prioritise developing a strong private sector to develop the economy across the board
  but that this could not be achieved in the absence of effective management of public

  336
  Transcript 10 February 2022, TS3990.5-10.

  337
  Transcript 10 February 2022, TS3990-3991.

  338
  Transcript 10 February 2022, TS3991.6-7.

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• resources. Merely creating a SWF will not fix these problems. 339 Professor Besley also
  noted the need to determine whether the establishment of a SWF would result in the best
  return on assets compared to improving the fiscal position by using the resources in the
  State’s possession more wisely.

  23.17 Speaking more broadly on the topic of corruption Professor Besley said the State’s place
  on the corruption index is a reflection of the inadequate structures in place for
  transparency. Professor Besley, while emphasising the need for the State to develop a
  bespoke and responsive approach to corruption340 best suited to address its needs, noted
  that properly functioning Parliamentary Committees had an important role to play in
  providing oversight and scrutiny. 341

  23.18 To negative perceptions of corruption Mr Murray suggested the appointment of a panel of
  experts under the auspices of the IMF, World Bank or Asian Development Bank to
  review the formula under which funds would flow from the State’s budget to the SWF’s
  stabilisation fund or savings fund. This panel could be charged with recommending:

  (a) how funds flow from the budget into normal budgetary expenditure;

  (b) defining how SoE’s should operate in terms of returns, dividend payments, new
  investments and indebtedness; and

  (c) how given all of that funds would flow into the stabilisations funds or savings
  funds. 342

  Conclusion

  23.19 Ultimately, the question of whether the Commission recommends the establishment of the
  Sovereign Wealth Fund is a matter for you Commissioners. It is the view of Counsel

  339
  Transcript 10 February 2022, TS3991-3992.

  340
  Transcript 10 February 2022, TS3993.

  341
  Transcript 10 February 2022, TS3994.16-17.

  342
  Transcript 10 February 2022, TS3996.

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• Assisting the Commission that the State is best served from the Sovereign Wealth Fund
  becoming operational as soon as practicable. But we do rate the impact of perception of
  official corruption on the capacity of the State to obtain investment and loans.

  24. TOR: 1(u) The history of the Elk/Antelope PDL and PRL; (v) The approvals
  process for PRL-15; and (x) Which entities have interests in Elk-Antelope PRL-15
  since its inception

  24.1 Before setting out the history of PRL 15, it is relevant to refer to the entities and people
  involved in the companies that held interests in it.

  24.2 Mr Carlo Civelli is a Swiss citizen,343 residing at the material time in Singapore and later
  Monaco.344 Mr Civelli founded Clarion Finanz AG, an asset management services firm
  incorporated in Switzerland.345

  24.3 Mr Philippe Mulacek is a US citizen346, who considers himself a resident of Singapore.347
  Mr Mulacek founded InterOil and was its CEO until around 6 May 2013.348 InterOil was
  a Yukon Territory, Canadian corporation.

  24.4 The nature of the business relationship between Mr Civelli and Mr Mulacek was the
  subject of a decision of the High Court of Singapore.349 The relevance of the Singapore
  proceeding is that on either party’s case, Mr Civelli had de facto control of InterOil shares
  and money from 2002 to 2014.350 Through subsidiaries, InterOil applied to be granted the
  full title to PRL 15 in 2009. It later divested its interest in PRL 15. At the same time that

  343
  Civelli v Mulacek [2019] SGHC 182, [4].
  344
  Ibid [4].
  345
  WIT.0030.0004.0010 at 5.
  346
  Civelli v Mulacek [2019] SGHC 182, [4].
  347
  Civelli v Mulacek [2019] SGHC 182, [4].
  348
  Cf Form 6-K filed with the SEC dated 6 May 2013 (link) and Form 6-K filed with the SEC dated 7 May 2013
  (link).
  349
  Civelli v Mulacek [2019] SGHC 182. Note that appeals were dismissed by the Court of Appeal of Singapore in
  Mulacek v Civelli [2020] SGCA 59.
  350
  Civelli v Mulacek [2019] SGHC 182, [4]–[7].

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• Mr Civelli had de facto control of InterOil shares, he also controlled a group of
  companies which became known as the PAC LNG companies. The PAC LNG
  companies held interests in PRL 15 from 2009 until mid-2014 when those interests were
  sold.

  24.5 Given that Mr Civelli had control of InterOil shares and the PAC LNG companies, much
  of the proceeds of sale of PRL 15 interests held by InterOil and the PAC LNG companies
  would have been received by entities under Mr Civelli’s control.

  24.6 A notable feature of the evidence in this Commisison 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.

  Issue of PRL 15 by the State in 2010

  24.7 A Petroleum Retention Licence (PRL) allows the licence holder(s) to carry out work to
  evaluate the commercial and technical options for developing the underlying resource
  (including whether it is worth developing at all).351 Essentially a PRL will be granted
  where an oil or gas field is known to exist, but its commercial viability is not yet
  established.352

  24.8 PRL 15 covers a gas field in the Gulf Province called Elk-Antelope. Commercial
  development of the Elk-Antelope field has been called the Papua LNG Project (not to be
  confused with the PNG LNG Project).

  351
  Department of Petroleum and Energy, Petroleum Policy Handbook (November 2005,
  <https://petroleum.gov.pg/wp-content/uploads/2020/02/PNG-Petroleum-Policy-Handbook.pdf>) page 11 [2.6].
  352
  Oil and Gas Act 1998, s 39(1); Department of Petroleum and Energy, Petroleum Policy Handbook (November
  2005, <https://petroleum.gov.pg/wp-content/uploads/2020/02/PNG-Petroleum-Policy-Handbook.pdf>).

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• 24.9 In 2005, InterOil entered an indirect participation agreement (and amendments of the
  same) (IPI) with various investors. The purpose of the IPI was for InterOil to raise funds
  for its exploration drilling program in the State. Under the IPI, the investors paid money
  to InterOil in return for InterOil granting the investors a right to convert their share in the
  IPI into a direct interest in the licences covered by the IPI (including what is now PRL 15
  which was ultimately issued out of Petroleum Prospecting Licences (PPL) 237 and PPL
  238). Clarion Finanz AG was a party to the IPI as an investor.353

  24.10 On 5 August 2009, SPI (208) Limited (a PNG incorporated subsidiary of InterOil) (SPI
  208) lodged an application to be granted the title to PRL 15.354

  24.11 In August 2009, SPI (208) and SPI (220) Limited (another PNG incorporated subsidiary
  of InterOil) agreed to sell to Pacific LNG Operations Limited BVI, a British Virgin
  Islands Company, (PAC LNG Operations) a 2.5% interest in PRL 15.355 The transfer
  was subject to Papua New Guinea Ministerial approval.356

  24.12 The State subsequently issued PRL 15 to SPI 208 on 30 November 2010.357

  24.13 In June 2011, SPI (208) agreed to transfer a 2.5% interest in PRL 15 to Pac LNG
  Operations. Approval of the transfer pursuant to the Oil and Gas Act 1998 was approved
  on 14 December 2011 and the transfer was entered into the register the following day.358

  24.14 On 21 May 2012, PAC LNG Operations transferred its 2.5% interest to its subsidiary,
  PAC LNG Investments Limited (PAC LNG Investments), a company incorporated in
  Papua New Guinea.359

  353
  WIT.0042.0007.0766, page 37.
  354
  WIT.0042.0005.0009, page 3.
  355
  Referred to in Instrument of Transfer of PRL 15 dated 11 June 2011, WIT.0042.0003.0542, page 12.
  356
  WIT.0042.0003.0542, page 13.
  357
  Referred to in Amendment No. 2 to Amended and Restated Indirect Participation Interest Agreement dated 24
  July 2012, WIT.0042.0007.0875, page 3, Recital B.
  358
  WIT.0042.0003.0542, page 9.
  359
  WIT.0042.0007.0043.

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• 24.15 The IPI was amended and restated on 24 July 2012.360 The list of investors is different
  from the IPI explained above. Relevantly, PAC LNG Operations is listed as an investor
  in the amended and restated IPI.361

  24.16 On 26 September 2012, SPI 208 and PAC LNG Operations entered into an agreement
  entitled Elk/Antelope Joint Venture Operating Agreement (PRL 15 JVOA). The PRL 15
  JVOA provided for the rights and obligations between the PRL 15 JVOA parties in
  developing PRL 15, including the sharing of costs and profits. It provided for SPI (208)
  to be the operator at the date of the agreement.

  24.17 On 25 March 2013, SPI (208) transferred further interests totalling 20.33% to PAC LNG
  companies.362

  History of Oil Search’s negotiations regarding PAC LNG and PRL 15

  24.18 Mr Botten’s evidence was that during most of 2011 and early 2012, the State and Minister
  Duma publicly admonished InterOil for its recalcitrance in moving the PRL 15
  development ahead. In May 2012, Minister Duma formally issued a 120 day notice to
  InterOil in respect of breaches of the project agreement.363 Mr O’Neill’s evidence was
  similarly that the government was concerned that the project was not being developed.364

  24.19 Mr Botten’s said that, in mid-May 2012, against the backdrop of a rapidly deteriorating
  relationship between InterOil and the PNG Government, Oil Search was made aware that
  InterOil was running a competitive bidding process for the sale of its interest in PRL
  15.365

  360
  WIT.0042.0007.0875.
  361
  WIT.0042.0007.0875, pages 3–4.
  362
  (a) 6.75% interest in PRL 15 to PAC LNG Assets Limited; (b) 5.1% interest in PRL 15 to PAC LNG
  International Limited; (c) 5% interest in PRL 15 to PAC LNG Overseas Limited; and (d) 3.485% interest in PRL 15
  to PAC LNG Holdings Limited.
  363
  Further statement of Peter Botten dated 27 January 2022 at [51] PNG government still aims to deliver InterOil
  project – Keith Jackson & Friends: PNG ATTITUDE
  364
  Transcript of evidence of Peter O’Neill at [3763] (7 February 2022).
  365
  Further statement of Peter Botten dated 27 January 2022 at [51] (WIT.0021.0006.0001).

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• 24.20 During the period from 2012 to 2014 Oil Search engaged in negotiations with several
  parties, including InterOil and the Pac LNG companies, concerning a possible acquisition
  of an interest in PRL 15.366

  24.21 The negotiations culminated in a joint bid made by Oil Search and Total for either 100%
  or 85% interest in PRL 15 in August 2012, with revised joint bids made throughout 2013
  until the announcement in early December 2013 by InterOil that Total were the successful
  bidder of PRL-15, which resulted in the Total SPA. In accordance with agreements that
  were already in place, Oil Search proceeded with negotiations to acquire a 5% (net)
  interest in PRL 15 from InterOil and a 10% (net) interest in PRL 15 from Total. Mr
  Botten says negotiations between InterOil and Oil Search stalled in January 2014 because
  InterOil insisted on increased consideration terms.367

  24.22 In early February 2014 negotiations between Oil Search and the Pac LNG companies
  regarding PRL-15 recommenced when Mr Civelli, on behalf of the PAC LNG
  Companies, approached Oil Search in early February 2014.368 These negotiations led to
  the transaction by which Oil Search acquired those companies. Mr Botten’s evidence
  was:369

  During these negotiations Mr Civelli said to me words to the effect that the Prime
  Minister and PNG Government supported the transaction. By this I understood
  Mr Civelli to mean that the Prime Minister and the PNG Government had no
  objection to Oil Search acquiring a stake in PRL 15 by acquiring the Pac LNG
  companies if such a transaction were to eventuate. This was consistent with
  discussions I had with Prime Minister O’Neill in which he supported the
  engagement of Oil Search with the Pac LNG companies as a means to address an
  impasse that had arisen between the Pac LNG companies and InterOil as a result
  of a reluctance on Mr Civelli’s part to sell the Pac LNG companies to InterOil

  366
  Further statement of Peter Botten dated 27 January 2022 at [55] (WIT.0021.0006.0001).
  367
  Further statement of Peter Botten dated 27 January 2022 at [55] (WIT.0021.0006.0001).
  368
  Further statement of Peter Botten dated 27 January 2022 at [69] ,WIT.0021.0006.0001.
  369
  Further statement of Peter Botten dated 27 January 2022 at [56], WIT.0021.0006.0001.

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• 24.23 Mr Botten says there would have been many discussions between representatives of Oil
  Search and representatives of the PNG Government about PRL 15 prior to 22 February
  2014. A common subject in those discussions was concern about the lack of progress and
  Oil Search’s interest in acquiring an interest in PRL 15.370

  24.24 Mr O’Neill denied any knowledge that Oil Search wished to raise money in issuing shares
  to the State to acquire interest in PRL15 or that he had any dealings with Mr Civelli.371
  Mr O’Neill said the basic knowledge that the government or the leaders had was that Mr
  Mulacek was the principal behind InterOil.372 But Mr Maladina subsequently gave
  evidence that Mr O’Neill and Mr Civelli, in the company of Mr Mulacek, had met on at
  least two occasions.373

  24.25 On 25 February 2014, Oil Search agreed to purchase the PAC LNG companies that
  together held 22.835% in PRL 15 for USD 900 million.374 In its 2014 annual report, Oil
  Search explained that it funded this purchase by the sale of shares to the State.375 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.376 You would reject this evidence.

  24.26 Mr Botten says Oil Search acquired the Pac LNG companies, rather than a direct
  participating interests in PRL 15, as this provided the owners of the Pac LNG companies
  with a complete exit (which was something that all parties wanted), meaning that any
  pre–emption rights were not triggered. It also allowed Oil Search, through its ownership
  of the Pac LNG companies, to became a party to the existing PRL 15 JVOA.377

  370
  Further statement of Peter Botten dated 27 January 2022 at [51] – [52], WIT.0021.0006.0001.
  371
  Transcript at 3770 – 3771 (7 February 2022)
  372
  Transcript of evidence of Peter O’Neill at [3763] (7 February 2022)
  373
  Affidavit of Jimmy Maladina dated 9 February 2022, WIT.0101.0005.0001.
  374
  Oil Search ASX release ‘Oil Search to acquire interest in PRL 15’ (27 February 2014, link).
  375
  Oil Search Annual Report 2014 (link), page 73.
  376
  Transcript of evidence of Peter O’Neill at [3764] (7 February 2021)
  377
  Further statement of Peter Botten dated 27 January 2022 at [59], WIT.0021.0006.0001.

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• 24.27 On 28 February 2014, SPI (208) Limited agreed to transfer 40.127529% of its interest in
  PRL 15 to SPI (200) Limited.378 The sale price was a nominal price of PGK 10. The
  agreement was approved by the Honourable Nixon Duban MP (then-Minister for
  Petroleum and Energy) on 6 March 2014 and entered into the register on 7 March
  2014.379

  24.28 Accordingly, the Commission understands that PRL 15-ownership as at 7 March 2014
  was as follows:380

  (a) 77.165% held by InterOil subsidiaries:

  (i) SPI (208) Limited – 35.483871%;

  (ii) SPI (200) Limited – 40.127529%;

  (iii) SPI Security Holdings Limited – 1.5536%;

  (b) 22.835% held by Oil Search through the PAC LNG Companies.

  24.29 As a result of Oil Search acquiring the PAC LNG companies’ interest on 25 February
  2014, the Total SPA could not be completed because the Total SPA was contingent on
  InterOil acquiring the minority interests in PRL 15 from the PAC LNG companies.
  InterOil and Total subsequently entered into another transaction, announced on 26 March
  2014, whereby a subsidiary of the Total SA Group agreed to purchase an InterOil
  subsidiary that held a 40.1% participating interest in PRL 15 for USD 540.1 million.

  24.30 While Oil Search disputed the validity of Total acquiring 40.1% of PRL 15 through
  purchasing SPI (200) Limited and the dispute was referred to an arbitration sitting in
  London before the International Court of Arbitration of the International Chamber of
  Commerce, the Total SPA was subsequently given effect by instrument of transfer and
  registration with the State.

  378
  WIT.0042.0003.0542, page 3.
  379
  WIT.0042.0003.0542, page 1.
  380
  WIT.0042.0003.0542, page 6.

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• 25. TOR (w): The scale and quantity of the PRL 15 resource

  25.1 The scale and quantity of the PRL 15 resource has been queried.

  25.2 For example, the Commission was provided with a report known as the “Sarkal report”
  which concluded that the Elk-Antelope gas field, contained within PRL 15, may contain
  no more than 0.52TCF381 of recoverable gas.382

  25.3 The Commission summonsed various relevant reports and engaged an independent
  expert, Dr John Hornbrook from DeGolyer and MacNaughton, to give his opinion on the
  reasonableness of the evaluations of the gas resource in the reports and provide a review
  of the Sarkal report.

  25.4 Dr Hornbrook concluded that, in general, the various estimates of raw gas resources
  associated with the Elk-Antelope gas field are consistent and that variations in estimates
  over time are in line with variation that should be expected with additional data and / or
  additional analysis. Dr Hornbrook noted that the “best estimate” of gross raw gas
  resources had ranged from 9.08TCF (31 December 2009), to 6.60TCF (31 December
  2011), to 7.00TCF (31 December 2013), to 6.80TCF (30 June 2016), to 6.35TCF (31
  October 2021). Dr Hornbrook noted that, while he did not have sufficient data to
  independently review the specific calculations, the evaluations followed industry standard
  procedures.383

  25.5 In relation to the Sarkal report, Dr Hornbrook disagreed with the report’s conclusion of a
  “gas initially-in place” of 0.52TCF. In Dr Hornbrook’s view, this was likely to be a
  significant underestimate.384

  381
  TCF or TSCF = trillion cubic feet.

  382
  WIT.0148.0001.1068, page 1.

  383
  WIT.0148.0001.0001 at .0002, pages 1-2.

  384
  WIT.0148.0001.0001 at .0002, pages 2-5.

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• 25.6 Oil Search also engaged an expert, Gaffney Cline & Associates (Gaffney Cline), to
  comment on the Sarkal report. The Gaffney Cline report also concluded that the Sarkal
  report’s gas initially-in place estimate of 0.52TCF was unrealistically low.385 The Gaffney
  Cline report concluded that there was nothing in the Sarkal report which caused it to
  change Gaffney Cline’s opinion that the best estimate of recoverable raw gas of the Elk-
  Antelope field is 6.8TCF as of 30 June 2016.386

  25.7 It is accordingly submitted that there has been no mis-representation of the size of the
  PRL 15 gas resource estimated in the various reports (other than the Sarkal report).

  26. TOR (y): Which individuals or organisations benefitted from the 2014 sale of PAC
  LNG Group of companies to Oil Search Limited and related transactions

  26.1 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.

  26.2 Shortly after 12 March 2014, Oil Search made the following payments from a USD
  account it held with Westpac Bank PNG Limited:387

  Payment to Beneficiary Amount (USD) %of
  total

  IPWI Partners LP IPWI Partners LP AUD 0.6776
  6,099,283.82 98

  John Mack John J Mack AUD 4.3528
  39,175,352.87 17

  385
  Gaffney Cline, ‘Comments on Sarkal Energy Report’, 1 February 2022, p 4 [12], OSL.5030.0001.0001 [12].

  386
  Gaffney Cline, ‘Comments on Sarkal Energy Report’, 1 February 2022, p 4 [12], OSL.5030.0001.0001 [7].

  387
  OSL.0019.0006.0243; OSL.0019.0006.0515.

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• Bruce Hendry Sawmill Trust AUD 4.3528
  39,175,352.87 17

  Pacific LNG Operations Limited Pacific LNG AUD 64.713
  Operations Ltd 582,425,889.33 9

  Aton Select Fun Ltd Aton Select Fund AUD 20.669
  Limited 186,026,644.12 63

  Papua’s Crude Investment Papua’s Crude AUD 1.7406
  Investment 15,665,401.61 00

  Polygon PNG LP Polygon PNG LP AUD 3.3762
  30,385,988.50 20

  King & Spalding LLP King & Spalding LLP AUD 0.0554
  498,653.36 06

  Baker Botts Baker Botts AUD 0.0372
  335,000.00 22

  Maples and Calder Maples and Calder AUD 0.0106
  96,087.37 76

  Leahy Lewin Nutley Sullivan Pacific LNG AUD 0.0129
  Lawyers Operations Ltd 116,346.15 3

  TOTAL AUD 100
  900,000,000.00

  Brattle’s Opinion

  26.3 Brattle considered whether the price paid by Oil Search for the interest in PRL 15 was
  objectively justifiable, assuming an arm’s length transaction between the buyer and seller.
  Brattle noted that the temporal proximity of the Total SPA and Oil Search purchase

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• indicated that they might expect the two transactions to have a similar price, having taken
  account of the differing sizes of the interests acquired.388

  26.4 Brattle noted that the sums paid were structured differently. Both had a fixed payment
  and then a variable component depending on the scale of the resource. Oil Search’s fixed
  payment was greater than Total’s but its variable payment less.

  26.5 Which price would ultimately be best would depend on the scale of the resource. If it
  were 7Tcf, then the prices paid were about the same. If the resource were smaller than
  that figure, Oil Search would have paid more. The position would reverse if the resource
  was greater than 7Tcf.

  26.6 Brattle concluded that they had not seen any evidence to suggest that the price paid by Oil
  Search was not justified and that the prices paid by Oil Search and Total were similar.389

  26.7 In February 2014, Oil Search estimated that the Elk/Antelope gas field contained 5.3Tcf.
  If that estimate was accurate, Oil Search would pay more than Total. According to
  Brattle 1, at that volume, Oil Search would pay USD0.74 per mcfe whereas Total would
  pay USD0.47.

  26.8 The strengths of Total and Oil Search’s negotiating positions would have been different.
  This is also likely to have been reflected in the prices ultimately agreed.

  27. TOR (aa) the rationale as to why the State/Kumul Petroleum Holdings Limited sold
  the Oil Search shares in 2017 and (bb) whether legal and administrative processes
  were followed in the sale of the Oil Search shares?

  The December 2014 Novation

  27.1 After the State entered into the UBS loan to acquire the Oil Search shares on 12 Mach
  2014, various other associated transactions occurred in the intervening period leading to
  the ultimate disposal of the shares in September 2017.

  388
  Brattle 1, page 67, Exhibit VV, WIT.0132.0001.0002.
  389
  Brattle 1, page 71, Exhibit VV, WIT.0132.0001.0002.

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• 27.2 The State was never able or intended to be the long term borrower from UBS, although it
  needed to be the initial borrower and shareholder in Oil Search. It could not have done so
  without breaching its debt to GDP ratio and it always intended to transfer the loan to
  another entity to remove the loan from the State’s balance sheet. As the loan was
  connected with the purchase of the Oil Search shares, it followed that the State’s rights in
  relation to the Oil Search shares should be transferred to the same entity.

  27.3 On 2 September 2014, the NEC issued decision 264/2014,390 pursuant to which the NEC
  acknowledged the establishment of NPCP Holdings Limited (which later changed its
  name to KPHL) as a wholly owned subsidiary of IPBC. It directed that all petroleum
  assets of the State, including the Oil Search shares held by the Department of Treasury, be
  consolidated into NPCP Holdings Limited and NPCP Kroton.

  27.4 By December 2014:

  (a) the UBS Bridge Facility component of the UBS loan had been novated from the
  State (NPCP Kroton) to KPHL;

  (b) the Bridge Facility component of the UBS loan had been discharged by repaying
  most of it through letters of credit and converting the remainder of the loan into a
  collar loan;

  (c) the Oil Search shares held by NPCP (Kroton) had been transferred to NPCP
  Holdings (which became KPHL).

  27.5 In short, both the asset (the shares) and the debt became the concern of NPCP (KPHL).

  NPCP/KPHL are reluctant shareholders

  27.6 Simply put KPHL never had an appetite to hold the Oil Search shares. Mr Sonk was quite
  definite about this. He said:

  (a) the Board of KPHL did not consider it part of their mandate ⎯ which was
  pursuant to section 7 of Kumul Petroleum Holdings Limited Authorisation Act

  390
  Affidavit of Wapu Sonk dated 21 June 2021, Exhibit FF, Annexure WRS-21, WIT.0036.0001.0321.

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• 2015 to hold and develop gas and oil interests, including participation in the
  exploration, development, production, processing, transportation and marketing of
  oil and gas products391 ⎯ to include holding shares for investment on behalf of
  the State, whether in Oil Search or any other company;392

  (b) from the outset, the board “never wanted KPHL to hold the Oil Search shares” and
  wished to dispose of them as the shares and their associated debt was a burden on
  KPHL;393

  (c) as a result the board of KPHL commenced looking for ways to dispose of the Oil
  Search shares almost as soon as they were novated to KPHL.394

  27.7 The evidence of Frank Kramer, the chair of NPCP Kroton, was to the same effect.395

  Structure of KPHL

  27.8 NPCP Holdings had originally been a subsidiary of IPBC which later changed its name to
  KPHL. In September 2015, this structure was changed as a result of the Kumul
  Petroleum Holdings Limited Authorisation Act 2015 (KPHL Act).

  27.9 By section 5 of the KPHL Act, the shares of NPCP Holdings (and its subsidiaries) were
  transferred to the Kumul Petroleum Trustee (Kumul Trustee) and NPCP Holdings’ name
  was changed to KPHL.

  27.10 The Kumul Trustee is the then current Prime Minister who holds the shares on trust for
  the benefit of the State.

  27.11 The KPHL Act limits the authority of the board of KPHL. Section 13 of the KPHL Act
  requires KPHL to prepare an annual plan which must then be approved by the Kumul

  391
  10 August 2021 statement [26-27], WIT.0132.0001.0002.

  392
  10 August 2021 statement [28], WIT.0132.0001.0002.

  393
  10 August 2021 statement [28], [32], WIT.0132.0001.0002.

  394
  10 August 2021 statement [34], WIT.0132.0001.0002.

  395
  Exhibit CCC, statement of Francis Kramer, 5 November 2020 [32], WIT.0037.0003.0002.

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• Trustee and the NEC. Section 13 also prohibits the board of KPHL from effecting
  transactions that total more than K10 million in any accounting period unless they are in
  accordance with the annual plan. The Kumul Trustee has the power to increase this
  amount to K25 million in any accounting period but that power has never been
  exercised.396

  27.12 To effect a transaction above the K10 million threshold, the board of KPHL must refer
  the matter to the Kumul Trustee (that is, the Prime Minister). The trustee then refers it to
  the NEC for approval. As Mr Wapu Sonk put it in his statement, the “effect of Section 13
  of the Act is therefore that any significant decision must involve the Prime Minister.
  Without the involvement of Trustee (PM), no major decisions of [KPHL] can be made.”397

  27.13 The Prime Minister is the trustee of the Kumul Petroleum Share Trust. The property of
  the Trust is broadly defined but essentially includes the entire share capital of KPHL and
  all rights and benefits attached to it, including dividend and other property.398 The
  beneficiary of the Trust is the State.

  27.14 Clause 7 and 8 of the Trust Deed provide for limitations on the liability of the trustee and
  an indemnities for any such liability. Importantly, the limitations and indemnities
  expressly do not apply in the event of “fraud, gross negligence, breach of trust or wilful
  default of the Trustee including as a result of breach of fiduciary duties”.

  396
  Evidence of Mr Sonk, T3101 (12 August 2021).

  397
  Exhibit NNN, Witness Statement of Mr Wapu Sonk dated 10 August 2021 [23] WIT.0036.0006.0004

  398
  KPHL Trust Deed (dated 26 May 2016) is at 10 August 2021 statement [15], WRS2-1, WIT.0132.0001.0002 (Affidavit),
  WIT.0132.0001.0002 (WRS2-1).

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• The February 2016 refinancing

  27.15 On 27 October 2015, NEC decision 308/2015 authorised KPHL to deal with the collar
  loans, including terminating the loans and disposing of the associated Oil Search
  shares.399

  27.16 Whilst KPHL was, pursuant to that decision, authorised to deal with the collar loans as it
  pleased, any such course required the approval of the Trustee, which, for the time being,
  was not forthcoming.

  27.17 In January 2016, the board of KPHL resolved to seek Mr O’Neill’s consent to unwinding
  the collar loans.400

  27.18 It is evident that Mr O’Neill refused this request because in February 2016, the March and
  December 2014 collar loans were refinanced again,401 with the new collar loan provided
  by UBS, but with JP Morgan providing some of the loan funds to UBS.

  27.19 It is unclear why KPHL elected to refinance the March 2014 and December 2014 collar
  loans rather than simply allowing them to mature.

  27.20 In their fourth report, Brattle assessed that if KPHL had done this, the loss that the State
  suffered as a result of the entire transaction, which Brattle assessed at AUD 336.3 million,
  would have been reduced by between AUD 74.4 and AUD 75.2 million, giving a reduced
  total loss to the State of AUD 261.2 to AUD261.9 million for the State. It is therefore
  clear that KPHL lost money by deciding to refinance. The principal components of this
  difference are that:

  (a) the State would have avoided paying UBS to unwind the March 2014 and
  December 2014 collar loans and, later, the February 2016 collar loan;

  399
  Bundle of Documents comprising 22 pages provided by Grace So-On, page 1 and see amendment dated 30 October 2015 at pages 13-14
  WIT.0016.0001.0747.

  400
  WIT.0036.0012.0003

  401
  Statement of Wapu Sonk 10 August 2021, Exhibit NNN [51] WIT.0036.0006.0004

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• (b) the State would have received different amounts in dividends. The dividend policy
  under the March 2014 and December 2014 collar loans was more generous to the
  State that the policy under the February 2016 collar loan, and

  (c) the State would have received payments from UBS as the March 2014 and
  December 2014 collar loans matured and the Oil Search shares were disposed of
  between March and July 2016.

  27.21 In addition to reduced losses, KPHL would have been freed of the loans and the shares,
  an objective that it wanted to achieve so that it could undertake other projects that fell
  more clearly within its mandate (in its view, holding Oil Search shares did not).

  27.22 The February 2016 refinancing was not fairly priced, according to Brattle, and favoured
  UBS. Whilst the interest rate in the February 2016 loan was reduced, it was still above a
  fair rate and the State received less than fair value when unwinding the March 2014 and
  December 2014 collar loans. Brattle estimated in their third report that a fair payment to
  unwind the March 2014 Collar Loan and December 2014 Collar Loan would have been
  AUD 127.9 million paid to KPHL as the rights that KPHL was releasing had value. A
  fair payment to refinance with the February 2016 Collar Loan would have been AUD
  191.0 million paid to UBS. On net, therefore, a fair payment would have been AUD 63.0
  million from KPHL to UBS. KPHL in fact paid AUD 101.8 million. Thus, in aggregate,
  these transactions transferred AUD 38.8 million of value from KPHL to UBS

  Attitude of the Trustee

  27.23 Throughout 2016, the Board of KPHL maintained their view of exiting the collar loans as
  soon as possible. For example, at a Board meeting on 28 January 2016 it resolved: “that
  the Managing Director should return to the Shareholder to seek endorsement for KPHL to
  unwind and not replace the existing equity collar on the basis that it is not commercially
  viable.”402

  402
  Kumul Petroleum Holdings Limited, Extract of Meeting Minutes – 28 January 2016, WIT.0036.0012.0003.

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• 27.24 According to Mr Sonk’s written evidence, KPHL received advice about the sale of the
  shareholding from a number of sources:403

  (a) From January 2015, it had received advice from Tony Kelly.

  (b) From about March 2017 to the sale of the shares in September 2017, KPHL’s
  primary adviser was Mr Robert Acevski, KPHL’s CFO.

  (c) From time to time, Mr Sonk would talk with Mr Jilek and Mr Turner of UBS.
  They would discuss the market, the performance of the options and when the right
  time to sell might be, amongst other matters.

  (d) By a letter dated 10 October 2015, Mr O’Neill had exercised his powers as trustee
  of KPHL to appoint Dr Jacob Weiss as economic and financial advisor to himself
  as trustee. The letter of appointment stated that Dr Weis was to be invited to all
  KPHL board meetings and have the right to express his views and advice to the
  board on economic and financial matters.404

  27.25 As mentioned above, KPHL required, in effect, Mr O’Neill’s approval as trustee to sell the
  Oil Search shares. Mr Sonk said that he had discussed the sale with Mr O’Neill over a
  lengthy period of time. His written evidence was:405

  (a) At the time of the 2016 refinancing of the collar loans, Mr Sonk and Mr O’Neill
  had several discussions in which Mr O’Neill had agreed that KPHL should unwind
  the collar loans if it was unable to refinance the loans with a cheaper and more
  traditional style of loan.

  (b) From those discussions, Mr Sonk was also aware that Mr O’Neill wanted the State
  to get out of the Oil Search shareholding because the collar loans were expensive

  403
  Statement of Wapu Sonk dated 10 August 2021 [42-46] Exhibit NNN, WIT.0036.0006.0004

  404
  Statement of Wapu Sonk dated 10 August 2021, Annexure 2-4, Exhibit NNN WIT.0036.0006.0063

  405
  Statement of Wapu Sonk dated 10 August 2021, [35]ff, [64]ff and [70]Exhibit NNN WIT.0036.0006.0063

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• for KPHL to maintain in comparison to the minimal returns on dividends and Mr
  O’Neill wanted KPHL to invest in the Papua LNG project.

  (c) Whilst there was no disagreement between Mr Sonk and Mr O’Neill about whether
  the shares should be sold, Mr O’Neill (in Mr Sonk’s estimation) saw a difficulty in
  managing this politically. This was not a concern of KPHL but because of Mr
  O’Neill’s dual roles as Prime Minister and Kumul Trustee and the scale of the
  transaction, KPHL had to wait for Mr O’Neill to give his approval to sell the
  shares.

  (d) KPHL was therefore seemingly waiting for the politics, share price and other
  factors to align before the shares could be sold. Mr Sonk noted that whilst the
  timing had to be right for KPHL, the primary consideration of Mr O’Neill, as Mr
  Sonk understood it, was a politically acceptable narrative.406

  27.26 Mr Sonk further explained in oral evidence:407

  Q. Well, the obvious question then, Mr Sonk, is if you already had approval – final
  approval from the NEC at the end of October 2015 to finally exit this transaction,
  why did it take until 2017 for you to actually exit the transaction?

  A: There were two in this transaction – there is two trigger points that we looked at.
  One was where is the share price and in relation to the put of $7.38. If it came below
  $7.38, we would exit without paying any more money; that was our target and also
  the political sensitivity around this decision because the same trustee made the
  decision to go in and the same trustee has made the decision to come out. So we were
  sensitive to something like that so we would be sensitive about making such a
  decision.

  …

  406
  Statement of Wapu Sonk dated 10 August 2021 [35-39] Exhibit NNN, WIT.0036.0006.0004

  407
  Evidence of Mr Sonk, T3108-3110 (12 August 2021).

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• Q. … So, let us just clarify this. The NEC decision that we were looking at was dated
  October 2015 so is your evidence that from somewhere even a little bit before
  October 2015, you had discussions with Prime Minister O’Neill that he wanted to get
  out of the Oil Search shareholding?

  A: He was prepared to get out hence these decisions, yes.

  Q: And that is only what 18 months after the transaction was entered into in the first
  place?

  A: Correct.

  Q: And why – so you have told us that one of the things that you were keeping an eye
  on was the share price but also you referred to the politics of it. Now, can I take you
  to paragraph 37. You say that what you understood from the discussions you had
  with Prime Minister O’Neill was that the issue was not disagreement about whether
  KPHL should dispose of the Oil Search shares but the difficulty the then Prime
  Minister saw in managing this politically. What did he say to you about the politics of
  this decision to sell Oil Search shares?

  A: It is just 2016 – he did not say, I am just – politics is around the corner in 2017.
  He did not say that but I am just saying that we saw it as him thinking about the
  consequences of 2017 politics when making these decisions in 2016.

  Q: You had regular discussions with the Prime Minister about this topic?

  A: Not about his politics and how to manage these things [but] about the shares, yes.

  Q: And that continued from the latter half of 2015 all the way to September 2017
  when the shares were finally sold, is that right?

  A: Correct

  Q: And you see paragraph 38, you say KPHL had to wait for Prime Minister O’Neill
  to give his approval to sell the Oil Search shares, without that approval KPHL could
  simply not sell I take it? So, again despite having the authorization to deal with the

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• shares, however you please, since October 2015 and the NEC decision, you say that
  you still needed Peter O’Neill’s approval to sell the shares?

  A: Yes. And also I do not think a lot of people, even the politicians and even the
  trustee maybe did not understand that the right time to sell was when the share price
  was at the put or below so we would not pay anything else and come out. That would
  look like we are selling at a loss and hard to message that was one of the difficulties.

  Q: And the issue of the share prices is something that you regularly kept the Prime
  Minister informed about?

  A: Correct. Well, discussions around that and where it is at.

  Q: You say in paragraph 29 that the timing had to be right for KPHL and I will just
  stop there, that is the share price. So in your mind the timing was timing in relation
  to share price, is that right?

  A: Correct.

  Q: And you said the primary concern for Prime Minister O’Neill was a politically
  accepted narrative, And what narrative is that?

  A: Narrative and explaining exactly why we are getting out and putting a positive
  spin when the share prices are below $8.20 that was announced in 2014 that we are
  getting into.

  27.27 However, Mr Sonk later clarified that he did not recall any actual conversations with Mr
  O’Neill about his need to manage the issue politically and that the only reasons Mr
  O’Neill gave for his position were that the collar loans were expensive in comparison to
  the returns on dividends and Mr O’Neill wanted KPHL to invest in the Papua LNG
  project.408

  408
  Statement of Wapu Sonk dated 22 February 2022, pp 5-6.

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• 27.28 When Mr O’Neill was asked whether his primary consideration as to when to sell the
  shares was a politically acceptable narrative he answered: “That is not quite true. A
  politically acceptable [sic] does not determine share prices. It will depend entirely on
  shares of value reflected on the stock market for Oil Search and that is for the Board to
  consider.”409 But the fact remains that the vital strategic need to own Oil Search shares
  disappeared very quickly – leaving not only large losses but the questions – what did the
  UBS Loan achieve – and what was it ever intended to achieve.

  27.29 On 1 August 2017, Mr O’Neill was formally re-elected as the Prime Minister. This
  development may have cleared the way for the sale of the Oil Search shares. However,
  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.”410

  27.30 KPHL obtained advice from Mr Tony Kelly on 10 August 2017 that:411

  (a) an Oil Search closing price of $6.48 was “in the money”;

  (b) KPHL could “request Early Termination of both Collar Loans” and “the Back
  Collar Confirmation Agreement… requires that all parties agree to each tranche
  termination date. In practice, this means that the banks need to be allowed to
  complete their Delta hedging programme underlying each Collar Loan in an
  orderly market. … the banks are obliged to notify [KPHL] of the settlement
  amount within [one] business day of the agreed Termination dates”;

  (c) KPHL would “receive back from UBS and JPM the pro rata amounts of pre-paid
  interest relating to the unexpired period of the two Collar Loans”; and

  (d) the “approximate amount of interest to be repaid [at a share price of $6.48] is
  A$20,878,656” and “the approximate net proceeds to KPHL of an early
  termination given today would be approximately A$155 million”.

  409
  Evidence of Peter O’Neill, T3783.

  410
  Evidence of Peter O’Neill, T3785.

  411
  WIT.0036.0007.0445.

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• 27.31 In his statement of 10 August 2021, Mr Sonk said that in or about August or September
  2017, he was told by his chairman, Sir Moi Avei, who had met with Mr O’Neill that
  KPHL could now sell the Oil Search shares. Sir Moi said that Mr O’Neill would manage
  the politics of the situation and defend the decision.412

  27.32 Sir Moi Avei provided a statement to the Commission dated 5 November 2020. The
  statement does not mention the meeting with Mr O’Neill or the instruction to Mr Sonk but
  states that at the 11 August 2017 KPHL board meeting, Mr Sonk recommended that he
  and Sir Moi should speak to Mr O’Neill as the Kumul Trustee about the risks and strategy
  KPHL should consider in advance of the maturity date.413

  27.33 When Sir Moi Avei gave oral evidence to the Commission, he denied that he had met Mr
  O’Neill to discuss the sale of the Oil Search shares.414

  27.34 The 19 September 2017 board meeting of KPHL approved the unwinding of the collar
  and sale of the Oil Search shares.415

  27.35 Mr Wato recalled that:416

  On 19 September 2019 [sic: 2017], the KPHL Board decided to seek the Prime Minister
  [sic] consent to the sale of the Oil Search shares, but defer seeking and obtaining the
  National Executive Counsel’s [sic] approval until after first selling the shares. Then
  subsequently seek the approval and ratification of the National Executive Counsel [sic].
  This was necessary to manage share price sensitivities in the market because any leakage
  of news that KPHL is about to sell the [Oil Search] shares would affect the [Oil Search]
  share price and have a negative impact on the margin due to KPHL from the sale or

  412
  Statement of Wapu Sonk dated 10 August 2021 [66] Exhibit NNN, WIT.0036.0006.0004

  413
  Statement of Sir Moi Avei dated 5 November 2020, Exhibit DDD, WIT.0074.0003.0002

  414
  Evidence of Sir Moi Avei, T2383

  415
  10 August 2021 statement [68], WIT.0036.0006.0004.

  416
  Statement of Rogen Wato dated 8 June 2021, Annexure RW-17 WIT.0038.0004.0004

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• might even result in a total loss. I understood that the Prime Minister’s consent to this
  approach was received prior to the Board’s decision to sell the shares in this way.

  27.36 Mr Sonk said the following in his statement to the Commission dated 13 November 2020:

  (a) Before 19 September 2017, he met with Peter O’Neill to discuss the possible sale
  of the Oil Search shares.417

  (b) On 19 September 2017, KPHL had a Special Board Meeting at which multiple
  options to reduce or cease the shareholding in Oil Search were canvassed.418 The
  board resolved to ‘authorise a physical unwind of the collar structure to allow the
  KPHL group to terminate the collar and for KPHL to have “no further exposure to
  the [shares]’.419

  (c) Between 19 September and 21 September 2017, Mr Sonk met with Mr O’Neill as
  the Kumul Trustee regarding the board’s decision to terminate the collar loans and
  sell the shares.420 No written approval of the sale was issued by Mr O’Neill.

  (d) KPHL announced its decision to sell the shares after the close of trading on 21
  September 2017.421

  (e) KHPL sold the shares held by Kumul Investments on 22 September 2017422 or 26
  September 2017.423

  27.37 Mr Sonk gave oral evidence to the Commission confirming that:

  417
  Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [142]

  418
  Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [144]

  419
  Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [146]

  420
  Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [148]

  421
  Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [149]

  422
  Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [125]

  423
  Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [150]

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• (a) He met Prime Minister O’Neill on 19 September 2017 to seek his consent to the sale of
  the Oil Search shares and unwinding the collar loans. He had some PowerPoint slides
  which he showed to Mr O’Neill that, in Mr Sonk’s view, demonstrated that it was the right
  time to sell the shares. Mr Sonk cannot now locate those slides.424

  (b) He had a second meeting with Mr O’Neill discussing the sale of the shares.425
  From paragraph 148 of Mr Sonk’s statement of 13 November 2020426, it would
  seem likely that this meeting took place on about 21 September 2017.

  27.38 In his statement of 10 August 2021, Mr Sonk stated that:427

  From in person discussions I understood that the then Prime Minister Peter O’Neill
  considered that he would be able to sell a narrative that the sale of the shares at that time
  was in fact “made money” [sic] because:

  (a) The sale was at above market price, being the difference between the market price of
  AUD$6.70 and the average strike price of the put options at AUD$7.38 creating what is
  described as a residual profit;[is this the difference between cash and ‘value’]

  (b) the sale generated AUD $35 million to KPHL comprising:

  (i) the “residual profit”; and

  (ii) refund of the pre-paid interest.

  27.39 Of course, far from making money the UBS Loan as a whole created a large loss.

  Sale of the Shares and unwinding the collar

  27.40 On 12 October 2017 NEC decision NG29/2017 authorised and ratified the sale KPHL’s
  revised operating plan together with a special dividend to the State of $31.5 million.

  424
  Evidence of Wapu Sonk T1613 (21 June 2021).

  425
  Evidence of Wapu Sonk T1614 (21 June 2021).

  426
  Statement of Wapu Sonk dated 13 November 2020, Exhibit FF, WIT.0036.0003.0002 [148]

  427
  Statement of Wapu Sonk dated 10 August 2021 [70] Exhibit NNN, WIT.0036.0006.0004

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• 27.41 Mr O’Neill did not apply to cross-examine Mr Sonk on these (or another other) issues.
  Further, whilst Mr O’Neill gave further oral evidence to the Commission in February
  2022, he did not seek to tender any further statement that might have responded to Mr
  Sonk’s evidence.

  27.42 We note the following people involved in the decision:

  (a) From January 2015, KPHL retained Anthony (or Tony) Kelly.428

  (b) From March 2017 until the sale in September 2017, the primary advisor to the
  KPHL board was Robert Acevski, Chief Financial Officer of KPHL

  (c) Mr Sonk had regular contact with Paddy Jilek and Mitch Turner of UBS and
  sought advice from them including in relation to “when the right time to sell would
  be”.429

  (d) July 2017, JP Morgan presentation containing the “intrinsic value” idea – an idea
  that is debunked by both Mr Sonk as well as Brattle.

  (e) Mr Sonk said that Mr O’Neill’s advisors and “channels of communication” were
  Isaac Lupari, Chief of Staff, and the Dr Jacob Weiss.430 Dr Weiss had been
  appointed by Mr O’Neill to act as “Economic and Financial Advisor” to KPHL,
  which in effect was Mr O’Neill’s eye and ears within KPHL.431

  27.43 Whilst Mr Sonk and his team were at times slow to produce documents and information,
  he ultimately gave evidence contrary to KPHL’s and his own personal interests – that is to
  say, evidence which does not put KPHL or himself in a perfect light and he also exposed,
  in an unfiltered way, some of the internal conduct and thinking inside KPHL. For that

  428
  10 August 2021 statement [44], WIT.0036.0006.0004.

  429
  10 August 2021 statement [46] , WIT.0036.0006.0004.

  430
  10 August 2021 statement [42] , WIT.0036.0006.0004.

  431
  10 August 2021 statement [42]-[43] , WIT.0036.0006.0004.

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• reason, and because contemporaneous documents support him, it is submitted that he is a
  witness to be believed.

  27.44 Where Mr Sonk’s evidence conflicts with O’Neill, Mr Sonk is to be preferred.

  27.45 On the other hand, where Mr Sonk’s evidence, or more accurately where the views or
  calculations of his advisors as set out in his evidence conflicts with Brattle, then Brattle is
  to be preferred.

  COUNSEL ASSISTING THE COMMISSION

  DR JAMES RENWICK CSC SC DR DOMINIC KATTER LEVENTE JURTH

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