PART A

Executive Summary

1.1   This Commission of Inquiry was established under the Commissions of Inquiry Act 1951 by Instrument dated 30 August 2019 and, as amended in October 2021, it required a report to be delivered to the Prime Minister, the Honourable James Marape MP, by 31 March 2022. This is that Report.

DOWNLOAD the full report from the UBSCOI website

1.2   This Executive Summary gives an overview of the Commission's work, and of some key conclusions and recommendations. It must be read with the Report as a whole, noting that individual chapters contain a comprehensive analysis of the often complex issues and evidence they each cover. Each generally concludes with relevant findings and recommendations. The Commission's key conclusions and recommendations follow this summary.

1.3   The rationale for this Commission is explicitly stated in the establishing Instrument as follows:

The decision of the Government of Papua New Guinea made in 2014 to obtain an off- shore loan from the Union Bank of Switzerland (UBS) has become controversial following the tabling of the Ombudsman Commission Investigation Report in Parliament in May 2019. The Prime Minister upon assuming office undertook to convene a Commission of Inquiry to establish facts surrounding the whole transaction, including all persons and entities involved in the deal and whether or not the deal followed proper and legal process and procedures.

In order to appreciate the public concerns on improprieties in regard to the whole deal it is necessary and important that the Commission of Inquiry commences inquiry with the cause which brought about the need for the Government of the day to seek funding from an off-shore loan facility. This necessitates the Inquiry to commence its investigation with the States participation in the PNG LNG Project, including the purchase of shares and the  disposal of the same.

1.4   The Ombudsman Commission Report is titled:

An Investigation Into The Alleged Improper Borrowing Of MN AuS1.239 Billion Loan From The Union Bank Of Switzerland ... (Australia Branch) To Purchase 149,390,244 Share[s] In Oil Search Limited ...

1.5   This is a reference to what this Report calls the UBS Loan. It is one of the key financial transactions examined by the Commission, the other being the Exchangeable Bond Transaction that IPBC entered into with IPIC in 2008.

1.6   The Ombudsman Commission Report made serious findings of illegality and failure to follow proper procedures, but its jurisdiction was limited to investigating complaints concerning actions of governmental bodies and agencies, and the actions of 'Leaders' as defined in the Leadership Code. Unlike this Commission, the Ombudsman Commission could not investigate private citizens or entities, even those who had been paid to advise or perform other services for the State, such as lawyers NRFA and UBS itself.

1.7   It might have been expected that such well-paid former advisers would unstintingly assist the Commission, even though they are located overseas and beyond the reach of the Commission's compulsory powers, but they have not. This surprising and disappointing behaviour has certainly limited what the Commission could achieve, and along with other findings of this Report, merits their exclusion from work for the State and its entities for some time to come.

1.8   Although the public concern generated by the Ombudsman Commission Report clearly led to this Commission, this Commission is not a review of the Ombudsman Commission's work, nor can this Commission decide legal controversies as a court can.

1.9   Nonetheless, despite the well-known difficulties caused by the COVID-19 pandemic, the Commission has been able to examine thoroughly a great many witnesses, entirely in live-streamed hearings which were held in public, and much documentary evidence, and to answer the Terms of Reference by the due date. The Commission acknowledges with gratitude the work of all those who made this significant achievement possible.

1.10   Papua New Guinea is blessed with abundant natural resources, which were largely unexploited before independence was attained in 1975. The need for wise and sustainable exploitation of natural resources focused the minds of the founders of the newly independent State and was reflected in the terms of the Constitution which, for example, declares in National Goal 4 that 'natural resources and the environment are to be conserved and used for the collective benefit of all and be replenished for the benefit of future generations'. Equally, evidence to this Commission from founders such as Sir Julius Chan and the late Grand Chief Sir Michael Somare emphasised that governments should be wary of becoming involved in private business investments and, when doing so, must carefully manage risks in order to avoid losses: overall, the Commission concludes that risks were well managed in the case of the Exchangeable Bond Transaction but were not in the case of the disastrous UBS Loan.

1.11   Among the most valuable and internationally marketable resource located in this country is liquefied natural gas (LNG). Perhaps the most significant current resources project for many years is the PNG LNG Project. Since its first LNG export in 2014, the PNG LNG Project has exported approximately 7 million tonnes of LNG per year. It is a vast and complex project which has been necessarily undertaken with the involvement of multinational companies and overseas finance. To illustrate the scale of the PNG LNG Project: on 8 December 2009 the Final Investment Decision for the PNG LNG Project was made, and this immediately resulted in the commencement of comprehensive construction activities in the construction and commissioning period from 2010 to 2014 costing more than USD 19 billion (approximately PGK 67 billion))

1.12   There are direct economic benefits to the country from such projects, especially employment and investment in infrastructure. And, like anyone else, the State can become a shareholder in the companies holding the licences or undertaking the work, receiving such dividends as those companies may choose to declare. But the State also has uniquely valuable 'back-in' rights under ss. 184 and 185 of the Oil and Gas Act which allowed it to pay to become an equity participant in the PNG LNG Project.

1.13   In 2009 the State decided to exercise those back-in rights, acquiring 19.4%. In return for acquiring 'back-in' rights then worth between USD 3-5 billion (approximately PGK 10.6-17.7 billion), the State needed to pay USD 300 million (approximately PGK 1.06 billion) upfront, and then USD 1 billion (approximately PGK 3.5 billion) between 2009 and 2014 in order to share in the future profits of the PNG LNG Project. The State did not have those funds, so it needed to raise them. At the time, it was the largest fundraising that the State had ever attempted. This significant need for finance directly led to the Exchangeable Bond Transaction.

1.14   In 2014. Oil Search was Papua New Guinea's largest company and an important partner with the State in many projects. The State had first acquired 196 million shares in Oil Search when it had merged in 2002 with Orogen Minerals, a company in which the State then held a bare majority of the shares. The merger gave Oil Search access to cash it did not otherwise have. The Oil Search shares the State then acquired gave the State between 17.65% (in 2004) and 13.17% (by 2013) of the issued share capital of Oil Search. Although Oil Search usually paid modest dividends, the shares tended to appreciate in value.

1.15   The Global Financial Crisis which began in 2007 was still being felt in Papua New Guinea in 2008/9 and it greatly affected the State's capacity to raise funds. At this time the late Sir Michael Somare was Prime Minister and Mr Peter O'Neill was in the NEC (Cabinet). The State decided to use a significant asset, namely its ownership, through IPBC, of the 196 million Oil Search shares to raise the funds needed for it to participate in the PNG LNG Project. The State (through IPBC) decided to raise AUD 1.681 billion (approximately PGK 4.46 billion) by issuing 5-year Exchangeable Bonds to IPIC, an Abu Dhabi sovereign wealth fund. Under that transaction, IPIC would receive 5% per annum interest for the duration of the Exchangeable Bonds. On maturity, the Exchangeable Bonds would be exchanged for the shares that IPBC held in Oil Search. The reference price for the exchange was AUD 8.55 per share. If (as was the case in 2014) the share price was below the reference price, IPBC would have to make a top-up payment to IPIC. If the share price was greater, IPIC would only receive shares up to the value of the bonds.

1.16   The Report closely considers the Exchangeable Bond Transaction: its terms and rationale, the processes leading to its adoption and the work done by advisers. The Commission, assisted by detailed expert reports from The Brettle Group, concludes that the lack of controversy historically attaching to the Exchangeable Bond Transaction is justified. While it involved some risks (which largely turned out not to be realised), it served a valuable purpose for the State by enabling it to acquire at an attractive price the back-in rights and share in the profits of the largest resource project in the country. Further (and in contrast with the UBS Loan) it:

         (a) was on the whole the best available option
         (b) was quite carefully and methodically examined by Government and its advisers before the 
             NEC decided to proceed with it
         (c) was fairly priced
         (d) achieved its stated purpose

1.17   From 2011-2019 the Prime Minister was Mr O'Neill. The Exchangeable Bonds were to mature in March 2014 and, unless IPIC otherwise agreed, the result would be that:

        (a) IPBC had used the funds borrowed to share in the future profits of the PNG LNG project, 
             for the ultimate benefit of the State and the people
         (b) IPIC would take ownership of the Oil Search shares, through the exchange provisions of 
             the Exchangeable Bonds, leaving IPBC and the State with no Oil Search shares
         (c) IPBC would, according to a formula based on the market value of the shares, most likely 
             make a relatively modest payment to IPIC thereby bringing the Exchangeable Bond 
             Transaction to an end (the amount actually paid was about AUD 74 million (approximately 
             PGK 196 million), and, critically
         (d) IPBC would not have any further monies to pay, and the significant amounts they were 
             due to receive as early as 2014 from the PNG LNG Project could be put into the legislated
            but not yet operational Sovereign Wealth Fund for the benefit of the country and its 
           economy

1.18   The first three matters came to pass. The fourth - the road not taken - did not, fundamentally because of the decision by Mr O'Neill, principally aided by then Secretary for the Department of Treasury, Mr Dairi Vele, to persuade the NEC to enter into the disastrous UBS Loan arrangement.

1.19   These matters are at the core of the Commission's work. As its establishing Instrument stated:

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

1.20   The period between mid-2013 and the entering into the UBS Loan in March 2014 can be seen as a series of stages, at each one of which serious errors were made.

1.21   The first stage covered the unsuccessful attempts by the State or State entities to persuade IPICto give up its contractual rights to retain the Oil Search shares which were the subject of the Exchangeable Bonds. While there were some limited signs that IPIC was prepared to do so, in the end it relied upon its rights to keep the shares. Although it was always clear the Exchangeable Bonds gave those rights to IPIC, and Mr O'Neill was in the Somare Cabinet which approved the Exchangeable Bond Transaction, in his evidence before the Commission he unhelpfully persisted with the notion that Papua New Guinea was well positioned to persuade IPIC to give up its rights. It never was. The NEC, the IPIC Exchangeable Bond Review Committee it established, IPBC and the Department of Public Enterprises and State Investments had their time wasted on what was likely to be a futile exercise.

1.22   The second stage was the growing realisation that the Oil Search shares formerly held were going to be lost and that, if even an approximately equivalent quantity was again to be held by the State, they would need to be newly acquired. From later in 2013 it became clear to Mr Vele, who was leading the State's search for a financial adviser in relation to refinancing the Exchangeable Bonds that an opportunity might exist to persuade Oil Search to issue new shares in itself to the State because Oil Search was seeking a significant amount of finance to buy into a valuable gas resource known as Elk-Antelope or PRL 15, and Oil Search might find it attractive to raise funds in a single transaction with the State.

1.23   The third stage was the formal but unsurprising advice from IPIC that it was keeping the Oil Search shares, which led to a series of urgent meetings between Oil Search executives, Prime Minister O'Neill and Mr Vele, which in turn led to the agreement with Oil Search. This created a need for the State to urgently obtain finance, although the urgency was because of Oil Search's timetable.

1.24   The fourth stage was a hurried and inadequate process over a period of 15 days whereby the State's financial adviser and arranger, UBS, and many lawyers, including from NRFA and PLG, put together a complex series of documents and largely drafted the NEC paperwork. Mr O'Neill and Mr Vele drove the process to the exclusion of others with key interests. Remarkably, even the Treasurer was excluded from drafting or commenting on a vital submission which recommended very large expenditure on behalf of the State. Nonetheless the UBS Loan was approved by the NEC and documentation executed.

1.25   The final stage of the UBS Loan was that, to avoid breaching the State's debt ratios, the Collar Loan (one of two parts of the UBS Loan) was novated to the SoE eventually known as Kumul Petroleum Holdings Limited (KPHL). In view of the controversy which resulted when the UBS Loan was announced, parliamentary disapproval of the UBS Loan could well have occurred. Importantly, KPHL never wanted either the Oil Search shares or the significant financing debts that came with the UBS Loan. But from 2015 the choice was not theirs alone, as the KPHL Trustee was the Prime Minister of the day and approval of the NEC was needed for many of its decisions. So the KPHL Board extended the loan in 2016 and, with its Trustee Mr O'Neill's permission, sold the shares at a significant loss in 2017. The Managing Director of KPHL, Mr Wapu Sank, with some justification, felt the Trustee's permission was deferred for purely political reasons which, if established, would be a clear breach of duty by a trustee.

1.26   In the end, the State's entirely unnecessary UBS Loan to buy Oil Search shares resulted in:

           (a) the loss of those same shares
           (b) significant financial losses to the State of in excess of AUD 340 million (approximately 
               PGK 902 million)
           (c) lost opportunities, including to establish the Sovereign Wealth Fund as intended and
               endow it properly
           (d) diversion of the significant revenues expected from the PNG LNG Project once the 
               exports of LNG began in 2014

1.27   As the Report concludes in relation to the UBS Loan:

            (a) Unlike the Exchangeable Bond Transaction which was justified by the purchase of 
                significant and financially beneficial rights in the PNG LNG Project, the UBS Loan had no 
                satisfactory justification or rationale_ It made no economic sense for the State to pay large 
               sums to multiple advisers as well as high interest payments on a loan to purchase shares 
               in a publicly listed company. If the State wanted to be involved in further oil and gas 
               exploration projects, waiting instead for the back-in rights to PRL 15 was a more prudent 
               course. The Commission rejects Mr O'Neill's stated 'strategic interest' justification for 
               obtaining new Oil Search shares in 2014. On analysis, it amounts, at its highest, to no 
               more than the habit of such ownership over the preceding dozen years, and access to 
               modest dividends in common with any other shareholder. If there were other reasons 
               they have not been revealed to the Commission. The State had powers to block 
               takeovers on national interest grounds if that became a concern. Further, any interest in 
               share ownership was short lived: the UBS Loan was swiftly novated to KPHL, which never 
               wanted the UBS Loan obligations and wished to sell the shares at the earliest opportunity
          (b)  The failure to follow proper processes, coupled with the speed with which complex 
               documentation was produced had the disastrous consequence that no-one within the 
               public service — including the Secretary for Treasury. Mr Vele — understood the 
               overcharging of the State by UBS, and the risks inherent in the UBS Loans, and no 
               adviser retained by or on behalf of the State identified these matters, either in themselves 
               or as risks to be further investigated
          (c)  In addition to its sizeable disclosed fee of AUD 28.4 million (approximately PGK 75.4 
               million), UBS also benefited from the refinancing of the Collar Loan in December 2014 
               and February 2016 as well as from the ultimate sale of the shares in September 2017. Its 
               total over-charging amounts to AUD 175 million (approximately PGK 464 million), which 
               should be repaid, with interest. The Commission considers UBS' failure to provide
              witnesses deeply disappointing, as is its final submission which suggested as 
              inappropriate Brattle's use of the widely recognised Black-Scholes financial model but 
              without stating what is appropriate or what model it used to price the UBS Loan in 2014. 
              The Commission considers its assertion to be a defensive strategy not a serious 
              submission. It is not accepted
           (d) The State's lawyers, including NRFA, failed to advise the State of UBS' at least potential 
            conflicts of interest and how to manage them. Like UBS, NRFA declined to provide 
            witnesses to the Commission. NRFA did not provide any submissions, and their delayed 
           and incomplete production of documents, owned not by them but by their former clients, 
           was inexcusable
         (e) Mr Vele was responsible for the settling of the NEC policy submission recommending the 
            UBS Loan. The submission's inadequacies included its failure to set out any downside to 
            the proposal and the false statement that the Treasurer agreed with the submission's 
            contents when, to Mr Vele's knowledge, he had never seen it prior to the eve of the NEC 
            meeting, and according to Mr Vele himself, then indicated his disagreement with the 
            submission by refusing to sign it
        (f) Mr O'Neill knew the submission was lengthy and complex and needed to be explained to 
            the NEC and yet he provided the NEC with no advance notice of it nor any real 
            opportunity to debate it during a meeting that lasted less than an hour, notwithstanding the 
            Treasurer's outburst against the proposal in the NEC (he being later sacked from that 
            role). The NEC is a valuable democratic method of analysing and discussing difficult 
            matters but Mr O'Neill ensured it could not operate effectively in relation to the UBS Loan. 
            Proper processes in the NEC and Government generally, like keeping adequate records, 
            may appear unimportant or uninteresting, but what happened in relation to the UBS Loan 
            demonstrates why such matters (like the NEC, parliamentary scrutiny and anti-corruption 
            measures) are vital in a democracy. Their absence can cost a nation dearly, as was the 
            case with the UBS Loan

1.28   In answer to the question 'Who was responsible and what remedies should be sought against them'; detailed findings are set out elsewhere in the Report, but fundamentally:

    (a) Mr O'Neill should be prosecuted for giving false evidence to the Commission and referred 
        to the Independent Commission Against Corruption (ICAC)

    (b) Mr O'Neill is centrally responsible for the UBS Loan, Mr Vele was indispensable in 
        assisting him in that endeavour. Each should be referred to the Leadership Tribunal

    (c) UBS is solely responsible for overcharging and any misleading or deceptive conduct. 
        They should be asked to repay the amounts overcharged and both Papua New Guinea 
        and Australian authorities should consider whether civil or criminal sanctions should be 
        sought. UBS should be banned from doing work for the State and any SoEs for 10 years

    (d) NRFA's obstruction of the Commission should be the subject of disciplinary investigation 
        in Australia. Their failure to give proper advice to the State should be further examined 
        and the firm should be banned from doing work for the State and any SoEs for five years

    (e) The following current or former UBS or NRFA personnel should be banned from doing 
        work for the State and any SoEs, in their own capacity or as employed by an entity for five 
        years:
            (i) Patrick 'Paddy' Jilek
            (ii)  Mitchell Turner
            (iii) Anthony Latimer
            (iv)  Steven Moe
            (v)   Vittorio Casamento

1.29   The Commission makes a number of recommendations to ensure the UBS Loan is not repeated. It also recommends the long promised establishment of the Sovereign Wealth Fund be delayed no longer. Its establishment and endowment is not only vital for the welfare of the State and its people but will be important evidence for foreign investors, along with the new ICAC and the ongoing role of the Ombudsman Commission, that sovereign risk from corruption and failure to follow mandated government processes is now being properly addressed. .

1.30   During the course of its work, the Commission received information about matters of concern which it pursued as far as its powers allowed. The Commission proposes to provide that information to appropriate authorities with greater investigative powers for them to consider and pursue if they think fit.

1.31   The Commission's work is now done. It is a matter for the Government, the Parliament and ultimately the people to decide whether to act on the Report's findings and its nation-building recommendations.

Note: all references in this document to the PGK equivalent are approximate, using the exchange rate as at 28 March 2022. Exchange Rates UK website, accessed on 28 March 2022 httus://www.exch_ancierates.ora_ukicurrencviexchanae-rate- 
calculator.html.