Audit Report on Toa Petroleum calls for Commission of Inquiry

The Audit Office Review report into the Toa Petroleum affair is out and the prime recommendation is for the setting up of a Commission of Inquiry into the whole matter. However, with the cost of the High Court case, legal action and review standing so far at over $2.5 million, should government commit more taxpayer funds to a costly Commission of Inquiry?
Following Cabinet on Tuesday, Prime Minister Hon Jim Marurai decided that the Minister for Finance Hon Wilkie Rasmussen should release copies of the “Audit Office Review into Government’s attempt to Nationalize the Fuel Industry” (commonly known as Toagate) to the media on Wednesday morning.
In this issue of the Herald we bring you extracts from the Review Report being the Audit Summary and the Conclusions and Recommendations.
Director of Audit Paul Allsworth presented the report to the Minister for Audit Office, Wilkie Rasmussen on 18 June 2010. 13 copies were sent to certain individuals including Ministers and government officials who were given 14 days to submit comments.
The report itself is a detailed document 73 pages long with 12 appendices which include copies of the Heads of Agreement, Cabinet documents, the Settlement Agreement and other official papers.
The Review began on 15 January 2010 and ended on 31 May 2010. 37 people were interviewed and the total cost of the failed strategy including High Court costs and those of the Audit Office investigation up to June 30, amounted to $2.5 million.
At some stage the full report will be available to the general public.
The report begins with comments by the Director of Audit, an Audit summary, an Introduction which covers the reasons for the inquiry, a chronology of events from 2007 to 2010, the Audit findings which cover the conduct of Ivaiti, the former Cabinet, the former DPM and the role of various senior officials, the Audit Office conclusions and recommendations.
In his comments the Director of Audit said it was Audit’s view that the allocation of blame and responsibility for the failure of project could not be attributed to any single person or event but to the highly questionable conduct of various public officials/elected members and the chain of events leading to comprehensive and disastrous results for the taxpayers.
The Director pointed to what he believed to be a lack of adherence to basic principles of governance on the part of the former Finance Secretary and DPM.
13 recommendations have been made to improve internal control systems within key areas of government so that government can mitigate against future high risk projects of this nature.
There are two significant recommendations. One calls for parliament to consider a Commission of Inquiry into Toa Petroleum and other matters in the interests of transparency, credibility and accountability. However, conducting a Commission of Inquiry will be very costly and is unlikely to be approved. It would require the appointment of a very senior legal person, perhaps a Judge.
The second significant recommendation concerns the Attorney General and whether he should consider obtaining independent legal opinion to establish whether or not the former DPM and former Financial Secretary had breached any legislation(s) within the Crown’s authority. Again there would be costs to consider. Any legal person engaged would almost certainly be a QC.
The purpose of this report is to examine the conduct of Government officials, including Cabinet Ministers, Cabinet itself and senior public servants, in what has become commonly referred to as the “Toagate” affair. This term applies to the fuel industry strategy adopted by Government between 2007 and 2010 including the proposed purchase by Government of the TOA petroleum facility and the JUHI petroleum facility both on Rarotonga.
The period under review is primarily from December 2007 (although mention is made of efforts made between 2002 and 2007 to regulate fuel prices) when a fact-finding mission led by the then Deputy Prime Minister and Minister of Finance, Sir Terepai Maoate and including the then Financial Secretary, Sholan Ivaiti, travelled to Tahiti and then Samoa to hopefully learn of ways and means to minimise fuel costs in the Cook Islands.
The report concludes in 2010 with the May High Court ruling that the terms of the mediated settlement agreement reached in December 2009 were valid and binding upon Government.
Commencing in mid-January 2010 the Audit Office investigation reviewed Court records, file documents, correspondence and computer records and conducted interviews with those persons it considered to have been involved.
Before the mediation settlement reached in December 2009 the Government entered into negotiations to purchase both the TOA and JUHI petroleum facilities and completed a Heads of Agreement (HOA) with TOA Petroleum in December 2008 to purchase TOA’s fuel terminal and other assets for $5.16 million. This was an integral part of the purported Government strategy to acquire fuel storage and distribution as a means of controlling and minimising fuel prices. This in turn led to Triad Pacific Petroleum (Triad), another fuel facility owner, filing proceedings in the High Court contesting the legality of the process. The Audit Office (on the 12 May 2009) and the Hon. Wilkie Rasmussen MP (on the 21St May 2009) later joined as interested parties. The Triad application for an interim injunction was successful and the acquisition was halted (pending a substantive hearing of the judicial review proceedings) until a mediated settlement was reached in December 2009.
The matter should have reached a conclusion of sorts with the mediated settlement agreements but the Government failed to meet the deadlines set in the mediation for certain payments to be made and actions undertaken and the matter was again returned to the Court in early 2010.
In March 2010, the Court entered judgment (with the consent of the Government) in favour of TOA and against the Government for payment of the sum of $1.75 million to Apex Agencies Limited(TOA). The Government then contested the guarantee component of the
In March 2010, the Court entered judgment (with the consent of the Government) in favour of TOA and against the Government for payment of the sum of $1.75 million to Apex Agencies Limited(TOA). The Government then contested the guarantee component of the settlement agreement in April 2010. Finally in May 2010 the Court determined that the guarantee component of the settlement agreement was valid and binding upon Government and had to be honored.
Throughout the two years the matter has been in the public arena a number of requests were made to the Audit Office and to the Public Expenditure Review Committee (PERC) for them to investigate the planned purchase and especially the conduct of the officials involved. The Audit Office already had concerns over the lack of disclosure and its failure to be provided with information requested under its legislation which resulted in the Director of Audit becoming a party to the High Court proceedings.
The Audit Office began this investigation in January 2010 and ended at the end of May. Its findings fall into three major areas. Given the significant Government expenditure proposed there were questionable decision-making practices by the Executive (Cabinet) and senior officials; there were major systemic failures especially a lack of robust checks and balances within all management systems; there was inadequate identification and determination of management and accountability responsibility.
The investigation concluded that the fuel strategy initiative was led by the Deputy Prime Minister and Minister of Finance, Sir Terepai Maoate and his senior official the Financial Secretary, Sholan Ivaiti, more in hope than by way of reasoned analysis. The depth of detail that would be expected to accompany an investment of this magnitude on the part of Government was missing and this taken together with major systemic failings within Cabinet and public sector processes led to its failure.
The Audit Office makes thirteen recommendations in this report which it hopes will be addressed by Government.
The most important of these is the recommendation to Parliament for the initiation of a formal Commission of Enquiry that would take evidence under oath and be open to the public. This, Audit believes, would complete the process begun by its investigation.
The other recommendations are:
• Cabinet should formalise its conduct and procedures into a Cabinet Manual with particular attention given to the degree of autonomy given to Cabinet members and their accountability.
• Cabinet should establish firm and absolute guidelines for the appropriate level of autonomy to be given to Ministers and Officials to act on behalf of Government
• Cabinet should make all budget and supplementary appropriation amendments
subject to the scrutiny and comment of the Budget Review Committee.
• Cabinet should direct that a review be undertaken of the MFEM Act and the
Financial Policies and Guidelines.
• Parliament should amend Standing Order 222 and Standing Order 224.
• Office of the Prime Minister to institute formal training and upskilling of Cabinet Services staff to improve Cabinet administrations.
• The Ministry of Internal Affairs should review the Control of Prices Act 1966 and the Fuel Pricing Template (2006).
• The Attorney General should review the performance of the Solicitor General.
• The Crown Law Office should review it’s capacity to meet changing demands from Government.
• The Public Service Commissioner should undertake a compliance review of all Heads of Ministry’s Employment Contracts, Job Descriptions and Performance Agreements.
The report is presented in four parts with the second part focusing on the chronology of-events, the participants and the decisions made at those times. The third part details the investigation findings relative to the decision making processes and finally the fourth part ends with the investigation conclusions and recommendations.
Part 1- Introduction
The Reasons for the Investigation
1.1 More than any other issue in recent years the fuel industry policy adopted by Government in 2007 attracted public interest and attention. Because of the secrecy involved and the inability of both the Executive and the public to get access to information related to the policy and, more recently, the costs to the Government, numerous complaints were made to the Audit Office requesting the matter be investigated. Although a series of three public meetings had been held on Rarotonga in January 2009 to try and answer some of the questions, these did not satisfy public concerns and if anything, caused even greater demands to be made for disclosure of information.
1.2 Attempts by the Audit Office to obtain information under the Public Expenditure Review Committee and Audit Act (PERCA) in late 2008 and early 2009 were unsuccessful.
1.3 In January 2009 proceedings began in the High Court that challenged the fuel policy adopted by Government and the actions it had taken in signing a Heads of Agreement. In May 2009 the Audit Office joined the proceedings after being unable to obtain compliance by the former Financial Secretary to the PERCA Act.
1.4 Audit believed there may have been significant breaches of the Ministry of Finance and Economic Management Act (MFEM Act), the PERCA Act and other Government legislation, regulations and policies by senior public servants and members of Cabinet during the period under investigation.
1.5 There was substantial public expenditure that may have been made without compliance with responsible fiscal management. Audit sought to determine the total expenditure from the beginning of the matter in 2007 to the writing of this report in early 2010. Public expenditure to date may not be final as it is not clear whether further proceedings will be issued against the Government in conjunction with the mediation settlement agreement and this is a possibility that cannot be ruled out.
1.6 Finally, to provide, its opinion as to whether or not the expenditure incurred was the best use of public funds in terms of economy, effectiveness and efficiency, and resulted in the desired savings and control over fuel costs.
The Scope of the Audit Inquiry
1.7 The Audit investigation examined:
• Whether all expenditure incurred was in accordance with legislation, approved policies and procedures and parliamentary appropriations.
• Possible breaches of the Ministry of Finance and Economic Management (MFEM) Cook Islands Financial Policies and Guidelines.
• The transactions (including contracts and agreements), actual and intended, entered into by Government for the provision of services, acquisition of goods, services, buildings and properties related to the fuel industry.
• Correspondence; electronic and written between the interested parties.
The inquiry commenced on 15 January 2010 and ended on 31 May 2010.
What Audit Investigated
1.8 Audit obtained and reviewed a substantial amount of documentation including Cabinet Minutes, Court records, correspondence (including email files), information papers and reports and other published data.
1.9 Audit interviewed individuals from Government, state owned enterprises and the private sector who had been a part of the fuel industry activities during the period under investigation.
1.10 Audit investigated the conduct of Cabinet, Ministers and officials.
Part 4 - Conclusions and Recommendations
Conclusions
The National Fuel Industry Strategy
There was no coherent, logical strategy to the actions taken by the Government in its Dbjective of managing fuel prices in the Cook Islands. As a result the Government attempt to restructure and manage the fuel industry through the acquisition of fuel Farm facilities (the so called “Samoa” model) was an enormously expensive failure with no benefit to the consumer. Instead the taxpayer has been left with an immediate payment of $1.75M and a long term debt of potentially many millions more.
There was never any concerted effort to develop a comprehensive and coherent written fuel industry strategy/policy document. As a consequence few of those involved in key decision making areas, especially Cabinet, but also others such as the Solicitor General had a full understanding and awareness of developments during this period.
The failure of the strategy can largely be attributed to the former Deputy Prime Minister and the Financial Secretary. Almost all of the submissions made to Cabinet during the period 2007-2009 relating to the fuel industry were by the Deputy Prime Minister and these in turn were written by the former Financial Secretary. Few others were given any insight into what was taking place or had any input.
4.4 None of those interviewed during the investigation could estimate to the nearest million dollars what the “strategy” would cost. The failure on the parts of the former Financial Secretary and the former Deputy Prime Minister as Minister of Finance, in particular, to cost the strategy can be considered a fundamental breach of the MFEM Act section 23(2)(c) in terms of “responsible fiscal management”.
4.5 The list of acquisitions was not limited to the TOA fuel farm but included the JUHI facility as well as the need to negotiate a new lease with the landowners of the TOA site. When asked the former Deputy Prime Minister’s response was “I can’t any figures but I think there must be some figures somewhere”.
4.6 From the time the Government commenced negotiations with TOA to acquire the fuel farm facility there were no meaningful discussions held with the landowners of Te Tamanu Section 100A Avarua, regarding the lease which expires in 2012. We noted as significant that the cost of a renewal to the existing lease or of a new lease altogether was not included in the NZ$5.5M appropriation made by Parliament in 2008 or in any appropriation since.
4.7 It is our conclusion that there was an obvious failure to address security of land tenure in the context of the Heads of Agreement. This failure is a further example of a failure to comply with the MFEM Act section 23(2) and “responsible fiscal management.” The securing of land tenure for the TOA site would have to be an integral part of the transaction to protect any value from the acquisition. To not address the land tenure issue and ensure continuity of the same would seem to potentially expose Government to an unknown cost in the future to rectify the problem.
4.8 The so called “Samoa” model involved the nationalisation of storage capacity and the inclusion of Triad should have been part of the strategy. The strategy/policy could have possibly succeeded if Triad was included.
4.9 Government should have communicated its intentions more clearly. As the main communicators of Government policy the former Deputy Prime Minister and the former Financial Secretary were the only ones with access to all relevant information. Neither was free and frank with information and often gave contradictory media releases.
4.10 Government had other options such as regulation and reducing excise tax that were not considered but may have achieved the desired result of cheaper fuel for less risk, at least in the short term.
The Involvement of the Former Financial Secretary
4.11 In relation to the role of the former Financial Secretary Audit concluded: He did not prepare a comprehensive risk analysis for his Minister or Cabinet of the possible threats to the fuel strategy/policy including the potential risks to Government if it was prohibited from completing the acquisition of the TOA fuel facility, of the potential costs of forced acquisition, of the risks of legal action by other parties, of the possible failure to secure land tenure and of the possible environmental risks it was assuming with the acquisition.
4.12 He did not have the authority to waive tender requirements as detailed in the MFEM Financial Policies and Guidelines Manual with regard to the appointment of the consultants EEA.
4.13 He used the Fuel Price Review Committee to promote decisions made on the recommendation of the EEA consultants.
4.14 He misled the public, whether intentionally or not, through his public statements in the media and at public meetings. There were numerous contradictions made by him in 2008/2009.
4.15 He withheld information from Cabinet, PERC and the Audit Office that should have been freely provided.
The Involvement of Parliament
4.16 In relation to the role of Parliament and the passing of Appropriation Amendment #2 which included the POBOC appropriation for the purchase of the TOA fuel facility, Audit concluded that: Present Standing Orders for Parliament do not allow adequate time for the distribution of bills to Members of Parliament so that the debating of bills may be suitably informed and more constructive.
The Involvement of the former Cabinet
4.17 Cabinet did not have the appropriate Cabinet policies and procedures in place to ensure that its directions were complied with. The absence of specific reporting requirements meant that its directions were often open-ended. Other directions made by Cabinet Minute and sighted during the investigation had been routinely ignored because they were lacking in defining responsibility, direction and timeliness.
4.18 The new Cabinet Manual should be considered no more than a work in progress as this review has highlighted a number of issues not mentioned in the manual.
4.19 Cabinet failed to have in place the necessary checks and balances to oversee and manage the actions of both the former” Deputy Prime Minister and the former Financial Secretary. Cabinet ostensibly armed the former Financial Secretary with broad and unlimited authority to enter into arrangements in relation to the fuel strategy. In Audit’s view this is not in accordance with the principles of responsible fiscal management in terms of the MFEM Act, section 23(2)(c).
4.20 Cabinet Services staff need further training and up-skilling to improve the quality Cabinet record keeping and to better manage the Cabinet administrative process. Proper chains of accountability and authority were found to be lacking.
4.21 It is a questionable practice to include Caucus as a part of Cabinet deliberations. They were not bound by any of the constitutional constraints on Cabinet. The new Cabinet Manual is lacking as it makes no reference to Caucus participation and what checks and balances exist to manage their conduct.
4.22 The value and quality of advice provided to Cabinet by the Cabinet Advisory Committee is questionable. In its present form it is not working and adding little value to the Cabinet process.
The Involvement of the Solicitor General
4.23 The Solicitor General is appointed under the Crown Law Office Act 1980. Under section 10 of the Crown Law Office Act the principal function of the Solicitor General is to: “... advice [sic] the Government of the Cook Islands on legal matters that may be referred to it by the High Commissioner, Cabinet, the Premier, a Minister, the Ombudsman, a head of department, or Statutory body or Corporation”.
4.24 The Solicitor General appears to have played a limited role in Government’s overall fuel strategy. The Solicitor General’s only real involvement was the review of the HOA submitted to him by the former Financial Secretary prior to it being signed
4.25 By his own admission the Solicitor General does not have any significant legal experience in commercial matters and stated during his interview with Audit. “My background is criminal law and jury trials, judge alone trials.” and in regards to the expertise within the Crown Law office “I have to admit that in terms of commercial experience amongst our lawyers it is very limited”.
4.26 Audit concludes that given the Solicitor General’s lack of legal experience in commercial matters, it would have been prudent for external or specialist counsel to have been engaged to review the HOA and provide relevant advice to the Government where the Crown Law office did not have the capacity to do this. This is particularly so given the nature and value of the acquisition.
The Heads of Agreement (HOA)
4.27 The HOA was prepared by the consultants EEA at the direction of the former Financial Secretary. Given the nature and size of the transaction it warranted further scrutiny in light of the risks involved. It is Audit’s conclusion that the legal and financial risks were not properly assessed before the HOA was signed. The Solicitor General conceded that the HOA was only subject to superficial scrutiny and that this was not an area of law that he specialized in.
4.28 Audit questioned whether the final price reflected the true value of the acquisition at the time and it would appear that the final negotiated price was too high. Audit concluded that the basis for reaching the agreed price is questionable and the acquisition would have been in breach of the MFEM Act, section 23(2).
4.29 Neither the former Deputy Prime Minister nor the former Financial Secretary could satisfactorily answer questions relating to the due diligence undertaken before the HOA became final. The former Deputy Prime Minister did not recollect sighting any of the due diligence documentation and left all of this at the discretion of the former Financial Secretary and his consultants. Our finding is that the due diligence was not complete and comprehensive and should have been undertaken by a neutral third party given the value of the acquisition.
Mediation Settlement Agreement
4.30 Audit concludes that in terms of the mediation settlement agreement between Government and TOA with regard to the new pricing template and the $1.2M guarantee (with reference to TOA’s EBITDA) for a period of eight years, Government failed to consider the settlement in accordance with the principles of responsible fiscal management under section 23 of the MFEM Act (see para 3.64). Audit considers the TOA settlement and the $1.2M guarantee does not accord with the principles of responsible fiscal management where the potential liability exposure of Government could not be quantified at the time of the settlement agreement and could prove to be very costly in the long term. The total cost of the settlement with TOA (taking both the lump sum paid of $1.75M together with the potential costs of the profit guarantee in favour of TOA) has the potential to exceed the original purchase price agreed in the HOA of $5.16M.
4.31 Audit is also concerned at the broad general authority given by Cabinet to the mediation team in terms of settlement without any apparent terms limiting such authority. It was not clear to what extent the Government understood the nature of its obligations under the settlement agreement with TOA or its potential liability exposure with particular regard to the $1.2M guarantee in favour of TOA (if in fact Cabinet had any knowledge of this proposal prior to the mediation). By granting a broad general authority to settle the mediation it was possible for the mediation team to agree to the lump sum settlement together with the new pricing template including the $1.2M guarantee in favour of TOA (a liability exposure that could not be quantified at the time of the settlement agreement). Audit does not consider the granting of the broad general authority to settle the mediation to be in accordance with the principles of responsible fiscal management and in particular the prudent management of fiscal risks facing the Crown.
Fuel Pricing Template Agreement
4.32 Audit concluded that the fuel pricing template needs to be reviewed on the basis given that it was supposed to have been done in 2006 and the continued failure to do so is a contributory factor to ongoing problems with at least one of the fuel farm operators and this has been highlighted by the Court. Any new pricing agreement must be inclusive of all importers.
Budget Review
4.33 The Budget Review Process is presently limited to the main budget and excludes review of amendments or supplementary budgets. This denies the scrutiny intended by the creation of the committee and limits the transparency intended under the 1996 reforms. If the Budget Review Committee is to properly carry out its function then it should review and critique all budgets.
The Fiscal Implications
4.34 The substantial public expenditure made in pursuing the fuel industry strategy was not in compliance with the MFEM Act and principles of responsible fiscal management.
4.35 The total cost of the failed strategy including the High Court costs and those of the
Audit Office investigation up to the end of June 2010 amounted to NZ$2,541,412.87
4.36 Audit concluded that the expenditure for the fuel industry strategy was not the most economical use of public funds by the Government.
5. Recommendations
Department of Parliamentary Services
The Speaker, together with the Clerk of Parliament, submit to Parliament to consider;
5.1 A formal Commission of Inquiry into TOA Petroleum and Other Matters. The Audit Office investigation interviews were not conducted under oath and were not open to the public and in the interests of transparency; credibility and accountability a formal Commission of Inquiry may complete the process this report has begun.
5.2 Amend Standing Order 222 Distribution of Copies of Bill to allow the insertion of “five working days” between the words “members” and “before’; and Standing Order 224 Notice to be Given of Introduction of Bill to be amended to allow for seven days notice for the introduction of a Public Bill, the same as for a Private Bill.
Office of the Prime Minister
The Chairman of Cabinet, the Hon Prime Minister considers to;
5.3 Formalise Cabinet conduct and procedures into a Cabinet Manual with particular attention given to the degree of autonomy given to Cabinet members and their accountability. The Cabinet Manual should also set out in detail the format of submissions including who is responsible for carrying out any directions made in the resulting Cabinet minute; if Cabinet requires any ongoing progress reports and when those directions or reports are to be carried out (i.e. timeline).
5.4 Establish firm and absolute guidelines to ensure the appropriate level of autonomy is given to Ministers and Public Officials to act on behalf of Government when entering into commercial contracts and agreements binding upon Government.
5.5 Ensure all budget and supplementary appropriation amendments subject to the scrutiny and comment of the Budget Review Committee.
5.6 Direct that a review be undertaken of the MFEM Act and MFEM Financial Policies and Guidelines.
5.7 Ensure the Cabinet Manual includes reference to Caucus participation and ensures proper checks and balances exist to manage their conduct.
Office of the Prime Minister
The Chief of Staff of Office of the Prime Minister should;
5.8 Ensure Cabinet Services staff receive the necessary training and up-skilling to improve the quality of Cabinet record keeping and to better manage the Cabinet administrative process.
Office of the Attorney General
5.9 The Attorney General should consider the role and performance of the Solicitor General in this matter and take whatever actions appropriate.
5.10 The Attorney General should consider obtaining an independent legal opinion to establish whether or not the former Finance Minister and former Financial Secretary had breached any legislation(s) within Crown’s authority.
Minister of Internal Affairs
The Minister of Internal Affairs directs:
5.11 The Secretary of Internal Affairs to review the Control of Prices Act 1966 CULu «« Fuel Pricing Template (2006) with the intention of establishing a comprehensive pricing regime applicable to all fuel importers, distributors and retailers.
Crown Law Office
The Solicitor-General should:
5.12 Review Crown Law Office human resources to ensure it has the capacity to meet the demands of Government and submit such to the Attorney General.
Minister Responsible for the Public Service the Public Service Commissioner should;
5.13 Review all current and future employment contracts, performance agreements and job descriptions of all Heads of Ministry’s to ensure full compliance to the requirements of each. In the case of the former Financial Secretary, he was assigned by Cabinet, to undertake specific tasks to carry out this fuel strategy, without any communication, dialogue and written consent from his employer, the Public Service Commissioner. Although an employment contract was signed, no performance agreement was ever signed.

By Charles PItt

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