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Vanuatu Ombudsman's Reports |
REPUBLIC OF VANUATU
OFFICE OF THE OMBUDSMAN
FINAL REPORT
ON THE
PURCHASE, REPAIR, MANAGEMENT,
OPERATION AND SALE OF PRINCE II
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PREAMBLE
'Gather the people together men and women and children and the stranger that is within thy gates, that they may hear and that they may learn, and fear the Lord your God, and observe to do all the words of this law.'
Deuteronomy 31 v 12
The country of Vanuatu adopted in 1980 as a motto for their independence, the unusual words 'Long God Yumi Stanap'. As the 20th year of independence approaches in 2000, and the new millenniums begins, it would be appropriate to ask just how closely 'yumi stanap long God' in terms of our country’s decisions and standards and actions. Is our moral compass keeping us in a good direction? Is our 'ship of state' in good repair?
The accompanying report is only one of many that sadly has become part of the duties of the Ombudsman’s Office to investigate. It shows what so many of the reports have shown - not only the lack of experience and maturity that might be expected in new and untested candidates, but a disregard of those principles of honesty and justice which are vital if this country is to be led to prosperity and happiness.
It has been depressing for the Ombudsman’s Office to see repeated again and again the selfish and greedy actions of those who put personal gain before public service with such regularity that it is with heavy hearts that the growing pile of complaints is surveyed. Cause for sadness, too, in that those charged with offences have chosen not to follow the path of confession and potential forgiveness but of denial or silence.
Constant attacks are made on the Ombudsman and endless parliamentary time taken to seek ways to reduce the power of the office to investigate and make public these offences against the public good. There is much talk about openness, accountability and responsibility while at the same time ways are sought to preserve secrecy and inappropriate power.
Therefore once again, as the Ombudsman’s contract draws to a close, we appeal to the public to be vigilant over what is happening to take a stand against corruption to realise that some 'men love darkness rather than light because their deeds are evil'.
If we are to 'stanap long God' we had better insure that we have 'fought a good fight with the power of wrong-doers, and battled for something more commendable than covetousness and envy. The future for our young people is at stake and it is our duty not only to learn those wise commandments, but to do them.
However desirable and welcome the work of visiting advisers and experts is, the factor that will determine the health and prosperity of our country is obedience to existing laws and observance of moral standards which alone will have a hope of keeping us on the right lines. If these laws are broken without consequences to the offenders, we can only expect disaster in the long run.
SUMMARY
This report looks into the purchase in 1993 of a ship Prince II in total breach of all the existing financial procedures and tender rules. The report outlines also all the questionable actions of the people involved in arranging loans and investing funds in a project destined from the outset to be loss-making.
This operation caused the loss for the Government and the people of Vanuatu of a total sum of Vt172 million vatu (USD 145.000) divided as follows amongst the government agencies for the purchase costs, the major repairs and the running costs.
Original purchase price: Vt67 million (paid by the Vanuatu Government)
Vanuatu Commodities Marketing Board (VCMB): Vt65 million
Vanuatu Cooperative Federation: Vt15 million
Development Bank of Vanuatu: Vt25 million
This amount represents 9 times the budget of Public Prosecution Office and 3 times the budget of the Judiciary.
This purchase was initiated and led by Mr Serge Vohor, former Minister for Economic Affairs, his 1st Secretary, Mr Alfred Maliu who was also Vice Chairman of the Board of the Development Bank, the former Director of the Cooperatives Department, Mr Robert Figa, the former manager of VCMB, Mr Franklin Kere, and the Executive Board of the Development Bank of Vanuatu, namely Mr Petre Malsungai, Mr Amos Andeng, Mr Alfred Maliu.
Prince II ceased operating in late ‘95 and she has been laid up and deteriorating and rusting in Port Vila’s harbour since then. Recently in Parliament, a Minister suggested sinking it to make a dive site. All the Vt 172 million appear to have been totally lost and unrecoverable.
The ship in fact only operated for 14 months on and off and only a total of 1060 tonnes of goods were shipped. This represents 6 full trips made by Prince II since it arrived in 1993.
In around 1991 or 1992, Mr Serge Vohor met with a New Caledonian, ship broker, Mr Franck Gallo who was also an old personal friend, and asked him to find a ship to service the islands of Vanuatu. Prince II was found in Singapore. It was just over 43.6 metres in length and had a gross tonnage of 385 tonnes with a net tonnage of 170 tonnes. It was very much bigger than any locally owned vessel. In August 1993, Mr Vohor addressed the Council of Ministers about purchasing this ship. While the purchase agreement which was signed by Mr Vohor, he informed the Council of Ministers that the price was 560,000 USD (67.2 million vatu).
At the same meeting, although he was provided with information by the Cooperatives Department that the shipping project would be making a loss of Vt35 million each year, Mr Vohor deceived the Council of Ministers by indicating that the ship would be generating a total income of Vt20 million annually.
Prince II was sold to the Government of Vanuatu for VT 82 million. Mr Gallo had purchased it for USD 370.000 and resold it to the Republic of Vanuatu for USD 670.000. The Government paid VT67 million from its budget in October 1993, while the balance of Vt15 million was borrowed from the Development Bank and paid in February 1994. The balance was part of a loan of Vt17 million; the other Vt2 million was used to set up a company, the Melanesian Shipping Line (MSL), to operate the ship. MSL was to be managed by Vanuatu Commodities Marketing Board.
After the decision of the Council of Ministers to approve the purchase of Prince II at 67 million, Mr Vohor increased the price by 15 million vatu which he financed by instructing the Development Bank through his own political appointee Mr Maliu to grant a loan.
Mr Alfred Maliu as First Secretary, Ministry of Economic Affairs and Vice President of Development Bank, applied for a loan of Vt30 million to complete the payment for the purchase of the ship and for working capital for MSL to operate the ship. The loan was rejected by the Development Bank, however, on the same day, the board of the bank met and approved the loan. Mr Maliu was a member of the board. While the entire amount requested was approved by the board, for some reason only Vt 17 million was disbursed to MSL.
When Prince II arrived in Vanuatu it was not seaworthy. It sat at wharf in Port Vila undergoing repairs for 13 months. After having been repaired, it operated for only 14 months and was again laid up. A further Vt43 million was spent on repairs to the ship, bringing the total cost of bringing the ship up to a seaworthy standard to Vt 125 million.
Because the ship was too big for local demands, and was regularly in port for mechanical problems it was difficult for it to compete with other local shipping operators. As a result the company made a huge loss of Vt27 million in the first year of operating.
The Ombudsman found that Mr Serge Vohor’s conduct was blatantly unreasonable and unjustified and in breach of the Leadership Code under the Constitution, and lead to losses to the government and people of Vanuatu of Vt 172 million. Mr Vohor did not carry out a feasibility study of the shipping project, nor did he arrange to have the price of the ship assessed. Even though the Finance Regulations had been introduced by the time the purchase of the ship was made, Mr Vohor did not follow them in that no tender was made to the public for the supply of a ship. After misleading the Council of Ministers, he went ahead and purchased the ship from an old friend. Mr Vohor knew the ship would operate at a loss.
The Ombudsman also found that the loan approval by the Development Bank Board members was improper and based on irrelevant considerations as it was made against the bank management’s own assessment report. Possible economic loss to the bank was not considered and the end result was that the Development Bank made a loss of Vt25 million, being Vt17 million principal plus Vt8 million interest on the unpaid loan. Mr Maliu was found to have a conflict of interest as political secretary of Serge Vohor and Vice Chairman of the Development Bank and acted contrary to S.15 of the Development Bank Act and s.208 of the Companies.
Mr Robert Figa was found by the Ombudsman to have acted unreasonably by approving that Vanuatu Cooperative Federation invest in a project that had already been assessed as non-viable. The Ombudsman also found that Mr Franklin Kere also acted unreasonably by injecting Vanuatu Commodities Marketing Board funds under his management after having been made fully aware of the non-viability of the entire project.
The Ombudsman recommends that Mr Serge Vohor not be reappointed to any ministerial post in the government, Messrs Alfred Maliu, Petre Malsungai and Amos Andeng should not be appointed to any statutory board and that they should compensate the Development Bank for losses due to their negligence. The Ombudsman also recommends that Mr Robert Figa and Mr Franklin Kere not be appointed to any position where investment decisions are to be made. The Director General of Finance should ensure that every incoming Council of Ministers is fully informed of the Finance Regulations, in particular Chapter 22 to prevent a recurrence of the incidents involved in Prince II.
The final recommendations made by the Ombudsman is that the Director Generals of Finance and Trade & Commerce coordinate their efforts to liquidate MSL’s assets and decide upon the future use of Prince II.
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TABLE OF CONTENTS
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1. JURISDICTION
1.1 The Constitution and the Ombudsman Act No 14 of 1995 allow me to look into the actions of the government and other organisations in which the government has interests. I can also look into defects in the law or the administration of the law, discrimination and breaches of the Leadership Code. This includes Mr Serge Vohor as Minister of Economic Affairs, the Development Bank Board, Mr Robert Figa as Director of Cooperatives Department and Mr Franklin Kere as Vanuatu Commodities Marketing Board Manager and Director of Melanesian Shipping Line.
1.2 The Ombudsman Act still applies to this case even though it has been repealed recently as the investigation began while the Act was in force (Interpretation Act [CAP 132] s. 11).
2. PURPOSE, SCOPE OF INVESTIGATION AND METHODS USED
2.1 The purpose of this report is to present my findings as required by Article 63 of the Constitution and Section 24 of the Ombudsman Act.
2.2 The scope of this investigation is to establish the facts about the purchase and the operation of the Prince II and to determine whether:
∑ the conduct of Mr Serge Vohor then Minister of Economic Affairs in negotiating the purchase and tendering procedures was proper,
∑ the conduct of Vanuatu Development Bank Board in approving a loan to Melanesian Shilling Line was proper;
∑ the conduct of Mr Robert Figa in approving funds from the Vanuatu Cooperative Federation for the repair of the Prince II was proper;
∑ the conduct of Mr Franklin Kere in injecting funds from the Vanuatu Commodities Marketing Board into Melanesian Shipping Line was proper;
∑ Mr Serge Vohor breached the Leadership Code.
2.3 This Office collects information and documents by informal request, summons, letters, interviews and research.
3. RELEVANT LAWS AND REGULATIONS
3.1 CONSTITUTION OF THE REPUBLIC OF VANUATU
CONDUCT OF LEADERS
66.(1) 'Any person defined as a leader in Article 67 has a duty to conduct himself in such a way, both in his public and private life, so as not to-
(a) place himself in a position in which he has or could have a conflict of interests or in which the fair exercise of his public or official duties might be compromised;
(b) demean his office or position;
(c) allow his integrity to be called into question; or
(d) endanger or diminish respect for and confidence in the integrity of the Government of the Republic of Vanuatu.
(2) In particular, a leader shall not use his office for personal gain or enter into any transaction or engage in any enterprise or activity that might be expected to give rise to doubt in the public mind as to whether he is carrying out or has carried out the duty imposed by subarticle (1).'
DEFINITION OF A LEADER
3.2 PUBLIC FINANCE ACT [CAP 117], FINANCE REGULATIONS
Chapter 22 of the Finance Regulations sets out the procedures required for purchase of goods and services. Where a purchase price exceeds 1 million Vatu, at least three written tenders must be obtained. The tenders must be submitted to the Central Tender Board and specific procedures must be followed, including advertisement, open competitive bidding, the use of sealed submissions, and acceptance of the lowest evaluated tender. Contracts over 3 million vatu must be approved by the Council of Ministers before being awarded and by the Attorney General before signature.
3.3 DEVELOPMENT BANK OF VANUATU ACT [CAP 169]
Section 15
Every member of the Board shall fully disclose to the Board any financial or other personal interest that he may have directly or indirectly in any matter before the Board and shall not take part in the discussion of any such matter nor vote thereon, and, if requested to do so by the person presiding at the meeting, shall absent himself while deliberations with respect to any such matter are taking place.
(emphasis added)
3.4 COMPANIES ACT [CAP 191]
Section 208(1)
Subject to the provisions of this section, it shall be the duty of a director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of his interest at a meeting of the directors of the company
4. OUTLINE OF EVENTS
PURCHASE OF SHIP
4.1 In Noumea in 1992, Minister of Economic Affairs Serge Vohor met Mr Jean Franck Gallo, a New Caledonian ship broker whom he had known for 7 or 8 years. According to Mr Gallo, Mr Vohor asked him if he could find a ship that could service the islands. Mr Gallo then located and purchased the Kahenda Gold for 370,000 US Dollars for subsequent sale to Vanuatu as the MV Prince II. The ship is 43.60 metres in length, of steel welded construction, with a gross tonnage of 385 and a net tonnage of 170. She is stated to have been built in 1991 in Vietnam, and was previously registered in San Lorenzo, Honduras. (Appendix A).
4.2 On 22 April 1993 the Council of Ministers approved the need for a ship in principle. On the same date the Secretary General of the Council of Ministers, Mr Charlot Salwai, wrote to the Minister of Economic Affairs Mr Vohor. He stated that the approval of the Council of Ministers was subject to identifying the borrower, obtaining more information on the terms of the purchase and the economic viability of the project, and the survey report of the Ports and Marine Department (Appendix B).
4.3 On 22 April 1993 the Cooperatives Department Financial Adviser, Mr. Peter Tomlinson confirmed the advice he had given orally to the Director of Cooperatives Department Mr Robert Figa with respect to the proposed ship purchase. Mr Tomlinson advised that a feasibility study should be carried out prior to the purchase of any ship, that funding could be obtained for a feasibility study, and that an independent expert should assess the condition of the ship to confirm that it would meet the stated needs (Appendix C).
4.4 On 3 May 1993, Mr. Figa advised Mr. Tomlinson that he had noted his advice, however this was really a political decision to help the people in the rural areas, and the ship would go on the slipway in Singapore on 11 May (Appendix D).
4.5 On 3 May 1993 First Secretary in the Ministry of Economic Affairs, Mr. Alfred Maliu requested financial information from Mr Figa to facilitate the processing of a loan for the purchase of the Department of Cooperatives ship. (Appendix E).
4.6 On 18 May 1993 Mr Tomlinson submitted to Mr Figa a detailed Profit and Loss Estimate which showed that the projected annual loss of the proposed ship purchase would be greater than VT 35 million. He considered the difficulties of inter-island shipping, the presence of competition in the country and current over-capacity, the high operating costs of the proposed ship, and the high price of the ship, and concluded that the shipping project would be loss-making and would require Government subsidy (Appendix F).
4.7 On 27 May 1993 Mr Figa submitted Mr Tomlinson’s financial information to Mr Maliu.
4.8 On 9 June 1993, Prince II was surveyed in Singapore by an officer from Bureau Veritas at the request of the owner Mr Gallo (Appendix G). Two officers from the Ports and Marine Department were also sent on the instruction of Minister Vohor to survey the ship in Singapore. At the time of the inspection all machinery and equipment was shut down, and because there was no power supply the machines could not be tested. The ship was deserted and no one was available to answer questions. The general condition of the ship was poor and there was equipment missing. The ship was not classed by any international classification society except for the Statutory and Trading Certificate stated to have been issued by the Honduras Authority.
4.9 The Special Projects Implementation Committee (SPIC) was a committee formed by Prime Minister Maxime Carlot Korman in April 1993 to negotiate funding and oversee the speedy and efficient implementation of priority projects. On 9 June 1993, SPIC met and finalised a list of projects to be financed in 1993, including the cooperative ship. A total of VT 66 million was set aside for the purchase of Prince II from SPIC funds.
4.10 In August 1993 Minister of Economic Affairs, Mr. Serge Vohor, presented a paper (Appendix H) to the Council of Ministers. He wrote that the estimated annual income of operating the ship would be VT 20 million, using the detailed figures from Mr Tomlinson’s Annual Profit and Loss Estimate. However, he did not provide the Council of Ministers with the Expenditures and Loss figures from this Estimate. Instead, he wrote that the initial operating expenses (excluding dry docking and maintenance) of the ship would be close to or greater than the income, and that the financing costs would be nil or absorbed by the Government. Mr Vohor indicated that the profitability of the project would be dependant to a large extent on the revenues to be earned from transporting local produce to New Caledonia. Mr Vohor deceived the Council of Ministers by failing to mention the estimated annual loss of 35 million Vatu and implying that the project was economically viable.
4.11 This Council of Ministers’ paper also stated, incorrectly, that the purchase price was 560,000 USD, approximately 67.2 million vatu, although the sale agreement of July 1993 (1 month earlier) stated the price as 670,000 USD. At the time of this paper the future MV Prince II was scheduled to arrive at Tanna the same week.
4.12 On 20 August 1993 Prince II arrived in Tanna and later sailed to Port Vila. On 23 August 1993 a welcome ceremony was held at the wharf in Port Vila to mark the arrival of Prince II. (Appendix I) The Prince II thus began its 13-month stay at the wharf in Port Vila.
4.13 On 23 August 1993 the Certificate of Sale for Prince II was signed by Mr Gallo and Mr Vohor (Appendix J). The Certificate stated that the sale price was 670,000 USD as written in the Sales Agreement of 2 July 1993. This is equivalent to VT 82 million not VT 67.2 million as presented to the Council of Ministers.
4.14 On 1 September 1993 a project profile was submitted by Mr Maliu from the Ministry of Economic Affairs to National Planning (Appendix K). This Profile stated that funding would come from SPIC (67 million), a Development Bank loan, and shareholders contribution. No application had yet been made to the DBV.
4.15 On 11 October 1993 SPIC approved VT 67 million to buy the ship Prince II, based on the amount that had been approved by the Council of Ministers (Appendix L). SPIC advised that the balance be secured elsewhere by the Ministry of Economic Affairs together with the Cooperatives Association.
4.16 On 14 October 1993 Mr Gallo and Mr Vohor signed an agreement indicating that Mr Gallo had accepted payment of a first instalment of VT67 million, and would receive the balance (VT15 million) in March 1994 by the Development Bank of Vanuatu (DBV) (Appendix M). At this point DBV had not authorised such a commitment; an application for a loan had not even been made! A cheque was made out by Finance Department to Mr Gallo for Vt 67 million (Appendix N).
4.17 On 5 November 1993 a local company called the Melanesian Shipping Line Limited ('MSL') was incorporated to be responsible for the management and operation of the ship. The directors and secretary of the company were:
Mr Robert Figa Then Director of Cooperatives Department
Mr Hollingson Issachar Melanesian Group Consultants
Mr Franklin Kere Then VCMB General Manager
Mr Hilton Tarileo Deputy Director Cooperatives Department
Mrs Dalsy Temakon Board Secretary (VCMB staff)
Messrs Figa and Issachar were the original directors of MSL and were allotted five (5) shares each in the new company. The share held by Mr Figa was on behalf of the Cooperative Federation while Mr Issachar held a share on behalf of Melanesian Group Consultants Limited in which he was personally interested. The actual management of the ship on behalf of MSL was transferred from the Cooperatives Department to VCMB on 23 December 1993.
4.18 On 15 December 1993 Mr Maliu, First Secretary to the Ministry of Economic Affairs, wrote to the Development Bank of Vanuatu requesting a loan of VT 30 million: VT 15 million to finalise the purchase of Prince II and VT 15 million for working capital (Appendix O). Mr Maliu was at the time Vice Chairman of the Board of the Development Bank.(It is to be noted that the letter from Mr Maliu was incorrectly worded).
4.19 On 16 December 1993 a loan appraisal was carried out by the management of the Development Bank. They recommended the loan be declined (Appendix P). This recommendation was later submitted to the Board of Directors for final consideration. The reasons for this recommendation were:
4.20 On 16 December 1993 the Executive Committee of the Development Bank approved a loan of VT30 million despite the Development Bank Management recommendation to decline the request. The Board Members present were: (Appendix Q)
Messrs Amos Andeng - Chairman
Alfred Maliu - Vice Chairman
Petre Malsungai - Director
Augustine Garae - DBV Managing Director
The reasons for overruling the recommendation of management are not stated. It is clear from previous documents that it was the intention of the Minister of Economic Affairs Mr Vohor and his First Secretary, Mr Alfred Maliu, from May 1993 or earlier, to borrow the balance of the purchase price from the Development Bank. It is also noteworthy that Mr Maliu was First Secretary of the Ministry of Economic Affairs at the same time that he was a member of the Development Bank Board Executive. Mr Maliu participated in the vote, and in fact moved the loan approval.
4.21 In February 1994 Melanesian Shipping Line (MSL) received VT 17 million from DBV (Appendix R), of which VT 15 million was paid to Mr Gallo to complete the purchase of Prince II (Appendix S). At the same time the Development Bank executed a floating charge over the assets of MSL including the Prince II. The DBV holds a first mortgage on the ship as security.
Becoming seaworthy
4.22 On 31 March 1994 a survey was carried out on Prince II by a marine consultant from New Zealand for insurance purposes only. In his report he recommended extensive repairs to the ship. The major repairs were on the main engine and two auxiliary engines. The main engine was not working. The two auxiliary engines were physically broken and the electrical system was dangerous and needed re-wiring. Because the engines were from Germany and Russia, it was difficult to find spare parts. Included with these major repairs there were a number of deficiencies such as the Auto Pilot and the radio equipment did not comply with international safety regulations. The consultant confirmed to this Office that at the time of his survey the ship was seriously substandard and was not seaworthy. It was not built to standards as normally required by Lloyds or Bureau Veritas.
4.23 Mr Robert Figa was the Director of Cooperatives Department. In April 1993 he was appointed as Registrar of Cooperatives Societies by Prime Minister Maxime Carlot Korman(CAP 152). He was given responsibility for the affairs of the VCF and making investment decisions. He was a director and nominee shareholder of MSL.
Being responsible for VCF he also approved expenses that were incurred by VCF on the repair of Prince II. Despite having been made aware of the potential loss the ship would be making as advised by his financial adviser Mr Peter Tomlinson, he went ahead and approved expenses from VCF towards Prince II.
4.24 MSL had only VT 2 million (from the first DBV loan payment) as capital. The costs of repairs and office staff prior to the ship’s operation were borne by the Vanuatu Commodities Marketing Board (VCMB) and the Vanuatu Cooperatives Federation (VCF) (Appendix T). VCMB holds a second mortgage on Prince II, while VCF holds a third mortgage. The following were the major repair costs (total VT 23,882,158) that were met by these institutions on behalf of MSL:
∑ May 1994, VT 2,560,935, by VCMB for a new generator
∑ May 1994, VT 4,806,203, by VCF for engine and spare parts
∑ July 1994, VT 3,815,746, by VCMB for a new generator
∑ July 1994, VT 1,842,554, by VCF for equipment and materials
∑ August 1994, VT 3,723,874, by VCMB for spare parts
∑ August 1994, VT 2,744,307, by VCMB for spare parts
∑ August 1994, VT 1,151,539, by VCMB for Air Start compressor
∑ August 1994, VT 1,618,500, by VCF for damage caused by ship Prince II to the barge Roena on 22 July 1994 at the wharf in Port Vila
∑ September 1994, VT 1,618,500, by VCMB for second instalment on damage to Roena
4.25 The cost of other parts and repairs met by VCMB during this period amounted to over VT 17.2 million, (Appendix U) while wages and salaries of over VT 2.4 million during this period were covered by VCF and VCMB (Refer Appendix T). The ship also incurred quay dues of VT 358,858 for the use of the wharf from August 1993 to September 1994 (Appendix V). The total cost of parts, repairs, wages, salaries and quay dues during the non-operational period was well over VT 43 million, making the full cost of a seaworthy Prince II over VT 125 million.
4.26 During this period of repairs, some time in July 1994 the UMP political party used Prince II to transport its delegates to Malekula to attend the UMP congress. The total cost of the trip was VT1,755,900, of which only part payment was received. The balance of VT755.900 has not yet been settled (Appendix W). There is no further record to show that the debt has been pursued by MSL. However we were informed that the debt was pursued with the political party by letters, telephone calls and in meetings but remains to be settled.
4.27 On 1 September 1994 Ports and Marine Department surveyed the Prince II and found it to be seaworthy. The Marine Safety Certificate was issued on 3 October 1994, allowing the Prince II to sail within Vanuatu waters only (Appendix X).
Operations - September 1994 to November 1995
4.28 The Prince II’s maiden voyage from Port Vila was on 27 September 1994, 13 months after its purchase.
4.29 The ship was in operation for approximately fourteen months, from September 1994 to November 1995. During this time a total of 85 days were spent in port on repairs, primarily on the crane and engines. (Appendix Y).
4.30 Former employee of MSL, Ms Leisau Kenneth, and former Chairman of the MSL Board, Mr Kere advised this Office during our investigation that the ship was not making much money during the time it was operating. Some of the reasons stated were:
4.31 During the months it was operating, the Prince II shipped a total of approximately 1,060 tonnes of Copra and Cocoa for VCMB (Appendix Z). This gives an average monthly shipment of 75.71 tonnes. This is very low when compared to the ship’s net tonnage of 170 tonnes, and in fact represents only six full trips by Prince II since it arrived in 1993.
4.32 MSL’s Profit and Loss Statement to 28.2.1995 showed accumulated losses of VT 27,907,577, based on revenues of VT6,845,410 and expenses of VT34,907,577. A Chartered Accounting firm issued its disclaimer on these unaudited accounts in May 1995, and the accounts remain unaudited. Since then no other accounts have been prepared by MSL.
4.33 The Prince II has not been operational and has been sitting at the wharf in Port Vila from December 1995 to date.
Sale of the ship
4.34 On 23 April 1996 the MSL board agreed to sell Prince II . The board agreed that any offer must be VT90 million or above, and that the ship must be advertised locally and overseas. In August 1996 the ship was advertised in Vanuatu Weekly and also in the Solomon Islands’ newspaper the Solomon Star.
4.35 Three tenders were submitted, offering VT 9.105.600, VT10.000.000 and VT19.000.000 for the ship.
4.36 A committee made up of representatives of the Ministry of Finance, Cooperatives and Rural Business Development, DBV and VCF was to meet to consider the tender applications on 5 September 1996. They did not meet, and at no time were the tender applications considered. Prince II continued to deteriorate at the wharf in Port Vila.
4.37 We understand that a proposal has been made to have the ship donated to a proposed Marine Training Centre in Luganville for training Ni-Vanuatu mariners.
Outcomes
Melanesian Shipping Line and the Prince II
4.38 Financial Services Commissioner Mr Julian Ala informed the Ombudsman in September 1997 that to his knowledge MSL does not operate any more and is insolvent. MSL failed to pay its annual company registration fees and file its annual returns. Although Mr Ala had prepared a final notice to strike MSL off the Companies Register, he was advised by the Company Secretary Mr George Vasaris that he could not strike off the company as it has an asset and that there was a major secured creditor in VCMB to be considered. The asset is believed to be Prince II. Therefore, rather than striking it off, MSL must be petitioned to be wound up. The Commissioner has taken the view that this asset may be worthless, and it would have been a waste of money, effort and time to petition the court to wind up MSL because it has no assets with which to meet the cost of the petition and liquidation.
4.39 The Prince II was valued by a marine consultant on 20 April 1998. He indicated that there is no demand for a vessel of its size, as it is too big for coastal trade and too small for international trade. The marine consultant valued the ship on an 'AS IS WHERE IS' basis, at 50,000USD, approximately equivalent to VT 6 million (Appendix AA). The cost of purchasing the ship and making her seaworthy was approximately VT 125 million.
4.40 MSL has the following assets:
∑ Prince II: VT 6 million
∑ Monies owing: UMP VT 755,900
Others VT 337,119
∑ Cash at Bank(NBV) as at 31 August 1998 VT 29,115
The value of all its assets, is less than the money owed to its creditors. The Company’s balance sheet as at 28 February 1995 showed that it had a total net liability of VT 27,907,377. From the total assets, Prince II was given a book value of approximately VT 111 million. However, it appears that the value of the assets is now grossly over-valued as in reality the ship is worth only VT 6 million if even that not VT 111 million.
4.41 However, it appears from the Lloyds registry that Mr Gallo is still the registered owner of Prince II, raising the possibility that MSL is unable to sell the ship even for VT 6 million.
Government of Vanuatu
4.42 The Government of Vanuatu invested and lost VT 67 million on the purchase of a ship which proved to be virtually worthless and could not meet the goal of facilitating inter-island trade.
Development Bank of Vanuatu
4.43 DBV received only one interest payment on the VT 17 million lent to MSL, in the amount of VT 368,761 on 8 May 1995 (Appendix AB). As of 26 November 1997 the total principal and interest outstanding on MSL’s loan was VT 24,962,963 (Appendix AC). DBV’s then General Manager and Manager Credit reminded the General Manager of MSL of the payments owing on a regular basis, but without success.
On 18 July 1995 the General Manager of DBV wrote to the Minister of Finance and reminded him as minister responsible for the DBV that the loan has fallen into heavy arrears. The bank has been doing everything possible to collect the monthly repayment from MSL, but due to the poor cash flow of the company it was impossible to repay the loan. (Appendix AD) He went on to state that the loan was highly political. There was no further action from the minister.
4.44 As DBV has a charge on all of MSL’s assets and a first mortgage on the ship, DBV would be the primary beneficiary of liquidation of the company (if the assets yield any funds at all).
Vanuatu Cooperatives Federation
4.45 VCF General Manager Mr Orrision Ores confirmed in January 1998 that the VCF had invested VT15 million in MSL. This investment has been made by way of meeting the costs of repairs on the ship and other related costs before services began. The cost of repairs were then to be taken as its share in MSL; this corporate share and the third mortgage on the ship are apparently worthless. On 2 April 1998 Acting Director of Cooperatives Department Mr H Amos instructed Mr Ores to write off the loss of VT15 million in the accounts of VCF over a period of four years.
Vanuatu Commodities Marketing Board
4.46 On 23 December 1993 Mr Frankin Kere was appointed the new Director of MSL while at the same time he was in the position of General Manager of VCMB following this appointment on 3 November 1993. Following his appointment as the new Director of MSL, the management and operation of the Prince II was transferred to VCMB. Mr Kere was now effectively responsible for the management of MSL.
4.47 During a MSL Board meeting on 26 May 1995, the board was informed that the Financial Statement of MSL for the period ended 28 February 1995 showed that the company made an operating loss of VT27,907,577. Again on 5 July 1995, the Board was told that MSL was facing financial difficulties. Mr Kere was present in these Board meetings. Despite this, VCMB continued to inject its funds into MSL by way of meeting the cost of staff salaries, insurance and other associated costs. The total of funds incurred after these Board meetings was VT6,269,622 (Appendix AE).
4.48 The current General Manager of VCMB, Mr Browny Reuben, confirmed in February 1998 that as of 30 September 1996, VCMB had made a series of payments totalling VT62,741,545 on behalf of MSL. He further stated that VT10 million of this amount was to be converted into share capital representing 10% of the total share capital of MSL. The 10% share in MSL (if realised) and the second mortgage on the ship are apparently worthless.
5. RESPONSES TO THE PRELIMINARY REPORT
5.1 The preliminary report in this matter was issued on 12 October 1998 to provide the person or body complained about or affected an opportunity to reply to the preliminary findings made against them.
5.2 The preliminary report and sections of the report were issued to the following people:
Mr Serge Vohor Former Minister of Economic Affairs
*Mr Franck Gallo Vendor of Prince II
Mr Browny Reuben Current VCMB General Manager
Mr Henry Taga Secretary General of UMP
*Mr Orrison Ores Current Vanuatu Cooperatives Federation General Manager
*Mr Robert Figa Former Director of Cooperatives Department
*Mr Peter Tomlinson Former Cooperatives Department Financial Adviser
Mr Alfred Maliu Former First Secretary in the Ministry of Economic Affairs and former Development Bank Board Vice Chairman
Mr Petre Malsungai Former Development Bank Board member
Mr Augustine Garae Former Development Bank General Manager
Mr Amos Andeng Former Development Bank Board Chairman
*Mr Willie Jimmy Former Minister of Finance
Ms Leisau Kenneth Former MSL employee
*Mr Julian Ala Financial Services Commissioner
Mr Tele Harry Current Vanuatu Development Bank General Manager
*Mr Franklyn Kere Former VCMB General Manager and Chairman of MSL Board
Mr Charlot Salwai Former Secretary Council of Ministers
*Mr Norris Hamish Director of Ports and Marine Department
Mr Maxime Carlot Korman Former Prime Minister
*Mr Hollingson Issachar Former Member of Directors of MSL
*Mr Hilton Tarileo Former Member of Director of MSL
*Mr George Vasaris Former MSL Board Secretary
Mr Happy Amos Former Director of Cooperatives Department
Mr Thompson Kawai Former UMP Secretary General
Mrs Dalsey Temakon MSL Board Secretary
5.3 Responses were received from only those marked with an asterisk (*). The others have not forwarded any comments to our office including former Minister Serge Vohor and we will have to assume that they agree with the facts and comments set out in my report.
Responses
5.4 Mr N. Hamish, Director of Ports and Marine Department, stated that the Safety Certificate that was issued was done only after considerable repairs were done to the ship, and also that, some equipment and machinery were replaced before the ship was issued with the Marine Safety Certificate.
5.5 Mr Franklyn Kere, the former Manager of VCMB, stated that various venues were pursued to secure funding for Prince II to go for dry docking, as this would add a further 5 - 10 years to the life of the ship. He considered that after dry docking, the ship could operate and thus VCMB could recoup some of the money spent on MSL. He also considered that after the ship had been on slip, VCMB could get a good price for it if it was sold. Mr Kere went on to state that VCMB did not ask for Prince II to be transferred to VCMB but that VCMB was given the ship to manage and operate.
5.6 Mr Robert Figa, Former Director of Cooperatives Department, stated that he had no conflict of interest. He further stated that under the Cooperatives Societies Act he, as the Register of Cooperatives, was responsible for the management of the VCF. He thought that the repairs would be minor but it was later found that the repairs were major. Because of this, VCF spent Vt15 million in repair costs and these are considered as VCF’s share in MSL.
Comments
5.7 Although Mr Figa was aware of the fact that the ship would be running at a loss as per the advice given by the Cooperatives Financial Adviser, he continued to approve VCF funds to be spent on the ship. As the Prince II was purchased primarily for the Cooperatives Department it was his wish to ensure that the ship was up and running. However, since the department had no funds to repair the ship, he used his power to spend VCF funds for the repairs. It now turned out that VCF will lose totally their money on this investment.
5.8 Mr Orrison Ores, current General Manager of VCF, in his reply to sections of the report concerning VCF, stated that VCF had invested Vt15 million in MSL by way of meeting the costs of repairs and the crew’s wages. This came about only with the prior approval of the Registrar (Mr Figa) who was responsible for the affairs and investment decisions of VCF under the Cooperatives Societies Act. He further stated that if MSL assets are sold, VCF will submit claims for the return of its investment.
5.9 F. Gallo, vendor of Prince II, stated in his reply that he bought the ship for USD 370.000 and that when the Vanuatu officers (Marine officers) went to inspect the ship, it was laying on its side in the slip for full cleaning and installation of the automatic steering for the voyage. Therefore, it was impossible to start up the ship’s engine. He further stated that since the ship was built in 1991 it could not have been in a poor state in June 1993.
He further stated that the ship was moored at the wharf in Vila for 13 months due to technical ignorance on the part of those responsible for maintaining it, and this in turn led to the deteriorating of its electric generating units and their replacement. He said that the amending of the ship’s papers in general and documents relating to the ship, rests with the Vanuatu Government following the agreement as set out in Appendix J.
He also stated that the cost of the ship did not include the research costs, staff travel expenses (team to and from Singapore) team wages, food, fuel and other consumables.
5.10 Augustin Garae, the former General Manager of DBV stated that the shipping project had a strong force behind it from the UMP led government. He said that the bank put up its recommendation to the Board Executive Committee declining the project proposal, however its recommendation was ignored. He further stated that there were a few letters that were sent to different Ministers of Finance about the Prince II and the non payment of the loan and that the government was fully informed of the problem.
5.11 Hilton Tarileo, the former Deputy Director of Cooperatives Department stated that the shipping project was one of the worst government projects because the decision to purchase the ship was based on political aspirations but not on business viability.
6. FINDINGS
6.1 Finding No 1. the conduct of then minister of economic affairs Mr serge vohor in the selection and purchase of the prince II was blatantly unreasonable and unjustified, and led to losses of VT 172 million.
6.1.1 Minister Vohor initiated the purchase of the Prince II for VT82 million without following any reasonable procedures. The Finance Regulations came into effect in July 1993. The Minister must have been aware of their passage and should have followed the tender procedures required, or a similar procedure to ensure a fair purchase. Instead, Mr Vohor simply chose a broker and a ship, without ascertaining actual needs and without allowing for competitive bidding. The boat was officially purchased on 14 October 1993.
61.2 Mr Vohor failed to conduct a feasibility study of the shipping project. Faced with a projected loss prepared by the Financial Adviser to the Cooperatives Department, Mr Vohor ignored this information and pushed on. Mr Vohor obtained ambiguous and negative reports from those who surveyed the ship, yet he did not falter in his determination to purchase this ship.
6.1.3 He failed to have an independent expert fully assess the seaworthiness of the ship and its suitability for inter-island transportation. When additional purchase funds became necessary, he signed an agreement purportedly binding the Development Bank to lend the extra funds, and later ensured, with Mr Maliu’s assistance, that the Bank did lend these funds. It appears that Mr Vohor’s friendship with Mr Gallo was a decisive factor in the purchase of the ship.
6.1.4 Minister Vohor’s decisions in respect of this ship were completely outside the bounds of reason. His colossal error in purchasing Prince II resulted in losses to the people of Vanuatu of at least VT 172 million, that is through losses of:
∑ VT 67 million by the Government (for the initial purchase)
∑ VT 25 million by the Development Bank (principle and interest)
∑ VT 15 million by the Vanuatu Cooperatives Federation (share in MSL and associated costs)
∑ VT 65 million by the Vanuatu Commodities Marketing Board (share in MSL and associated costs)
6.2 Finding No 2. the conduct of MR serge VOHOR in deceiving the council of ministers and signing a contract purporting to bind the development bank of vanuatu, places his integrity in question and is a breach of the leadership code.
6.2.1 Mr. Vohor did not disclose to the Council of Ministers that the financial adviser had projected an annual loss of VT 35 million on the ship project, even though he had listed the adviser’s projected revenues. He misled the Council of Ministers by minimising the costs of the project and stating an incorrect purchase price. Later, faced with a shortfall of funding for the ship’s purchase, Mr Vohor signed an agreement with the vendor stating that the balance was to be paid by the Development Bank of Vanuatu. He had no authority to make a commitment on behalf of DBV, and in fact no application had been made for the loan at that time. He furthermore made an application to the Council of Ministers for an amount of 67 million and paid 62 million to his friend Mr Gallo.
6.2.2 These actions were dishonest and clearly illustrate a lack of integrity on Mr Vohor’s part. Mr Vohor breached Article 66(1)(c) of the Leadership Code set out in the Constitution of Vanuatu.
6.3 Finding No 3. the loan approval by development bank board members amos andeng, alfred maliu and petre malsungai was improper and based on irrelevant considerations.
6.3.1 The approval of this loan was made against the Development Bank management’s own assessment report which recommended that the loan be declined. The approval was obviously a political decision which did not adequately consider the possible economic loss to the bank. The members were likely influenced by the prior commitments made by Minister Vohor and Mr Maliu. As a result, the Development Bank will have lost all of VT 25 million in principal and interest on this transaction.
6.3.2 It was obvious from the DBV management assessment that the project was not viable, however, the Board went ahead and approved the loan despite the decision of the Bank.
6.4 Finding No 4. mr Alfred maliu’s participation in the approval of the loan to msl as vice-chairman of dbv BOARD was a conflict of interest and contrary to s.15 of the development bank act and s.208 of the companies act.
6.4.1 Mr Maliu had an indirect interest in the granting of the loan to MSL, through his role as First Secretary to the Minister of Economic Affairs Mr Vohor and the commitment to fund the purchase of the ship. There is no indication that Mr Maliu formally disclosed this interest to the other Board members as required by s.208 of the Companies Act and by s. 15 of the Development Bank Act. Furthermore, Mr Maliu moved the approval of the loan and so violated s. 15 of the Development Bank Act, which required him to 'not take part in the discussion of any such matter nor vote thereon'.
6.5 Finding No 5. Mr Robert Figa’s approval of VCF investing in a project which had already been assessed as non-viable was blatantly unreasonable.
6.5.1 As Director of Cooperatives Department, Mr Figa had information that the ship would be loss making through the advice he was given by Mr Tomlinson. Despite this he went ahead and invested VCF money under his responsibility on a shipping project which turned out to be a total failure. As a result, VCF on whose behalf he had a duty to make sound investment decisions, has lost Vt15 million in this investment.
6.6 Finding No 6. the injection of vcmb funds under the management of mr Franklin kere to msl after having been MADE aware of ITS FINANCIAL situation was blatantly unreasonable.
6.6.1 Although Mr Kere, as Manager of VCMB, was aware in the early part of 1995 that MSL had made a loss of over VT 27 million, he did nothing to stop VCMB putting its funds into a company that made a huge loss in its operation, and was facing financial difficulties. As a result VCMB, under his management, is in a position to lose a substantial amount of its funds in this investment: VT 65 million.
7. RECOMMENDATIONS
Recommendation No. 1: Mr Serge Vohor never to be appointed to any ministerial post in the Government
Recommendation No. 2: Messrs Alfred Maliu, Petre Malsungai and Amos Andeng, former member of Development Bank Board not be appointed to any statutory board and that they compensate DBV for its losses due to their negligence (either voluntarily or through court proceedings undertaken by the Attorney General).
Recommendation No. 3: Mr Robert Figa and Mr Franklin Kere not be appointed to any position where investment decisions are to be made.
Recommendation No. 4: That the Director General of Finance and the Director General of Trade and Commerce co-ordinate efforts to liquidate MSL’s assets and decide upon the future use of Prince II.
Recommendation No. 5: That the Director General of Finance ensure that every incoming Council of Ministers is informed of the Finance Regulations, particularly Chapter 22, to prevent any unintentional approvals and purchases or sales which are contrary to law.
8. CONCLUSION
8.1 To comply with Article 63(2) of the Constitution and Sections 22 and 23 of the Ombudsman Act, the Ombudsman requests the President, the Prime Minister and his Director General, the Leader of the Opposition, the Minister of Economic Affairs and his Director General to consider these recommendations and to put them into effect.
8.2 The Office of the Ombudsman must be notified of the decision and proposed steps to implement these recommendations within thirty (30) days of the date of this report.
Dated the 2nd day of December 1998
Marie-Noëlle FERRIEUX PATTERSON
OMBUDSMAN OF THE REPUBLIC OF VANUATU
9. INDEX OF APPENDICES
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