Islands Business - Interview: ROD MITCHELL

Rod mitchell is chief executive of national superannuation fund taking the super fund to a new high.

Baeau Tai
Thousands of contributors to the National Superannuation Fund (Nasfund), who are private sector employees throughout Papua New Guinea, are glad that Nasfund has come to be what it is now—a fund that has so far achieved profit results and growth in its asset value. All this has happened under the reign of Chief Executive Officer, Rod Mitchell.

“It really has been a tumultuous six years with enormous turnaround and growth. To think we inherited a fund with K154 million in debt and today we have over K800 million in net assets and no debt is no small feat.”

In 1999 the government-controlled National Provident Fund of Papua New Guinea (now Nasfund) was on the verge of financial collapse.

The private sector superannuation fund had over many years been subject to corruption, maladministration and political interference. In the nineties, spurred by political direction, the fund embarked on a vigorous acquisition of Papua New Guinean resource stocks, funded by overseas debt.

When the resource markets tumbled in 1997, high-risk equities with no dividend income to sustain the incurred debt led the fund into an economic spiral.

This was compounded on the domestic front by the economic mismanagement of Bill Skate Government which plunged the country into a liquidity crisis, leading to interest rates above 20% and a falling currency.

Adding to the problem was the yet to be completed Deloitte Tower, PNG’s largest commercial building, which was experiencing escalating construction costs, embroiled in kickbacks and financed by domestic debt at 20% interest rates. In total, the fund had borrowed K154 million against largely illiquid and falling asset values.

In 1999, the board realising the fund was in crisis sought a new investment manager. On being appointed, Mitchell began cleaning up the mess. For the next 18 months, Mitchell lived on the edge with the fund surviving on overdraft as he worked to keep the banks on side, conduct an orderly sell-down of largely illiquid assets and manage hostile elements on the board determined to keep the status quo.

The problems were exacerbated by poor record keeping. It was in a total shambles with non-existent asset registers, annual accounts three years behind and bank accounts unreconciled for over 18 months. A strong ally in the reform process was the President of the Employers Federation, John Jeffery (now chairman of Nasfund), who understood the problems and worked with Mitchell to bring the fund under control.

A commission of inquiry into the National Provident Fund commenced in 2000 which led to a number of individuals referred to the police for prosecution. In the same year, the Mekere Morauta Government overhauled superannuation through an act of Parliament and in doing so paved the way for the privatisation of the National Provident Fund (now Nasfund) in 2002.

Mitchell spoke to ISLANDS BUSINESS about the fund’s success and future plans. Here’s what he said:

Since the financial system reforms in 2000, most financial institutions in Papua New Guinea including Nasfund have reported profit earnings and good returns. You and your management team have done a great job to turn Nasfund into what it is now. How have you seen the last six years?

“It really has been a tumultuous six years with enormous turnaround and growth. To think we inherited a fund with K154 million in debt and today we have over K800 million in net assets and no debt is no small feat. It’s a great PNG story and amply demonstrates what can be achieved with focus and reform.

“In terms of fund growth, Nasfund has averaged in excess of 30% annualised, membership has grown over 50% to 84,000 active members, our branch network has doubled, and our contributing employer base has increased by 29%.”

What do you credit the success of Nasfund to?

“Probably two things have driven the Nasfund story. One, of course, is the financial sector reforms introduced in 2000 by the former Prime Minister, Sir Mekere Morauta. One aspect of this was to free up the economy from the negative influences of state control.

“Over a two-and-a-half year period, a raft of legislative reform was passed that saw the privatisation of National Provident Fund (now Nasfund) and the largest and at the time ailing commercial bank PNG Banking Corporation, now Bank South Pacific Limited. Further reforms included the Superannuation 2000 Act, the creation of an Independent Central Bank through amendments to the Central Banking Act and constitutional changes including preferential voting and Organic Law on the Integrity of Political Candidates and Parties.

“All these reforms have worked well and improved the dynamics and perception of the country. The financial sector has become independent and non-politicised. This was the heady days of reform and while many may not have understood the agenda back then, most now see how positive these reforms have played out on the economic and political life of the country.

“The other aspect to the success of Nasfund has been its corporate governance platform. I think you need to know further explanation other than to look at our website. We were the first and probably still the only major PNG company that has its board and audit minutes on the web. We also have personal contact details of all directors, contracts of employment and quarterly governance statements all there for easy access.

“We were also the first PNG company to have an online whistleblower policy. It really has been an open door policy and as a result, members feel comfortable and have confidence.”

Is Nasfund expecting to report a good profit this year?

“I am not sure what a good profit is. If you mean similar to the net return of 33% generated in 2005, the answer is clearly no. If you mean will we credit in excess of inflation and prevailing interest rates, the answer is yes.

“I think while it is too early to make an unequivocal predication on the return outcome for 2006, my guess is somewhere around 7 to 7.5% assuming no surprises. When we look at an inflation rate of 2.5% and a similar interest rate environment, we are satisfied with that outcome. And you should remember, we have a further 6% of assets in reserves. The balance sheet is strong.”

Are there plans to boost members’ contributions?

“A new product will be launched at the end of October, which will change how we see superannuation going forward. Superannuation has always been viewed as only for those lucky enough to be in the larger end of the formal sector.

“This will soon change and the product will allow for greater participation of those currently excluded from superannuation. We have always viewed Nasfund as a “grassroots” organisation and this product fits well with that thinking.

“Nasfund is a major shareholder in Highlands Pacific Limited, Bank South Pacific Limited and New Britain Palm Oil Ltd.

Is Nasfund expecting good returns from these companies?

“I mentioned Bank South Pacific (BSP) Limited before and that frankly is another great story of the benefits of reform. BSP Limited has gone from effectively 0.65 toea to K3.50 in just over three years. Its track record post-privatisation has made it PNG’s leading blue chip company. While we see increased earnings over the next few years, we do not expect the same share price increases as previous years. You just don’t get that with mature businesses. Having said this, BSP to-date has been a nice earner with a growth and income return of around 15%.

“We own just over 5% of New Britain Palm Oil and that to us is a sleeper. I see a great future for that company, especially in the new age of sustainability and renewable resources. Highlands Pacific has been a disappointing performer this year, but early days there. Long-term, we have no reason to change our view that it will be a great little gold stock with some interesting copper and nickel exposures.”

Nasfund recently announced plans to diversify its investments further with K42 million already spent on different investments in the country. Plans are advanced for an investment in a hotel in Solomon Islands. Could you elaborate on these plans?

“You have probably heard it yourself from time to time: people saying that investment opportunities in PNG are limited. We do not share that view. As a developing country, PNG is ripe with investment opportunities. We have four solid property proposals on the table currently and we’ve just completed the purchase of 60% of DataNets, Papua New Guinea’s leading Internet service provider. Last year, we acquired 30% of City Pharmacy and through that acquisition, participated in the acquisition of PNG’s largest retail chain, Stop “N” Shop. We now have Telikom and PNG Power seeking funding for their expansion and we look forward to being part of the finance consortiums. It really is an exciting time for investment.”

Nasfund is the major unit holder with 20% of the Pacific Balanced Fund (PBF). Currently, there is a commission of inquiry underway to examine the administration of Pacific Balanced Fund. Do you wish to make any comments on this issue?

“Very simply, the Nasfund board remains determined to remove the manager of Pacific Balanced Fund (PBF), which we believe has not acted in the best interest of the 35,000 unit holders in PBF.

“This view was determined not only through the lack of audited accounts and failure to lodge tax returns, suspension of unit pricing and the attempted write-off of K37 million without explanation, but also through an independent report by an international accounting firm, which highlighted many anomalies within the management of PBF.

“The current government to its credit is also sufficiently concerned about the management of Pacific Balanced Fund under the current investment managers that a commission of inquiry is now underway. It’s the right move by the government.”

I’ve noticed that Nasfund is actively involved in social issues too, particularly the HIV/AIDS awareness campaign:

“We at Nasfund can be proud about our progressive social awareness programme, which combines corporate governance, empowerment of women, HIV Awareness, and soon, TB awareness. We have been the leading private sector advocates on these issues and this will continue. It’s part of who we are. From a philosophical view, I see no problem in this either. As a major organisation with the largest membership base in the country, we have ongoing concerns about the welfare of our members; Nasfund is not just about profit. While the overriding objective of every business of course is to make profits, modern corporations no longer operate in this vacuum and from a Melanesian viewpoint, I think making profits and social responsibility go cap in hand. And really, when you think about it, all we are doing is participating in a trend that has been evident in the developed world for sometime.

“And at the end of the day, I have a view that companies that continue to go from strength to strength have not only strong underlying philosophies, but are also guided by a moral compass.