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Loan losses quantified as PNG Inquiry prepares to release report

Former Prime Minister Peter O'Neill
Former Prime Minister Peter O'Neill

By Kevin McQuillan

Papua New Guinea lost US$432 million on a loan arranged by the Sydney office of the Union Bank of Switzerland in 2014, far more than earlier thought.

Current Prime Minister, James Marape, set up the inquiry three years ago but it only began hearing evidence earlier this year. It is expected to report back at the end of September, 2021.

Led by former chief justice, Sir Salamo Injia, the inquiry is investigating whether there was any corruption or impropriety in the PNG government obtaining the loan.

Background

In 2014, the Peter O’Neill government borrowed US$900m to fund the purchase of 10%  of shares in Oil Search Limited at about $8 per share. The UBS loan comprised two components, a bridging loan of US$240 million (K844 million) and a collar loan, (where the value of the parcel of shares on any day supported the loan itself), of US$660 million (K2.82 billion).

The Ombudsman Commission said in 2015, the share purchase and the loan were unlawful, and that O’Neill and Acting Treasury Secretary Dairi Vele, by-passed all normal government procurement and tendering processes.

At the time, commentators said Oil Search was vulnerable to a take-over and wanted a large injection of cash so it could buy a stake in the new Elk-Antelope LNG project.

As Oil Search share prices fell, the PNG government, through Kumul Petroleum, sold the shares US$4.94, representing an on-paper loss of US$240 million (K760 million). O’Neill falsely claimed at the time that PNG had made a US$29 million profit on the deal.

Evidence

Among those giving evidence to the commission were former finance minister, Don Polye, former Prime Minister, Peter O’Neill and current Prime Minister, James Marape.

Polye  – who was sacked by O’Neill for opposing the loan deal – told the Commission UBS “preyed” on PNG, had multiple conflicts of interest and held a gun to the head of cabinet. Part of the deal UBS insisted on was a guarantee that the State’s income stream from the Exxon-Mobil LNG project would be paid directly to UBS.

O’Neill has told the inquiry that “every minister and treasurer expressed their views in respect to this submission in Cabinet”.

Former Treasurer Patrick Pruaitch described the loan as simply a gift of US$900 million to Oil Search Ltd. 

Marape said as Finance Minister he might have had a role in implementing the loan by endorsing documents.

Dr George Oldfield, a derivatives expert who previously worked for the US Securities and Exchange, told the inquiry UBS made ‘excessive profits’ from the deal. He said UBS made US$81 million (K210 million) more than was “appropriate” from a loan and options deal that was “overly complex” and lacking in transparency.

UBS was also given the right to purchase 20% of the PNG government’s shares at 10%  below what the government paid for them, “guaranteeing a loss in the order of $18 million” for the State.

Former Oil Search managing director Peter Botten told the inquiry UBS was “greedy” for the fees, and that he was uncomfortable with the investment bank being on both sides of the transaction.

UBS and Norton Rose, which advised the PNG government on the deal, have so far refused to co-operate with the inquiry.

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