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• OMBUDSMAN COMMISSION
  OF
  PAPUA NEW GUINEA

  [i
  11
  u
  I1

  “il
  ‘! REPORT
  ,I
  OF AN INVESTIGATION INTO
  11
  i THE DISCIPLINED FORCES
  I INSTITUTIONAL HOUSING PROJECT
  I1
  I:

  Members
  of the
  Ombudsman Commission

  Sir Charles Maino Joe Waugla Ninchib Tetang
  Chief Ombudsman Ombudsman Ombudsman

  June 1994

• Page 2 of 109

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  TABLE OF CONTENTS
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  PART I: INTRODUCTION

  I” 1. JURISDICTION AND PURPOSE OF THE
  INVESTIGATION 2

  [1.1] Introduction 2

  [1.2] J urisd iction 3

  [1.3] Purpose of the investigation 3

  [1.4] Method of inquiry 4

  [1.5] The preliminary report 4

  [1.6] Procedural fairness 5

  [1.7] Responses to the preliminary report 6

  PART 11: RELEVANT LAWS

  2. LAWS GOVERNING PUBLIC WORKS
  CONTRACTS IN PAPUA NEW GUINEA 8

  [2.1] Three Acts of particular relevance 8

  [2.2] The public tender requirements of the
  Public Finances (Management) Act 1986 8

  [2.3] Certificate of inexpediency was necessary 10

  [2.4] The Public Works Committee Act 10

  [2.5] The Loans (Overseas Borrowings) (No.2) Act 11

  [2.6] Detailed consideration 12

• Page 3 of 109

• – ii –

  PART Ill: FINDINGS OF FACT

  3. OVERVIEW OF THE PROJECT FROM 1989
  TO 1993 14

  [3.1] Si-partisan support for the project 14
  since 1989

  [3.2] Developments in 1989 – 90: the initial
  proposal and memorandum of understanding 14 ,’·’i

  [3.3] January 1991: confirmation of Malaysia’s
  commitment to the project 15

  [3.4] Mid-1991: cost estimates and loan offer 15

  [3.5] December 1991: first visit by Papua New
  Guinea delegation to Malaysia 15
  J
  I
  [3.6] December 1991: project considered by National I
  Executive Council for the first time 16

  [3.7] March 1992: offer of aid funding 16

  [3.8] May 1992: National Executive Council reaffirms
  support for the project 17

  [3.9] January 1993: visit to Malaysia by
  Prime Minister Wingti 17

  [3.10] June 1993: National Executive Council authorises
  execution of agreements 17

  [3.11] August 1993: Public Investment Program submission 17

  [3.12] September 1993: application for certificate of
  inexpediency 18

  [3.13] October 1993: second visit to Malaysia by Papua
  New Guinea delegation 18

  [3.14] Minister for Defence delegated power to execute
  the contracts 18

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  [3.15] Early December 1993: project again ratified by
  the National Executive Council 19

  [3.16] Mid-December 1993: the certificate of inexpediency 19

  [3.17] Letter from Prime Minister Wingti to
  Prime Minister Mahathir 19

  [3.18] Execution of the contracts 21

  4. THE ROLE OF THE SUPPLY AND TENDERS
  BOARD 22

  [4.1] Crucial role of the Board 22

  [4.2] First contact with the Board in September 1993 22
  [4.3] Further submission to the Board in November 1993 23
  [4.4] Ombudsman Commission requests Board to defer
  consideration of application 23

  , ‘
  [4.5] Chairman of Board summoned to appear before Commission 24
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  Planned meeting of the Works Supply and Tenders Board
  1

  I” [4.6]
  li fails to go ahead 25
  I1
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  j [4.7] 7 December 1993: meeting of the Works Supply and
  I
  Tenders Board 25

  [4.8] Morning of 8 December 1993: Board issues certificate
  of in~xpediency 26

  [4.9] Was the Board pressured into granting the certificate? 27

  5. THE TERMS OF THE CONTRACTS 29

  [5.1] Afternoon of 8 December 1993: Minister leaves for Malaysia 29

  [5.2] The loan agreement 29

  [5.3] The project contract assignment 30

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  The construction contract: scope of the works 30
  [5.4]

  The side-letter of 20 October 1993 32
  [5.5]

  No taxes will be paid by the YTL Company 32
  [5.6]

  [5.7] Further concessions given to the YTL
  Company and its associates 34

  State obliged to prepare sites for the YTL Company 34
  [5.8]

  Local content requirement 35
  [5.9]

  OTHER KEY FINDINGS OF FACT 36
  6.
  Other findings of fact 36
  [6.1]

  Alternative sources of funding not sought 36
  [6.2]

  No public tender 36
  [6.3]

  [6.4] No consideration of the project by the
  National Parliament 36

  Not an “aid project” or a “government-to-government” 37
  [6.5]
  arrangement

  The aid component 38
  [6.6]

  PART IV: FINDINGS OF WRONG CONDUCT
  AND DEFECTIVE ADMINISTRATION

  7. THE FAILURE TO FOLLOW PUBLIC TENDER
  PROCEDURES 40

  No valid reason for failure to call public tenders 40
  [7.1]

  Misconceptions about public tender procedures 41
  [7.2]

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  ,. ” .. [7.3] The National Executive Council does not have power
  ~
  ” to waive tender procedures 42
  ~,
  1 [7.4] Turnkey projects are subject to tender procedures 42
  ~. I
  [7.5] This is not a government-to-government contract 43
  ~,!
  ~I
  ~:t
  ,’j 8. THE UNSATISFACTORY CIRCUMSTANCES IN
  ‘I
  .!;
  1 WHICH THE CERTIFICATE OF INEXPEDIENCY
  ;,! WAS OBTAINED 44
  ,,’I [8.1]
  I The decision to grant the certificate was wrong 44
  .1 [8.2] Response by Chairman of the Board 44
  I1
  ‘I [8.3] The Works Supply and Tenders Board: a rubber stamp
  i
  -I for the National Executive Council 45
  I
  [8.4] The “impracticable or inexpedient” decision 48
  I
  I [8.5] The Board failed to appreciate its statutory function 49
  I-I
  ,i
  I [8.6] The Works Supply and Tenders Board folded under pressure 50
  I
  I [8.7] Proceedings of Supply and Tenders Board were a farce 52
  I.

  I
  I
  9. THE UNSATISFACTORY CIRCUMSTANCES IN
  WHICH THE MINISTER FOR DEFENCE WAS
  DELEGATED POWER TO EXECUTE THE
  CONTRACTS 54

  [9.1] Contracts signed by the Minister for Defence 54

  [9.2] Who has the power to execute contracts on behalf
  of the State? 54

  [9.3] Delegation of power to the Minister for Defence 55

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  [9.4] Concerns about the legality and propriety of
  the execution of the contracts by the Minister
  for Defence 56

  [9.5] Another breach of procedure: Governor-General
  did not approve the terms and conditions of the loan 60

  10. THE FAILURE TO COMPLY WITH THE
  PUBLIC WORKS COMMITTEE ACT 63

  [10.1] Public Works Committee ignored 63

  [10.2] Constitutional principles ignored 63

  [10.3] Misunderstandings about the role of 64
  the Public Works Committee

  [10.4] Public Works Committee Act should have been
  complied with first 65

  11. THE UNSATISFACTORY COSTING OF THE
  PROJECT 66

  [11.1] Will the State be getting value for money? 66

  [11.2] Response by the Secretary for Finance 66

  [11.3] How much was the original contract really worth? 68

  [11.4] Conclusion as to costing of the project 69

  12. THE FAILURE TO PURSUE ALTERNATIVE
  FUNDING ARRANGEMENTS 70

  [12.1] Seeking off-shore funds from only one source 70

  [12.2] Secretary for Finance maintains that financial
  package is very good 70

• Page 8 of 109

• – vii –

  [12.3] Are the Malaysian financial institutions offering
  a generous rate of interest? 71

  [12.4] Presence of grant aid does not justify failure
  to seek alternatives 72

  [12.5] Failure to seek alternative funding inevitably
  raises suspicion 72

  13. THE UNNECESSARY IMPORTATION OF FOREIGN
  SKILLS AND RESOURCES 73

  [13.1] Importance of the National Goals and Directive
  Principles 73

  [13.2] The National Goal of political and economic
  independence 73

  [13.3] Papua New Guinea has adequate skills and
  resources to undertake this project 74

  [13.4] The National Goal of equal development
  opportunities for all citizens 74

  14. THE SUSPICION CAUSED BY MAKING SPECIAL
  ARRANGEMENTS WITH A FOREIGN ENTERPRISE 76

  [14.1] Decision-making processes of government must 76
  be above suspicion

  [14.2] Generous concessions for the YTL Company 76

  [14.3] Suspicion an inevitable consequence of lack 77
  of public tender

  15. SUMMARY OF FINDINGS OF WRONG CONDUCT
  AND DEFECTIVE ADMINISTRATION 79
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  [15.1] National Executive Council ignored public 79
  rl
  ,i tender procedures
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  [15.2] Supply and Tenders Board granted certificate
  of inexpediency without good reason 79

  [15.3] Minister for Finance and Planning improperly
  delegated his powers to another minister 80

  [15.4] National Executive Council ignored the
  requirements of the Public Works Committee Act 80

  [15.5] National Executive Council approved the project
  without a proper costing 81

  [15.6] National Executive Council failed to pursue
  alternative funding arrangements 81

  [15.7] National Executive Council gave preference to
  foreign skills and resources 82

  [15.8] National Executive Council gave tax concessions
  which are too generous 82

  PART V: RECOMMENDATIONS

  16. RECOMMENDATIONS 85

  [16.1] Strict observance of the laws of Papua
  New Guinea 85

  [16.2] Publication of administrative procedures 86

  [16.3] Greater independence for Supply and Tenders
  Boards 87

  [16.4] Certificates of inexpediency 89

  [16.5] Clarification of the role of the Public
  Works Committee 90

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  [16.6] Tightening procedures for execution of
  State contracts 91

  [16.7] The future of the disciplined forces
  institutional housing project 94

  PART VI: SUMMING-UP

  17. SUMMING-UP 96

  [17.1] The mistakes of the Poreporena Freeway
  project have been repeated 96

  [17.2] The need to follow proper procedures 97

  [17.3] Recommended reforms 98

  [17.4] Ombudsman Commission will monitor the project 98

  [17.5] Leading by example 99

  * * * * * *

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• 1

  PART I

  INTRODUCTION

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  1. JURISDICTION AND PURPOSE OF THE
  INVESTIGATION

  [1.1] INTRODUCTION

  This investigation concerns a National Government project known as the
  “disciplined forces institutional housing project”. The project has been proposed
  for a number of years – at least as early as 1989 – and is intended to satisfy the
  housing needs of three of the State Services in the Port Moresby area. The
  services concerned are:

  the Papua New Guinea Defence Force;

  the Police Force; and

  the Correctional Service.

  The National Executive Council has made a number of decisions supporting this
  project, the most recent being on 2 December 1993. In Decision No. 197/93, the
  National Executive Council reaffirmed its support for the project, which is to be
  financed by a US$50 million commercial loan from Malaysian financial
  institutions, a US$5.5 million aid grant from the Government of the Federation of
  Malaysia and proposed budgetary appropriations over the next four years of
  approximately K7 million. Construction work for the project is to be carried out by
  the Syarikat Pembenaan Yeoh Tiong Lay Sdn Bhd Company of Malaysia,
  hereafter referred to as the YTL Company.

  The Ombudsman Commission received information from a number of different
  sources suggesting that the National Executive Council had not followed normal
  procedures prior to approving the execution of financing and construction
  contracts for this project. After making preliminary inquiries, it appeared that the
  project had neither been put to tender nor considered by the National Parliament.
  As public works projects of this magnitude are normally subject to these
  procedures, the Commission decided to conduct an investigation, on its own
  initiative, to ascertain whether the allegations as to non-compliance with normal
  procedures were well founded.

  Chapter 1

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  [1.2] JURISDICTION

  The Ombudsman Commission conducted the investigation under Section 219(1)
  of the Constitution and Section 13 of the Organic Law on the Ombudsman
  Commission. These constitutional laws allow the Ombudsman Commission to
  investigate, on its own initiative, any conduct on the part of any governmental
  body or any of its officers. The Commission can thus investigate the conduct of
  any arm, department, agency or instrumentality of the National Government,
  including statutory authorities and the National Executive Council.

  [1.3] PURPOSE OF THE INVESTIGATION

  In accordance with Section 219(1)(a) of the Constitution, the purpose of this
  investigation was:

  to determine whether any of the conduct under investigation was
  wrong; and

  to determine whether there were any defects in any law or
  administrative practice.

  In March 1993 the Ombudsman Commission presented a major report to the
  National Parliament on the Poreporena Freeway project. That report followed an
  extensive investigation and highlighted numerous instances of wrong conduct in
  the decision-making process which led the National Executive Council to decide
  to enter into contracts for that project. The present investigation follows a similar
  pattern to the Poreporena Freeway investigation. Its focus has been on the
  legality and propriety of the decision-making process. Its purpose has not been
  to report on the housing needs of Papua New Guinea’s disciplined forces, which
  the Ombudsman Commission accepts as being acute, and which must be
  addressed, but properly and legally.

  The Commission points out that it has given some consideration to whether the
  decisions made by the National Executive Council are in conformity with the
  National Goals and Directive Principles of the Constitution. The Commission is
  authorised to do this by Section 219(3) of the Constitution, which states:
  “The Commission shall not inquire into the justifiability of a policy of the National
  Government or a Minister … except in so far as the policy may be contrary to law or
  to the National Goals and Directive Principles, the Basic Rights or the Basic Social
  Obligations, or of any Act of the Parliament.”

  Chapter 1

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  Furthermore, Section 25(4) of the Constitution requires the Ombudsman
  Commission to take the National Goals and Directive Principles fully into account
  when exercising its jurisdiction.

  [1.4] METHOD OF INQUIRY

  The Ombudsman Commission obtained documents and other evidence from a
  number of different sources and used its powers under Section 18 of the Organic
  Law on the Ombudsman Commission to summon persons to attend before the
  Commission and give evidence under oath and produce documents in their
  possession or control.

  [1.5] THE PRELIMINARY REPORT

  The Commission prepared a preliminary report, which outlined preliminary
  findings of fact and indicated concerns about a number of aspects of the project,
  in particular the failure to call public tenders and the failure to have the matter
  referred to the Parliament. The Commission stated that, subject to comments
  and submissions received in response to the preliminary report, it proposed to
  recommend that a certificate of inexpediency should not be granted by the Works
  Supply and Tenders Board, that the draft contracts should not be executed and
  that the project should be put to public tender in accordance with the Public
  Finances (Management) Act.

  The preliminary report was hand-delivered on 25 November 1993 to each of the
  following:

  The Prime Minister, Rt. Hon. Paias Wingti, CMG, MP.

  The Deputy Prime Minister and then Minister for Finance and
  Planning, Rt. Hon. Sir Julius Chan, KBE, MP.

  The Attorney-General, Hon. Philemon Embel, MP.

  The Minister for Defence, Hon. Paul Tohian, MP.

  The then Minister for Police, Hon. Avusi Tanao, MP.

  The Minister for Correctional Services, Hon. John Kamp, MP.

  Chapter 1

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  The Secretary for Finance, Mr. Gerea Aopi, MBE.

  The then Acting Secretary for Justice, Mr. Sao Gabi.

  The then Acting State Solicitor, Mr. Zachary Gelu.

  Less than two weeks after distribution of the preliminary report, the Minister for
  Defence, together with members of the project management group, left for
  Malaysia to execute contracts for the project. This trip was made without any
  notice being given to the Commission, and contracts for the project were in fact
  executed on 15 December 1993 in Malaysia.

  [1.6] PROCEDURAL FAIRNESS

  All recipients of the preliminary report were given the opportunity to respond to
  adverse findings and correct any factual errors they believed the Commission
  may have made. They were put on notice that if they failed to respond, the
  Commission would assume agreement with the preliminary findings and prepare
  its final report accordingly.

  The purpose of seeking comments and submissions from those affected by the
  report, was to discharge the Commission’s constitutional obligation of procedural
  fairness. Section 17(4) of the Organic Law on the Ombudsman Commission
  states:

  “Nothing in this Law compels the Commission to hold any hearing and no person is
  entitled as of right to be heard by the Commission except that”

  (a) where a report of the Commission may affect a State Service, provincial government
  body or statutory body, the Commission shall provide reasonable opportunity for the
  Permanent Head of that service or the statutory head of that body, as the case may
  be, to comment on the subject of the investigation; and

  (b) the Commission shall not make any comment in its report that is adverse to or
  derogatory of any person without ”

  (i) providing him with reasonable opportunity of being-heard; and

  (ii) fairly setting out his defence in its report.”

  Chapter 1

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  [1.7] RESPONSES TO THE PRELIMINARY REPORT

  Of the nine recipients of the preliminary report, only three responded: the Prime
  Minister, Rt. Hon. Paias Wingti, the Secretary for Finance and Planning, Mr.
  Gerea Aopi and the State Solicitor, Mr. Zachary Gelu. In addition, the
  Commission received a late submission from the Minister for Defence, Hon. Paul
  Tohian, which was in response to a direction given to him under Section 27(4) of
  the Constitution. The Commission issued this direction after it became clear that
  the Minister had travelled to Malaysia with the intention of executing contracts for
  I the project while the Commission’s investigation was pending.

  All of these submissions have been considered and incorporated in this report,
  where appropriate.

  * * * * * *

  Chapter 1

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• ·r,· ·
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  PART 11

  RELEVANT LAWS

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  2. LAWS GOVERNING PUBLIC WORKS
  CONTRACTS IN PAPUA NEW GUINEA

  [2.1] THREE ACTS OF PARTICULAR RELEVANCE

  As the disciplined forces institutional housing project is a major public works
  project, there are three Acts of the Parliament which should have regulated the
  decision to enter into contracts for the project. These are:

  the Public Finances (Management) Act 1986;

  the Public Works Committee Act (Chapter No. 28 of the Revised
  Laws); and

  the Loans (Overseas Borrowings) (No. 2) Act (Chapter No. 133A).

  The Commission’s investigation has revealed that the requirements of
  these important laws were either completely ignored or simply given lip
  service by the National Executive Council and its advisers.

  In this chapter, the requirements of these Acts are outlined.

  [2.2] THE PUBLIC TENDER REQUIREMENTS OF THE PUBLIC
  FINANCES (MANAGEMENT) ACT 1986

  Section 40(1) of the Public Finances (Management) Act lays down the general
  rule that tenders must be publicly invited for the supply of works and services
  the estimated cost of which exceeds K10,000.00. ‘

  The Act permits a number of exceptions to the general rule. Public tenders do
  not have to be called in the following situations:

  1. Where the works are performed by public bodies, e.g. an agency of
  a foreign government approved by the Minister for Finance and
  Planning by notice in the National Gazette (Sections 40(3)(a) and
  40(4».

  Chapter 2

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  The Ombudsman Commission notes that there has been no gazettal
  under Section 40(4) in respect of this project. Furthermore, as the
  YTL Company is a private Malaysian corporation, it is not open to
  the Minister to designate the YTL Company as an “approved
  overseas agency”.

  2. If the relevant Supply and Tenders Board certifies that the invitin~ of
  tenders is “impracticable or inexpedient”, the project does not have
  to be put to tender (Section 40(3)(b)).

  The power to issue a “certificate of inexpediency”, which is the
  name commonly given to a Section 40(3)(b) certificate, rests with
  the Supply and Tenders Board. Neither the Minister for Finance and
  Planning nor any other Minister has the power to issue such a
  certificate. Furthermore, no Minister has the power to direct a
  Supply and Tenders Board to issue a certificate of inexpediency.
  Any Minister who gave such a direction would be acting unlawfully;
  just as the Board would be, if it followed the instructions of the
  Minister.

  3. If the amount of a transaction does not exceed K100,000.00, the
  Minister for Finance and Planning may waive public tender
  requirements in “exceptional circumstances” (Section 40(3)(c)).

  Clearly, this exception could not apply in the present case.

  4. If the State is to receive money under an agreement with an
  “international organisation” and the agreement makes special
  provision for the manner in which tenders will be invited, it is not
  necessary for tenders to be publicly invited (Section 4Q(3)(d)).

  The Ombudsman Commission notes that this project does not
  involve the receipt of money from any international organisations nor
  does any of the agreements make provision for the manner in which
  tenders will be invited. Accordingly, this exception is not applicable.

  5. If the value of a contract is not likely to exceed K50,000.00, a
  Supply and Tenders Board may order that tenders not be called and
  that the contract be only let to a national tenderer (Section 41).

  Clearly, this exception could not apply in the present case.

  Chapter 2

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  [2.3] CERTIFICATE OF INEXPEDIENCY WAS NECESSARY

  It is evident from the above that the only way the disciplined forces institutional
  housing projecteould have complied with the Public Finances (Management) Act
  was if a certificate of inexpediency were granted by a Supply and Tenders Board.
  Eventually, a decision to issue such a certificate was made, but the
  circumstances in which this occurred were totally unsatisfactory, for the reasons
  explained in Chapter 8.

  [2.4] THE PUBLIC WORKS COMMITTEE ACT

  The Public Works Committee Act (Chapter No. 28 of the Revised Laws)
  establishes the “Standing Committee of the Parliament on Public Works”, known
  as the Public Works Committee. The Committee comprises fourteen members of
  the National Parliament. Its function is to inform the Parliament of the
  “expediency” of carrying out public works projects referred to it under the Act,
  (Public Works Committee Act, Section 13).

  The Public Works Committee is a Permanent Parliamentary Committee,
  established in accordance with Section 118 of the Constitution. The purpose of
  such committees is “to ensure full and active participation by backbenchers in the
  work of the Parliament.”

  The notification requirement
  I Section 14(1) of the Public Works Committee Act imposes an important obligation
  II.il
  on the Minister for Finance and Planning: whenever the government makes a
  .
  11·
  decision to proceed with a public work expected to cost more than K200,000.00,
  1
  he is required to notify the Public Works Committee of that decision, for the
  ,I
  information of its members. The Ombudsman Commission notes that this
  requirement was not complied with in this case.

  Project must be approved by the National Parliament

  The other key provision of the Public Works Committee Act is Section 17. It
  provides that a “proposed public work” expected to cost more that K500,000.00
  can only be commenced in three situations:

  (a) when it has been referred to the Public Works Committee and, after
  receiving a report from the Committee, the Parliament declares that
  it is “expedient” to carry out the project (Sections 18 – 20); or

  Chapter 2

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• 11

  (b) when the Parliament has resolved that it is “expedient” that the
  project be carried out without it being referred to the Committee; or

  (c) when the project is for defence purposes and the Minister for
  Defence has declared that it would be contrary to the public interest
  to refer the matter to the Committee.

  In the opinion of the Ombudsman Commission the disciplined forces institutional
  housing project cannot properly be regarded as being for defence purposes. In
  any event, there has been no declaration to that effect by the Minister for
  Defence.

  Accordingly, this project can only lawfully proceed if the National
  Parliament resolves that it is expedient for the work to be carried out.

  [2.5] THE LOANS (OVERSEAS BORROWINGS) (NO. 2) ACT

  Papua New Guinea has a number of Acts of Parliament which regulate overseas
  borrowing by the State. These include:

  the Loans and Assistance (International Agencies) Act (Chapter No.
  132)

  the Loans (Overseas Borrowings) Act (Chapter No. 133)

  the Loans (Overseas Borrowings) (No.2) Act (Chapter No. 133A).

  The Loans and Assistance (International Agencies) Act only applies if the State
  intends to borrow money or seek technical or financial assistance from official
  international agencies such as the World Bank, the European Community or the
  Asian Development Bank. As that was not the case with this project, the Act had
  no application.

  The Loans (Overseas Borrowings) Act applies to commercial borrowings by the
  State and imposes a limit of K65 million on the amount that can be borrowed
  overseas by the State on any single occasion. That limit was not breached in the
  case of this project. There is, however, an important procedural requirement
  imposed by Section 2(1) of this Act, which is reinforced by Section 2(1) of the
  Loans (Overseas Borrowings) (No. 2) Act: Before a loan agreement with an
  overseas financial institution is executed, the manner and the terms and
  conditions of the borrowing must be agreed on by the Head of State, acting on
  the advice of the National Executive Council.

  Chapter 2

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  As the disciplined forces institutional housing project involved a commercial loan
  from overseas financial institutions of approximately K50 million, it was necessary
  for the National Executive Council to advise the Governor-General of the manner
  and the terms and conditions of the borrowing and it was also necessary for the
  Governor-General to agree on those matters. As the Commission will show in
  Chapter 9, this requirement was not complied with.

  [2.6] DETAILED CONSIDERATION

  The concerns the Commission has about the failure to comply with these three
  Acts of Parliament are recorded in later chapters as follows:

  failure to comply with the Public Finances (Management) Act:
  Chapters 4, 7 and 8;

  failure to comply with the Public Works Committee Act: Chapter 10;

  failure to comply with the Loans (Overseas Borrowings) (No. 2) Act:
  Chapter 9.

  ******

  Chapter 2

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  PART Ill: FINDINGS OF FACT

  * * * * * *

  This part of the report records the findings of fact made as a result of the
  Commission’s investigation. Chapter 3 traces the history of the negotiations for
  the project. Chapter 4 examines the crucial role played by the Works Supply and
  Tenders Board and Chapter 5 outlines the terms and conditions of the
  construction contract, the loan agreement for the project and other documents
  executed by the Minister for Defence. In Chapter 6, there is a summary of other
  key findings of fact, which forms the basis of the findings of wrong conduct and
  defective administration in Part IV of the report.

  * * * * * *

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• 14

  3. OVERVIEW OF THE PROJECT FROM 1989 TO
  1993

  [3.1] SI-PARTISAN SUPPORT FOR THE PROJECT SINCE 1989

  This chapter of the report traces the history of negotiations for the project, from
  their commencement in 1989 to their conclusion at the end of 1993. It is
  significant that the project has been actively supported by two successive Prime
  Ministers, Rt. Hon. Rabbie Namaliu CMG, MP and Rt. Hon. Paias Wingti CMG,
  MP.

  [3.2] DEVELOPMENTS IN 1989-90: THE INITIAL PROPOSAL AND
  MEMORANDUM OF UNDERSTANDING

  In November 1989, the then Prime Minister, Rabbie Namaliu, attended a
  Commonwealth Heads of Government meeting in Kuala Lumpur, Malaysia.
  Prime Minister Namaliu held official discussions with the Prime Minister of
  Malaysia, Dr. Mahathir Bin Mohamad, on a defence co-operation program
  between the two countries. The issue of Malaysian assistance in the
  construction of houses for the Papua New Guinea Defence Force was raised in
  the course of these discussions.

  Following those. discussions, a memorandum of understanding concerning the
  defence co-operation program was signed by both prime ministers. This
  memorandum focused on military co-operation and equipment and technology
  co-operation. The proposed housing project was not covered by the
  memorandum. However, in August 1990, Prime Minister Namaliu wrote to Or.
  Mahathir and raised the issue of the housing project. Prime Minister Namaliu
  was contemplating, at that stage, that the project could be funded by a
  government-to-government financial arrangement:

  “My Government would be prepared to consider guaranteeing a concession loan
  which will enable your housing technology, expertise, and material to be brought to
  PNG under an arrangement mutually beneficial to our countries.”

  [Letter: Prime Minister Namaliu to Prime Minister Mahathir, 27.8.90.]

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• Page 25 of 109

• 15

  JANUARY 1991: CONFIRMATION OF MALAYSIA’S
  COMMITMENT TO THE PROJECT

  In January 1991, the then Minister for Defence, Hon. Benias Sabumei MBE, MP,
  travelled to Malaysia and held detailed discussions on the proposed project with
  a number of Malaysian corporations: Bank Industri Malaysia Berhad (a
  government controlled bank); Syarikat Pembenaan Yeoh Tiong Lay Sdn BHD (a
  construction company) and Malaysian Export Credit Insurance BHD (a Malaysian
  export finance corporation). At that stage the proposed project was confined to
  the provision of housing for the Defence Force.

  Following the Defence Minister’s visit, Or. Mahathir made an official
  communication to Prime Minister Namaliu, confirming Malaysia’s commitment to
  assist in the proposed housing project.

  Or. Mahathir stated:

  “As you will probably know by now from your Defence Minister, the problems of
  financing the housing project under the MOU have been resolved. An agreement
  has been signed which cover this program [sic]. The Malaysian Export Credit
  Insurance and the Industrial Bank have both committed themselves to this project.”

  [Letter: Prime Minister Mahathir to Prime Minister Namaliu, 14.1.91.)

  The scope of the project was subsequently expanded to include the housing
  needs of the Police Force and the Correctional Service in the Port Moresby area.

  [3.4] MID-1991: COST ESTIMATES AND LOAN OFFER

  In May – June 1991, consulting engineers, Kinhill Kramer Pty Lld of Port
  Moresby, prepared cost estimates for the project and submitted them to the
  Minister for Defence. Kinhill Kramer had been nominated by the YTL Company
  to be their Papua New Guinea consultants.

  In July 1991, Bank Industri Malaysia Berhad offered to provide a commercial loan
  of US$50 million to Papua New Guinea to facilitate implementation of the project.

  [3.5] DECEMBER 1991: FIRST VISIT BY PAPUA NEW GUINEA
  DELEGATION TO MALAYSIA

  In December 1991, an eight person Papua New Guinea delegation visited Kuala
  Lumpur to negotiate the proposed loan package. The delegation was led by the
  then Secretary for Finance, Mr. Morea Vele MBE, and consisted of

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• 16

  . representatives of the Department of Finance and Planning, the State Solicitor’s
  Office and the Papua New Guinea Defence Force. During these negotiations, the
  Papua New Guinea delegation raised the possibility of the Government of the
  Federation of Malaysia providing grant aid in connection with the project.

  [3.6] DECEMBER 1991: PROJECT CONSIDERED BY NATIONAL
  EXECUTIVE COUNCIL FOR THE FIRST TIME

  The project was formally considered by the National Executive Council on 6
  December 1991. The National Executive Council noted the critical shortage of
  accommodation for the three State Services and approved the project “in-
  principle”. A significant aspect of the consideration of the project was recorded in
  item 3 of Decision No. 221 (a)/91, which stated:
  ” … C9uncil end9rsed that alternative arrangements be sought to develop the project
  so as to comply with the requirements of the appropriate laws. The alternative
  arrangements would include:

  (a) Government to Government Bilateral Agreements;

  (b) Public Tendering; and

  (c) Turn Key.”‘

  As the Commission will show, such alternative arrangements were never
  pursued.

  [3.7] MARCH 1992: OFFER OF AID FUNDING

  In March 1992, the Minister of Defence for Malaysia, Dato’ Sri Mohd Najib, wrote
  to Minister Sabumei to advise that the Malaysian Government had agreed to
  extend a grant of US$5.5 million for the project, on the following conditions:

  the nominated contractor must be the YTL Company;

  finance must be provided by Bank Industri Malaysia Berhad;

  project sites must be made available by the Papua New Guinea
  Government and fully serviced; and

  disbursement of the grant and payments under the contract must be
  free of any taxes, fees, duties or other impositions directly or
  indirectly imposed by the Papua New Guinea Government.

  All of these conditions have been agreed to.

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• 17

  MAY 1992: NATIONAL EXECUTIVE COUNCIL REAFFIRMS
  SUPPORT FOR THE PROJECT

  On 20 May 1992, the National Executive Council reaffirmed its support for the
  project and prescribed the parameters within which its negotiating team was
  permitted to operate. At that stage it was contemplated the project cost would be
  K52.1 million.

  The project was not considered again by the National Executive Council for more
  than twelve months. In the intervening period, there was a change of
  government. This project, along with a number of others which the Namaliu
  Government had agreed to implement using turnkey financing, was placed under
  review.

  [3.9] JANUARY 1993: VISIT TO MALAYSIA BY PRIME MINISTER
  WINGTI

  Prime Minister Wingti visited Malaysia from 21 to 23 January 1993. On 3 March
  1993, he made a Ministerial Statement to the Parliament regarding this visit. The
  Prime Minister notified that he had also visited Singapore and Indonesia, and
  emphasised the importance of strengthening Papua New Guinea’s trade and
  investment relationships with these nations. This was part of the Government’s
  “Look North” policy.

  [3.10] JUNE 1993: NATIONAL EXECUTIVE COUNCIL AUTHORISES
  EXECUTION OF AGREEMENTS

  In June 1993, the project returned to the agenda of the National Executive
  Council. Support for the project was reaffirmed, the estimated cost of which, by
  this stage, was US$55.5 million, plus costs associated with infrastructur~
  development, plus interest on the loan. (A breakdown of the costs is given at the
  end of Chapter 6.)

  [3.11] AUGUST 1993: PUBLIC INVESTMENT PROGRAM SUBMISSION

  In August 1993, a Public Investment Program submission was lodged in respect
  of the project. The submission sought to have the project listed in the Public
  Investment Program, commencing in 1994. In addition, it sought budgetary
  support commencing in 1994 to fund all costs associated with the development of
  project sites and the engagement of a project management team.

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• Page 28 of 109

• 18
  [3.12] SEPTEMBER 1993: APPLICATION FOR CERTIFICATE OF
  INEXPEDIENCY

  On 8 September 1993, Colonel J. Tuat OBE, the Chief of Logistics in the Papua
  New Guinea Defence Force and chairman of the project management group,
  applied for a certificate of inexpediency from the Works Supply and Tenders
  Board. This was the first occasion on which the project had come before the
  Board.

  The Board’s handling of the application is dealt with in detail in Chapters 4 and 8.

  [3.13] OCTOBER 1993: SECOND VISIT TO MALAYSIA BY PAPUA
  NEW GUINEA DELEGATION

  On 13 September 1993, Prime Minister Wingti wrote to Dr. Mahathir, and
  confirmed that the project would proceed. Then, between 2 and 22 October 1993,
  a Papua New Guinea delegation travelled to Malaysia to negotiate the final terms
  and conditions of the loan package and the construction contract. The delegation
  returned on 25 October 1993 with a draft loan agreement and a draft construction
  contract.

  The Ombudsman Commission summoned Lt. Col. Mike Bird, the Director of
  Engineers in the Papua New Guinea Defence Force and a member of the project
  management group, to give evidence in relation to the October trip to Malaysia
  and other matters. Lt. Col. Bird was a competent and co-operative witness and
  the Commission has no reason to doubt the veracity of his evidence. He
  indicated that the October 1993 trip was crucial, because the project
  management group had been able to negotiate, at no extra cost to the State, a
  substantial expansion of the scope of the works, including a significant upgrading
  of the quality of the housing, refurbishment of existing barracks blocks, the
  construction of the Officers, NCO and OR mess and communal kitchen at
  Jackson’s Airport (estimated to cost US$2 million), provision of free wear-and-
  tear maintenance for a period of six months after the duration of the contract and
  a contribution of US$1.3 million to the costs of project management.

  [3.14] MINISTER FOR DEFENCE DELEGATED POWER TO EXECUTE
  THE CONTRACTS

  On 18 October 1993, the Deputy Prime Minister and Minister for Finance and
  . Planning, Sir Julius Chan KBE MP, executed an instrument of delegation which
  purported to authorise Minister Tohian to execute both the loan agreement and
  the construction contract. The Commission has a number of concerns about this
  instrument of delegation, which are dealt with in Chapter 9.

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• Page 29 of 109

• 19

  [3.15] EARLY DECEMBER 1993: PROJECT AGAIN RATIFIED BY THE
  NATIONAL EXECUTIVE COUNCIL

  On Thursday 2 December 1993, the project was again considered by the
  National Executive Council. Support for the project was re-affirmed and, amongst
  other things, it was decided to advise the Head of State to approve the principal
  terms of the borrowing under the Loans (Overseas Borrowings) (No.2) Act.

  However, the Governor-General was not advised what the terms of the borrowing
  actually were. Nor was his Excellency given a copy of the draft loan agreement
  intended to be executed. This is significant, as one of the requirements of the
  legislation regulating overseas borrowing by the State is that the Governor-
  General must approve the terms and conditions of the borrowing. How this could
  be done, when his Excellency was given no indication of what the terms of the
  borrowing were, is a mystery to the Ombudsman Commission. This
  unsatisfactory situation is also dealt with in Chapter 9.

  [3.16] MID-DECEMBER 1993: THE CERTIFICATE OF INEXPEDIENCY

  After the project management group returned from their October 1993 trip to
  Malaysia, the need to obtain a certificate of inexpediency became urgent, as it
  was realised that without such a certificate, the contracts for the project could not
  lawfully be executed.

  It transpired that the certificate was issued on the morning of 8 December 1993,
  the day that Minister Tohian, together with members of the project management
  group, travelled back to Malaysia to execute the contracts for the project.

  [3.17] LETTER FROM PRIME MINISTER WINGTI TO PRIME MINISTER
  MAHATHIR

  When Minister Tohian travelled to Malaysia, he took with him a letter addressed
  by Prime Minister Wingti to Or. Mahathir. This letter is significant, as it provides
  an inSight into some of the confusion surrounding this project; in particular, the
  misconception that it is an aid project, sponsored by the Government of Malaysia.

  Chapter 3

  J

• Page 30 of 109

• 20

  I”~’;
  The letter reads as follows:

  “My dear Prime Minister,

  I would like to take this opportunity, on behalf of my Government and the people of Papua
  New Guinea, to express our profound gratitude to your Government and the people of
  Malaysia for making US$50 million syndicated loan available to Papua New Guinea. I am
  pleased to advise that the concessionalloan together with the grant will make a significant
  contribution towards meeting the housing needs of the disciplined forces.

  Your personal intervention in ensuring that the approval of the loan was granted with
  minimum delay is very much appreciated. Indeed your persuasive stand signified the
  importance that your Government attaches to the cooperative partnership that exist between
  our two countries. This relationship, I am proud to say that it has reached a level of maturity
  besides expanding into new areas of mutual benefits. While our relationship has been
  harmonious and fruitful we must, together, continue to explore areas that would greatly
  benefit our respective people. We cannot remain complacent therefore we must strive for
  the betterment of our peoples, by employing all available means and resources.

  Early this year I visited your beautiful country where we had constructive exchanges on
  issues of bilateral significance. More significant was my Government’s new policy drive
  “The Look North Policy”. Principally the aim of this policy is to cultivate new markets in the
  ever expanding and competitive Asian Market Economy. We believe Malaysia offers
  enormous trade opportunities and therefore we would like to be part of your trade and
  economic expansion process. We have therefore carried out necessary legislative reforms
  that are aimed at creating Malaysian and other investors confidence in Papua New Guinea.

  Both the syndicated Loan and your Government, Grant-aid-component is itself an expression
  .’ , of the Malaysian Business Community and the Government Confidence in Papua New
  Guinea. I believe through such cooperative arrangements we will create business
  opportunities that will greatly benefit our two countries.

  Honourable Paul Tohian QPM MP, Minister for Defence, has been duly authorised by my
  Government to execute the Loan and Contract Agreements on behalf of the Government. I
  therefore kindly request your concurrence to enable him to proceed with the execution of the
  Agreements.

  As always I look forward to your continued support for future cooperative endeavours that
  would be of mutual benefits to us.

  Kind regards.

  Yours sincerely,

  [Signed]

  Rt. Hon. Paias Wingti, CMG, MP
  Prime Minister”

  [Letter: Prime Minister Wingti to Prime Minister Mahathir, 7.12.93.]

  Chapter 3

• Page 31 of 109

• 21

  [3.18] EXECUTION OF THE CONTRACTS

  Minister Tohian executed the contracts, enabling the project to proceed, at the
  Regent Hotel, Kuala Lumpur, on 15 December 1993. The terms of the contracts
  are dealt with in Chapter 5.

  ******

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• Page 32 of 109

• J,, ,

  i

  22

  4. THE ROLE OF THE SUPPLY AND TENDERS
  BOARD

  [4.1] CRUCIAL ROLE OF THE BOARD

  The Works Supply and Tenders Board played a crucial role in this project. It was
  the body which decided to grant a certificate of inexpediency, which enabled the
  project to be awarded to the YTL Company without the calling of public tenders.
  The Ombudsman Commission was intent on investigating the circumstances in
  which the Board made this decision. The results of that inquiry are dealt with in
  this chapter, and the Commission’s concerns about the granting of the certificate
  are recorded in Chapter 8.

  [4.2] FIRST CONTACT WITH THE BOARD IN SEPTEMBER 1993

  The first occasion on which the project came to the attention of the Board was in
  September 1993, when the chairman of the project management group, Col.
  Tuat, applied for a certificate of inexpediency. The application was lodged on a
  pro-forma document issued by the Board. The reasons given in support of the
  application were as follows:

  “Following Government to Government agreement in 1991, the NEC approved in
  principle a Turn-Key Project Funded by a Consortium of four Malaysian Bank.[sic] In
  addition it agreed that Malaysian Contractor YTL be the Preferred Contractor for the
  Project.”

  The application was supported by a covering letter which outlined the National
  Executive Council’s consideration of the project and concluded:

  “In accordance with the NEC decisions, it is recommended that the Tender Board
  approve YTL as the contractor for the execution of the Disciplined Forces
  Institutional Housing project.”

  [Letter: Col. Tuat to Chairman, Works Supply and Tenders Board, 2.9.93.]

  Chapter 4

• Page 33 of 109

• 23

  [4.3] FURTHER SUBMISSION TO THE BOARD IN NOVEMBER 1993

  The next formal correspondence between the Board and the project management
  group was in November 1993. Lt. Col. Bird gave evidence that before this time,
  the project management group had offered to attend and brief the Board, but this
  offer had never been taken up.

  On 18 November 1993, the Board’s Chairman, Mr. Gavera Morea, received a
  submission from the then Acting State Solicitor, Mr. Sumasy Singin. The Acting
  State Solicitor stated:

  “The offer made by the Government of Malaysia to fund the housing project for our
  diSCipline forces and has been accepted by the PNG Government was subject to the
  following conditions. The loan of K50 million to be made available by a Syndicate of
  Malaysian Banks led by the Bank Industry of Malaysia and a grant aid of K5.5 million
  to be provided by the Malaysian Government through its Defence Cooperation
  Agreement with the PNG Defence Force for the construction of the housing was on
  the condition that the project be undertaken by YTL of Malaysia.

  This did not give PNG Government the option to call for public tenders. It is
  therefore obvious that if this project is to be implemented then a Certificate of
  Necessity (COl) has to be issued by your Board to enable the government to award
  the contract to YTL.

  Furthermore, as the project is to cost around K55 million the policy direction issued
  by the Under Secretary for Finance and Planning under Section 39(3) of the Public
  Finance (Management) Act 1986 restricting contracts worth K5 million to be aWarded
  to nationally owned companies does not apply here. I therefore, advise that it is
  legally in order for the Board to consider this application for the issuing of a COl for
  the engagement of this contractor (YTL).

  As the submission on this project will be going before the National ElIecutive
  Council (NEC) for a final decision very shortly and that the Agreement is scheduled
  to be executed by the respective parties (i.e., PNG Government and YTL) around the
  first week of December 1993 in Malaysia, I would sincerely request that you convene
  an urgent meeting of your Board to deliberate on this matter.

  Thanking you in advance for your support and kind consideration.”‘

  [Letter: Acting State Solicitor to Chairman, Works Supply and Tenders
  Board, 9.11.93.]

  [4.4] OMBUDSMAN COMMISSION REQUESTS BOARD TO DEFER
  CONSIDERATION OF APPLICATION

  On the same date that the Board received the submission from the Acting State
  Solicitor, the Ombudsman Commission made a request to the Chairman in the
  following terms:

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• Page 34 of 109

• ‘1,1 24

  “The Commission understands that an app’ication for a Certificate of Inexpediency
  I “!,:i
  under Section 40(3)(b) of the Public Finances (Management) Act 1986 has been
  lodged with the Works Supply and Tenders Board. The Commission considers that
  it would be inappropriate for the Works Supply and Tenders Board to determine that
  application while its investigation is proceeding.

  Accordingly, the Works Supply and Tenders Board is requested not to determine the
  application until such time as this investigation by the Commission is concluded.”

  [Letter: Ombudsman Commission to Chairman, Works Supply and
  Tenders Board, 18.11.93.]

  It needs to be emphasised that this request was not a direction to the Board. Nor
  was it an open-ended request.

  In their responses to the Commission’s preliminary report, both Prime Minister
  Wingti and the Secretary for Finance, Mr. Aopi, suggested that the Ombudsman
  Commission had acted improperly by attempting to influence the views and
  independence of the Works Supply and Tenders Board. This criticism was ill-
  founded, as is evident from the events which occurred later: despite the
  Commission’s request to the Board, a decision to grant a certificate of
  inexpediency was in fact made before the conclusion of the investigation.

  [4.5] CHAIRMAN OF BOARD SUMMONED TO APPEAR BEFORE
  COMMISSION

  On Tuesday 23 November 1993, Mr. Morea appeared before the Commission
  under summons and gave evidence on oath. At that stage, the only information
  before the Board was the application of 8 September 1993, together with the
  Acting State Solicitor’s submission.

  Mr. Morea stated that this information was not sufficient to warrant the granting of
  a certificate of inexpediency. The normal practice of the Board was to insist on
  seeing all the relevant contract documents, so it could be fully informed about the
  cost of the project and the scope of the works. In this case, the Board had not
  been given copies of the contract documents. Nor had it been advised of the
  scope of the works. When asked whether he thought there was enough
  information on which to grant a certificate, Mr Morea stated:

  ” … the information as you said is not acceptable for deliberation by the Board because as
  you can see there’s no information on the -scop-e of – what is involved in – the project. As far
  as the Tenders Board is concerned we- have to ensure that the tenders procedures are
  complied with. In a submission like this, we’ll be wondering what the hell is going on.”

  Chapter 4

• Page 35 of 109

• 25

  PLANNED MEETING OF WORKS SUPPLY AND TENDERS
  BOARD FAILS TO GO AHEAD

  On Friday 19 November 1993, a meeting of the Board was scheduled. Its
  purpose was to allow the project management group to make further submissions
  concerning the certificate of inexpediency. However, the meeting did not go
  ahead as planned.

  [4.7] 7 DECEMBER 1993: MEETING OF THE WORKS SUPPLY AND
  TENDERS BOARD

  On Tuesday 7 December 1993, another meeting of the Board was convened to
  further consider the application for the certificate of inexpediency. The
  Commission questioned the Chairman of the Board, Mr. Gavera Morea, and a
  member of the project management group, Lt. Col. Bird, as to what transpired at
  this meeting. Both were reliable witnesses and the evidence they gave was
  generally similar.

  Information before the Board

  The meeting started at 10.30 am and lasted approximately one and a half hours.
  The project management group (comprising representatives of the Defence
  Force, the State Solicitor’s Office and the Department of Finance and Planning)
  presented three documents to the Board:

  The draft loan agreement.

  The draft project agreement.

  A “side letter” to the project agreement. (This was a letter from the
  Managing Director of the YTL Company to the chairman of the
  group, dated 20 October 1993, which contained undertakings by the
  YTL Company as to extensions of the scope of the project etc.)

  These documents were left with the Board at the end of the meeting for its
  perusa1.

  The project management group also showed the Board copies of the responses
  to the Ombudsman Commission’s preliminary report made by the Prime Minister
  and the Secretary for Finance. The Board was permitted to peruse these
  responses, but the project management group declined to leave copies of the
  responses with the Board, on the ground that these could only be made available
  by the Ombudsman Commission.

  Chapter 4

• Page 36 of 109

• 26

  Issues raised

  During the course of the meeting, the Board questioned the group on a number
  of aspects of the project, such as the starting date, the life of the project, the
  terms of the loan agreement, the method of payment, the credentials of the YTL
  Company and the details of the 35% local content requirement. The Board also
  asked about building materials, and was advised that a new cladding material,
  developed in Malaysia, was to be used.

  Towards the end of the meeting, the project management group pointed out that
  the Minister for Defence was leaving at 3.30 pm the next day for Malaysia. They
  said he was attending an air show at the request of his Malaysian counterpart.
  But, in case the Minister was caught in an “embarrassing situation”, they
  suggested that it would be convenient if the Board made a prompt decision on
  the application for the certificate of inexpediency.

  Deliberations of the Board

  The Board discussed the matter, in the absence of the project management
  group, on the afternoon of 7 December 1993, between 1.30 pm and 4.30 pm.
  The decision was made then, to grant the certificate of inexpediency.

  The Ombudsman Commission was not advised of this meeting, until three days
  after it took place.

  [4.8] MORNING OF 8 DECEMBER 1993: BOARD ISSUES
  CERTIFICATE OF INEXPEDIENCY

  On the morning of Wednesday 8 December 1993, Mr. Morea rang Lt. Col. Bird
  and advised him of the Board’s decision. Mr. Morea then faxed copies of two
  documents to Col. Bird. These were:

  (a) The application for the certificate. of inexpediency, which was
  marked:

  “The issue of certificate of Inexpediency as requested above is/is not
  Approved.”

  This notation was signed by Mr. Morea, as Chairman, and two other
  members of the Board, and dated 7 December 1993.

  (b) A document headed “Tender Awarded Form”, which insofar as
  relevant stated:

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• 27

  “RECOMMENDATION OF PERSONS WITH SPECIALIZED
  KNOWLEDGE TO ASSIST THE BOARD IN IT’S
  CONSIDERATION is that the contract be awarded to:

  RECOMMENDED: TENDERER: SYARIKAT PEMBENAAN –
  YEON TIONG LAY, SON BHD

  TENDERED PRICE: K52,875 M

  NATIONAL EQUITY: 100% Foreign Owned Company.

  RECOMMENDATION OF THE BOARD IS THAT the contract
  be awarded to Syarikat Pembenaan – Yeoh Tiong Lay, SON
  BHD of Malaysia”

  [Signed by all members of the board and
  dated 7.12.93.]

  The decision to approve the issue of the certificate meant that the Minister for
  Defence and members of the project management group were able to travel to
  Malaysia that afternoon, safe in the knowledge that one of the last legal
  “obstacles” to execution of the contracts had been removed.

  [4.9] WAS THE BOARD PRESSURED INTO GRANTING THE
  CERTIFICATE?

  One of the objects of this investigation was to ascertain whether the Board had
  been pressured into granting the certificate of inexpediency. After hearing the
  available evidence, the Commission is satisfied that there was no overt pressure
  put on the Board to grant the certificate. There were no direct threats, physical or
  otherwise, made against the members of the Board.

  Mr. Morea stated that he did not discuss the application with any other person
  prior to the meeting. No contact was made with any of the ministers responsible
  for the project and no attempts were made to influence the Board, he said.

  Lt. Col. Bird testified that the project management group was acutely aware of
  the sensitive position which the members of the Board were in and did not want
  to be seen to be pressuring them.

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• Page 38 of 109

• 28

  However, though there may have been no overt pressure put on the Board
  to grant the certificate, the unsatisfactory circumstances in which the
  application was being made meant that, in fact, the Board was labouring
  under a great deal of pressure to grant the. certificate of inexpediency. As a
  result, the decision to grant the certificate was not made objectively or
  properly and the proceedings of the Works Supply and Tenders Board
  became a farce.

  These issues are explored further in Chapter 8.

  * * * * * *

  Chapter 4

• Page 39 of 109

• ,

  29

  5. THE TERMS OF THE CONTRACTS

  [5.1] AFTERNOON OF 8 DECEMBER 1993: MINISTER LEAVES FOR
  MALAYSIA

  On the afternoon of Wednesday 8 December 1993, Minister Tohian, together with
  members of the project management group, left for Malaysia. On this trip, the
  Minister signed four agreements on behalf of the Independent State of Papua
  New Guinea:

  the loan agreement;

  the project contract assignment;

  the construction contract;

  a side letter to the construction contract.

  [5.2] THE LOAN AGREEMENT

  The loan agreement is between the Independent State of Papua New Guinea
  (the borrower), the Bank Industri Malaysia Berhad (the arranger and agent) and
  the lending institutions which have made varying commitments in respect of the
  loan facility of US$50 million.

  The lenders and their respective commitments are:

  Maybank International (L) Ltd US$22 million

  BBMB International Bank (L) Ltd US$10 million

  D & C Bank (L) Ltd US$10 million

  Bank Industri Malaysia Berhad US$ 8 million

  Chapter 5

• Page 40 of 109

• 30

  The loan facility is repayable at a variable interest rate, which basically
  represents the London Inter-Bank Offered Rate (LlBOR) plus 1% (see Clause
  5.2). (“LlBOR” refers, generally, to the rate at which United States dollars are
  offered by prime banks in the London Inter-Bank Money Market.)

  When the Secretary for Finance, Mr. Aopi, appeared before the Commission on
  13 December 1993, he advised that the then LlBOR rate was 3.375%; which
  meant that the interest rate applicable to the loan agreement of that time would
  have been 4.375%.

  While ostensibly this may appear an attractive rate of interest, it must be noted
  that the interest rate to which the State is subject is variable and will be
  determined by market forces in the international money market. As the
  repayments will be in United States Dollars, the loan agreement is commercial in
  character. It is not a “soft” loan.

  This commercial loan agreement is conditional upon the State entering into the
  construction contract with the YTL Company (Clause 4.2 and Schedule 1). The
  loan agreement is to be governed by the laws of Malaysia and any dispute
  arising in connection with the agreement is to be determined by the
  courts of Malaysia (Clause 19.14).

  [5.3] THE PROJECT CONTRACT ASSIGNMENT

  In addition to the loan agreement and the construction contract, a further
  agreement was signed in Malaysia, entitled “Project Contract Assignment”. Under
  this agreement the State, as beneficial owner, has agreed to assign all its rights,
  title and interest in the construction contract to Bank Industri Malaysia Berhad.
  This assignment is expressed to be “as security for the due and prompt payment
  and discharge of the sums payable under the loan agreement”.

  The terms of the assignment further provide that, notwithstanding the
  assignment, the State is authorised to continue to deal with the YTL Company in
  relation to the construction contract as if it remained solely entitled to all the
  rights, title, interest and benefits under that contract; provided that if the State is
  in default, the foregoing authority ceases to have effect and the assignment in
  favour of Bank Industri Malaysia Berhad will operate.

  [5.4] THE CONSTRUCTION CONTRACT: SCOPE OF THE WORKS

  The construction contract is between the Independent State of Papua New
  Guinea and the YTL Company. The contract sum is US$55.5 million, to be
  funded as follows:

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  > the US$50 million commercial loan; and

  > an aid grant of US$5.5 million from the Government of the
  Federation of Malaysia.

  The scope of the works includes the design and construction or renovation of the
  following structures:

  1. 6 Units of Type 1 three bedroom stand alone houses.

  2. 164 Units of Type 2 three bedroom stand alone houses.

  3. 40 Units of Type 3 three bedroom stand alone houses.

  4. 40 Units of Type 2 two bedroom duplex houses.

  5. 126 Units of Type 3 three bedroom duplex houses.

  6. 10 Blocks of 4 unit two storey three bedroom flats.

  7. 15 Blocks of 6 unit two storey three bedroom flats.

  8. 6 Blocks of single storey 20 person barracks.

  9. 4 Blocks of two storey 40 person barracks.

  10. 3 Blocks of three storey 120 person barracks.

  11. The renovation of 11 blocks of three storey singles accommodation to
  convert the same to twin bedroom accommodation for a total of 1,188
  persons.

  The project will provide housing for members of the disciplined forces at Bomana,
  Gerehu, Kaugere, Kila, McGregor, Murray and Taurama Barracks.

  Chapter 5

• Page 42 of 109

• I:!
  32

  [5.5] THE SIDE-LETTER OF 20 OCTOBER 1993

  In addition to the works listed above, the YTL Company has promised, in a “side-
  letter” dated 20 October 1993, to construct a new Officers’, NCO and OR mess
  and communal facilities at the Air Transport Squadron site at Jackson’s Airport,
  “at no cost to the State”. This work will be undertaken during Phase 2 or Phase 3
  of the contract, “depending on the state of readiness of the site.”

  The YTL Company has also given other undertakings in the side-letter:

  to make good any damages caused by fair wear and tear to the
  buildings for a period of six months after the duration of the contract;
  and

  to contribute US$1.3 million to the costs of project management;
  and

  to procure professional services, labour, materials and sub-
  contractors locally and to employ local workmen (in order to give
  effect to the 35% local content requirement which is incorporated as
  a term of the contract).

  The Ombudsman Commission notes that the undertakings in the side letter do
  not appear to form part of the contract.

  [5.6] NO TAXES WILL BE PAID BY THE YTL COMPANY

  When the National Executive Council considered the project in June and
  December 1993, it was decided that all goods imported for the project would be
  exempt from import duty and that all payments made for services rendered in
  connection with the project would be exempt from income tax (see NEC Decision
  Nos. 90/93 and 197/93). Those decisions are incorporated in Supplementary
  Provision S3, which states:

  “The Employer warrants that it shall exempt the Contractor and its personnel from (or the
  Employer shall bear the cost of) any taxes, duties, fees, levies and other impositions
  imposed under the laws and regulations in effect in Papua New Guinea on the Contractor
  and its personnel in respect of:

  (a) any payments made to the Contractor and its personnel, other than payments made
  to personnel who are Papua New Guinea citizens, in connection with the·
  construction of the Disciplined Forces Institutional Housing Project;

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• 33

  (b) any equipment, materials and supplies brought into Papua New Guinea for the
  purpose of constructing the Disciplined Forces Institutional Housing Project and
  which, after having been brought into Papua New Guinea, will subsequently be re-
  exported;

  (c) any equipment imported for the purpose of construction [sic) the Disciplined Forces
  Institutional Housing Projects and paid for out of funds provided by the Employer
  and which is treated as property of the Employer;

  (d) any property brought into Papua New Guinea by the Contractor, its personnel, or the
  eligible dependents of the personnel for their personal use and consumption and
  which will be consumed in Papua New Guinea or will subsequently be re-exported
  on the departure of the Contractor and its personnel from Papua New Guinea;

  Provided that:

  (1) the Contractor and its personnel and their eligible depends [sic) shall follow
  the usual customs procedures of the Government in importing property into
  Papua New Guinea; and

  (2) if the Contractor or any of its personnel or their eligible dependents do not
  consume or withdraw, but dispose of any property in Papua New Guinea on
  which customs duties have been exempted, the Contractor shall bear such
  customs outlines [sic) in conformity with the laws and regulations of the
  Government.”

  The effect of Supplementary Provision S3.1 is that:

  > The YTL Company will pay no Papua New Guinea tax in respect of
  the income it derives from the project.

  > None of the non-citizen employees of the YTL Company will
  pay any income tax.

  > The only persons working on the project who will pay income
  tax will be Papua New Guinea citizens.

  > All equipment, materials and supplies will be exempt from import
  duty.

  > Any goods brought into Papua New Guinea for the personal
  use of the non-citizen employees of the YTL Company will be
  exempt from duty.

  The State is obliged by Supplementary Provision S3.2 to “use its best
  endeavours to ensure the early passage of any legislation necessary to achieve
  the above income tax and customs exemptions”. But in the event that the
  necessary exemptions are not passed into law, the State will still bear the cost of
  all these concessions. If, for example, construction equipment is imported by YTL
  and an exemption is, for some reason, not granted, the State will be obliged to

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  J

• Page 44 of 109

• ,I “”
  !

  34
  reimburse YTL for any duty paid. If a non-citizen employee of YTL brings a hi-fi
  stereo into Papua New Guinea for his or her personal use and is required to pay
  duty on it, the State must reimburse the employee.

  Despite the restrictions imposed on disposal of such imported goods and
  equipment, these provIsions confer extraordinarily generous tax
  concessions on the YTL Company and its non-citizen employees. These
  concessions may have been justified if this were a genuine aid project.
  However, this is not an aid project and it is the opinion of the Ombudsman
  Commission that such generous concessions should never have been
  agreed to.

  [5.7] FURTHER CONCESSIONS GIVEN TO THE YTL COMPANY AND
  ITS ASSOCIATES

  There are some other important terms of the construction contract that must be
  highlighted.

  The State has agreed to exempt the YTL Company and its personnel and any
  independent consultants or sub-contractors employed by YTL, from any
  requirement to register or obtain a permit to practice any profession in Papua
  New Guinea (Supplementary Provision S3.3(e)). This is an intriguing clause, as
  its purported effect appears to be that all tradesmen, consultants and
  professional advisers employed by the YTL Company in connection with the
  project can be completely unlicensed, unqualified and unregistered.

  The Commission can only wonder whether this was the genuine intention of the
  parties when inserting the clause. No consideration seems to have been given to
  whether such a clause might conflict with the laws of Papua New Guinea dealing
  with licensing and regulation of the various trades and professions.

  [5.!!] STATE OBLIGED TO PREPARE SITES FOR THE YTL COMPANY

  Another crucial clause in the construction contract is Supplementary Provision
  S4, which requirc;;~ ,de State to bear the cost of preparing all the construction
  sites:

  “The [State] shall provide sites which shall be complete with infrastructural services
  and fully serviced. Each “Site” in this context shall mean each plot of land on which
  I,”: i a single building or a single block of building [sic] is to be constructed.”
  ·”I!
  Ill’ ‘ it is apparent from this clause that the true cost of this project will be much,
  !) greater than the sum of US$55.5 million. The contract sum is exclusive of the
  costs of road building, kerb and guttering, water, electricity, sewerage and other
  , ‘”i
  , ‘
  infrastructure, !ill of which must be provided by the State at its own expense. In
  I’

  ; ”

  ,I

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• Page 45 of 109

• 35
  the Public Investment Program submission in August 1993, the cost of site
  development work was estimated at K6,955,OOO.OO. This makes the total
  estimated project cost more than US$62 million, only US$5.5 of which is being
  financed by grant aid.

  The Ombudsman Commission can see no good reason why the Malaysian
  contractors are not being required to provide fully-serviced accommodation units.
  Why are these extra costs being borne by the State? And is there any guarantee
  that the three State Services involved in the project will have sufficient funds
  available in their respective budgets to cater for these additional costs? The
  prospect of this project being continually delayed while funding is sought for the
  preparation of the project sites cannot be dismissed as remote.

  [5.9] LOCAL CONTENT REQUIREMENT

  In the execution of the works, the contractor is required to procure and utilise
  Papua New Guinea local plant, equipment, materials, goods, labour and services
  to a total value of not less than 35% of the contract sum (Supplementary
  Provision S5).

  However, it is to be noted that the contract does not specify how the 35% figure
  is to be calculated, nor does it state what will fall into the definition of “Papua
  New Guinea local plant, equipment, materials, goods, labour and services”.

  In the course of the Secretary for Finance’s response to the Commission’s
  preliminary report, it was suggested that the YTL Company was restricted in the
  number of foreign nationals it was permitted to engage to work on the project.
  However, when the Secretary for Finance, Mr. Aopi, was invited to identify the
  source of this claim, he could not do so. He said that the YTL Company was:

  ….. bound to comply with various legislation in Papua New Guinea includinJ those
  related to the employment of foreign nationals”.

  Furthermore, Mr. Aopi stated:

  “As well, YTL’s plan and base camp requirements assume total foreign national
  staffing of up to 20 foreign nationals. This level of foreign staffing is expected to
  reduce over time.”

  [Letter: Secretary for Finance to Chief Ombudsman, 15.2.94.]

  Whatever the informal indications by the YTL Company may have been, it
  is clear that there are no restrictions imposed by the contract on the
  number of foreign nationals permitted to be engaged on the project. This
  is regrettable.
  ******

  Chapter 5

• Page 46 of 109

• 36

  6. OTHER KEY FINDINGS OF FACT

  [6.1] OTHER FINDINGS OF FACT

  There are some other important findings of fact which the Commission must
  make prior to forming its opinion on wrong conduct and defective administration.
  These additional findings of fact are:

  1. Alternative sources of funding the project have never been sought.

  2. The project has never been put to public tender.

  3. The project has never been approved, or considered, by the
  National Parliament.

  4. The aid component of the total project cost is less then 10%.

  [6.2] AL TERNATIVE SOURCES OF FUNDING NOT SOUGHT

  No attempt has been made to obtain funding for this project from sources such
  as the Asian Development Bank or the World Bank. Nor has any attempt been
  made to fund the project from domestic sources, or from any foreign source other
  than the Malaysian financial institutions with which the loan agreement has been
  executed.

  [6.3] NO PUBLIC TENDER

  This project has not been subject to public tender, nor have expressions of
  interest been called for in relation to the provision of finance, the design or
  construction of the works. This is despite the fact that in December 1991, the
  National Executive Council decided that alternative arrangements be sought to
  develop the project, including the invitation of public tenders.

  All negotiations for this project have been carried out on the assumption that the
  construction contract would be awarded to the YTL Company.

  [6.4] NO CONSIDERATION OF THE PROJECT BY THE NATIONAL
  PARLIAMENT

  Despite the requirements of the Public Works Committee Act, this project has’
  never been brought to the attention of the Public Works Committee, nor has it
  been formally considered or authorised at any time by the National Parliament.

  Chapter 6

• Page 47 of 109

• 37

  [6.5] NOT AN “AID PROJECT” OR A “GOVERNMENT – TO –
  GOVERNMENT ARRANGEMENT”

  Throughout the life of the disciplined forces institutional housing project, it has
  been suggested in various quarters that it is an “aid project”, supported by a
  “Government-to-Government” arrangement. However, it is evident from an
  analysis of the total project cost and the sources of finance from which the
  project is to be funded, that those are quite misleading descriptions.

  The total project cost and the sources of finance are summarised in the tables
  below.

  TOTAL PROJECT COST

  APPROXIMATE KINA
  EQUIVALENT AS AT
  COST COMPONENT U.S. DOLLARS 15.12.93 (DATE OF
  EXECUTION OF THE
  CONTRACTS)’
  CONSTRUCTION 55.500 million 54.648 million
  CONTRACT WITH YTL
  COMPANY
  (inclusive of project
  management costs of
  US$1.3 million)”

  SITE DEVELOPMENT 7.063 million 6.955 million
  WORK”

  TOTAL PROJECT 62.563 million 61.603 million
  COST’”

  Notes re the total project cost:
  , Based on an exchange rate of K1.00/US$1.0156.
  ” If there are over-runs in the costs of project management or site
  development, they will be borne by the State, as the YTL
  Company is not contractually bound to provide for either of
  these items.
  ‘” Exclusive of interest repayments.

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• Page 48 of 109

• 38

  SOURCES OF FINANCE

  APPROXIMATE KINA
  EQUIVALENT AS AT
  SOURCE U.S. DOLLARS 15.12.93 (DATE OF
  EXECUTION OF
  CONTRACTS)
  COMMERCIAL LOAN
  FROM SYNDICATE OF 50.000 million 49.232 million
  MALAYSIAN BANKS

  NORMAL
  BUDGETARY 7.063 million 6.955 million
  APPROPRIATIONS

  GRANT FROM
  GOVERNMENT OF 5.500 million 5.416 million
  MALAYSIA

  TOTAL FUNDING 62.563 million 61.603 million

  [6.6] THE AID COMPONENT

  This analysis reveals that the aid provided by the Government of Malaysia will
  contribute only US$5.5 million to the total project cost (exclusive of interest
  repayments on the commercial loan from the Malaysian banks) of US$62.563.
  That is, the aid component is approximately 8.79% of the total project cost.

  Clearly, this is neither an “aid project” nor a “Government-to-Government”
  arrangement. It is, in truth, a major public works project which is to be
  implemented via a commercial construction contract with the YTL Company
  ill and a commercial loan agreement with the syndicate of Malaysian banks,
  I.
  supplemented by a small aid grant.

  Despite the commercial character of the contracts, the Independent State of
  Papua New Guinea has seen fit to include in the construction contract a
  number of tax and other concessions which are usually only granted in
  respect of genuine aid projects.

  ‘* ‘* ‘* ‘* ‘* ‘*

  Chapter 6

  ,
  , .

• Page 49 of 109

• 39

  FINDINGS OF WRONG CONDUCT
  AND DEFECTIVE ADMINISTRAnON

  * * * * * *
  The Ombudsman Commission is concerned about a number of aspects of the
  decision-making process which resulted in the State entering into contracts for
  this project.

  The main concerns are:

  that the project was not put to public tender;

  that the certificate of inexpediency was improperly granted by the
  Works Supply and Tenders Board;

  that proper procedures for execution of State contracts were not
  followed;

  that the Public Works Committee Act was totally ignored;

  that the costing of the project left no guarantee that the State was
  getting value for money;

  that alternative funding arrangements were not pursued;

  that the project involves the unnecessary importation of foreign skills
  and resources. contrary to the National Goals and Directive
  Principles of the Constitution; and

  that the arbitrary selection of one particular foreign enterprise
  aroused suspicion about the decision-making processes of the
  National Government.

  These concerns are outlined in Chapters 7 to 14. In Chapter 15 the Commission
  records its formal findings for the purposes of Section 219(1) of the Constitution
  and Section 22(1) of the Organic Law on the Ombudsman Commission.

  * * * * * *

• Page 50 of 109

• 40

  7. THE FAILURE TO FOLLOW PUBLIC TENDER
  PROCEDURES

  [7.1] NO VALID REASON FOR FAILURE TO CALL PUBLIC TENDERS

  The purpose of the public tender procedures of the Public Finances
  (Management) Act is to avoid the making of “private” deals, to minimise the risk
  of corruption and to create a competitive bidding environment. It was vitally
  important that a project of this magnitude, which is being financed principally by a
  commercial loan, be put to public tender.

  It was especially important, given the nature of this particular project, that tenders
  be called. There are a number of locally-based construction companies which
  have the expertise and experience to undertake a project of this nature. Papua
  New Guinea has a thriving and competitive construction industry, so the question
  must inevitably be asked: Why did the National Executive Council decide to give
  the project to an overseas company, which has no track record in Papua New
  Guinea, without even calling for expressions of interest from locally-based
  companies?

  If the National Executive Council lacked confidence in the ability of the local
  industry to provide a suitable contractor, any number of overseas contractors
  could have been invited, through the normal public tender process, to submit
  bids.

  The Ombudsman Commission acknowledges that negotiations for this project
  were initiated at a high level between the Governments of Papua New Guinea
  and the Federation of Malaysia. However, that does not provide any justification
  for by-passing the public tender process. On the contrary, in such
  circumstances, there is an even greater need for the public tender process to be
  allowed to run its normal course. The People of Papua New Guinea must be
  able to know that the contracts for this project have been awarded fairly, carefully
  and without undue influence; otherwise the deal, though initiated at the top level,
  is questionable.

  The Commission also acknowledges that the Government of the Federation of
  Malaysia has offered to provide aid funding in resp~ct of this project. However,
  the aid component represents less than 10% of the total project cost.

  The Ombudsman Commission can see no valid reason why public tenders
  were not called for th is project.

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• Page 51 of 109

• 41

  [7.2] MISCONCEPTIONS ABOUT PUBLIC TENDER PROCEDURES

  This project could not have proceeded unless the Works Supply and Tenders Board
  certified that the inviting of tenders was “impracticable or inexpedient”. In the
  application for a certificate of inexpediency, the chairman of the project management
  group advanced the following reason why it was considered inexpedient to invite
  tenders:

  “Following Government to Government agreement in 1991, the NEC approved in
  principle a Turn-Key Project Funded by a Consortium of four Malaysian Bank.[sic] In
  addition it agreed that Malaysian Contractor YTL be the Preferred Contractor for the
  Projec!.”

  [Application for certificate of inexpediency, 2.9.93.]

  Similar reasons were advanced by the State Solicitor, Mr. Gelu, when he responded
  to the Commission’s preliminary report on 8 December 1993. Mr. Gelu stated:-

  “I have noted that … you have highlighted that although my office was involved in the
  negotiation, no attempts were made to ensure that legal requirements are corn plied
  with. I attached herewith a copy of legal advise to the Secretary for Finance and
  Planning dated 27th August, 1993.

  [fhis advice stated that before the project management agreement could be
  executed, a certificate of inexpediency would have to be granted by the
  Works Supply and Tenders Board.]

  As you may be aware the Discipline Forces Institutional Housing Project is a
  Government to Government initiative which has been endorsed by Cabinet on three
  separate occasions. In order to implement the Cabinet decision a Project Management
  Group was set up. Mr. Robert Irung the Assistant State Solicitor (Commercial) Division
  is the Department’s representative in the group. Because it is a Government to
  Government initiative my office have been advising on along that a Certificate of
  Inexpediency is required under Section 40 of the Public Finances (Management) Act.
  That advise was confirmed in the letter attached.

  Therefore a formal application for a Certificate of Inexpediency was made on the 8th of
  September, 1993. I considered that calling of public tender may not be possible due to
  the nature of arrangements made by the two (2) governments.”

  [Letter: State Solicitor to Chief Ombudsman, 8.12.93.]

  In the opinion of the Ombudsman Commission, the reasons advanced by the
  chairman of the project management group and the State Solicitor fell well short of
  establishing that it was “impracticable” or “inexpedient” to invite tenders for the
  project. Implicit in the reasons were three fundamental misconceptions about public
  tender procedures, and this project:

  the misconception that the National Executive Council has power to
  waive tender procedures; and

  Chapter 7

• Page 52 of 109

• 42
  the misconception that turnkey projects are not subject to tender
  procedures; and

  the misconception that “Government-to-Government” arrangements
  avoid the necessity to call public tenders.

  I
  . , [7.3] THE NATIONAL EXECUTIVE COUNCIL DOES NOT HAVE POWER
  TO WAIVE TENDER PROCEDURES

  The Commission encountered this same misconception during its investigation of the
  ”
  Poreporena Freeway project. In the Freeway Report, the Commission stated:
  !I

  :” “Though the National Executive Council is one of our most important decision-
  1’1′ making bodies, it is not above the laws made by Parliament. Our legal system
  I”
  is not based on “rule by decree”. The rule of law is paramount. We have a
  sophisticated system of checks and balances, which ensures that the powers
  to make and administer and interpret laws are not monopolised or abused.

  All persons and bodies in Papua New Guinea exercising governmental power-
  including the National Executive CounCil, the Governor-General, the Judges, the
  Parliament, the Ministers, the Ombudsman Commission and all the
  constitutional office-holders – must operate within the confines of the powers
  given to them by the People through the Constitution and other laws, such as
  Acts of the Parliament.

  There is nothing in the Constitution or an Act of Parliament which gives the
  National Executive Council power to waive tender procedures.”

  [The Report of an Investigation into the Spring Garden Road/Poreporena Freeway Project,
  18.12.92, Chapter 35, pages 413 – 414.]

  Unfortunately, not a lot has been learned since the publication of the Freeway
  Report. Throughout the life of the disciplined forces institutional housing project, the
  attitude of all the Government’s advisers has been: the contractor has been
  approved by the National Executive Council and therefore it is not necessary for the
  project to go to tender.

  This attitude was irresponsible and wrong.

  [7.4] TURNKEY PROJECTS ARE SUBJECT TOTENDER PROCEDURES

  The Commission also pointed out in the Freeway Report that if a project is proposed
  to be undertaken using turnkey financing, it is still necessary for the project to
  comply with the Public Finances (Management> Act.

  The fact that the National Executive Council decided that tenders should not be
  called, and approved a particular contractor to undertake the disciplined forces
  institutional housing project using turnkey financing, did not mean that it was either
  impracticable or inexpedient to invite tenders.

  Chapter 7

• Page 53 of 109

• 43

  [7.5] THIS IS NOT A GOVERNMENT-TO-GOVERNMENT PROJECT

  The notion that this project is being undertaken on a “Government-to-Government”
  basis is misleading and wrong. This is not an aid project. The vast bulk of the cost
  of the project is being financed by a commercial loan. The aid component is less
  than 10%. The People of Papua New Guinea will be paying for this project for many
  years to come. The fact that the project may have been initiated at high levels of
  government, and that the other government involved has dictated who the contractor
  should be, is not a good reason for avoiding tender procedures. As the Commission
  stated earlier, that is precisely the reason why the public tender procedures should
  have been vigorously adhered to in this case.

  If the notion that this is a “Government-to-Government” project is accepted, then, in
  future, any Prime Minister or Minister of the State will be able to travel overseas,
  arrange a small aid grant from a foreign country, “select” a contractor, then come
  back to Papua New Guinea and say that a “Government-to-Government” deal has
  been arranged and that the calling of tenders is “inexpedient”. It is stating the
  obvious to say that this is a dangerous scenario, in which the risks of bribery,
  corruption and maladministration are unacceptably high. This notion should not
  have been entertained at all.

  As to the Prime Minister’s statement on the Government’s “Look North” policy, the
  Ombudsman Commission states that that policy is also not a sufficient reason for
  by-passing public tender procedures. If the policy of the Government of the day is
  that Asian-owned companies are to be given preference when awarding contracts
  for large construction projects, that policy must have some basis in law. At present
  there is, with respect, no basis for such a policy in the laws of Papua New Guinea.
  That policy, if accepted, must be implemented in accordance with the laws of Papua
  New Guinea.

  For all of the above reasons, the Ombudsman Commission records its grave
  concern that this project has not been put to public tender in accordance with
  the Public Finances (Management) Act.

  * * * * * *

  Chapter 7

• Page 54 of 109

• ……….————–
  11,li

  Ilil
  ,Ill
  “11

  44

  8: THE UNSATISFACTORY CIRCUMSTANCES IN
  WHICH THE CERTIFICATE OF INEXPEDIENCY
  WAS OBTAINED

  [8.1] THE DECISION TO GRANT THE CERTIFICATE WAS WRONG

  In this chapter, the Commission records its concerns about the circumstances in
  which the certificate of inexpediency was granted by the Works Supply and Tenders
  Board. We have concluded that the decision to grant the certificate was wrong
  because:

  1. Throughout the life of the project, the Works Supply and Tenders
  Board had been treated as a rubber stamp for the National Executive
  Council.

  2. The Board failed to address its mind to the relevant issues.

  3. The Board folded under pressure and simply made the decision which
  it thought it had to make, in order to avoid the possibility of adverse
  repercussions for members of the Board.

  [8.2] RESPONSE BY CHAIRMAN OF THE BOARD

  The above matters were put to each member of the Works Supply and Tenders
  Board. However, the Chairman of the Board, Mr Morea, was the only one to
  respond.

  Mr Morea stated:

  “Referring to the Ombudsman Commission report on the Preliminary Findings on the above
  subject, I agree in general and in principle of the findings. However, I would like to make the
  following comments particularly, in respect of the position of the Board and the circumstances
  surrounding the Application for Certificate of Inexpediency by the Project Management Group,
  recommending award of contract to YTL of Malaysia:

  (i) The delegation authority of the Board for awarding and entering into State
  contracts is only up to K1,OOO,OOO.00 as prescribed under the Public Finance
  (Management) Act 1986 per the relevant Instrument. Therefore, the Board can
  only recommend to the National Executive Council for award of contract with
  the value in excess of the K1.0 mil as stated above. Note: NEC Decision No.
  90193 of Meeting No. 35193 dated 17th June 1993 had in fact done that and
  someone may have later realised that other procedures were not followed.
  Under the circumstances surrounding the contract [sic]

  Chapter 8

• Page 55 of 109

• 45

  (ii) The project package was negotiated, commencing in 1991, on Government to
  Government basis under an established Defence Corporation with a Grant in
  Aid being provided by the Malaysian Government of US$5.5 mil.

  (iii) The State Solicitors, the legal advisor to the Board and any other Government
  agencies on matters of contracts, particularly the legal correctness, did advise
  that although the Application for Certificate of Inexpediency was submitted in
  retrospect, as long as the Board made its determination the formalisation of the
  contract was in order under the circumstances.

  (iv) As far as the Board is concerned, the project tender through the Application for
  Certificate of Inexpediency was duly submitted and all necessary information
  and documents plus a briefing by the Project Management Group given before
  the Application was considered and determined.”

  [Letter: Chairman, Works Supply and Tenders Board to Chief Ombudsman
  13.4.94.]

  Having considered this response, the Commission retains the view that the Board’s
  decision to grant the certificate of inexpediency was wrong.

  [8.3] THE WORKS SUPPLY AND TENDERS BOARD: A RUBBER STAMP
  FOR THE NATIONAL EXECUTIVE COUNCIL

  The Ombudsman Commission notes with concern that, though a Papua New Guinea
  delegation travelled to Malaysia to negotiate the loan package for the project as
  early as December 1991 (on the assumption that the construction contract would be
  awarded to the YTL Company), the application for the certificate of inexpediency
  was not made until September 1993. And though the Board had yet to determine
  that application, a second delegation, which included a lawyer from the State
  Solicitor’s Office, travelled to Malaysia in October 1993 to negotiate the contracts.
  Furthermore, in November 1993, plans were made to travel to Malaysia yet again
  in December 1993 – this time to execute the loan agreement and the construction
  contract – even though a certificate of inexpediency had still not been issued.

  The Ombudsman Commission is surprised that, although the State Solicitor’s Office
  was actively involved in all of the above negotiations, adequate steps were not taken
  to ensure that the legal requirements were complied with first. It is noted that on 27
  August 1993, Acting State Solicitor Singin wrote to the Secretary for Finance,
  advising him of the need to obtain a certificate of inexpediency. Despite this advice,
  the negotiations continued along their normal path, even though the certificate had
  not been obtained.

  It is apparent to the Ombudsman Commission that the granting of a certificate
  of inexpediency was being taken for granted and that the Supply and Tenders
  Board was being treated as a rubber stamp.

  Chapter 8

• Page 56 of 109

• 46

  Responses from the Prime Minister and the Secretary for Finance

  When the above concerns were expressed in the Commission’s preliminary report,
  the Prime Minister stated:

  Neither Cabinet, the Minister for Finance and Planning or any other Minister have
  issued directive for the Works Supply and Tenders Board for the issuance of a
  Certificate of Inexpediency.

  At no instance has the authority of the Works Supply and Tenders Board been
  questioned. It is on receipt of formal advice from the State Solicitor’s Office that a
  formal application has been lodged with the Supply and Tenders Board for the issuance
  of a Certificate of Inexpediency.

  Properly, the Works Supply and Tenders Board should be in a position to independently
  make a determination on the application for a Certificate of Inexpediency. Instead, the
  Commission has decided to go against its own recommendation by communicating its
  views to the Works Supply and Tenders Board not to issue a Certificate of
  Inexpediency. This was also undertaken prior to securing responses or comments on
  its preliminary report.

  My Government is committed to expanding PNG’s trading and funding arrangements to include
  non-traditional sources through its “look north” policy initiative and, to the extent that it will
  boost PNG’s interest, actively participate in the “south-south” regional cooperative
  arrangements.

  Equally important is my Government’s commitment to actively promote the welfare of its
  servicemen and their families through the provision of institutional houses under the
  Disciplined Forces Institutional Housing Project. Such action will not only improve the morale
  of the DiSCiplined Forces but will also assist in improving the law and order situation in Papua
  New Guinea.

  [Letter: Prime Minister Wingti to Chief Ombudsman, 2 December 1993.]

  The Secretary for Finance’s response was similar to that of the Prime Minister.
  Secretary Aopi emphasised that at no stage had any directives been given to the
  Works Supply and Tenders Board. He disagreed with the suggestion that the
  Board had been treated as a rubber stamp. He said members of the project
  management group had turned up to meetings of the Board on at least three
  occasions in relation to this project and, on each occasion, formal consideration of
  the project had been deferred.

  Secretary Aopi re-iterated that the grounds for securing a waiver of tender
  procedures in this case were:

  ” the project being undertaken on a Government to Government basis;

  turnkey arrangements and the terms and conditions under which the Grant Aid and
  Loan funding arrangements being based on the nomination of a particular tenderer;

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• Page 57 of 109

• 47

  the nominated tenderer having the technical and financial capability to undertake the
  project.”

  [Letter: Secretary for Finance to Chief Ombudsman, 3 December
  1993.]

  Supply and Tenders Board should not be treated as a rubber stamp

  With due respect to Secretary Aopi, his assertion that the Works Supply and
  Tenders Board was not being treated as a rubber stamp, is not borne out by the
  facts.

  Negotiations for the project had been continuing since 1991. The cost estimates
  were prepared in May-June 1991. The US$50 million loan offer was made by Bank
  Industri Malaysia Berhad in July 1991. The Papua New Guinea negotiating team
  travelled to Malaysia in December 1991, and the project was formally considered by
  the National Executive Council in December 1991. All of these things happened well
  before the application for the certificate of inexpediency in September 1993.

  After the application for the certificate was lodged, negotiations continued as if the
  certificate had been granted. The negotiating team travelled to Malaysia in October
  1993, then booked a flight to Malaysia for 8 December 1993 to execute the
  contracts. The Board did not meet to consider the application until the day before
  the negotiating team was due to fly to Malaysia.

  It is also significant that on 7 December – one day before the Board conveyed its
  decision to the project management group – Prime Minister Wingti wrote to the Prime
  Minister of Malaysia, Or. Mahathir, expressing Papua New Guinea’s “profound
  gratitude” for making the US$50 million loan available and requesting Or. Mahathir’s
  r. concurrence to allow Minister Tohian to execute the necessary contracts.
  le
  le The only conclusion that can be drawn is that all of the negotiations took
  et place on the assumption that the certificate would be issued. In other words,
  ,e the Board was being treated as a rubber stamp for the National Executive
  Jf Council.

  This was wrong. It was defective administration, and it made a mockery of the
  ~r public tender provisions of the Public Finances (Management) Act.

  Id

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• Page 58 of 109

• 48

  [8.4] THE “IMPRACTICABLE OR INEXPEDIENT” DECISION

  Another serious problem with the way in which the Works Supply and Tenders
  Board made its decision was that it failed to give proper consideration to its statutory
  function under Section 40(3)(b) of the Public Finances (Management) Act, which
  was to decide whether the calling of public tenders for this project was
  “impracticable or inexpedient”.

  The granting of a certificate under Section 40(3)(b) is a significant statutory power
  which must be exercised with the greatest of care. The certificate should state in
  clear and unequivocal terms whether it is considered “impracticable” or inexpedient”
  to call public tenders and it should also state the reasons for drawing that
  conclusion.

  In this case, it was clearly not “impracticable” to call tenders for this project. The
  Chairman of the Board, Mr Morea, conceded this when giving evidence to the
  Commission.

  If it was not impracticable to call tenders, why then was it “inexpedient”? In the
  opinion of the Ombudsman Commission, there must be some identifiable and
  tangible reason why it is inexpedient to call tenders, before a Supply and Tenders
  Board can properly decide to issue a certificate of inexpediency. “Inexpedient” in
  this context must mean something more than simply “inconvenient”. The calling of
  tenders should only be regarded as inexpedient if there is some special or
  exceptional or unforeseeable reason why, in the circumstances of a particular case,
  it is unnecessary to call tenders. When a natural disaster occurs, for example, the
  Government may have to purchase relief supplies at short notice, and the urgency
  of the situation may dictate that it is inexpedient to call tenders.

  In the present case, none of the reasons put on behalf of the project management
  group showed that it was inexpedient to call public tenders. The fact that the YTL
  Company had been approved by the National Executive Council, should have been
  dismissed as irrelevant, and wrong, because the NEC decision was contrary to the
  Public Finances (Management) Act. The assertion that this was a “Government-to-
  Government” arrangement should not have been accepted. (Though apparently it
  was; the Chairman of the Board testified that one of the factors that led to the
  granting of the certificate was that this was a Government-to-Government
  arrangement that had the full support of the Opposition.)

  Chapter 8

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• 49

  The fact that execution of the contracts was imminent was also not a good reason
  for granting the certificate. If it is, then all governmental bodies will in future be
  encouraged to by-pass normal tender procedures, engage in detailed negotiations
  and then go to the Board on the eve of executing the contracts, asserting that the
  calling of public tenders, at that late stage, is “inexpedient”. This sort of practice will
  only encourage abuses, maladministration, bribery and corruption.

  [8.5] THE BOARD FAILED TO APPRECIATE ITS STATUTORY
  FUNCTION

  The record of the Board’s decision gives no indication of why it decided to grant the
  certificate. One explanation for this is that there were no good reasons for the
  certificate being granted – so none could be recorded. But there is also another
  explanation of why the Board failed to disclose reasons for its decision, and that is
  that the Board failed to appreciate what its proper statutory function was.

  The Board attempted to examine the contract documents and decide for itself
  whether the State was getting value for money from the project; whether the loan
  agreement was satisfactory; how the 35% local content requirement was to be
  calculated; whether the new cladding material proposed to be used would be
  suitable and so on. Apparently, the Board thought its role was to recommend the
  YTL Company to undertake the project. But even in this role, the Board could not
  function effectively. It had no proper opportunity to examine the draft contracts put
  before it by the project management group. It did not have time to assess whether
  the materials proposed to be used would result in housing of a sufficient quality and
  whether the State would be getting value for money from the project. The task of
  examining all the complex contractual documents and the attached design
  specifications and satisfying itself on all these matters in the space of a few hours
  was impossible ..

  But, in any event, in the opinion of the Ombudsman Commission, it was not the
  function of the Board to recommend the YTL Company to undertake the project. Its
  role was to certify that the calling of public tenders was either “impracticable or
  inexpedient”. It had to satisfy itself that there was some good reason why public
  tenders should not be called.

  In making this decision, it may have been appropriate to consider the credentials of
  the YTL Company and the other matters that the Board attempted to investigate.
  But the Board had to go one step further: it had to identify some particular reason
  why it was impracticable or inexpedient to call public tenders. This, it failed to do.
  As a redult, the proceedings of the Board miscarried. There was no justification for
  issuing a certificate of inexpediency and the Board’s decision was therefore wrong.

  Chapter 8

• Page 60 of 109

• 50

  [8.6] THE WORKS SUPPLY AND TENDERS BOARD FOLDED UNDER
  PRESSURE

  The fact that the Works Supply and Tenders Board was being treated as a rubber
  stamp resulted in a most unsatisfactory situation arising on 7 December 1993.

  On the morning of that day, the Board convened to hear submissions in support of
  the application for the certificate of inexpediency. However, some members of the
  project management group who were making the submission had already booked
  seats on the flight to Malaysia the next ~ay. They were due to fly out with the
  Minister for Defence to execute the contracts.

  The Ombudsman Commission is left to wonder what would have happened if the
  Board decided not to grant the certificate. Certainly the negotiating team, the
  Minister for Defence, the members of the National Executive Council, the
  Government and the Prime Minister would have been severely embarrassed. This
  was made clear, in a subtle, but effective, way, to the members of the Board at the
  meeting on 7 December 1993.

  And who would have received the blame if this “embarrassing situation” had arisen?
  The members of the project management group? No. The Minister? No. The
  Ombudsman Commission? Perhaps. The Works Supply and Tenders Board?
  Certainly. That, at least, is the way that the members of the Board appeared to view
  the situation. They obviously felt they would stand accused of being the obstacle to
  the project going ahead if they withheld the certificate. So, instead of addressing
  their minds to the real issues raised by the application for the certificate, they made
  the only decision that could save the “embarrassing situation” from arising. The
  Works Supply and Tenders Board meekly accepted its role as the rubber stamp for
  the National Executive Council; it failed to address its mind properly to the
  independent statutory discretion it had to exercise; and it folded under pressure.

  Lest there be any doubt that this was the true situation, the Commission will now
  refer to the transcript of the evidence that was given to the Commission by the
  Chairman of the Works Supply and Tenders Board, Mr. Gavera Morea, on Tuesday
  14 December 1993. This was just one week after the Board had granted the
  certificate of inexpediency.

  Ombudsman
  Commission “Is it fair to say – just comment on this – is it fair to
  say that if the Board takes the same approach in
  future as it took as in this case, that if the NEC
  1

  I’
  , !!
  decides on a selected contractor, that the Board will
  issue a certificate of inexpediency?

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• Page 61 of 109

• 51

  Mr Morea Well I can only say that a precedent has been set.
  But then the Board will have to take into
  consideration all the existing circumstances. Why not
  the other options? Okay, why COl [Certificate of
  Inexpediency]? What is the nature of COl? What are
  the conditions being imposed in the application for
  the COl? I mean, if I remain as the Chairman of the
  Tenders Board, you know, I will definitely refer to this
  as a precedent, you see, but then the normal
  procedures, normal consideration of the Board will
  have to go ahead, you know, before looking at the
  other side, the conditions being imposed.

  Ombudsman
  Commission Would you agree that it was not impracticable to call
  tenders for this project?

  Mr Morea Unfortunately yes.

  Ombudsman
  Commission So that only leaves you with
  inexpedient.

  Mr. Morea You see we were not given, there is every evidence
  to indicate that we were not given adequate
  opportunity to consider fully or adequately the nature
  of the application for the certificate of inexpediency,
  because of lack of documents.

  Ombudsman
  Commission Why didn’t you just say no – no certificate?

  Mr. Morea Well I can’t, it’s a Board decision, it’s not just a one
  man’s decision.

  Ombudsman
  Commission But you weren’t, it was a unanimous decision?

  Mr. Morea Yes, of the Board.

  Ombudsman
  Commission So, it’s your decision?

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• Page 62 of 109

• 52

  Mr. Morea Well I’m part of it, I must admit.

  Ombudsman
  Commission So why didn’t you just say no?

  Mr. Morea Got to be careful. Because, it’s not my personal
  decision, it’s a Board decision.

  Ombudsman
  Commission You mean you have to be careful for the security of
  your job?

  Mr. Morea I am a public servant, yes, the level I am heading, if
  the Government decides to, you know, I am going on
  contract January this year.

  Ombudsman
  Commission In 1994?

  Mr. Morea 1994. And I just have to perform, if I don’t perform
  than that could be, you know, a consideration, if I am
  not doing my job properly, then the Government will
  just kick me out. But these are unfair pressures put
  on public servants by the Government. Last of all,
  the public servants are there to serve the
  government of the day.

  Ombudsman
  Commission Do you think the Board should be completely
  independent?

  Mr Morea That is my wish.”

  [8.7] PROCEEDINGS OF SUPPLY AND TENDERS BOARD WERE A
  FARCE

  The Commission acknowledges the candour with which Mr. Morea gave this
  evidence to the Commission. The lack of independence of the Works Supply and
  Tenders Board is a major problem. It is comprised of public servants who have a
  very difficult job to do and who must make decisions which are inevitably
  controversial and often involve large sums of money. The members of the Board are
  given no protection from political and other influences.

  Chapter 8

• Page 63 of 109

• 53

  In the present case, this lack of protection meant that the Board did not do its job
  properly. The Chairman thought that the security of his employment was at risk if he
  made the wrong decision. So, the members of the Board made the decision which
  they thought was expected of them by the Government.

  As a consequence, the proceedings of the Board which resulted in the
  decision to grant the certificate of inexpediency, were a farce.

  * * * * * ..

  Chapter 8

• Page 64 of 109

• 54

  9: THE UNSATISFACTORY CIRCUMSTANCES IN WHICH
  THE MINISTER FOR DEFENCE WAS DELEGATED
  POWER TO EXECUTE THE CONTRACTS

  [9.1] CONTRACTS SIGNED BY THE MINISTER FOR DEFENCE

  One of the many unusual aspects of this project is that both the construction
  contract and the loan agreement were executed on behalf of the State by the
  Minister for Defence, rather than by the Governor-General. The Ombudsman
  Commission is concerned about the propriety and legality of this procedure.

  [9.2] WHO HAS THE POWER TO EXECUTE CONTRACTS ON BEHALF
  OF THE STATE?

  In the vast majority of State contracts worth more than K1 million, it is either the
  Governor-General acting on the advice of the National Executive Council, or the
  Minister for Finance and Planning, who sign on behalf of the State. This practice
  derives from Section 46(1) of the Public Finances (Management) Act, which states:

  “Where there is no provision in any law as to the person or authority empowered to execute a
  contract or agreement on behalf of the State. that contract or agreement may be executed by –

  (a) the Minister; or
  (b) the Head of State, acting on advice.”

  (In relation to public works contracts worth up to $1 million, the Works Supply and
  Tenders Board has authority to execute the contracts by virtue of Section 42(6)(b)
  of the Public Finances (Management) Act and Statutory Instrument No. 11 of 1992.)

  Prior to the Supreme Court’s decision in the recent case of Curtain Bros (Qld) Pty
  Ltd and Kinhill Kramer pty Ltd v The State (SCA 75/93; 9.11.93), it had generally
  been accepted that the effect of Section 46(1) was that State contracts worth more
  than K1 million could – with two limited exceptions – only be executed by the
  Governor-General or the Minister for Finance and Planning. The exceptions to this
  general rule were, first, where there was some provision in another Act of
  Parliament authorising a person to execute contracts on behalf of the State and,
  secondly, where the powers in Section 46(1) had been delegated to another person.

  The Court’s decision in the Curtain Bros-Kinhill Kramer case did not coincide with.
  this generally accepted interpretation of Section 46(1). The Court, by a 2/1 majority,’
  (Kapi DCJ and Hinchliffe J; Jalina J dissenting) decided that the term “any law” in
  Section 46(1) included the common law of agency. Thus a public servant could

  Chapter 9

• Page 65 of 109

• «

  55
  enter contracts as an agent of the State, notwithstanding the apparent restrictions
  imposed by the various financial delegations imposed under the Public Finances
  (Management) Act. In that case, the Court held that an officer of the Department of
  Transport had effectively agreed to settle a US$14 million compensation claim by
  the Curtain 8ros-Kinhill Kramer consortium in relation to the aborted Poreporena
  Freeway project. This agreement, which was evidenced by a two-paragraph
  handwritten document, was therefore binding on the State.

  As a result of the Supreme Court’s decision, it appears that it is now possible for
  any officer of the National Public Service and any Minister of the State to execute
  contracts on behalf of the State for multi-million kina projects. The Ombudsman
  Commission regards this as a very undesirable and dangerous situation, which must
  be rectified as soon as possible by an amendment to the Public Finances
  (Management) Act. A formal recommendation to that effect is made in Chapter 16.

  [9.3] DELEGATION OF POWER TO THE MINISTER FOR DEFENCE

  When the Minister for Defence executed the contracts for the disciplined forces
  institutional housing project, he did not rely on his common law authority as “agent”
  of the State. Instead, he purported to act in accordance with an instrumenL of
  delegation which had been executed by the then Minister for Finance and Planning,
  Sir Julius Chan, on 18 October 1993.

  The Ombudsman Commission accepts that the Minister for Finance and Planning
  was legally permitted by the Ministers (Delegation) Regulation (Chapter No. 35) to
  delegate his power to execute contracts for this project. However, we have serious
  reservations about the desirability of such a procedure.

  Section 2(1) of the Ministers (Delegation) Regulation states:

  “A Minister may, by writing under his hand, delegate to any person all or any of his functions
  under any Act … to enter into and execute any contract or agreement so that the delegated
  powers or functions may be had and exercised by the delegate in relation to an agreement or
  contract or any class of agreement or contract.”

  Section 39 ofthe Regulation also specifically authorises the Minister for Finance and
  Planning to delegate his power under Section 46 of the Public Finances
  (Management) Act to execute contracts on behalf of the State.

  In the present case, Sir Julius Chan’s instrument of delegation stated:

  Chapter 9

• Page 66 of 109

• r:l”.i·,I,1
  I
  , ‘:,1
  ,I’
  i
  11

  ii”

  1’1:
  56

  “I, SIR JULlUS CHAN, KBE, MP, Minister for Finance and
  Planning hereby delegate to Honourable Paul Tohian, MP,
  Minister for Defence all my powers and functions under Section
  2 of the Loans (Overseas Borrowing) Act No. 2 (Chapter 133A)
  and Section 46 of the Public Finances (Management) Act 1986
  pursuant to powers given to me under Section 2 of the
  Ministers’ Delegation Regulation (Chapter 35) and all other
  powers me enabling, to enter into and execute the Loan
  Agreement between the Independent State of Papua New Guinea
  Bank Industri Malaysia Berhad of Malaysia [sic] and Project
  Agreement between the Independent State of Papua New Guinea
  and Syarikat Pembenaan Yeoh Tiong Lay Sdn Bhd.

  Dated this Eighteenth day of October, 1993.

  [Signed]

  SIR JULIUS CHAN, KBE, MP
  Minister for Finance and Planning”

  ‘I’
  I
  ,
  ,

  [9.4] CONCERNS ABOUT THE LEGALITY AND PROPRIETY OF THE
  EXECUTION OF THE CONTRACTS BY THE MINISTER FOR
  DEFENCE

  Having examined the way in which the Minister for Finance and Planning delegated
  his powers, and the manner in which the Minister for Defence used them, the·
  Ombudsman Commission has a number of reservations about the legality and
  propriety of the procedure that was adopted.

  When the matters outlined below were put to Sir Julius Chan, he responded in the
  following way:

  “A policy submission was made to Cabinet in my absence and was subsequently approved and
  In view of the official endorsement of the department and my non·availability it was
  I recommended to me that the procedure to effect the transaction would be by delegation.”

  [Letter: Sir Julius Chan to Chief Ombudsman, 29.3.94.]

  Chapter 9

• Page 67 of 109

• 57
  Sir Julius also stated that he was concerned that proper procedures were not being
  followed in relation to this project. He said that, following the experience of the
  Poreporena Freeway inquiry, he referred the matter to the Department of Finance
  and Planning to formally advise him whether this was the case. Sir Julius stated that
  he withheld final approval of the project for approximately six months until such time
  as he received official endorsement from the Department.

  With due respect to Sir Julius, it is apparent that he was very poorly advised by his
  Department in relation to this project. If Sir Julius and his advisers had properly
  considered the findings of both the Ombudsman Commission and the Ellis
  Commission of Inquiry concerning the Poreporena Freeway, it would have been
  obvious that proper procedures were !1IDl§: followed in relation to the disciplined
  forces institutional housing project. It would have been clear that the project had to
  be submitted to public tender, or at least that a certificate of inexpediency was
  necessary before the project management group was sent to Malaysia to negotiate
  the final terms of the construction contract and the loan agreement. Furthermore, it
  was common sense that the project had to be endorsed by the Parliament in
  accordance with the Public Works Committee Act before the contracts were
  executed.

  These sorts of issues were canvassed in great detail by both the Ombudsman
  Commission and the Ellis Commission of Inquiry in each of the reports concerning
  the Poreporena Freeway. We are at a loss to understand why the same mistakes
  occurred again in this project. ‘.

  Having considered the explanation offered by Sir Julius Chan regarding execution
  of the contracts by the Minister for Defence, the Commission retains the view that
  this particular procedure was improper, for a number of reasons. ‘ .;)

  1. The instrument of delegation

  There are a number of problems with the instrument of delegation.

  (a) Purpose not identified

  First, the instrument does not identify the purpose for which “the Loan Agreement”
  and “the Project Agreement”, which it refers to, are being executed. The instrument
  seems to allow the Minister for Defence to execute any “Loan Agreement” between
  the Independent State of Papua New Guinea and Bank Industri Malaysia Berhad
  and any “Project Agreement” between the State and the YTL Company. This is a
  far too general grant of power to the Minister for Defence. The Ombudsman
  Commission considers that when a delegation is made by one Minister to another,
  the purpose for which the power is being delegated must be specified with some
  particularity. In the case of PNG v Keboki Business Group Inc [1985] PNGLR 369,

  Chapter 9

  J

• Page 68 of 109

• 58
  the Supreme Court emphasised the importance of the principle that a person who
  has been permitted to delegate his powers to another, has a duty to maintain some
  degree of control over the acts of the delegate:

  “In general the control preserved … must be close enough for the decision to be identifiable as
  that of the delegating authority.” [11985] PNGLR 369, at 374.]

  This principle of sound administration was not adhered to in this case.

  (b) Terms and conditions not identified

  A second and related problem is that the instrument does not refer to any of the
  terms and conditions of “the Loan Agreement” or “the Project Agreement”. Thus the
  Minister for Defence was given an open discretion to execute the contracts,
  unbridled by any instructions as to interest rates, repayment periods, costs to the
  State, local content requirements and so on. As a result, the Minister for Defence
  could have agreed to virtually anything, without travelling beyond the terms of his
  instrument of delegation. Again, the Commission makes the point that much greater
  care should be exercised when a Minister delegates his power to another person,
  particularly where contracts worth large sums of public money are involved.
  Ministerial powers must be exercised cautiously and with due care. Otherwise it
  may amount to abuse.

  (c) Premature delegation

  ,I”
  Thirdly, the delegation was prematurely made. On the date the instrument of
  ; I
  delegation was executed, the Papua New Guinea delegation was actually still in
  I I
  Malaysia negotiating the terms of the construction contract and the loan agreement.
  “1
  ,; 1,1
  This meant that the Minister for Defence had been delegated the power to execute
  the contracts before he had reported to the Minister for Finance and Planning on the
  proposed terms of the contracts.

  2. Normal procedures by-passed

  Another concern of the Commission is that the effect of delegating powers to the,
  Minister for Defence was that the project management group was able to by-pass
  the normal procedures laid down by Chapter 3 of the National Executive Council
  Submissions Handbook in relation to execution of State contracts.

  In the normal course of events, when a State contract is proposed for execution by
  the Governor-General, the draft contract is req’uired to be presented to the National
  Executive Council, together with: ‘

  (a) a certificate of legal correctness by the State Solicitor;

  Chapter 9

• Page 69 of 109

• 59

  (b) a certificate of technical correctness by the head of the department or
  agency sponsoring the project; and

  (c) details of the reference of the project to the Public Works Committee.

  All of these procedural safeguards – which are intended to impose a system of
  accountability and control in the decision-making process for large public works
  projects – were by-passed in this case.

  3. Breach of the Loans (Overseas Borrowings) (No.2) Act

  The Commission also queries the legality of the signing of the loan agreement by
  the Minister for Defence, in light of the special requirements of the Loans (Overseas
  Borrowings) (No.2) Act concerning execution of agreements with overseas financial
  institutions (outlined in Chapter 2 of this report).

  The Act draws a distinction between borrowings by the Head of State (which are
  authorised by Section 2(1)) and those by the Minister for Finance and Planning
  (authorised under Section 2(2». It is only the Head of State who is permitted to
  borrow for general purposes such as “works and services of the State”. The
  Minister’s borrowing power is restricted to purposes such as refinancing and
  prepaying previously incurred debts and bridge financing. While Section 2(7) of the
  Act provides that a “loan agreement” can be executed by the Minister, the term “loan
  agreement” is defined by Section 1(1) of the Act in such a way that it excludes
  agreements of a kind referred to in Section 2(1), i.e. borrowings agreed to by the
  Head of State.

  The effect of the Act therefore appears to be that if money is to be borrowed
  overseas for the purpose of works and services of the State, the agreement is to be
  made and executed by the Governor-General – not by the Minister for Finance or
  any other Minister to whom the Minister for Finance has purported to delegate that
  power.

  However, irrespective of whether that is, in fact, the correct legal position (and it
  must be acknowledged that there is some confusion, owing to the terms of other
  prOVisions of the Act which assume the term “loan agreement” to have a wider
  meaning than simply borrowings made by the Minister under Section 2(2» the
  Ombudsman Commission considers that is far preferable for loan agreements of the
  type entered into for the disciplined forces institutional housing project to be
  executed by the Governor-Governor, acting on the advice of the National Executive
  Council, rather than by a single Minister of the State.

  Chapter 9

• Page 70 of 109

• 60

  Responsibility for execution of a contract involving such a substantial sum of money
  should not be left with a single person, as it leaves open the possibility that “special”
  arrangements can be made between the Minister and the institutions with which the
  negotiations are being conducted. To build checks and balances into the decision-
  making processes of government, it is necessary to ensure that the risk of such a
  situation arising is minimised as far as possible.

  For all of the above reasons, the Ombudsman Commission records its serious
  concern about the procedures adopted for execution of the contracts for this
  project. In future, contracts of this . nature should be executed by the
  Governor-General, acting on the advice of the National Executive Council. A
  formal recommendation, giving effect to these views, is recorded in Chapter
  16.

  [9.5] ANOTHER BREACH OF PROCEDURE: GOVERNOR-GENERAL DID
  NOT APPROVE THE TERMS AND CONDITIONS OF THE LOAN

  During this investigation, the Commission also discovered another serious breach
  of procedure in the execution of the loan agreement: the manner and the terms and
  conditions of the borrowing were not agreed upon by the Governor-General as
  required by the Loans (Overseas Borrowings) (No. 2) Act.

  Section 2( 1)(b) of that Act states:

  “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 as are
  agreed on by the Head of State, acting on advice, and the institutions such sums as are
  specified … for the purpose of … works and services of the State.”

  The effect of Section 2(1)(b) is that whenever the State proposes to borrow from
  .p,verseas financial institutions, the manner and the terms and conditions of the
  ” ,
  borrowing must be agreed on by the Governor-General. This requirement applies,
  Jfre~pective of whether the agreement is executed by the Governor-General, the
  Mirlsterfor Finance or any other person. It gives effect to Section 210(1) of the
  Q;t,l§iitution, which states that the Parliament shall not provide for the raising of
  loans except on the recommendation of the’ Head of State, acting with, and in
  accordance with, the advice of the National Executive Council.

  An attempt was made to comply with Section 2(1)(b) on 8 December 1993, when
  Prime Minister Wingti executed the following instrument of advice:

  Chapter 9

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• 61

  “Your Excellency,

  You are hereby informed that on the
  2nd day of December, 1993

  the National Executive Council did decide to advise you, to approve
  the Principle Terms and Conditions of the borrowing by the State, .
  from a syndicate of Malaysian Bank headed by Bank Industri
  Malaysia Berhad for the funding of the Disciplined Forces
  Institutional Housing Project under the Loans (Overseas Borrowings)
  (No. 2) Act (Chapter 133A).

  In accordance with the attached instrument.

  [signed by Rt. Hon. Paias Wingti]

  Chairman
  National Executive Council
  Date: 8th December, 1993”

  It will be observed that this instrument was executed on the same day that the
  Minister for Defence and the members of the project management group left Papua
  New Guinea to travel to Malaysia to execute the loan agreement. However, the·
  Governor-General had not agreed to the terms and conditions of the loan before the
  party left for Malaysia. Nor did he agree before the loan agreement was executed
  in Malaysia on 15 December 1993; In fact, as at the date of this report, it appears
  that the Governor-General has still not agreed to the manner and the terms and
  conditions of the borrowing as required by the Loans (Overseas Borrowings) (No.
  2) Act.

  . This is a most regrettable breach of an important statutory requirement.

  Chapter 9

• Page 72 of 109

• 62

  But, not only that, the effect of this illegality is to throw into question the
  enforceability of the loan agreement and the construction contract. Under Clause
  2.1 of the loan agreement, the State is not permitted to utilise the loan facility unless
  Bank Industri Malaysia Berhad is satisfied that all the conditions precedent set out
  in Schedule 4 of the Agreement have been fulfilled. One of those conditions is that
  the Bank Industri Malaysia Berhad is to receive evidence of the “approval of the
  relevant authorities in Malaysia and the Independent State of Papua New Guinea
  for the Malaysian banks to extend the loan to Papua New Guinea”. As that authority
  has not yet been given, it seems that the Malaysian banks are still not obliged to go
  through with the deal. Furthermore, Article 6 of the construction contract states that
  the contract only becomes effective upon the satisfaction of all the conditions
  precedent in the loan agreement.

  Again, the failure to follow normal, established procedures for overseas
  borrowing by the State has created an unsatisfactory situation, which may
  ultimately be detrimental to the interests of the Independent State of Papua
  New Guinea.

  * * * * * *

  I

  Chapter 9

• Page 73 of 109

• ,
  63

  THE FAILURE TO COMPLY WITH THE
  PUBLIC WORKS COMMITTEE ACT

  [10.1] PUBLIC WORKS COMMITTEE IGNORED

  As the Commission pointed out in Chapter 2, work on the disciplined forces
  institutional housing project can only lawfully proceed if the National Parliament
  passes a resolution that it is “expedient” to do so. In Chapter 6, the Commission
  recorded its finding that, at the time the contracts for this project were executed, no
  such resolution had been made. Indeed, the project was never brought to the
  attention of the Public Works Committee or the Parliament.

  This is yet another very serious breach of an important statutory requirement. In fact,
  it amounts to a breach of the Constitution.

  [10.2] CONSTITUTIONAL PRINCIPLES IGNORED

  In Papua New Guinea, the National Parliament is the body which has the
  responsibility of controlling the raising and expenditure of public money.

  Section 209( 1) of the Constitution 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 subiect to authorization and control by the Parliament. and shall be regulated
  by an Act of the Parliament. n

  The Constitution has given the Parliament the power and the responsibility to
  safeguard the nation’s wealth on behalf of the People. In performing this function,
  the Parliament provides an important check and balance on the exercise of power
  by the Executive. The Public Works Committee Act gives effect to Section 209(1)
  of the Constitution by allowing the Parliament – not the National Executive Council –
  to have the final say on whether major public works projects proceed.

  Regrettably, in the case ofthe disciplined forces institutional housing project –
  just as in the case of the Poreporena Freeway project – these important
  constitutional principles have been completely ignored. The National
  Executive Council has decided, without referring the matter to Parliament, that
  the project should proceed. This is wrong. It is defective administration and
  it is contrary to law.

  Chapter 10

• Page 74 of 109

• 64

  [10.3] MISUNDERSTANDINGS ABOUT THE ROLE OF THE PUBLIC
  WORKS COMMITTEE

  When the Ombudsman Commission raised these matters in its preliminary report,
  the Secretary for Finance and Planning, Mr. Gerea Aopi, responded in the following
  terms:

  “The Ombudsman Commission should be aware that submissions are not raised to
  National Parliament until such time as the submission has cleared Cabinet. The normal
  procedure is for the Project Agreement, Loan Agreement, side letters and other
  documents to be submitted to the next sitting of Parliament after the Head of State,
  acting on advice from the National Executive Council, has approved the said
  agreements. To do otherwise would be “putting the cart before the horse”.”

  [Letter: Secretary for Finance to Chief Ombudsman, 3.12.93.]

  Prime Minister Wingti’s response on this point was the same as Secretary Aopi’s,
  i.e. it was asserted that it was not necessary for this project to go before the
  Parliament until after the Head of State had approved the agreements.

  With respect to both the Prime Minister and the Secretary for Finance and Planning,
  the Ombudsman Commission regards their interpretation of the procedures under
  the Public Works Committee Act to be clearly and manifestly wrong.

  As to Secretary Aopi’s assertion that the normal procedure is for all relevant
  contractual documents to be submitted to the Parliament at the next sitting after
  approval of the agreements, the Commission notes that in the present case no
  approval has yet been given by the Head of State (because the documents were
  executed by the Minister for Defence, thus bypassing the Head of State). And
  though the contracts were executed in December 1993, they were not brought to the
  attention of the Parliament at its next meeting after their execution, which was in
  February-March 1994.

  Furthermore, if it is correct that there is no obligation to refer this project to the
  Parliament until after the contract agreements have been approved by the Governor-
  General, the question must be asked: What role, if any, does the Parliament have
  to play in the decision-making process? What can the Public Works Committee do,
  if it decides that the project should not go ahead? If the construction contract and
  the loan agreement have already been executed, what happens if the Parliament
  resolves that the project should not be carried out? The State would no doubt be in
  an embarrassing and potentially costly dilemma: either go ahead with the project,
  contrary to the Public Works Committee Act, or stop the project and be sued by the
  contractors for breach of contract.

  Chapter 10

• Page 75 of 109

• 65

  [10.4] PUBLIC WORKS COMMITTEE ACT. SHOULD HAVE BEEN
  COMPLIED WITH FIRST

  Clearly, it was necessary for the project to go to the Parliament well before the
  contracts were executed. In fact, the project should have been referred as early as
  1991, before any negotiations took place with the YTL Company and the Malaysian
  banks.

  In the Poreporena Freeway Report – which was presented to the Parliament eight
  months before the execution of contracts for this project – the Commission pointed
  out the importance of the procedures laid down in the Public Works Committee Act.
  There was ample time to refer the project to the Parliament after the Freeway
  Report was published, but still nothing was done by the Secretary for Finance and
  Planning or the Minister.

  Such an alarming disregard for the laws of Papua New Guinea and the
  constitutional principles on which those laws are based, is disheartening, to
  say the least. If the National Government disregards the laws then how can
  it expect the People to respect the laws?

  * * * * * *

  ” .

  Chapter 10

• Page 76 of 109

• T

  66

  11. THE UNSATISFACTORY COSTING OF THE
  PROJECT

  [11.1] WILL THE STATE BE GETTING VALUE FOR MONEY?

  As well as minimising the risk of corruption, the purpose of the public tender
  procedures of the Public Finances (Management) Act is to create a competitive
  bidding environment and to ensure that the State gets value for money when it
  enters into contracts for the supply of works and serviCes.

  In the case of the disciplined forces institutional housing project, there were no
  tenders called – hence no competitive bidding. In these circumstances, can it be
  said that Papua New Guinea is getting value for money from a project which will
  cost the State approximately K57 million, plus interest?

  When the Commission raised this issue in its preliminary report, it indicated its
  concern that the only detailed cost estimates that had been prepared were those
  carried out in 1991 by Kinhill Kramer pty Ltd. It was also pointed out that Kinhill
  Kramer had been nominated by the YTL Company to be their Papua New Guinea
  consultants.

  As a result of the response to th~ preliminary report by the Secretary for Finance,
  Mr. Aopi, and additional evidence which has since come to light, the Commission
  has modified its finding concerning the preparation of costings for the project. It now
  appears that a more recent costing has been prepared and that this formed the
  basis of the October 1993 negotiations between the project management group
  and the YTL Company in Kuala Lumpur. However, as will be explained below, the
  Commission retains its concern about the manner in which the cost of the project
  was originally established.

  [11.2] RESPONSE BY THE SECRETARY FOR FINANCE

  Secretary Aopi’s rl’lsponse to the preliminary report was as follows:
  ni) whilst YTL Company has nominated that the State secure the services of Kinhill Kramer
  as PNG Consultants to the project, this was rejected in favour of the State establishing
  an independent Project Management Group with its own Project Manager, Supervising
  Architect, ancillary advisers (i.e., quantity surveyors, etc.) and project management staff
  established. within the Directorate of Engineers office of the Department of Defence;

  Chapter 11

• Page 77 of 109

• 67

  ii) through the Project Management Group, detailed design briefs, scope of works and
  costings have been provided and incorporated in submissions and documents
  submitted to the Ombudsman Commission. The following table summarises the unit
  cost for major facilities to be constructed under the project:

  House Type Price/Unit

  Type 1 House K 25,800

  Type 2 House K 41,450

  Type 3 House K 59,250

  Duplex K 25,400

  Flats K 44,250

  Barracks Block (3 storey) K1,000,OOO

  iii) documents submitted to the Ombudsman Commission also show the following major
  improvements in the scope of works:

  Air Transport Squadron (ATS) facilities for 230 personnel:

  855 square meters
  central kitchen
  officer/sgtJOR mess/recreational rooms

  increase in size of houses

  Type 1 from 40 sm to 65 sm
  Type 2 from 55/60 sm to 84 sm
  Type 3 from 90 sm to 129 sm

  improvement in fit-out

  houses include white goods, built-in/free standing furniture and
  outdoor furniture
  barrack blocks include partitioning of single/living rooms and built-
  in/free standing furniture
  mess facilities (as above)

  Project Management Costs to be covered under funding arrangements;

  Maintenance costs over 4 1/2 years to be covered under the project.

  iv) lastly, with respect to value for money, the Disciplined Forces Institutional Housing
  Project will provide new and renovated accommodation for 2,684 families and personnel
  of the three services:

  Chapter 11

• Page 78 of 109

• 68

  House Type Number Families/Servicemen Housed

  New Houses 210 210 Families
  I
  ‘I
  New DuplexlFlats 296 296 Families
  !I
  New Barracks 14 760 Personnel of the Services

  Renovated Barracks 11 1,188 Personnel of PNGDF

  New ATS Accom. 4 combined kitchen with individual dining
  and ante rooms for 230 offr, Sgt and Ors

  New and Renovated Accom for 2,684
  TOTAL families and personnel of the three
  services

  When the Commission sought clarification of the extent to which the 1991 cost
  estimates of Kinhill Kramer had been double-checked, Secretary Aopi responded:

  “The review of the detailed costings commenced as from July 1993 and was formalised
  when a Supervising Architect and Project Manager were appointed to the Project. A
  revised design brief was prepared by the Project Management (which incorporated
  additions/amendments sought by the PNG Team), the nominated Contractor re-priced
  their costs based on the original contract sum of US$55.5 Million and a draft Contract
  Agreement was submitted to PNG using JCT Standard Form With Contractors Design
  (1981 edition) i.e” an internationally accepted form of contract. The technical group of
  PNG — Project Manager, Supervising Architects and Beca Gure as ancillary consultants
  — then reviewed the revised contract, assessed the value against previous estimates
  and confirmed the breakdown of costs, as previously submitted to the Ombudsman
  Commission and incorporated in the Contract and the Loan Agreements on the
  Discipline Forces Institutional Housing Project”

  [Letter: Secretary for Finance to Chief Ombudsman, 13,12,93,]

  [11.3] HOW MUCH WAS THE ORIGINAL CONTRACT REALLY WORTH?

  The evidence given to the Commission by Lt Col, Mike Bird, the Director of
  Engineers in the Papua New Guinea Defence Force and a member of the project
  management group, reinforced Secretary Aopi’s response to the preliminary report,
  The Commission now accepts that the 1991 estimates were subject to review in
  1993 and that an expansion in the scope of the project was achieved as a result of
  the efforts of the project management group in Malaysia in October 1993.
  I:
  ”

  As reported in Chapter 3, they were able to negotiate, at “no extra cost”, (Le. the
  ,
  I
  ,
  contract sum of $US55.5 million remained the same) a significant upgrading of the
  ~ II I quality of the housing, refurbishment of existing barracks blocks, the construction of
  the Officers, NCO and OR mess and communal kitchen at Jackson’s Airport
  (estimated to cost US$2 million), provision of free wear-and-tear maintenance for a
  period of six months after the duration of the contract and a contribution of US$1.3
  million to the costs of project management

  Chapter 11

• Page 79 of 109

• 69

  But once it is accepted that the project management group was able to negotiate
  these extra benefits for the State – which must be worth, conservatively, US$5
  million – this begs the question: how much was the original contract really worth?
  Despite repeated and misleading claims that this project is supported by a
  “Government-to-Government” agreement, it must be remembered that the
  construction contract with the YTL Company is a commercial agreement. The YTL
  Company is, from all accounts, an established and successful corporation with a
  large portfolio of commercial investments and projects in its home country – it is not
  a philanthropic organisation. So, why, as late as October 1993, was that company
  prepared to negotiate US$5 million worth of benefits, or more, in favour of the other
  party to the construction contract?

  The only conclusion that can be drawn is that the scope of the works in the original
  draft contract was, in actuality, worth considerably less than the US$55.5 million
  originally agreed to by the National Executive Council. That being the case, the
  additional question must be asked: what guarantee is there that the revised and
  expanded scope of the works in the construction contract eventually executed with
  the YTL Company is now worth US$55.5 million, or even US$50 million, which is the
  amount of the loan to be obtained from the Malaysian banks?

  [11.4] CONCLUSION AS TO COSTING OF THE PROJECT

  In the opinion of the Ombudsman Commission, there can be no guarantee that the
  costing of the project has resulted in a project that will give the State value for
  money. This is because, in its determination of the scope and cost of the project,
  the YTL Company, though it has been willing to negotiate, has never been subject
  to any competition.

  Despite the confidence expressed by the Secretary for Finance that the State
  is getting value for money, the Ombudsman Commission maintains the view
  that the only way an accurate assessment of the value of the project could
  have been obtained was to subject the original cost estimates to competition.
  via the normal public tender process. As there was a complete absence of
  competitive bidding, the costing of this project was, and remains,
  questionable.

  * * * * * *

  Chapter 11

• Page 80 of 109

• •

  70

  12. THE FAILURE TO PURSUE ALTERNATIVE
  FUNDING ARRANGEMENTS

  [12.1] SEEKING OFF-SHORE FUNDS FROM ONLY ONE SOURCE

  The Ombudsman Commission is concerned that no concerted attempt has been
  made to find alternative sources of funding for this project, either in the form of
  concessional loans or alternative commercial arrangements. TheOmbudsman
  Commission can see no good reason why this was not done, especially as there has
  been a surplus of loan funds available in the domestic market in recent times. To
  seek offshore funding from one particular group of foreign financial institutions –
  without inviting any other foreign or domestic institution to submit a funding offer –
  at a time when local financial institutions are flushed with funds, does not appear to
  make sense.

  [12.2] SECRETARY FOR FINANCE MAINTAINS THAT FINANCIAL
  PACKAGE IS VERY GOOD

  When the Commission expressed the above opinion in its preliminary report, the
  Secretary for Finance, Mr. Aopi, responded as follows:

  “Alternative sources of funding were considered for the Discipline Forces Institutional
  Housing Project. With respect to specific funding alternatives nominated by the
  Ombudsman Commission:

  the Discipline Forces Institutional Housing Project is not eligible for Asian
  Development Bank and/or World Bank funding. Terms and conditions of
  Malaysian Government and Malaysian financial institutions are also
  significantly cheaper than either Asian Development Bank or World Bank;

  given the magnitude of funds involved (i.e. US$55.5 Million), it is highly unlikely
  that the domestic banks can provide the finance necessary to support the
  project without having a severe and significant impact on domestic liquidity;

  notwithstanding recent improvements in the terms and conditions of!!! the
  f commercial banks, proposed funding arrangements from the Malaysian
  Government and financial institutions are,significantly cheaper.”

  1. [Letter: Secretary for Finance to Chief Ombudsman, 3.12.93.]
  r J

  When the Commission asked Secretary Aopi to elaborate, he further responded:
  ” ‘

  “Loans which ADB and World Bank are willing to fund within PNG are normally
  covered/discussed during programming missions of both international agencies.
  Neither ADB or World Bank have expressed interest in providing loan funding for the
  Discipline Forces Institutional Housing Project ….

  Both ADB and World Bank base their lending terms based on “pool-based” or variable
  lending rates. For example:

  Chapter 12

• Page 81 of 109

• i

  71
  Asian Development Bank – for the period 1st July to 31st December 1993, the
  pool-based variable lending rate for US Dollars loans of the Asian Development
  Bank was set at 6.64%;

  World Bank – on 16th June 1993, the Head of State recently approved the ISRD
  (World Bank) loan to support the funding of population and family planning
  project programme, which provided for an interest rate based on a variable
  interest rate which currently stands at 7.5% and attracted commitment charges
  of 0.75% of the outstanding amount.

  Given that the Malaysian Bank loan is based at 1% over the London Interbank Offer
  Rate (which is currently 3.375%), this translates to an interest rate of 4.375%. The cost
  of borrowing is further enhanced in that US$5.5 Million of the US$55.5 Million project
  cost refer to grant aid.

  Cost of funding in the domestic market

  Loans secured from the domestic market (i.e., PNG commercial banks) are normally
  based on a margin over the bank’s indicator lending rate. Loans to the general public
  and the private sector normally attract a margin of between 2% to 3% above the bank
  indicator lending rate whilst the State or its Commercial Statutory Authorities have
  recently been able to negotiate better terms of reduced or nil margin over the bank
  indicator lending rate.

  Whilst the bank indicator lending rate has reduced from a high of 9.25% to a current low
  of 8.25%, the effective interest rate to the State of domestic borrowing is still
  significantly more expensive than terms and conditions offered by Malaysian
  Commercial Sanksand the Malaysian Government.”

  [Letter: Secretary for Finance to Chief Ombudsman, 13.12.93.]

  When Secretary Aopi appeared before the Commission on 13 December 1993, he
  emphasised that, in his view, the financial package which the project management
  . group had negotiated on behalf of the State was a very good one. He said that
  World Bank funding of projects had become relatively expensive in recent years and
  that the State would have been worse off, had the project been financed from other
  sources.

  [12.3] ARE THE MALAYSIAN FINANCIAL INSTITUTIONS OFFERING A
  GENEROUS RATE OF INTEREST?

  The Commission considered this issue in Chapter 2. It must be emphasised again,
  that the State has entered into a commercial loan agreement. As to Secretary
  Aopi’s submission that local financial institutions would have been unable to supply
  funding for a project of this magnitude, the Commission believes, nevertheless, that
  they should have at least been given the opportunity of doing so. Likewise with the
  contention that the funding arrangements being provided by the Malaysian
  institutions are significantly cheaper than what could be provided by domestic
  institutions. This may be true, but Papua New Guinea’s own financial institutions, as
  well as foreign institutions – other than those nominated by the initiators of this
  project – should have been given the opportunity of making a competitive bid.

  Chapter 12

• Page 82 of 109

• 72

  [12.4] PRESENCE OF GRANT AID DOES NOT JUSTIFY FAILURE TO
  SEEK ALTERNATIVES

  As the proposed loan is commercial in character, the Ombudsman Commission
  does not regard it as proper that the lending institutions have been permitted to
  nominate the contractor to undertake construction of the project. Giving such a
  privilege to the lending institutions might have been justified if the effect of the aid
  grant of US$5.5 million was to make the total project cost less than what would have
  been paid on the open market. But, as the funding arrangements and the selection
  of the contractor to execute the works have never been open to competition, it is not
  possible to say what the total project cost would have been if alternative
  arrangements had been sought. The presence of the US$5.5 million grant aid does
  not justify the failure to seek alternative funding arrangements.

  The Ombudsman Commission cannot say with confidence that this was the
  best deal for Papua New Guinea, when only Malaysian financial institutions
  were involved, together with the Malaysian Government and a Malaysian
  construction company.

  [12.5] FAILURE TO SEEK ALTERNATIVE FUNDING INEVITABLY RAISES
  SUSPICION

  The Ombudsman Commission is of the view that alternative funding arrangements
  should have been pursued. When alternatives are not pursued, and when financial
  matters are decided at very high levels of government in private negotiations, a” of
  the financial arrangements become questionable.

  The concerns generated by the failure to seek alternative funding may have
  been allayed if the disciplined forces institutional housing project had been
  put to public tender. But, as that was not done, those concerns remain. The
  .,
  ,
  Ombudsman Commission retains the view that the failure to pursue
  I,
  alternative funding arrangements was questionable and undesirable.

  * * * * * *

  Chapter 12

• Page 83 of 109

• 73

  13. THE UNNECESSARY IMPORTATION OF
  FOREIGN SKILLS AND RESOURCES

  [13.1] IMPORTANCE OF THE NATIONAL GOALS AND DIRECTIVE
  PRINCIPLES

  The Ombudsman Commission is concerned that the policy of the National
  Executive Council, as reflected in its decision to award this project to a foreign
  company, supported by foreign capital, without even allowing Papua New
  Guinea-based corporations the opportunity to make a bid, is contrary to the
  National Goals and Directive Principles. The Commission points out that it was
  required by Section 25(4) of the Constitution, to take the National Goals and
  Directive Principles fully into account when exercising its jurisdiction in this
  investigation.

  [13.2] THE NATIONAL GOAL OF POLITICAL AND ECONOMIC
  INDEPENDENCE

  The third of our National Goals set out in the Preamble to the Constitution is:
  “”For Papua New Guinea to be politically and economically independent, and
  our economy self-reliant:’

  Directive Principles 3(5), 3(7) and 3(8) call for:

  Strict control of foreign investment capital and wise assessment of foreign
  ideas and values so that these will be subordinate to the goal of national
  sovereignty and self-reliance, and in particular for the entry of foreign capital
  to be geared to internal social and economic policies and to the integrity of
  the Nation and the People.

  Economic development to take place primarily by the use of skills and
  resources available in the country either from citizens or the State and not in
  dependence on imported skills and resources.

  The constant recognition of our sovereignty, which must not be undermined
  by dependence on foreign assistance of any sort, and in particular for no
  investment, military or foreign-aid agreement or understanding to be entered
  into that imperils our self-reliance and self-respect, or our commitment to
  these National Goals and Directive Principles, or that may lead to substantial
  dependence upon or influence by any country, investor, lender or donor.

  Chapter 13

• Page 84 of 109

• 74
  [13.3] PAPUA NEW GUINEA HAS ADEQUATE SKILLS AND
  ,’-i RESOURCES TO UNDERTAKE THIS PROJECT

  The Ombudsman Commission is seriously concerned that these constitutional
  principles are being countermanded by the National Executive Council’s decision
  that a contract for a large public works project be awarded to a particular foreign
  company, without that company being subjected to any competition, when there
  are adequate skills and resources already available in Papua New Guinea to
  undertake that project.

  li The Commission is aware that it is unlikely that a 100% Papua New Guinea –
  owned corporation would have the resources available to undertake this project
  by itself. Nevertheless, there is a number of established, locally based
  corporations which do have a long history of involvement with Papua New
  Guinea and its people, and which are already making use of the skills and
  resources of our country. It is not suggested that any of these corporations had a
  right to be awarded the contract. What they did have, however, was a legitimate
  expectation of being given an opportunity to make a bid. Unfortunately this was
  denied, as no consideration was given to the National Goals and Directive
  Principles and the importance of making use of skills and resources already
  available in the country.

  The Commission acknowledges that a 35% local content requirement has been
  included in the construction contract. However, it must be observed that the
  contract does not specify how the 35% figure is to be calculated; nor does it
  prescribe what will fall into the definition of “PNG local plant, equipment,
  materials, goods, labour and services”. Those technical issues aside, the
  Commission’s main concern is that the contract allows the great majority of the
  plant, equipment, materials, goods, labour and services to be imported, thus
  leaving open the possibility that the contractor will be able to import prefabricated
  dwellings to erect on-site. This appears particularly irrational to the Ombudsman
  Commission, as it appears that similar dwellings could be built by locally based
  and established construction companies, using predominantly Papua New
  ,I Guinean labour and enterprise.

  Again, the question must be asked: how can local labour, capital and
  :i ~
  ,
  , ,, enterprise develop and prosper, when it is given no opportunity of
  I!!’i
  I’il competing with foreign investment capital? —
  .’

  [13.4] THE NATIONAL GOAL OF EQUAL DEVELOPMENT
  OPPORTUNITIES FOR ALL CITIZENS

  Another concern is that the National Executive Council appears to have allowed
  foreign interests to dictate the geographical scope of this project. Despite the
  large amount of money committed, no attempt is being made to satisfy the

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• 75
  housing needs of the disciplined forces in any part of the country outside Port
  Moresby. Why is this so? The answer is provided by National Executive Council
  Policy Submission No. 233/91, presented by the then Minister for Defence, Hon.
  Benias Sabumei MBE, MP, and the then Minister for Police, Hon. Mathias Ijape
  MP, in December 1991:
  “The project is also geared primarily to institutional housing in the NCO only. This
  was prompted by the expressed wish of the Malaysian representatives to focus its
  resources in one location and in so doing develop a clear understanding of the
  construction industry in PNG. Future phases of the project could be considered for
  other centres in PNG.”

  [Policy Submission No. 233/91, page 27; emphasis added.)

  The Ombudsman Commission notes that the second of our National Goals is:

  “For all our citizens to have an equal opportunity to participate in, and benefit from,
  the development of our country”.

  Directive Principles 2(3) and 2(4) call for every effort be made to achieve an
  equitable distribution of the benefits from development and an equalisation of
  services, throughout the various parts of the country.

  The National Executive Council appears to have had no regard to these
  principles by deciding to address the housing needs of the disciplined forces only
  in the Port Moresby area. Not only that, the disregard of the needs of
  servicemen and servicewomen and their dependants in other parts of the country
  has been caused by a desire to meet the needs of the foreign interests which
  have been given the contract for the project.

  In the opinion of the Ombudsman Commission, the decision to permit the
  importation of foreign capital and to ignore the ready availability of local
  skills and resources, and to allow foreign interests to dictate that this
  project be exclusive to Port Moresby, is contrary to the National Goals and
  Directive Principles and is not in the best interests of Papua New Guinea.

  * * * * * *

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  14. THE SUSPICION CAUSED BY MAKING
  SPECIAL ARRANGEMENTS WITH A FOREIGN
  ENTERPRISE

  [14.1] DECISION·MAKING PROCESSES OF GOVERNMENT MUST BE
  ABOVE SUSPICION

  In the Poreporena Freeway Report, the Ombudsman Commission emphasised
  the need to follow correct, lawful, proper and fair procedures when awarding
  contracts for public works projects. All those involved in the decision-making
  process have a duty to conduct themselves in a way that minimises the
  opportunity for corruption and puts the decision-making processes of government
  above suspicion.

  This is especially the case where arrangements are entered into with foreign
  enterprises. As the National Goals and Directive Principles of the Constitution
  make clear, Papua New Guinea is to strive for political and economic
  independence. Our leaders must be committed to the National Goals and
  Directive Principles and ensure that their freedom to make decisions is not
  restricted by obligations or relationships with others, particularly foreigners.
  Subdivision VI.2.H of the Constitution – Protection of Elections from Outside or
  Hidden Influence – reinforces the theme of national sovereignty and
  independence which runs through the Constitution.

  Unfortunately, the way in which the decision was made to award the contracts for
  the disciplined forces institutional housing project failed to meet these
  constitutional standards.

  [14.2] GENEROUS CONCESSIONS FOR THE YTL COMPANY

  The YTL Company has been awarded a large public works contract, without
  being subject to any competition. The contract sum of US$55.5 million was set in
  1991 after cost estimates were prepared by consultants nominated by the YTL
  Company. There have been no public tenders called and no other company has
  been given the opportunity to express interest in the project. Papua New Guinea
  i
  has an established and competitive construction industry, yet no members of that
  industry were permitted to bid for the project. The YTL Company will pay no tax
  in relation to the project. It is exempt from income tax, customs duty, stamp
  duty, sales tax and customs duty. The YTL company is under no obligation to
  develop the infrastructure for any of the project sites.

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• •

  77
  On any objective assessment, these are very generous concessions. So, the
  questions must be asked: Why has this particular company been given the
  contract? Why has this company been given a saloon passage into the Papua
  New Guinea economy?

  Is it really because of the aid grant of US$5.5 million from the Malaysian
  Government? If so, does this aspect of the deal really justify the generous
  concessions to the YTL Company? It seems to the Ombudsman Commission
  that it does not.

  What has been received by Papua New Guinea in the form of a small aid grant
  has been quickly given back in the form of overly generous tax concessions (of
  the type that are normally confined to aid projects), the release from any
  obligation on the part of the YTL Company to provide services for the project
  sites and, perhaps (as the costings have never been subject to competition),
  inflated costs for the construction work.

  The absence of any competition for the construction contract or the financial
  package means that, at the end of the day, nobody can properly say with
  confidence that Papua New Guinea is getting a good deal.

  Administrative conduct which allows such a situation to develop inevitably
  leads to suspicion about the motives of those involved in the decision-
  making process and the whole matter becomes questionable.

  [14.3] SUSPICION AN INEVITABLE CONSEQUENCE OF LACK OF
  PUBLIC TENDER

  The Ombudsman Commission emphasises that it does not question the ability of
  the YTL Company to undertake this project. It has not been the purpose of the
  investigation to inquire into that company’s financial and technical capabilities.
  Nor does the Commission question the bona fide intention of the YTL Company
  to properly carry out its obligations under the construction contract. The
  Commission has no evidence which would lead it to believe that the YTL
  Company itself acted improperly in obtaining the contract to undertake this
  project.

  Nevertheless, when the financial aspects of the project are set against the
  background of other unsatisfactory aspects of the decision-making process – the
  capitulation by the Works Supply and Tenders Board, the by-passing of the
  Public Works Committee and the dubious legality of the execution of the contract
  by the Minister for Defence – the suspicion of impropriety is compounded.
  Unfortunately, that is the price paid, not only by those who engineer these special
  arrangements with foreign enterprises, but also by those who, however
  innocently, benefit from them.

  Chapter 14

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• 78

  The way to avoid this suspicion is to avoid making special arrangements
  with particular foreign enterprises and to make public works contracts
  subject to vigorous competition.

  * * * * * *

  Chapter 14

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• ·’.

  79

  15. SUMMARY OF FINDINGS OF WRONG
  CONDUCT AND DEFECTIVE ADMINISTRATION

  The Ombudsman Commission makes the following findings of wrong conduct and
  defective administration for the purposes of Section 219(1) of the Constitution
  and Section 22(1) of the Organic Law on the Ombudsman Commission.

  [15.1] NATIONAL EXECUTIVE COUNCIL IGNORED PUBLIC TENDER
  PROCEDURES

  The decision of the National Executive Council to award the construction contract
  for the disciplined forces institutional housing project to the YTL Company of
  Malaysia was wrong, because:

  the contract is a commercial agreement;

  the project should have been open to public tender;

  no company other than the YTL Company was ever given the
  . opportunity of bidding for this project.

  To safeguard the integrity of the decision-making processes of government, a
  public works project of this magnitude must be put to public tender in strict
  accordance with the provisions of the Public Finances (Management) Act.

  [15.2] SUPPLY AND TENDERS BOARD GRANTED CERTIFICATE OF
  INEXPEDIENCY WITHOUT GOOD REASON

  The decision of the Works Supply and Tenders Board to issue a certificate of
  inexpediency in relation to this project was wrong, because:

  the Board failed to address the question of whether it was
  impracticable or inexpedient to invite public tenders;

  the Board allowed itself to be treated as a rubber stamp for the
  National Executive Council; and

  there was no valid reason for granting the certificate of
  inexpediency.

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  If the public tender procedures of the Public Finances (Management) Act are to
  operate fairly and effectively, it is necessary that certificates of inexpediency be
  granted only in special circumstances. These certificates must not be granted
  simply because the National Executive Council has decided to waive normal
  tender procedures. The requirements of the law must be complied with by
  everyone, including the National Executive Council.

  [15.3] MINISTER FOR FINANCE AND PLANNING IMPROPERLY
  DELEGATED HIS POWERS TO ANOTHER MINISTER

  The decision of the then Minister for Finance and Planning, Sir Julius Chan MP,
  to delegate all his powers to execute the contracts for the project, to the Minister
  for Defence, Hon. Paul Tohian MP, was wrong, because:

  the instrument of delegation was too vague and gave the Minister
  for Defence far too much discretion regarding the terms of the
  contracts;

  the normal procedures for executing public works contracts with the
  knowledge and approval of the National Executive Council were by-
  passed; and

  the requirements of the Loans (Overseas Borrowings) (No. 2) Act
  were breached.

  When contracts involving the expenditure of large amounts of public money have
  to be executed on behalf of the State, it is bad practice to allgw one Minister to
  sign the contracts, without having to first obtain the approval of the National
  Executive Council.

  [15.4] NATIONAL EXECUTIVE COUNCIL IGNORED THE
  REQUIREMENTS OF THE PUBLIC WORKS COMMITTEE ACT

  The decision of the National Executive Council to go ahead with the project,
  without referring the proposal to the Parliament in accordance with the Public
  Works Committee Act, was wrong, because:

  under the Constitution it is the Parliament which has the
  responsibility of controlling the expenditure of public money on
  behalf of the People;

  the National Executive Council had no right to authorise the
  spending of more than K50 million on this project without the matter
  being approved by the National Parliament; and

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• 81

  the procedures laid down by the Public Works Committee Act
  should have been complied with before the contracts were signed.

  The procedures of the Public Works Committee Act are an important part of the
  system of checks and balances which controls the spending of public money.
  The only way that this project can lawfully proceed is if the project is brought to
  the attention of the Parliament and the Parliament resolves that it is expedient for
  the work to be carried out.

  [15.5] NATIONAL EXECUTIVE COUNCIL APPROVED THE PROJECT
  WITHOUT A PROPER COSTING

  The decision of the National Executive Council to agree to pay more than K50
  million of public money to the YTL Company for this project was wrong, because:

  the decision to commit this amount of money was made well before
  the scope of the project had been finally decided on;

  the original cost estimates for the project were prepared in 1991 by
  a company which had been nominated by the YTL Company; and

  the YTL Company has never been exposed to any competition, so
  there is no guarantee that the State will be getting value for money
  from the project.

  The only way an accurate assessment of the value of the project could have
  been obtained was to subject the original cost estimates to competition, via the
  normal public tender process as required by the Public Finances (Management)
  Act.

  [15.6] NATIONAL EXECUTIVE COUNCIL FAILED TO PURSUE
  ALTERNATIVE FUNDING ARRANGEMENTS

  The decision of the National Executive Council to have this project funded by a
  syndicated loan from a group of four Malaysian banks arranged by Bank Industri
  Malaysia Berhad was wrong, because:

  the loan agreement which the State has entered into is a
  commercial agreement, supplemented by only a small aid grant from
  the Malaysian Government (it was not a government-to-government
  deal);

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  some attempt should have been made to fund the project from other
  sources, so that the funding proposal made by the Malaysian banks
  could be subject to competition; and

  Papua New Guinea’s domestic financial institutions should have
  been given an opportunity to arrange funding for the project.

  With such a large amount of public money involved, it was financially
  irresponsible and suspicious to negotiate the loan in this manner, without making
  any attempt to seek alternative funding arrangements that will, in the end, be in
  the best interests of the People and the country.

  [15.7] NATIONAL EXECUTIVE COUNCIL GAVE PREFERENCE TO
  FOREIGN SKILLS AND RESOURCES

  The decision of the National Executive Council to award this project to the YTL
  Company was wrong, because:

  the YTL Company is a 100% foreign-owned company which has
  never operated in Papua New Guinea before;

  there are locally-based companies with a long term presence in
  Papua New Guinea which could have undertaken this project; and

  locally based companies were never given an opportunity of bidding
  for this project.

  One of our National Goals is for Papua New Guinea to be politically and
  economically independent and our economy self-reliant. This cannot be achieved
  when the National Executive Council awards contracts to foreign companies,
  without giving locally based companies any chance to bid for a project.

  [15.8] NATIONAL EXECUTIVE COUNCIL GAVE TAX CONCESSIONS
  WHICH ARE TOO GENEROUS

  The decision of the National Executive Council to grant generous tax and other
  concessions to the YTL Company and its non-citizen employees was wrong,
  because:

  the construction contract with the YTL Company is a commercial
  agreement;

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• 83

  the aid grant from the Government of Malaysia represents less than
  10% of the total project cost;

  the YTL Company had already been given an easy passage into the
  economy; and
  ‘.
  ,
  the generosity of the concessions added to the suspicion created by
  the decision to award the project to this company without any public
  tender.

  As the Ombudsman Commission pointed out in its report on the Poreporena
  Freeway project, the decision-making processes of government must be above
  suspicion. For that reason alone, the decision-making process adopted in this
  case was wrong and improper.

  *******

  Chapter 15

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• 84

  PART V

  RECOMMENDATIONS

  ******

  Section 22(2) of the Organic Law on the Ombudsman Commission allows the
  Ombudsman Commission to make recommendations to Ministers and heads of
  governmental bodies, where it has formed the opinion that an investigation has
  disclosed wrong conduct, defective laws or defective administrative practices.

  In this part of the report, the Commission makes a number of recommendations
  based on the findings of wrong conduct referred to earlier.

  The first recommendation is general in nature, and is directed at all persons
  involved in the decision-making processes of government. The second
  recommendation is directed at the Prime Minister, while the remaining
  recommendations are specifically addressed to the Attorney-General and the
  Minister for Finance and Planning, who we believe should bear responsibility for
  initiating a number of important changes to the laws dealing with the awarding of
  State contracts.

  The Ombudsman Commission also formally records its opinion, for the purposes
  of Section 22(4) of the Organic Law on the Ombudsman Commission, that the
  decision for the State to enter into contracts for the disciplined forces institutional
  housing project has produced unfair and objectionable results, for the reasons
  outlined in Chapter 15. Further, that that decision was caused partly by defective
  legislation, in particular the Public Finances (Management) Act.

  We accordingly present this report to the National Parliament under Section 22(4)
  of the Organic Law on the Ombudsman Commission. We urge all the Honourable
  Members of the National Parliament – who have the primary responsibility for
  making the laws of our country – to carefully and conscientiously consider these
  recommendations, in the interests of the People of Papua New Guinea.

  ******

• Page 95 of 109

• 85

  16. RECOMMENDATIONS

  RECOMMENDATION NO.1: STRICT OBSERVANCE OF THE LAWS OF
  PAPUA NEW GUINEA

  Before stating our specific recommendations, we wish to make a general
  recommendation. To some people, this general recommendation will appear to
  state the obvious. But it is nevertheless necessary to state it, because many of
  our leaders and their professional advisers apparently do not understand or
  appreciate the principle underlying it, or may be deliberately attempting to avoid
  the legal requirements – which is wrong.

  Our general recommendation is this: the laws of Papua New Guinea which
  regulate the awarding of contracts for multi-million .kina public works
  contracts must be strictly observed.

  The principle underlying this recommendation, is that laws such as the Public
  Finances (Management) Act, the Public Works Committee Act and the overseas
  borrowing legislation, have been enacted to ensure that public works contracts
  are awarded fairly and openly and competitively, so that the best deal possible is
  obtained for the People of Papua New Guinea. These laws also help to minimise
  the risk of corruption.

  Such laws should not be dismissed as unnecessary bureaucratic red tape. If the
  laws are ignored or simply given lip service – as in the case of the disciplined
  forces institutional housing project – then corrupt practices will inevitably flourish,
  sooner or later.

  We do not believe that corruption in this country is “out of control”. But if
  government decisions continue to be made in the way that they were with the
  disciplined forces institutional housing project – and our general recommendation
  referred to above continues to be ignored – then corrupt practices will become the
  norm. If and when corruption in Papua New Guinea gets “out of control”, the real
  losers will be the People of Papua New Guinea,: not the leaders, not the
  government advisers, and not the companies involved in the ,special deals.

  11
  I

  ‘I,’
  ,
  i.
  , Chapter 16

• Page 96 of 109

• 86

  The specific recommendations made below, are aimed at tightening up the laws
  which we already have in place to regulate the awarding of contracts for public
  works projects. However, the effectiveness of these recommendations depends
  on all those involved in the decision making processes of government – including
  those in the private sector – respecting and acting in the spirit of our general
  recommendation.

  RECOMMENDATION NO. 2: PUBLICATION OF ADMINISTRATIVE
  PROCEDURES

  The Ombudsman Commission recommends to the Prime Minister that, in
  consultation with the Attorney-General, he devises a clear and concise set
  of administrative procedures to be followed by government departments
  and other governmental bodies in all cases where it is proposed to enter
  into State contracts of a value of K1,000,000.00 or more.

  The procedures must take full account of the legal requirements of the
  Public Finances (Management) Act the Public Works Committee Act and
  the overseas borrowing legislation, and must be distributed widely to
  government departments and other governmental bodies and also
  throughout the private sector.

  Explanation: In its report on the Poreporena Freeway project, which was
  presented to the Parliament a little over twelve months ago, the
  Ombudsman Commission pointed out many defects in the decision-making
  process which was followed in that case and made a number of
  recommendations for reforms to the process. Regrettably, many of these
  recommendations have not been implemented and many of the mistakes
  made with the Freeway project have been repeated in the disciplined
  forces institutional housing project.

  In these circumstances, it is incumbent on the Prime Minister, as Chairman
  of the National Executive Council, to take some positive administrative
  steps, quite apart from the legislative changes we propose below, to
  ensure that the same mistakes are not made yet again with future projects.

  AND FURTHERMORE the Prime Minister is requested under Section 22(3)
  of the Organic Law on the Ombudsman Commission to notify the
  Ombudsman Commission, within 30 days after service of this report upon
  him, of the steps he proposes to take to give effect to this
  recommendation.

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  RECOMMENDATION NO. 3: GREATER INDEPENDENCE FOR SUPPLY AND
  TENDERS BOARDS

  The Ombudsman Commission recommends to the Attorney-General and
  the Minister for Finance and Planning that they initiate the following
  amendments to the Public Finances (Management) Act, in order to clarify
  and improve the role played by the Works Supply and Tenders Board in the
  awarding of public works contracts:

  A. The Works Supply and Tenders Board should be established as
  an independent statutory body, with its members having
  security of tenure for a fixed term of three years.

  Explanation: As the current investigation revealed, there is little point
  in having a Supply and Tenders Board if its members feel that they
  are constantly under pressure to make particular decisions in favour
  of the Government of the day. The purpose of having a Supply and
  Tenders Board is to allow an objective assessment to be made of
  competing bids for government contracts. This purpose is defeated
  if the Board continues only to make decisions it believes it has to
  make in order to satisfy the Government which appoints it.

  The members of the Board should be appointed on a fixed term
  basis, and their appointments should be revocable only on certain
  prescribed grounds, such as misbehaviour, insolvency or ill-health.

  B. The members of the Works Supply and Tenders Board should
  be appointed on a full-time basis.

  Explanation: Under the system which exists at the moment, the
  members of the Board are appointed from the ranks of the National
  Public Service. Members of the Board only serve on a part-time
  basis and have to fit their duties into their normal work schedule.
  We believe that the work of the Board is too important to be left to
  part-time members who already have other onerous responsibilities
  to perform.

  In addition, it was obvious from this investigation, that there are
  often problems encountered in convening meetings of the Board and
  arranging a quorum. As a result, delays occur, the public tender
  system becomes clogged and contractors and governmental bodies
  become frustrated and are tempted to take short-cuts.

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  Giving the Board its proper status as a full-time body is one way of
  greatly improving the efficiency of the system and reducing the risk
  of corruption.

  C. The members of the Works Supply and Tenders Board should
  be made subject to the Leadership Code.

  Under Section 26(3) of the Constitution, it is possible for an Act of
  the Parliament to declare any public office to be an office to which
  Division 111.2 of the Constitution (leadership code) applies.

  We believe that, in view of the nature and importance of the work
  they perform, all members of the Board should be subject to the
  Leadership Code. They should be subject to the same code of
  behaviour as that which regulates other leaders, such as members
  of the Parliament and members of the controlling bodies of statutory
  authorities. They will also be required to lodge annual statements to
  the Ombudsman Commission regarding their assets, liabilities and
  financial affairs.

  D. Limits should be imposed on the time within which the Works
  Supply and Tenders Board is required to meet and consider
  tenders. However, the time limits should be flexible, in that
  extensions of time could be granted by the Minister for Finance
  and Planning in special circumstances.

  Explanation: We believe that the problem of delays in the public
  tender process will be greatly alleviated if Recommendation Nos. 3A
  and 3B are implemented. However, giving the members of the
  Board security of tenure and appointing them on a full-time basis
  may not solve the problem completely.

  The Board must be encouraged to consider tenders and make its
  decisions as soon as is practicable.

  As to the length of time needed for consideration of tenders, this will
  depend on the size and complexity of each project for which tenders
  are called. The times specified in the legislation can be determined
  after consultation with the members of the Board and other persons,
  including industry representatives, who are normally engaged in the
  public tender process.

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• 89

  AND FURTHERMORE the Attorney-General and the Minister for Finance
  and Planning are requested under Section 22(3) of the Organic Law on the
  Ombudsman Commission to notify the Ombudsman Commission, within 30
  days after service of this report, of the steps they propose to take to give
  effect to this recommendation.

  RECOMMENDAnON NO. 4: CERTIFICATES OF INEXPEDIENCY

  The Ombudsman Commission recommends to the Attorney-General and
  the Minister for Finance and Planning that they initiate the following
  amendments to the Public Finances (Management) Act, in order to control
  the circumstances in which certificates of inexpediency are granted by
  Supply and Tenders Boards:

  A. The circumstances in which it is permissible to certify that the
  calling of tenders is unnecessary must be prescribed in some
  detail in the legislation.

  Explanation: There appears to be a great deal of uncertainty as to
  what the proper role of a Supply and Tenders Board is, when it is
  asked to issue a “certificate of inexpediency”. Under the current
  legislation, such certificates can only be issued when it is
  “impracticable or inexpedient” to invite tenders. However, the
  meaning of these words is unclear. The legislation should also
  clarify the role of the Board in the event that it grants such a
  certificate; in particular it should be made clear whether, after
  granting the certificate, the Board is required to recommend a
  particular contractor to which the contract is to be awarded.

  B. The Board should be required to publish details of a certificate
  of inexpediency in the National Gazette within 14 days after
  issuing it, and state fully the reasons for issuing the certificate.

  Explanation: The decisions of the Supply and Tenders Boards
  should be open to public scrutiny. In the case of the disciplined
  forces institutional housing project, the certificate of inexpediency
  was issued on flimsy grounds following a rushed decision made
  behind closed doors. We believe that if the decisions of the Board
  were subject to greater public exposure, the quality of the decisions
  would improve and the potential for corruption would be diminished.

  , I

  Chapter 16

  11 !
  i: l

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  AND FURTHERMORE the Attorney-General and the Minister for Finance
  and Planning are requested under Section 22(3) of the Organic Law on the
  Ombudsman Commission to notify the Ombudsman Commission, within 30
  days after service of this report, of the steps they propose to take to give
  effect to this recommendation.

  RECOMMENDATION NO. 5: CLARIFICATION OF THE ROLE OF THE PUBLIC
  WORKS COMMITTEE

  The Ombudsman Commission recommends to the Attorney-General and
  the Minister for Finance and Planning that they initiate the following
  legislative amendments, in order to clarify and improve the role of the
  Public Works Committee in the decision-making process for large public
  works contracts:

  A. Before tenders can be called for projects costing more than
  K500,000.00, the Parliament must resolve that it is expedient for
  the project to proceed, in accordance with the Public Works
  Committee Act.

  Explanation: Under the Public Works Committee Act, all public
  works projects costing more than K500,000.00 must be approved by
  the Parliament before work can commence. As there is no point in
  calling tenders if the project has not been approved, the Public
  Finances (Management) Act should be amended to ensure that the
  requirements of the Public Works Committee Act are met before
  tenders are called.

  There appears to be some confusion at the moment about the time
  at which it is necessary to comply with the Public Works Committee
  Act. Some respondents to the Commission’s preliminary report
  suggested that it was not necessary to bring a project to the
  attention of the Parliament until after contracts for the project had
  been executed. However, as we pointed out in Chapter 10, that
  approach makes little sense. The proposed amendment to the
  Public Finances (Management) Act will assist in relieving the
  confusion about this important procedure.

  B. The Public Works Committee Act should be amended to
  impose a limit on the time within which the Public Works
  Committee presents its reports on the proposed projects to the
  Parliament. However, the time limits should be flexible, in that
  extensions of time could be granted by a resolution of the
  Parliament in special circumstances.

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  Explanation: At present, Section 18 of the Public Works Committee
  Act requires the Committee to deal with matters referred to it “with
  all convenient dispatch” and report the results of its inquiries to the
  Parliament “as soon as conveniently practicable”. We consider that
  this allows too much scope for delay. The process needs to be
  streamlined, so that unnecessary delays are avoided.

  AND FURTHERMORE the Attorney-General and the Minister for Finance
  and Planning are requested under Section 22(3) of the Organic Law on the
  Ombudsman Commission to notify the Ombudsman Commission, within 30
  days after service of this report, of the steps they propose to take to give
  effect to this recommendation.

  RECOMMENDATION NO.6: TIGHTENING PROCEDURES FOR EXECUTION
  OF STATE CONTRACTS

  The Ombudsman Commission recommends to the Attorney-General and
  the Minister for Finance and Planning that they initiate the following
  legislative amendments, in order to tighten controls over the execution of
  contracts entered into by the State:

  A. Section 46 of the Public Finances (Management) Act must be
  immediately amended to ensure that the power to enter into
  State contracts of a value of K1,000,000.00 or more, rests solely
  with the Governor-General, acting with, and in accordance with,
  the advice of the National Executive Council.

  Explanation: As a result of the Supreme Court’s decision in the
  Curtain Bros-Kinhill Kramer case, it is now possible for multi-million
  kina State contracts to be entered into by public servants, even
  when they have no authority whatsoever to do so. As we pointed
  out in Chapter 9, this is a very dangerous and undesirable situation,
  which can have disastrous financial consequences for the State, as
  the Curtain Bros-Kinhill Kramer case itself showed. Furthermore, the
  Supreme Court’s interpretation of Section 46 has created, in our
  view, an environment which is ripe for corruption. The power of
  public servants to enter into such large contracts on behalf of the
  State must be immediately removed.

  The problems (and the potential for financial disaster) caused by the
  Supreme Court’s decision in the Curtain Bros-Kinhill Kramer case
  must be addressed as a matter of urgency.

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  In addition, we believe it is necessary to remove the power of
  individual Ministers, including the Minister for Finance and Planning,
  to execute these contracts. As the present investigation revealed,
  the effect of Section 46 is that the Minister for Finance and Planning
  can delegate his powers to other Ministers, and thereby by-pass the
  syste l11 of checks and balances that is imposed when a proposal to
  enter into State contracts is presented to the National Executive
  Council for endorsement.

  B. The Ministers’ Delegation Regulation· must be amended to
  remove the power of the Minister for Finance and Planning to
  delegate his power under Section 46 of the Public Finances
  (Management) Act to execute contracts on behalf of the State.

  Explanation: This legislative amendment is necessary in order to
  supplement Recommendation No. 6A.

  C. The Loans (Overseas Borrowings) (No. 2) Act must be
  amended to ensure that the power to borrow overseas for the .
  purpose of works and services of the State, rests solely with
  the Governor-General, acting with, and in accordance with, the
  advice of the National Executive Council.

  Explanation: As we pointed out in Chapter 9, there is some
  confusion at the moment about who is actually empowered to
  execute loan agreements with overseas financial institutions. That
  uncertainty must be removed as soon as possible, and the best way
  to do this is to give exclusive power to execute these agreements to
  the Governor-General.

  It is most undesirable, to allow a single Minister to travel to an off-
  shore location and enter into a loan agreement with overseas
  financial institutions, on behalf of the State, especially if the
  instrument of delegation executed in his favour by the Minister for
  Finance and Planning contains no restrictions or guidelines as to the
  terms and conditions of the borrowing. This actually occurred in the
  case of the disciplined forces institutional housing project. We
  believe that the risk of enormous adverse financial consequences
  caused by abuse of power in this situation is simply too great for the
  nation to bear.

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  D. A new provIsion should be inserted in the Public Finances
  (Management) Act which states that any contract entered into
  by or on behalf of the State in breach of the provisions of that
  Act shall be void and unenforceable.

  Explanation: As the Commission has stated throughout this report,
  the circumstances in which contracts are entered into by the State
  must be carefully controlled. A competitive bidding environment
  must be created and the possibility of corrupt practices interfering
  with the fair and proper functioning of the market place must be
  minimised. The provisions of the Public Finances (Management) Act
  must not be dismissed as unnecessary red tape, nor should they be
  regarded as a set of directory guidelines. The provisions of the Act
  dealing with public tenders must be given teeth, and one way of
  achieving this is to ensure that any contract entered into in
  contravention of the Act is a nullity. This way, when negotiations are
  taking place for large public works projects, the onus of ensuring
  that the provisions of the Act are fully and properly complied with
  will rest, not only on members of the Government’s negotiating
  team, but also on private sector representatives. There will be an
  incentive on both sides to follow the normal and proper procedures
  laid down by the Act.

  We are aware that the common law of contract which Papua New
  Guinea adopted at Independence, may provide a remedy to a party
  aggrieved by a contract which has been entered into illegally, e.g.
  where the public tender provisions of the Public Finances
  (Management) Act have not been followed. However, the Parliament
  has the opportunity to make the law crystal-clear in this area, and
  we believe this is a much better option than leaving this issue to the
  courts to decide only on common law principles.

  E. A new provIsion should be inserted in the Public Finances
  (Management) Act which makes it a criminal offence for a
  person to execute a contract on behalf of the State, contrary to
  the provisions of that Act, or for a person to hold himself out
  as having authority to execute contracts on behalf of the State,
  if the person has no such authority to do so.

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  This amendment will reinforce Recommendation No. 60, and
  thereby reduce the risk of unauthorised persons executing State
  contracts. We also believe that it is important for individual persons
  who flout the provisions of the Act, to bear personal responsibility for
  their actions, which may sometimes have grave financial
  consequences for the State.

  AND FURTHERMORE the Attorney-General and the Minister for Finance
  and Planning are requested under Section 22(3) of the Organic Law on the
  Ombudsman Commission to notify the Ombudsman Commission, within 30
  days after service of this report, of the steps they propose to take to give
  effect to this recommendation.

  RECOMMENDATION NO. 7: THE FUTURE OF THE DISCIPLINED FORCES
  INSTITUTIONAL HOUSING PROJECT

  The Ombudsman Commission recommends to the Government of Papua
  New Guinea that the State continue to discharge its obligations under the
  construction contract with the YTL Company and the loan agreement with
  the Malaysian banks, which have been entered into for the purposes of the
  disciplined forces institutional housing project.

  Explanation: In view of the widespread abuse and violation of proper
  procedures for execution of public works projects that occurred in the case
  of this project, the Ombudsman Commission has given consideration to
  recommending that the project not go ahead in its proposed form.

  However, we have decided against such a recommendation. As the
  contracts have already been executed, the State appears to be under a
  legal obligation to go ahead with the project. The country certainly does
  not need a repeat of the financial disaster that followed the decision to
  terminate the contract for the Poreporena Freeway project.

  Of course, this does not mean that the Commission approves of the
  abuses that occurred in this case. The suspicion surrounding the manner
  in which the project was awarded to the YTL Company will remain, as will
  the question-marks surrounding the value of the project and the cost of the
  loan.

  The way to remove such suspIcIon in future, and to reduce the
  opportunity for corruption, is to follow the normal, established and
  lawful procedures for execution of public works contracts, and for
  the Parliament to implement the recommendations referred to above.

  ************

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  95

  PART VI

  SUMMING UP

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  17. SUMMING UP

  [17.1] THE MISTAKES OF THE POREPORENA FREEWAY PROJECT
  HAVE BEEN REPEATED

  A little over twelve months ago, the Ombudsman Commission presented a
  detailed report to Parliament on the Poreporena Freeway project. The report
  highlighted the flagrant disregard of public tender procedures and numerous
  other breaches of laws dealing with the award of contracts for public works
  projects.

  It is our sad duty to report to the Parliament and the People of Papua New
  Guinea that the same thing has happened again with the disciplined forces
  institutional housing project.

  When are the leaders of our country going to learn that the laws of Papua
  New Guinea must be respected and followed?

  The following is the summary of what has happened so far with the disciplined
  forces institutional housing project:

  • This project was not put to public tender. No company, other than
  the YTL Company of Malaysia, was given any opportunity of bidding
  for the project.

  • A certificate of inexpediency was issued in very strange and
  unsatisfactory circumstances by the Works Supply and Tenders
  Board. The proceedings of the Board became a farce.

  • The Minister for Defence was improperly delegated power to
  execute the contracts for this project. The normal checks and
  balances imposed by submitting the final draft contracts to the
  Governor-General, through the National Executive Council, were by-
  passed.

  • The project was not approved by the Parliament in accordance with
  the Constitution and the Public Works Committee Act.

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  • The project was not properly costed, so there is no guarantee that
  Papua New Guinea will be getting value for money from the project.

  • The project is being funded by a commercial loan from four
  Malaysian banks, but they were not subject to any competition
  regarding their funding offer.

  • Even though locally-based companies, with a long term presence in
  Papua New Guinea, could have undertaken the project using Papua
  New Guinean materials (and been subject to taxes) they were
  denied the opportunity of making a bid. Instead, the project was
  handed to a foreign-owned company, which is entitled to import
  duty-free prefabricated building materials, and rely on foreign labour
  and management, subject only to a vague 35% “local content”
  requirement.

  • The YTL Company has been given extremely generous
  concessions. It will pay no income tax, no customs duty, no stamp
  duty and no sales tax in relation to this project. Its non-citizen
  employees will pay no income tax or customs duty. The YTL
  Company has no obligation to develop the infrastructure for any of
  the project sites. The effect of these concessions has been to give
  this particular company a very, very easy passage into our
  economy. Suspicion of corruption inevitably arises when these sorts
  of concessions are made in the course of commercial agreements.

  The People of Papua New Guinea deserve much better than this.

  [17.2] THE NEED TO FOLLOW PROPER PROCEDURES

  The Government’s advisers were prepared to turn a blind eye to these
  irregularities because they took the view that this was an “aid” project, which had
  been approved by the National Executive Council. But the Ombudsman
  Commission categorically rejects that view.

  As we pOint out in Chapter 6, the total cost of this project is approximately K61.6
  million, plus interest on the loan from the Malaysian banks. The Government of
  Malaysia will contribute only K5.4 million of this amount. So, this project will cost
  Papua New Guinea approximately K56.2 million, plus interest.

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  With such a large amount of public money involved, it was incumbent on the
  National Executive Council and its advisers to ensure that proper procedures
  were followed. These procedures should not have been dismissed as
  unnecessary red tape. They exist for very good reasons: to create a competitive
  bidding environment, to ensure that Papua New Guinea gets the best deal
  possible and to minimise the risk of corruption. .
  /

  When an investigation of this nature reveals no evidence of corruption, it does
  not necessarily mean that corrupt practices did not occur.

  Unfortunately, the nation seems to have been lulled into a false sense of
  security following the tabling in Parliament of both the report of the Ombudsman
  Commission and the report of the Ellis Commission of Inquiry concerning the
  Poreporena Freeway. Media coverage of both reports highlighted that “no
  evidence of corruption was found” – the inference being that there was nothing to
  worry about.

  But nothing could be further from the truth. While our laws for awarding public
  works contracts continue to be flouted, and our leaders and their advisers take a
  complacent attitude to these gross irregularities, corruption will inevitably prosper
  and there will always be grave suspicion about what has happened. Our
  government advisers and leaders must both respect and follow our laws – and
  not try and by-pass them.

  [17.3] RECOMMENDED REFORMS

  It is necessary for the laws dealing with the awarding of public works contracts to
  be reformed, and we have therefore made a number of recommendations to that
  effect in Chapter 16.

  These recommendations are extremely important and we trust that they will be
  given close and careful consideration by the National Parliament. Both the
  Attorney-General and the Minister for Finance and Planning have been
  specifically directed to notify the Ombudsman Commission of the steps they
  propose to take to initiate these reforms.

  [17.4] OMBUDSMAN COMMISSION WILL MONITOR THE PROJECT

  We have not recommended that work on the disciplined forces institutional
  housing project be stopped. The contracts for the project have been executed
  and work should proceed.

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  However, the Ombudsman Commission gives nQtice of its intention to monitor
  the progress of this project. Any further irregularities will be investigated. And if
  further information comes to light regarding the circumstances in which the
  negotiations for this project took place, the Commission will report these matters
  to the Parliament and take whatever steps may be necessary under the
  Constitution and the Organic Laws to remedy the situation.

  [17.5] LEADING BY EXAMPLE

  It is our sincere wish that this report, together with the Ombudsman
  Commission’s report and the Ellis Commission of Inquiry’s report on the
  Poreporena Freeway project, will soon result in an overhaul of procedures
  and attitudes towards the awarding of government contracts. As the
  Commission stated in the Freeway Report:

  “We all have a duty to conduct ourselves in a way that minimises the
  risk of corruption and puts the decision-making processes of
  government above suspicion.”

  If the Government of the day ignores the laws of our country, then it can
  hardly expect the ordinary citizens to obey them.

  It is not only important but a paramount responsibility and duty for our
  leaders to lead by example. We therefore plea once again that OUR
  LEADERS MUST LEAD BY EXAMPLE.

  SIR MAINO
  CHIEF OMBUDSMAN
  N,AANG
  OMBUDSMAN

  9 June 1994

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  Chapter 17