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Vanuatu Commodities Marketing Board Utilisation of the Vt 1.3 Billion 1986-1987 Stabex Funds Subsidy [1996] VUOM 2; 1996.03 (6 August 1996)

REPUBLIC OF VANUATU

OFFICE OF THE OMBUDSMAN

PUBLIC REPORT

VANUATU COMMODITIES MARKETING BOARD

UTILISATION OF THE VT. 1.3 BILLION

1986 – 1987 STABEX FUNDS SUBSIDY

6th August 1996

TABLE OF CONTENTS

1. INTRODUCTION

2. BACKGROUND

3. JURISDICTION

4. VCMB CHARTER

5. SCOPE OF THE REVIEW

6. FINDINGS OF FACTS AND OF MALADMINISTRATION

6.1 Dates and Results of the Statutory Audits of VCMB
6.2 Utilisation of the Stabex Funds
6.3 Overview of VCMB Funding - 1988 to 1995
6.4 Cash Deposits
6.5 Bank Overdraft VT. 318,742,404 (31.12.95)
6.6 Short Term Government Advances VT. 150,000,000
6.7 Types of Investments made with Stabex Funds and the quality thereof
6.8 Fixed Assets VT. 65.23 Million
6.9 Purchase of Government Bonds
6.10 Investment in Vanuatu Coconut Products Limited (VCPL) Guarantee: VT. 16,000,000 Approximately
6.11 Investment in Vanuatu Tropical Products Limited (VTPL) Total: VT. 3,000,000
6.12 Loan to Melanesian Shipping Line (MSL) Total: VT. 56,544,000
6.13 Staff Housing Loans Total: VT. 21,012,615 (31/12/95)
6.14 Mode of Management of Stabex Funds
6.15 Board of Directors

7. OPPORTUNITY TO REPLY TO COMPLAINTS
   
8. SUMMARY AND RECOMMENDATIONS
   

APPENDIX A
APPENDIX B.

REPORT ON THE VANUATU COMMODITIES MARKETING BOARD UTILISATION OF THE VT1.3 BILLION 1986 - 1987 STABEX FUNDS SUBSIDY.

1. INTRODUCTION

"Better is a little with righteousness than great revenues without right"

Proverbs 16 v 8.

This report on the Vanuatu Commodity Marketing Board (VCMB) illustrates once more the difficulties which are prone to arise when leaders place political and personal considerations before the well-being of the institutions which have been committed to their charge and which the public expect them to care for.

Once more we are concerned with funds given by overseas donors to aid the people of Vanuatu. In this instance the purpose of these "STABEX FUNDS" is to assist in the production and marketing of commodities (primarily copra, but also others) in such a way as to give a reasonable return to producers while avoiding the need to rely on Government grants or subsidies with the eventual aim of making producers more independent.

While our investigations have not shown any specific dishonesty on the part of office bearers in VCMB, they have shown inappropriate willingness on the part of its Board of Directors to make unwise financial decisions which ensured a reversal of the instructions of the Fund.

For instance, it is clear that VCMB funds were made available to the Government when the VCMB purchased long-term Government bonds to the value of 320 million vatu. The VCMB then had to immediately borrow these funds back in the form of an expensive overdraft and short-term Government advances.

Another instance is the advancing of a loan exceeding VT. 56 million to Melanesian Shipping Ltd, which is unlikely to be recovered from any sale of the boat, MV Prince II, which is being initiated as we finalise our report. This has been the source of great loss and appears to have had no commercial justification but only undue influence from the Government.

It is to be hoped that no more of the public’s money will be misdirected into such shipping ventures. Similarly sums in excess of 21 million vatu has been "lent" by VCMB for staff housing loans at an interest rate of 1%!

There is little doubt that the Board of Directors was unwisely "loaded" in favour of political appointees rather than carefully vetted applicants of high ability.

Altogether it is a sad chronicle of events which is not helped by the failure of the authorities to appoint a current Board of Directors, so that all decisions are at present at the disposal of the Minister of Finance.

The absence of experienced Directors with commercial ability and experience, as well as strong enough character and independence to resist undue political influence can only prolong this situation.

Once again we are obliged to point out the real scarcity of skilled and experienced management for large enterprises and to recommend urgently some form of training programme.

2. BACKGROUND

Under the "Framework of Mutual Obligations Regarding The Use Of Stabex Funds During Implementation Years 1988/1989 And 1990/1991" (FMO) signed between the Government of Vanuatu (Vangov) and the Commission of the European Community (EU) on 23 July 1993, Vangov agreed under Part V.1. to "provide the findings of the judicial inquiry requested by it and affecting other institutions including VCMB:"

The Commissioner in charge of the Commission of Enquiry, Mr Clarence Marae, was instructed on 24 February 1993, by the then Minister of Justice, Mr Sethy Regenvanu, to "inquire into the establishment and use of the STABEX Funds to the Vanuatu Commodities Marketing Board". Mr Marae commenced his enquiry on 29/10/93 however due to the sudden termination of the Commission, the enquiry never progressed beyond a very preliminary stage.

On 5 June 1995, in order to comply with Vangov obligations agreed to in the FMO, the Director of the National Planning Office (NPO), Mr George Maniuri, requested the Ombudsman to undertake an enquiry into the VT. 1.300.000.000 of Stabex funds paid to the VCMB during the years 1988 to 1992 with the view to reporting on the following matters:

• Dates and results of the statutory audits of the VCMB.
  
• Utilisation of the Stabex funds. (Budgetary or extra-budgetary).
  
• Type of investments made with the Stabex funds and the quality thereof.
  
• Mode of management of the Stabex funds.
  

Following discussions with both the NPO and the EU during March 1996, the Ombudsman agreed to undertake the review.

3. JURISDICTION

Article 62 of the Constitution states:

"The Ombudsman may enquire into the conduct of any person or body to which this Article applies:

a) upon receiving complaint from a member of the public (or, if for reasons of incapacity, from his representative or a member of his family) who claims to have been the victim of an injustice as a result of particular conduct;

b) at the request of a Minister, a member of Parliament, of the National Council of Chiefs or of a Local Government Council; or

c) of his own initiative."

Section 14(1) of the Ombudsman Act states, inter-alia; that the Ombudsman may also:

"(a)) enquire into, either on complaint of a person or body referred to in Article 62(1) (a) and (b) of the Constitution or on his own initiative, any conduct on the part of:

i) any state service, or a member of any state service;

ii) any government body, or an officer or employee of a government body; or

iii) any other body.

(A) that is wholly or mainly supported out of public monies of Vanuatu; or

(B) all of, or the majority of the members of the controlling authority of which one appointed by the President, the Council of Ministers or a Minister, or an officer or employee of any such body."

This enquiry was commenced on the basis of a request received from the National Planning Office to enable the Government of Vanuatu to comply with its obligations under the FMO signed with the EU.

4. VCMB CHARTER

The functions and powers of the VCMB are set out in Section 6 of The Vanuatu Commodities Marketing Board Act No. 10 of 1981, which states:

6. (1) The function of the Board shall be as follows:

(a) to secure the most favourable arrangement for the purchase, sale, grading and export of prescribed commodities;

(b) to purchase prescribed commodities products thereof and to sell or export the same;

(c) to develop or to assist in the development of the various prescribed commodity industries in the Republic of Vanuatu, including the manufacture and processing of prescribed commodities and related products, for the benefit and prosperity of those industries;

(d) to stabilise prices paid for prescribed commodities.

(2) In carrying out its function under this Act, the Board shall so conduct its affairs as to avoid the need to rely on Government grants or subsidies.

5. SCOPE OF THE REVIEW

We have reviewed the statutory accounts of the VCMB (Balance Sheets and the related Profit and Loss Accounts and the accompanying notes to the accounts) for the years 1988 to 1995. We did not perform an audit of these statutory accounts and, accordingly we will not express an audit opinion on them.

Responsibility for the statutory accounts, including adequate disclosure, is that of the management of the VCMB. This includes the maintenance of adequate records and internal controls and the election and application of accounting standards.

We have reviewed the work undertaken by other independent experts, such as the APROMA Report, and, where applicable, we have relied on their findings in formulating our opinion.

The APROMA (Association des Produits à Marché) report was the result of a consultancy funded by the Lomé IV NIP to evaluate VCMB’s operations with specific regard to commodity marketing, accountancy, administration and the management system. This consultancy was agreed as a Government commitment under Part V (1) of the FMO referred to above.

6. FINDINGS OF FACTS AND OF MALADMINISTRATION

6.1 DATES AND RESULTS OF THE STATUTORY AUDITS OF VCMB

I set out below the dates and results of the statutory audits of the VCMB for the years 1987 to 1995.

It is apparent from the above that a fundamental change in the affairs of the VCMB occurred during the 1992 year which resulted in the auditors introducing a qualification into their audit report for this and all subsequent years.

The qualification relates to the "GOING CONCERN PRINCIPLE" where the Auditors are concerned that the continuing losses of the VCMB have eroded the capital base of the VCMB to the extent that without an undertaking by the Government of Vanuatu to provide continued funding, the VCMB would not be able to continue trading i.e. the auditors believe that without this support the VCMB would be bankrupt.

Note 1 to the statutory accounts for the years 1992 to 1994 sets out the nature of this qualification by stating:

"CONTINUITY OF OPERATIONS

The continuing operations of the Vanuatu Commodities Marketing Board is contingent upon the ongoing advance of funds by the Vanuatu Government. The Board members and management of the Vanuatu Commodities Marketing Board are of the opinion that this funding will continue to be available in the future to enable the Board to continue operations. The accounts have been prepared on the going concern basis on the assumption that this support will continue."

The audit of the VCMB was undertaken by the Australian firm of Chartered Accountants, Price Waterhouse, until the closure of their Port Vila office in 1995. The audit for the 1994 year was undertaken by the local chartered accounting firm of Conway and Co. who remain as auditors for the 1995 year.

6.2 UTILISATION OF THE STABEX FUNDS

I attach by way of APPENDIX A, an analysis of the Profit and Loss Accounts for the VCMB from 1982 to 1995 (i.e. the complete life of the board).

My review is primarily concerned with the VT1.3 Billion (STABEX 86/87) subsidy received by VCMB during the years 1988 to 1992, however I believe that it is important to look at the overall results of the operations of the VCMB as significant earlier subsidies from STABEX had been received and were still held by VCMB at the time that the additional subsidies were paid.

The important points to note from this analysis are as follows:

• Total subsidies paid by STABEX to the VCMB from 1982 to 1994 amounted to VT. 2,067 Million.
  
• The VCMB earned an amount of VT. 628 Million in interest over this same period. This interest is due entirely to the investment of excess STABEX funds and could therefore be considered to be part of the total STABEX grants. The statutory accounts of VCMB include the interest earned as part of the overall operating income of the Board.
  
• Total operating losses for this period amounted to VT. 2,210 Million.
  
• Total operating losses for this period exceed STABEX subsidies by approximately VT. 150 Million.
  
• Copra trading losses alone amounted to VT. 1,608 Million.
  

Administration costs totalled VT. 768 Million and have shown an increasing trend over time.

APROMA REPORT AND ITS CONCLUSIONS:

This Report is issued following an international consultancy agreed to in the FMO signed between the E.U and the Government of Vanuatu on 23.07.96.

I believe that the APROMA Report, "Evaluation of Vanuatu Commodities Marketing Board" dated March 1994, adequately covers the operational constraints faced by VCMB which have directly caused such large operating losses. It is therefore important to restate some of the report’s conclusions, and to note that no change has yet been made to address these problems.

The main conclusions of APROMA that directly impact on our review of the utilisation of STABEX subsidies are as follows:

• "Conclusion 4. Since its founding the VCMB has followed a policy of producer price stabilisation although it never pays farmers directly....... Because of the importance of copra to in Vanuatu’s agriculture and economy, the VCMB plays a social role by redistributing income through its stabilisation system. The system generally functions well, despite a few exceptions. The level of the deficit cannot be attributed to impropriety as there is a high degree of integrity among the VCMB’s personnel. There is no possibility that the deficit could be covered simply by improving operating procedures.
  
• Conclusion 5. The VCMB’s financial situation is bad, but not desperate. There are elements which suggest that the situation can be improved.
  
• Conclusion 11. The marketing department is in charge of negotiating contracts..... The marketing department has no authority..... All decisions are made by the board of directors including the quantities to be sold to each customer, the quantities to be transported by the shipping lines and choosing the cocoa agent.... Since the board’s directors are political appointees, their decisions are influenced by political factors (producer price level, quantities sold to Europe which are thought to affect the STABEX transfers, government borrowing, etc.), more than by economic concerns (profitability of the VCMB, its financial situation, opportunities in developing markets). The VCMB has no authority over certain elements which strongly affect its situation, such as the producer price.
  
• Conclusion 12. The current guaranteed producer price puts the VCMB in a delicate financial situation and compels it to seek government subsidies. As mentioned above, the VCMB has no control over this factor.
  
• Conclusion 13. Still more distressing is the fact that the VCMB is unable to determine whether it is succeeding in its social welfare role (redistribution of income via producer price stabilisation) since it has no way to verify that the ship owners are paying the correct prices to farmers.
  
• Conclusion 14. Other savings could be had by improving efficiency in certain departments, although those would not suffice to make the VCMB a profitable operation if it continues to buy copra at prices which are higher than the sale price.
  

Some operational improvements can be made within the VCMB (see recommendations), but the major problem will still be the setting of the producer price.

This issue - which has a direct effect on the VCMB’s financial situation - must be resolved by government authorities, since the Board has no control over the producer price.

The government policies for the copra and cocoa sectors must be clarified and coordinated.

If the government wants the VCMB to ensure producers’ incomes regardless of market prices, it must accept that the VCMB will have deficits which have little to do with operational problems.

If the government is no longer willing or able to subsidise the VCMB, it must abandon its policy of support prices and transport subsidies and allow the VCMB to act independently. The VCMB cannot develop its own policies if it is subject to political directives from national authorities.

• Given current market conditions, it is hard to reconcile the interests of the VCMB as a private enterprise subject to market forces and price fluctuations, with the goal of stable income for producers and for the sector in general."
  

According to these it is clear that as long as the government continues use the VCMB as a tool for its political work there will remain little chance of the board fulfilling its role as a true price stabilisation organisation, instead we will continue to see the boards funds being utilised to underwrite short term political promises.

The VCMB has consistently chosen to utilise the STABEX funds for price support. In doing so it has carried out only one of its functions set out in its charter, i.e. section 6.(1).(d), and has failed to direct funding into areas that would have allowed it to comply with the equally important functions set out in S.6.(1).(c) and S.6.(2).

These conclusions reached by the Aproma report in 1994 are still valid today.

6.3 OVERVIEW OF VCMB FUNDING - 1988 TO 1995

As the losses of the VCMB clearly exceed the subsidies received from STABEX it is necessary to look at the overview of funding received by the VCMB over this period. This is important because no separate accounting was ever made of the utilisation of STABEX funds as distinct from other sources of funds.

As all funds were pooled, it is not possible to specifically match the VCMB’s expenditure on either operating losses or individual investments with a specific source of funds such as STABEX.

I attach by way of APPENDIX B a Cash Flow Analysis of the VCMB for the years 1988 to 1995 which allows us to clearly view the major cash movements over this period and to identify from this both the investments made by the VCMB and the source of funds utilised to support these investments.

By way of summary we can state the major cash flows (after rounding) over the past eight years as follows:

I set out below a detailed discussion of each of the above cash inflows.

6.4 CASH DEPOSITS

The balance sheet of the VCMB was extremely strong as at the beginning of the 1988 year with the board holding significant cash deposits amounting to more than 433 Million vatu.

From the detailed annual cash flows we see that these cash deposits were completely drawn down during the 1988 - 1990 years to help cover the extremely large trading losses of these years, which were significantly in excess of the on going STABEX subsidies.

As noted above these cash deposits were the residual amounts of STABEX subsidies received by the VCMB prior to 1988.

6.5 BANK OVERDRAFT VT. 318,742,404 (31.12.95)

As the VCMB had exhausted its cash reserves by 1990, it found it necessary to establish an overdraft facility with the Reserve Bank Of Vanuatu to provide the necessary cash liquidity to pay daily outgoings.

This overdraft facility was effectively fully drawn down in 1991, the first year of its establishment, when the VCMB drew down more than 232 million vatu.

After a small reduction in 1992, a further VT 121 Million was drawn down in 1993 which pushed the total overdraft well above its formal limit.

Since this time the VCMB has consistently exceeded the overdraft limits established by the RBV and has paid penalty interest to the RBV on the excess balance.

The VCMB has been in continual overdraft since 1991 to obtain the necessary short term funding to cover its heavy operating losses. The overdraft can no longer be considered short term funding as its chronic size and persistence indicate that it forms part of the VCMB’s long term funding needs.

As at 31/12/95 the overdraft amounted to VT. 318.742.404. This is VT. 78.742.404 in excess of the agreed limit of VT. 240.000.000.

The overdraft is secured over the government bonds that were purchased by the VCMB in 1989/90.

6.6 SHORT TERM GOVERNMENT ADVANCES VT. 150,000,000.

Despite having exhausted all its cash reserves and its short term overdraft facilities, the VCMB continued to pay producers an excessively high copra purchase price. The ongoing operating losses resulting from this policy forced the VCMB to request short term advances from the Government of Vanuatu to pay its outstanding debts to producers.

The VCMB initially borrowed VT. 130 Million in 1990 and this was repaid in 1991 when the overdraft was established by the RBV.

The VCMB again requested the Government to provide advances in 1993 and 1994 to ease its liquidity crisis and the advances of VT. 150.000.000 remain outstanding today.

The Government considers these advances to be short term repayable advances however it is difficult to see them ever being repaid. The Government must therefore look at the possibility of converting these advances to a grant as the VCMB shows no ability to repay these advances if called to do so.

In fact the excessive reliance on short term debt financing have left the VCMB with a highly unbalanced capital structure unsuited to its operational needs.

6.7 TYPES OF INVESTMENTS MADE WITH STABEX FUNDS AND THE QUALITY THEREOF

I outline below the major investments undertaken by the VCMB during the years 1988/1995.
Having discussed above the fact that it is not possible to specifically match STABEX funds with specific investments, due to the pooling of all funds, it will remain debateable as to whether these investments were funded out of STABEX or the other funding sources outlined above.

6.8 FIXED ASSETS VT. 65.23 MILLION

The major assets purchased by the VCMB over this time are as follows:

I did not specifically review the quality or appropriateness of the above fixed assets.

The VCMB has recently invested in cocoa handling equipment following its decision to terminate its cocoa handling agency in favour of an "in house" arrangement.

6.9 PURCHASE OF GOVERNMENT BONDS

The VCMB currently holds Government bonds with a total value of VT. 320 Million.

The VCMB initially subscribed for government bonds totalling VT. 331.200.000 during the 1989 and 1990 years (Refer detailed cash flow). These bonds paid interest at 12%, had a maturity of 15 years and were due for redemption in 2004.

The government subsequently gave notice of early redemption and redeemed these bonds in 1993. At the same time the Government immediately reissued new 10 year bonds with an interest rate of 8%.

There was no legal requirement for the VCMB to subscribe to the new issue of bonds, however they eventually subscribed for the following:

I am unable to understand why the VCMB ever invested in any long term government bonds given that their surplus cash position would, at best, be temporary whereas the initial bonds had a maturity of fifteen years.

The immediate result of investing in the bonds was that the VCMB had insufficient cash to meet its day to day commitments and was forced to firstly obtain a short term advance of VT. 130 Million from the government and then use the bonds as security for an overdraft facility with the Reserve Bank of Vanuatu.

There was a nominal interest rate differential of 3% in favour of the VCMB on the initial bonds in that the Bonds had a coupon rate of 12% whereas the overdraft rate was 9%. (10% on any excess draw downs).

This differential ceased when the initial bonds were redeemed and new bonds issued. The VCMB now has a negative interest rate differential of 1% - 2% which is costing it a minimum of VT. 3.2 Million per annum.

As there is not, and never has been, any commercial justification for the VCMB to invest in long term government bonds, I can only conclude that the Government of Vanuatu has used its influence through the Board of Directors of the VCMB to force the VCMB to divert some of its cash resources to the Government.

This cynical cash stripping exercise was carried out solely for the benefit of the Government of Vanuatu without any regard for the future problems that it would cause the VCMB.

It is therefore essential that the VCMB liquidate its holdings of government bonds as soon as possible and use the funds from this to reduce its overdraft.

6.10 INVESTMENT IN VANUATU COCONUT PRODUCTS LIMITED (VCPL) VT. 26,540,000 PLUS GUARANTEE: VT. 16,000,000 (APPROXIMATELY)

The VCMB has a 50% share in VCPL at a cost of VT. 20 MILLION as at 31/12/95. The remaining 50% is held by P Cathonnet.

This company operates a coconut oil mill on Santo and manufactures certain coconut based products in its factory.

The VCMB held high expectations of generating significant profits from this investment, however I believe that the APROMA conclusion is a more realistic appraisal when they state.... "We recommend that the VCMB abandon its plan to subsidise producer prices using dividends from the factory. The factory will only make profits if it can operate at least 50% capacity. This would produce enough soap to cover 50% of the local market, which seems like a rather ambitious short-term goal. In addition, given the needs of the firm, the other shareholders might vote to reinvest the dividends."

This view is supported by VCPL’s history of trading losses which amount to more than VT. 11 Million for the two years ending 31/12/95.

In reality the VCMB cannot expect any short term returns from this investment but must take a long term investment position whereby dividends will only be paid when past losses are recouped and borrowings have been repaid or reduced.

In addition to the equity investment in VCPL, the VCMB has advanced an unsecured loan of VT. 6.54 Million during 1994 and 1995. There is a difference between the accounts of the VCMB and the annual accounts of VCPL regarding the balance of this loan a/c which must be reconciled by the VCMB.

The VCMB has also guaranteed 50% of VCPL’s loan facility with the Development Bank of Vanuatu. As at 31/12/95 the DBV loan amounted to VT. 31.720.548.

I am most concerned to see the VCMB taking on contingent liabilities of this nature, particularly given its own perilous financial state. If the VCMB was called on to honour any of its guarantees it may be unable to do so.

6.11 INVESTMENT IN VANUATU TROPICAL PRODUCTS LTD (VTPL) TOTAL: VT. 3,000,000

During 1995 the VCMB invested VT. 1.5 Million to take a small shareholding in this company which plans to purchase root crops from the provinces and to package them for export.

This investment is quite small and I would not expect VCMB to receive any financial return from this investment in the near future.

The VCMB has invested a further VT. 1.5 Million in VTPL since the end of the 1995 year and has a 25% shareholding in the company. I am concerned that the VCMB’s commitment to VTPL may be expanding without adequate planning.

The other shareholders in VTPL are:

COFED (35%),

Vanuatu Holdings Ltd (10%) and

Negotiants International Ltd (30%). (In trust for Bernard Bourgois, Andre Frouin and Jacques Barnier.)

The VCMB must exercise caution that it does not enter in financial commitments on behalf of this Company. without proper expectation of receiving a commercial return in the future.

6.12 LOAN TO MELANESIAN SHIPPING LINE (MSL) TOTAL: VT. 56,544,000

One of the greatest concerns that I found in my review of the VCMB was its involvement with MSL.

I am firmly of the opinion that there is an urgent need for an enquiry into the full circumstances surrounding the purchase of the MV Prince II and its subsequent operation, given the large losses incurred by the Government of Vanuatu and other Statutory bodies (i.e. VCMB and COFED) that were forced to be involved with the company.

As per the draft accounts as at 31/12/95, VCMB had advanced VT 56.544 Million to MSL and, despite having a registered mortgage over the MV. Prince II, is unlikely to ever recover any material part of this loan.

In any event, the mortgage is limited to the sum of VT. 35.100.000 plus outstanding interest, whereas the current exposure is far in excess of this.

There has been a clear conflict of interest in that the managing director of the VCMB (Mr Franklyn Kere) was appointed managing director of MSL. This conflict was exacerbated by the fact that the Minister responsible for the VCMB (Serge Vohor) was also the person who negotiated the purchase of the MV Prince II.

In addition, the composition of the Board of the VCMB was such that it would never be able to act as an independent body capable of maintaining an "arms length" relationship in dealing with MSL. (Refer section 18 below).

Given these conflicts it is not surprising to find that the VCMB has wasted significant amounts of its scarce resources (both cash and management time) in trying to maintain MSL.

At this point in time it is sufficient to state that the VCMB was forced to bear the cost of maintaining MSL due to the Minister of Economic Affairs’ (MP Serge Vohor) inability, or unwillingness, to solve a problem of his own making.

This has placed an unacceptable drain on the scarce cash resources of the VCMB and must be rectified immediately by the government reimbursing in full the monies lent by VCMB to MSL.

Once again I can find no commercial logic for the VCMB’s involvement in MSL and can only conclude that it resulted from direct political interference in the affairs of the VCMB.

The unaudited accounts of MSL as at 28/02/95 show that the company has a deficiency of shareholders funds amounting to VT 27.9 Million. This is based on the MV Prince II having a value of VT 111 Million. As the ship’s value is much less than this, MSL would be expected to have a much higher deficit than that stated in the accounts.

6.13 STAFF HOUSING LOANS TOTAL VT. 21,012,615 (31/12/95)

The VCMB staff housing scheme had a balance of VT. 21.012.675 outstanding from a total of 15 loans as per the draft accounts as at 31/12/95. The VCMB currently charges an annual interest rate of 1% on these loans.

This scheme was commenced before 1988 however additional loans occurred during the 1988 and 1989 years when further loans totalling VT. 29.1 Million were paid out.

The matter of these staff housing loans have been discussed many times in the past and the management have held discussions with both the Development Bank of Vanuatu (DBV) and the Vanuatu National Provident Fund (VNPF) with the aim of transferring the staff loans to a third party commercial lender.

Despite an agreement by the DBV to refinance the housing loans in December 1995, no result has been effected to date. This means that the VCMB continues to suffer annual losses of approximately VT 1.9 Million on these loans due to the interest rate differential between its overdraft rate and the housing scheme interest rate.

Given the poor state of the VCMB’s finances, this loss cannot be allowed to continue and the Board of Directors must ensure that these loans are refinanced without delay.

Until these loans can be refinanced it is essential that the rate of interest charged to staff be increased to at least equivalent to the VCMB’s penalty rate of overdraft. (i.e. 10%)

6.14 MODE OF MANAGEMENT OF STABEX FUNDS

I have already stated above that the Stabex monies received by the VCMB were not separately accounted for. They were pooled with all other assets of the VCMB and not adequately separated from monies received from short term loans, overdraft or normal working capital movements.

A major problem with this pooling has been the creation of a false impression that the VCMB was "cash rich".

This false impression has allowed the Government to divert some of the cash assets of the VCMB for its own benefit.

I note that tighter control was established for STABEX 89 - 91 transfers paid to the VCMB during 1994, with each transfer being subject to a separate application based on the actual level of previous purchases.

It is unfortunate that due to the lack of financial discipline within the VCMB the transfers have to be controlled to this extent.

6.15 BOARD OF DIRECTORS

A clear example of the difficulties faced by the VCMB in its operations is the situation where the term of its Board of directors expired at the end of December 1995 and, as yet, no new board has been appointed by the Government.

This indicates either a complete disregard by Government for the VCMB, or a lack of understanding of the need for any commercial organisation to have an independent, active and technically competent board to direct management.

Given the absence of a board, all key decisions are referred directly to the responsible Minister, Mr Barak Sope. This situation only exacerbates the already highly politicised nature of the VCMB’s operations and increases the likelihood of poor commercial decisions being made.

The appointment of a new board of directors will not improve this situation unless the appointees have real business skills and are allowed to operate independently of political interference.

The previous Board of Directors was completely dominated by senior UMP members who appeared to have been appointed on political grounds rather than their technical abilities. They were therefore incapable of remaining independent from the directives of Minister Serge Vohor.

In fact Minister Vohor gave detailed instructions to the board through his second secretary in March 1993. This was some four months before his authority to assume responsibility for the VCMB was gazetted.

The composition of the board was as follows:

At best, I conclude that the Board lacked balance and technical competence and could never be considered to be politically neutral.

7. OPPORTUNITY TO REPLY TO COMPLAINTS

In compliance with Article 62(4) of the Constitution and Section 16(4) of the Ombudsman Act No.14 of 1995, all persons or bodies adversely named in this Report have received a copy of it and have been given adequate time to respond to the matter raised therein.

Apart from the following, whose comments have been used to amend parts of our Preliminary Report, we have not received any comments:

- National Planning Office

- Director of Agriculture

- Board Member J.P. Mahe.

8. SUMMARY AND RECOMMENDATIONS
   

A recurring conclusion from my review (and also that of APROMA) of the financial affairs of the VCMB is that the persistent political interference in the affairs of the VCMB exercised through the Government’s representatives on the Board of Directors has caused the VCMB to make many decisions that were commercially unsound.

The most immediate result of this has been that the VCMB is an organisation that suffers from a chronic imbalance in its capital structure in that it has investments that are mainly long term, low yielding assets, whereas it has financed itself heavily by way of short term, high cost current liabilities.

Even if the VCMB was not facing ongoing tight trading conditions, its current Financial/Investment strategy is a receipt for ongoing liquidity crises.

BASED ON MY REVIEW, I RECOMMEND THE FOLLOWING:

1. Independent Board: An independent and technically competent Board of Directors must be appointed without delay. This Board must not only reflect the party of the Minister in charge.

2. Reduce Minister’s influence: Section 5 of The Vanuatu Commodities Marketing Board Act No 10 of 1981, must be amended to reduce the influence of the Minister in the appointment of the Board of the VCMB. It is essential that independent organisations with a direct interest in the industry, such as Syndicate Agricole or the Chamber of Commerce, be given the power to appoint representatives to the Board of VCMB.

3. Conversion of short-term advance into a grant: The Government should convert its current short term advances amounting to VT. 150 Million to a grant to recognise the fact that the VCMB has used these funds to subsidise an artificially high copra price dictated by direct government influence in the VCMB Board of Directors.

4. Liquidation of Government bonds: Immediate negotiations be held with the Reserve Bank of Vanuatu and the Government, with the aim of liquidating the investment in Government bonds amounting to VT. 320 Million.

5. Review of overdraft: A more satisfactory overdraft arrangement has to be negotiated which more adequately reflects the VCMB’s cyclical cash flows. The key for this will be the resolution of the government bond situation.

6. Government to reimburse MV Prince II to VCMB: The government must immediately accept responsibility for the problems associated with Melanesian Shipping Ltd. and reimburse the VCMB for the Loans of VT. 56.544 Million which it has advanced to date. If no timely response is received, the VCMB should immediately move to enforce its rights under its registered mortgage security.

7. Inquiry into MV Prince II: An immediate enquiry be commenced into the matters surrounding the purchase and operation of the MV Prince.

8. Housing Loans: Negotiations have to be undertaken immediately with a commercial bank regarding the transfer of the remaining staff housing loans. It is highly unlikely that either the Development Bank of Vanuatu or the National Provident Fund will ever refinance these loans.

9. Sale of MV Prince II: We recommend that the VCMB immediately enforce its right under the mortgage and move to force the sale of MV Prince II to recover whatever is possible before the ship become economically worthless and the value of the VCMB’s security is dissipated (recommendation being enforced as we are finalising this report).

MARIE-NOËLLE FERRIEUX PATTERSON

OMBUDSMAN OF THE REPUBLIC OF VANUATU.

APPENDIX A & B

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