Papua New Guinea’s former prime minister decried a probe into a UBS loan that called for the bank to be banned for 10 years from government contracts as a politically motivated “witch hunt”.
An independent commission of inquiry into a UBS loan to the PNG state in 2014 recommended that former prime minister Peter O’Neill, who secured the loan for the state, should be prosecuted “for giving false evidence to the commission”.
O’Neill said in a statement he believed the commission had found “no evidence of wrongdoing or corruption” on his part.
In 2014, the Swiss bank provided a “collar” loan of A$1.24bn ($920mn) to the PNG government to fund the purchase of a 10 per cent stake in Sydney-listed oil and gas company Oil Search. The complicated loan structure provided protection against market losses but put a limit on PNG’s upside returns.
Despite the downside protection, the loan proved costly to the PNG government, which sold its stake at a A$340mn loss after the oil price collapse of 2015. The commission said UBS profited from the “complex and opaque” structure of the loan, charging an upfront interest rate that independent consultancy Brattle Group found was unfair value.
In its final report, tabled in the PNG parliament on Wednesday, the commission said the government was incapable of understanding the complex financial contract it was entering into. It said UBS overcharged the state by A$175mn for the collar loan, while the PNG government believed UBS was acting as an adviser rather than a loan vendor.
It found that the approval, completed within 15 days, was rushed and it was critical of O’Neill for attempting to speed up the approval process.
The commission recommended the PNG and Australian governments to consider civil or criminal action against UBS, arguing it had overcharged the government and failed to communicate key features of the complicated loan.
“UBS is solely responsible for overcharging and any misleading or deceptive conduct,” the commission final report said. “They should be asked to repay the amounts [of A$175mn] 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.”
UBS rejected those claims, saying it earned only a fraction of what was claimed from the transaction.
The office of current PNG prime minister James Marape did not respond to requests for comment. PNG media reported he had committed to pursue the royal commission’s recommendations. Marape replaced O’Neill as prime minister in 2019.
UBS disputed claims it had overcharged for the loans, saying Brattle’s assumptions were wrong.
“The commission appears to have relied heavily on flawed and highly theoretical financial analysis and conclusions reached by Brattle Group, including the concept that the collar loans were risk-free to UBS or that risk was able to be managed without cost, and hence that the appropriate interest rate for the collar loans was the AUD risk-free rate,” UBS said in a prepared statement.
It said Brattle’s claim it had earned a total of A$336mn from the loan were incorrect, saying its total earnings from the transaction were about A$100mn.
“UBS believes that its responses, including its critique of the Brattle analysis and conclusions, were not appropriately considered by Counsel Assisting the Commission,” the bank said.
