TRANSCRIPT OF PROCEEDINGS

National Judicial Staff Services Supreme Court PO Box 7018 BOROKO. NCD PAPUA NEW GUINEA

Telephone: (675) 324 5792 10 Facsimile: (675) 325 7732

COMMISSION OF INQUIRY INTO THE SALE OF PAPUA NEW GUINEA BANKING CORPORATION

Mr Marshall Cooke, Q.C. Chairman 20 Mr Cyprian Warokra Commissioner

AT WAIGANI, THURSDAY 13 FEBRUARY 2003 AT 9.34 AM.

(Continued from 12 February 2003)

[9.34 am]30 THE CHAIRMAN: Yes?

MR VARITIMOS: Mr Chairman and commissioner, I received about six minutes ago a letter signed by the honourable Peter C Yama, MP, Leader of the People’s Labour Party from his executive officer Mr Jimmy Tine. I will seek to tender the letter but could I just indicate in summary Mr Yama has advised that he will be unable to attend to his disappointment because he has got some National Court commitment.

I have indicated to Mr Tine that he should go over and see Mr Yama at court, in the event that it does not proceed or there is some time available for Mr Yama to come here and 40 give evidence. I have also indicated to Mr Tine that the commission will be prepared to interpose Mr Yama. So, I would seek to tender the letter from Mr Yama but before I do so, I would seek to tender some other correspondence involving the honourable Peter Yama, MP.

[9.36 am] In relation to that correspondence there is a schedule that has been prepared and in fact I would seek to tender it as one exhibit. The schedule and the nine pieces of correspondences. They will be exhibit 205.

THE CHAIRMAN: Yes, that will be exhibit 205. 50 EXHIBIT 205 - SCHEDULE AND 9 PIECES OF CORRESPONDENCES

THE CHAIRMAN: Did you include in that schedule the letter of this morning’s date?

MR VARITIMOS: No, I will seek to tender that as a separate exhibit, exhibit 206.

PNGBCCOM 13/02/2003 2627 THE CHAIRMAN: Yes. That will be marked exhibit 206.

EXHIBIT 206 - LETTER DATED 13 FEBRUARY 2003

MR VARITIMOS: Could I say in relation to exhibit 205 that Mr Yama indicated by a letter of 5 December 2002 received by the commission on 16 December 2002 that he would cooperate with the commission but indicated in the letter “As you may know I was very vocal on this issue, that is the PNGBC sale and some sections of the community are against me. To that end someone broke into my Parliament office last week Tuesday 26 10 November 2002 and got classified documents including documents relating to the sale of PNGBC.

[9.38 am] Nevertheless I am arranging again from my sources and will hand them over to your commission as soon as I receive them”. I did receive a communication from Mr Yama which is part of exhibit 205, a fax of 7 February 2003 confirming that he would make himself available before the Commission of Inquiry on 13 February 2003 and that the commission office would be advised accordingly if any unfortunate events prevented him from making himself available on the agreed date, namely 13 February 2003. Exhibit 206, Mr Chairman, Commissioner you will see, says in the letter that Mr Yama was informed by 20 the National Court yesterday at 2 pm that one of his cases will be put before the trial today, that is his words, and that on Friday he has some other pre-planned programmes but I will hand that exhibit 206 to the commission. I should inform you Mr Chairman and Commissioner that I also indicated to Mr Tine the executive officer that we would appreciate a statement from Mr Yama in relation to the terms of reference. I had previously provided about three weeks ago a copy of the terms of reference to Mr Yama and requested a statement from him and copies of relevant documents that he might have but to date have not received any of that material.

[9.40 am] I have again provided to Mr Tine this morning another copy of the terms of reference, and 30 as I indicated, requested that a statement be provided by Mr Yama which deals with matters relevant to the terms of reference. So hopefully Mr Yama will be in attendance some time today. But in the event that is not forthcoming, then some other arrangements are going to have to be made.

THE CHAIRMAN: Well, 19 February is next Wednesday, is it?

MR VARITIMOS: Well, Mr Yama says he is not available before then.

THE CHAIRMAN: Until then. 40 MR VARITIMOS: So Mr Tine has agreed to contact me.

THE CHAIRMAN: Well, I suppose we will still live in hope that something might happen today, otherwise we will continue with Mr Smith.

MR VARITIMOS: I have just indicated to Mr Erik Andersen that we will require Mr Smith now. The arrangement was that Mr Smith, because of other commitments, was going to stay in his office and was going to receive a phone call in the event that Mr Yama did not turn up. So I expect that Mr Smith will probably be here in about 10 or 15 minutes. 50 THE CHAIRMAN: All right.

MR VARITIMOS: I see that we are also joined by Mr Littlemore QC again.

MR LITTLEMORE: Good morning Mr Chairman and Mr Commissioner.

THE CHAIRMAN: Good morning Mr Littlemore.

MR VARITIMOS: Could I just indicate to you, Chairman and Commissioner, that I have 60 spoken to my learned friend Mr Littlemore further to a conversation that I had with his instructing lawyer, Mr Lowing, yesterday, and also I have spoken to Mr Erik Andersen, first of all in relation to Mr Littlemore and his client’s interest. I have indicated subject to you Mr Chairman and Commissioner having no objection, I would not have any objection to Mr Littlemore asking Mr Smith some questions prior to the close of proceedings tomorrow.

PNGBCCOM 13/02/2003 2628

[9.42 am] I understand Mr Littlemore has some commitments tomorrow afternoon effectively so any questions would need to be asked before lunch time tomorrow. I understand that there will not be particularly many questions, but Mr Littlemore can give some estimate of how long he thinks he might take so I can allow sufficient time for Mr Littlemore. Perhaps he might even ask the questions this afternoon. Mr Erik Andersen is in a similar position and I have indicated again that subject to you Mr Chairman and the Commissioner having no objection I have no objection to Mr Erik Andersen having the opportunity of similarly asking some questions of Mr Smith. In fact prior to my finishing examination of Mr Smith. 10 MR LITTLEMORE: I am grateful to my learned friend. I should not be half an hour. I should be less, but I should think something between 20 minutes and half an hour if that meets with the commission’s convenience.

THE CHAIRMAN: Yes, well we will see how things progress today.

MR LITTLEMORE: Thank you, Mr Chairman.

THE CHAIRMAN: And possibly tomorrow morning, all things be equal at 9.30. 20 MR LITTLEMORE: Which they never are.

THE CHAIRMAN: No.

MR ANDERSEN: If I can inform the commission, I have just spoken to Mr Smith he is of course rather expecting to come, he will be here in say half an hour. He is just in the middle of another task and he will finish that then he will be here. In relation to the question of the time that I would be likely to take in re-examining Mr Smith at this stage I would doubt if I would be very long much more than half an hour. And it may well be 30 indeed that as time progresses say for the next one working day it maybe that some of the questions that I currently have will be disposed of anyway. So I am not expecting to be long.

THE CHAIRMAN: The problem we have with your interest though is that it may not - all the evidence may not be finished before you ask your questions.

MR ANDERSEN: Well, that is true. Up to this point I mean I have to say I think we have been dealing with fairly marginally relevant matters. And there is really not much that has emerged. I am rather keen if we can get onto those sort of meaty things if that is 40 possible. But the way it is panning out present I do not perceive that I really have a lot more to re-examine on.

[10.02 am] MR VARITIMOS: Mr Chairman, commissioner, you have that exhibit 206 from Mr Yama indicating that he had some court commitments, I do not have that now, and was unable to attend this morning. Could I just have a look at that please?

The letter provided by Mr Yama of 13 February 2003 exhibit 206 received at 9.25 am this morning said, “I refer to my letter of 6 February 2003 regarding the above and my availability to give my statement to the commission today, 13 February 2003. To my 50 disappointment I was informed by the National Court yesterday, Tuesday 12/02/2003 at 2 pm that that one of my cases will be put before the trial today. Tomorrow Friday, I have other pre-planned programs et cetera.” He goes on to say, Mr Yama, in the letter, “As much as I want to give my information to your commission I am physically unable to today and up till 19 February 2003.”

Could I just inform you Mr Chairman and commissioner that one of the counsel assisting and Mr Andersen have gone over to the court this morning, and I understand that Mr Yama is not there. And according to the law list there is a matter involving Mr Yama or one of his companies in the motions list to commence at 1.30 this afternoon. But there is in fact 60 nothing on the law list as I am instructed to suggest that Mr Yama has any court commitments this morning. I just wish to inform you Mr Chairman and commissioner of that position.

THE CHAIRMAN: Have you got a contact telephone number for him?

PNGBCCOM 13/02/2003 2629

MR VARITIMOS: I do have a number. We can try and ring that again now. I have been attempting to ring that number for two weeks and it is always busy or not working. I raised that with Mr Tine, Mr Yama’s executive officer this morning to see if I could have another number and he said that is the only number.

[10.05 am] So I will get one of the counsel assisting to try and ring Mr Yama on that number and see if we can make contact. As I indicated earlier Mr Chairman, commissioner, I did say to Mr Tine the executive officer to bring Mr Yama here if proceedings were going to be adjourned 10 over at court and Mr Tine indicated to me that he was going straight to court.

THE CHAIRMAN: He might have found out by now that it is not on this morning.

[10.18 am] MR VARITIMOS: Mr Chairman and commissioner, Mr Kilepak counsel assisting, has attempted to contact Mr Yama. He has telephoned a number of telephone numbers. He managed to contact Mr Tine, the executive officer, who indicated in substance he did not know where Mr Yama was but would try and locate him and if he did, he would bring him straight over. So, that is where we stand with Mr Yama. And I have had confirmed again that Mr Yama’s case was not and is not listed this morning but is listed for 1.30 this 20 afternoon. And Mr Kilepak has also contacted his lawyers who are representing him and they do not know where he is either apparently.

[10.25 am] NOEL RAYMOND SMITH, recalled:

XN: MR VARITIMOS

Q: Good morning Mr Smith. Are you ready now, Mr Smith?

30 A: Yes.

Q: You had some homework to do last night, Mr Smith. We might just go through to see what you managed to achieve. I see that you have got some videos there.

A: Yes, I have got two videos, the ones we discussed yesterday, one from me and one from the various general managers. Also a CD ROM of my video and a hard copy of my actual statement. In regard to- - -

Q: Sorry, we will just deal with one thing at a time, Mr Smith. 40 A: Okay.

Q: The hard copy, that is a transcript of the video tape involving yourself?

A: Indeed, yes.

Q: Is that correct.

A: That is right. 50 Q: And you have got a CD which is effectively containing the same material as the video. Is that correct?

A: That is correct.

Q: I seek to tender the two video tapes.

THE CHAIRMAN: That will be exhibit 207.

60 MR VARITIMOS: If it suits you, Mr Chairman and Commissioner, I seek to also make the CD and the transcript of that video tape as part of that exhibit.

THE CHAIRMAN: Part of exhibit. All right, well, they will all be marked exhibit 207.

PNGBCCOM 13/02/2003 2630 EXHIBIT 207 - TWO VIDEO TAPES, CD AND TRANSCRIPT OF THE VIDEO TAPE

[10.27 am] MR VARITIMOS: The second piece of material that you may have there.

A: Do you want more copies of that message to the hard copy?

Q: If you have a spare copy, yes, thank you.

A: I do. 10 Q: Mr Smith, do you know whether there was any transcription of the other video tape?

A: No, it was a relatively short contribution from each of the general managers and I did a brief wrap up and I do not have it available to me but I could obtain them if you require them. I am not sure from where but our marketing department may have copies of the actual statements.

Q: If you do not mind making inquiries. If it is too difficult, do not worry about it but 20 make some inquiries so if you do not mind adding that to your list. The second thing is in relation to the dinner that you had at the Southwell’s residence. Mr and Mrs Southwell, Mr and Mrs McIlwain, Mr and Mrs Wardley and yourself and your wife. You have since determined that that is 19 September or that was 19 September 2001, is that correct?

[10.30 am] A: I think that was 19 October.

Q: Well, I will show you your diary again.

30 A: I must have inadvertently transposed that to 19 October on the chronology list because it shows there that I had dinner under a reference to Dan Kakaraya, a meeting with Dan Kakaraya.

Q: But the reference in exhibit 199 to the Dan Kakaraya meeting that was 19 September?

A: September, was it?

Q: Yes, not October. 40 A: Oh, okay. So you are correct.

Q: And you have just seen your diary of 2001 and it does in fact have the dinner as occurring at the Southwells on 19 September which was a Wednesday evening at 7.30?

A: That is correct.

Q: The next piece of homework you were attending to was attempting to prepare 50 some schedules in relation to cash deposits of BSP and PNGBC pre-amalgamation and BSP at the date of amalgamation and now. Have you had any luck with that?

A: We are working on those and I should be able to produce them to you tomorrow morning. The problem there is we are still running two systems IBS and ICBS and we have had to go back and get that information. So I am confident of being able to supply that tomorrow morning.

Q: Now, the current accounts not bearing interest at this point in time was approximately 430 million not 43 million. Is that correct? 60 A: That is correct.

PNGBCCOM 13/02/2003 2631 [10.32 am] Q: It was the case that at the end of 2001 and just prior to amalgamation, BSP’s current accounts not bearing interest was K85 million but in fact now under the amalgamated entity it is K430 million not K43 million?

A: Yes. The K430 million came from a figure probably at the end of a quarter, I did check up on the liquidity position as at last night and the figure was around 413 but it does change significantly day to day.

Q: Now the next item you were seeking to attend to was preparing a schedule or 10 schedules in relation to the amount that could have been bid if the capital adequacy was going to be 10 percent, 11 percent or 14 percent, have you had any luck with that?

A: That calculation is proving to be difficult. I did email Deloitte Touche Tohmatsu in Sydney, I have not had a response from them. I think to achieve that figure, they are going to have to re-run the model but our staff in Finance and Planning are working on it at the moment and they have constructed the CAR as required. But we are having a little bit of difficulty coming to terms with the request but I believe I will be able to tender that for you tomorrow morning or so. 20 Q: All right, thank you. The third aspect was in relation to the cooperation of Deloittes and you will recall that I raised the fact that Deloittes had indicated without your or BSP’s consent they would not provide any documents or statements and you indicated yesterday that you had spoken to Deloittes and indicated that BSP’s consent was forthcoming. You recall that?

[10.35 am] A: Yes.

Q: And, you were waiting to hear from Deloittes. Have you heard whether Deloittes 30 will now cooperate by, for example, providing a statement, provision of documents, and in fact potentially giving evidence or one of the members giving evidence to the commission?

A: Unfortunately, I have not been able to speak to Graeme Reid. I spoke Don Manifold, but he was not aware whether Graeme had gone before the committee. But, I will undertake to make contact again today, later today, and see if I can give you a definitive response tomorrow morning.

Q: The fourth aspect was the issue of fees payable to Gadens regarding their having 40 acted for BSP in relation to the bid. Did you have any success with that?

A: That is difficult. I did have a look at my records, and we did not actually come to a specific agreement because of the moving nature of the process. I did speak to Gadens, and they agreed that it was charged out on a normal fee basis and there was not actually a figure agreed.

It was the subject of some discussion with Gadens and that is why it did not appear as a specific agreement early because we had not agreed.

50 We talked about a possible ceiling figure of an amount per month which was in fact in the very early days, from memory, I think it was AUD$110,000. But, then, it was pointed out to me that the impetus of Gadens’ work was clearly going to increase sharply if the bid was won because they would be heavily involved in preparation of documentation right up to settlement.

So, that was the reason why we did not arrive at a figure. I just accepted that being the credible firm they are, that we would accept their normal billing on what is probably an hourly basis.

[10.37 am]60 Q: As matters transpired can you give us some estimate of what it cost BSP in relation to the engagement of Gadens regarding their having acted for BSP in relation to the bid?

PNGBCCOM 13/02/2003 2632 A: Right. I have not been able to obtain that but I will undertake to ring our finance and planning department at lunch time and they should be able to provide that information from their general ledger which should identify it under a separate entity. So I should be able to provide that for you tomorrow morning also.

Q: Are you ready now, Mr Smith?

A: Yes.

10 Q: Mr Smith, in relation to the information memorandum of 19 October 2001, which is exhibit 12 volume 1 document 21, you have all the volumes in front of you there, is that correct, Mr Smith?

[10.39 am] A: Yes. You said volume one?

Q: Volume one, information memorandum of 19 October 2001, document 21, paragraph 2.1.2 under the heading “strategy” typed page number 5?

A: Yes, I have that. 20 Q: There is a reference to this under strategy. BSP’s underlying strategy represents (a) and then the words “flight to quality” which is the prudential philosophy in the current depressed economic environment, you see that?

A: Correct?

Q: Now, you have indicated that you had input into the information memorandum, is that correct?

30 A: That is correct.

Q: And I take it that it went through a number of drafts?

A: Yes, it did.

Q: And you were involved in the process of preparing the drafts or settling the drafts, is that correct?

A: Yes. 40 Q: And you effectively signed off on the information memorandum before it was distributed to potential investors?

A: Correct.

Q: Now, the reference “flight to quality”, were they your words or someone else’s words?

A: I have used that terminology previously. It is a terminology that is not uncommon 50 when you are talking about a re-direction of a strategy and where there is a perception that there is an inferior quality and a need to improve that level of quality and I felt that that was not an unreasonable statement given the reputation that BSP had for quality assets which did not necessarily occur in PNGBC.

[10.41 am] Q: Well, the reference to flight to quality - - -

THE CHAIRMAN: Is that flight as in a bird’s flight rather than flight as in a defeated enemy’s flight? What in fact is meant by the flight to quality?

60 MR VARITIMOS: What do you mean precisely by flight to quality?

A: In my view, we would be looking with some degree of urgency in changing that and it would be a fast pursuit, it would be - we would be flying towards a goal. And one of the priorities would be to come to grips with this problem loan book

PNGBCCOM 13/02/2003 2633 and to impose the skills that BSP had in that area on the situation which existed in PNGBC.

Q: So, that was not intended to be a reference to buying a quality asset?

A: It was a reference to using our most expeditious method possible to turn a potentially strong asset into a high quality asset.

[10.43 am] Q: That is turn BSP into a high quality asset by amongst other things the acquisition 10 of PNGBC?

A: Yes. After acquisition of PNGBC. That is to say we would not want to be dilatory about our attempts to change what existed in PNGBC because clearly the crux of a business is to generate income from assets. And as you would be probably aware there was about K130 million worth of non performing loans. So since the first day we had access to the asset management area of the former PNGBC we have indeed been trying to achieve a flight to quality.

Q: Now, in exhibit 12, volume 4, document 80 - you do not necessarily have to get 20 this out. I will just refer you to it. It is in fact your address which you gave on 15 November at the Holiday Inn to the Papua New Guinea Institute of Accountants. You are familiar with that address?

A: Yes.

Q: And you indicated that the oral address that you gave was the same as the typed version that is an exhibit?

A: Yes. 30 Q: Now, on page 16 of that address, the typed version of the address, you said this. “Before going on to the bid structure, I have to point out that whilst there were problems in executive management decision making in the late ‘90s at PNGBC, this did not detract from the inherent value of its business in terms of its extensive branch network, its large electronic card base, its huge and valued customer base and a mature and experienced staff.” You recall saying that?

[10.45 am] A: Absolutely and I think we referred to that yesterday.

40 Q: And they were matters that those benefits or inherent value was a matter that you would have recognised well prior to submitting the bid?

A: We did deduce quite an amount of information from our due diligence in respect to the staff numbers and obviously I looked at a lot of files and I was particularly interested in the contracts that existed and the reports on performance and that sort of thing. And it was not until August that I sat down and spoke to Tony Westaway about his perception of the quality of people. And Tony Westaway was very much of the view that PNGBC had been somewhat unreasonably maligned and their reputation may not have been as good as it could have been for reasons 50 that did not really relate to the general staff performance.

The poor reputation, if I can be as bold to call it that, related to the mismanagement at the top of PNGBC, not the general staff performance. So, I became quite pleased about the fact that it was looking as though there was going to be more inherent value in what we were looking at, and indeed that is exactly what has transpired.

[10.47 am] Q: When you talk about inherent value, you are talking about or what do you distinguish between inherent value and simply value of its business? 60 A: Well, when you are talking value, you are talking about something that is more tangible and may be as being measured or this is my own opinion whereas there is some underlying value that may not necessarily be obvious, maybe it is a little bit more intangible and we are talking about the quality of people, their ability to

PNGBCCOM 13/02/2003 2634 contribute to the goals; whether there is good enough leadership to extract that value and whether the administration are of the mind that they have an obligation to ensure that people reach their potential. And if I can just give you an example. I was talking to our staff at Tabubil Branch recently and I said to them, you should all aspire to management and it is really important that we get feed back from our staff about what we are doing, how we can do it better because we now have two thousand people working for the bank and that is a huge store of knowledge and skills which we have not necessarily exploited in the past. I think the banks by and large tend to make decisions at the top and it is very much a top down 10 arrangement which is wrong. In BSP we have gone out of our way to try and introduce a bottom up planning process for example and try and get the involvement of staff through the management line and get them to contribute to the strategic decisions that are made at the top.

[10.49 am] That is a long winded answer but what I am trying to say is that it just seemed to me from what Tony was saying to us from looking at the files and having had some knowledge and contact with quite a number of PNGBC staff over the previous decade, that maybe here was some underlying value that had not been recognised by people and may not be recognised by the competitors who are bidding. And in 20 fact that is exactly as it turned out.

Q: Well, that underlying value is effectively value that you had put on the business which was not necessarily evident from simply looking at the profit and loss statements of the bank.

A: Absolutely and that is what the building of the model was all about. Building the model was simply a combination of the ideas of people and trying to identify the synergies and placing a value on those synergies. So it was - simply to identify the benefits, the positives and the negatives and feed all that information in, do 30 some what ifs, come up with some scenarios and see what the bottom line looked like.

Q: But even I suggest before lodging the expression of interest in August 2001, you would have been obviously aware from your banking experience particularly in Papua New Guinea that the PNGBC had this inherent value.

[10.50 am] A: As I said in earlier evidence I had not actually set my mind to think about that concept. If I had I may have - I would have identified that, I am sure. Because I have had a lot of dealings with a lot of people and you do build a view and I 40 certainly had a view about the quality of some people and the lesser quality of others.

Q: Well, you went on to say BSP recognised these key factors in assessing a potential value of the bank’s business. Do you recall saying that?

A: Yes.

Q: So when you were determining what the value of the business, i.e. PNGBC business was you looked not just at the profit and loss accounts and balance 50 sheets?

A: Definitely not because if I had have done that I would have drawn the conclusion that the business was not worth anything.

Q: And you looked at all these other factors which you were quite well aware would properly run drastically increase the profitability of the business?

[10.51 am] A: Yes, that is indeed correct in as much as part of the process of assigning a value to the PNGBC business which was not easy given the previous loss performance, 60 substantial loss performance and the low net asset position. What in fact we did as part of the valuation approach was to value BSP as a stand alone entity and then value BSP and PNGBC as a combined entity and identify the difference which had to then be the value we were applying to the synergistic benefits and that was a major part of the, well, that really got to the heart of the valuation. And maybe

PNGBCCOM 13/02/2003 2635 some people would say that that is probably not the best way to do it. Maybe others would say that is why you have paid far more than what the other bidders paid because you used a very subjective approach and maybe that is right. But that is exactly how we came up with the price. It was that synergistic value of K80 million plus the non core assets.

[10.53 am] Q: Well, what you are effectively saying is you looked at BSP pre-amalgamation and you looked at profits and the business that the entity had, is that correct?

10 A: Yes.

Q: You looked at the entire network of BSP pre-amalgamation, is that correct?

A: Yes.

Q: You then looked at the fact that if you acquired PNGBC what extra benefits that would give to BSP?

A: Yes. 20 Q: And one of those benefits that you indicated yesterday which was critical was the benefit of the low cash deposit base?

A: Low cost deposit base, yes.

Q: Deposit base, sorry?

A: Absolutely.

30 Q: And as we indicated this morning or you indicated this morning, pre- amalgamation, it was K85 million approximately that BSP had that were not earning any interest on deposits, that is correct?

A: We were not paying.

Q: Paying any interest?

A: Yes, that is right.

40 Q: Were not earning any interest to customers?

A: Yes, correct.

Q: And then it went to?

A: 430 million.

Q: K430?

50 A: Yes.

Q: After amalgamation?

A: Yes. That is correct and I went on to say that that is the very reason why the interest spread in the amalgamated bank is roughly 30 per cent higher than the interest spread in the former BSP and that enables us to be highly competitive with our lending rates today which is reflected in the indicator lending rate of BSP being one and three quarter per cent below ANZ and 1.65 per cent below Westpac.

[10.55 a60m] Q: Now, you went on to say after having mentioned in your address BSP recognised these key factors in assessing a potential value of the bank’s business. You went on immediately to say for some obscure reason the other bidders did not. Is that intended to be a suggestion that the other bidders did not bid as much as perhaps they should have?

PNGBCCOM 13/02/2003 2636

A: Absolutely.

Q: So in terms of- - -

THE CHAIRMAN: Looked to be a one horse race, was it, as it turned out?

A: Well, I wish I would have known that before we put in our bid. At the end of the day, it was. We were 100 million more than the next bid. But I am not concerned 10 about that. I believe there is that inherent value and history is now showing from performance that it seemed to be now, in hindsight, although the amount was so much higher than the other bidders, I think it was a fair and equitable price we paid. But I hasten to add that it was not my role to identify what was fair and equitable. It was my role to buy the bank as cheaply as possible. It was the role of KPMG/Peat Marwick who were the advisers to the privatisation commission to determine whether BSP’s bid was fair and equitable or not.

[10.56 am] MR VARITIMOS: Well, now having gone down the track and having operated the businesses under the amalgamated system, I take it that you are very satisfied with 20 having proceeded with the bid and succeeded?

A: Absolutely, yes.

Q: You have no regrets at all in relation to the bid and the success of the bid?

A: Absolutely not. I am very proud of what the staff is achieving and I know that the shareholders are going to be pleased with the return they will get on their investment. And hopefully over time the government will concede that a good thing has occurred. 30 Q: But certainly from a business point of view, you are absolutely confident that the correct business decision was made by the BSP Board and yourself to bid for the bank?

A: Well, it is easy to say that in hindsight but I think we have both agreed that it was a very big ask at the time and we were dependent on two key factors and that was that the Privatisation Commission would accept a non conforming bid. And that the Central Bank would have the confidence in the management of the bank to overcome what we perceived would be a very short term capital adequacy position 40 that did not meet the prudential guideline at the time.

Q: But now having had the benefit of going down the track for now some months, I take it that in your mind, you are satisfied that BSP did not bid too much money for the interest in PNGBC?

[10.58 am] A: No, I am very comfortable about the fact that we paid that price because the results we are achieving now justifies that price but I will go back to what I said yesterday. I am disappointed that the advisers to the Privatisation Commission took advantage of the situation to eke out another 18.8 million from BSP that 50 clearly was difficult to justify. I felt that it was almost unprofessional to ask for revised bids when ANZ for example had six or seven months to put their bid together and BSP as we know was late on the scene and hastily put its bid together. And as we were 100 million in front of ANZ I suggest that it was somewhat unprofessional for KPMG to ask for a revision of bids. It was purely an attempt to ratchet up the price and I thought that was pretty unfair.

Q: What in fact happened was bids were supposed to be lodged I think on 9 November, is that correct, 2001?

60 A: That is correct.

Q: And then as matters transpired ANZ wanted a very short extension?

A: To Tuesday, the 13th.

PNGBCCOM 13/02/2003 2637

Q: And you were notified of that before lodging the bid?

A: I actually had the bids under my arm and I was walking out the door. It was 20 to 12 on the morning of 9 November.

COMMISSIONER WAROKRA: Counsel whilst you are on the point of the PNGBC business, with the various inherent value of PNGBC that you have identified do you not think you have actually paid less than what PNGBC was actually worth? I am saying you have not 10 paid a fair price for the bank, PNGBC?

[11.00 am] A: Commissioner, I believe that we did pay a fair price. You have to remember that BSP introduced significant management skills into the organisation which did not previously exist.

MR VARITIMOS: Mr McIlwain was turning the business around no doubt?

A: Yes, I agree.

20 Q: And he made a significant improvement Mr McIlwain during his chairmanship of the bank?

A: That is correct.

THE CHAIRMAN: If the bank was meeting the prudential standards at the time of sale obviously it would command a better price, would it not?

A: Yes.

30 Q: And if it had sustained profits over a couple of years that price would improve even more?

A: Yes, I agree Mr Chairman. In fact, I venture to say that if the sale had have been deferred for another two years BSP would not have been able to afford to acquire PNGBC.

Q: So that is a decision really which the Privatisation Commission and its advisers could have taken in view of the lack of interest from overseas banks and the position being that the PNGBC would return to profitability and meet the prudential 40 standards by the end of 2002?

A: That is not an unreasonable view.

[11.02 am] MR VARITIMOS: In terms of BSP being able to afford to acquire the interest in PNGBC, you indicated in substance as I understand it that if a couple of years had passed, BSP would not have been able to afford to buy the bank, you recall saying that?

A: Yes.

50 Q: Because obviously BSP would have had to have paid a lot more money if the bank returned to a capital adequacy ratio of for example 10 or 11 percent?

A: That is correct.

Q: And as matters transpired, I suggest that it is correct to contend or put to you that when BSP in fact lodged its bid, it was effectively stretched in terms of the capital that it would offer?

A: Yes that is correct. 60 Q: Because the position was when BSP lodged its bid, it was aware that the amalgamated entity if the bid was successful would trade at a capital adequacy ratio well below the prudential standard?

PNGBCCOM 13/02/2003 2638 A: That is correct.

Q: And as I understand it, it was a Deloitte strategy to remove the non core banking assets from the purchase, is that correct?

A: That is correct.

Q: And you thought that that was a good strategy?

10 A: Yes.

Q: Because what that did I suggest is to reduce the amount of cash that BSP had to first of all raise and then submit as part of the bid for the purchase price?

A: That is exactly the case.

[11.05 am] Q: So I think it was your words yesterday that you were aware that BSP would have to obtain a truck load of money.

20 A: That is right.

Q: That is, you were referring to the fact that you were aware that if BSP was going to be successful for this bid, it would need to obtain from other sources a huge amount of cash. Is that correct?

A: That is right.

Q: But even with the benefit of going around and obtaining other investors, ie. NPF it was still the case that to lodge a credible bid it was necessary to subtract 30 effectively the non-core banking assets from the purchase of the bank.

A: That is correct.

Q: So of course if the bank had been allowed to return, that is PNGBC, had been allowed to return to a proper capital adequacy ratio, that is 11 percent or more the bank PNGBC would obviously have been worth a lot more money.

A: That is correct.

40 Q: And effectively that would have put BSP in a position that it could not have successfully lodged a credible bid, a successful bid?

[11.06 am] A: That is so on the basis that we did not seek outside assistance or equity from a foreign investor for example.

Q: But BSP proceeded on the basis that just prior to the amalgamation PNGBC had a capital adequacy ratio of zero but as matters transpire, it appears to have improved. You are aware of it now?

50 A: Yes.

Q: But it was still very much below the prudent percentage which had been set by the Central Bank pursuant to the prudential standard.

A: That is correct, Mr Varitimos. I have got an idea though that by the time we got to the end of 2001 the capital adequacy would have been restored. When you refer to zero, I know it was zero at some time but I think by the time we got to the end of 2001 which is really not long after the bid and it was four months before the settlement, I think the capital adequacy was probably starting to get into a more 60 reasonable shape.

Q: I will just give you the figures now, exhibit 103, 105 and 107 which someone is just finding for me.

PNGBCCOM 13/02/2003 2639 THE CHAIRMAN: Your advisers Deloittes in one of the submissions, in one of the reports that they made to you they reported the fact that the bank had returned to profitability. And Mr Tony Taylor had forecast that it was going to meet the prudential standards by the end of 2002. You knew that before you put your bid in I suggest to you because it was in the Deloittes report.

[11.08 am] A: Yes, I cannot specifically remember focussing on that as a major item because I guess I felt that the whole strategy of the bank was going to change. What we had to worry about first was being successful with the bid but it would probably 10 would have been an encouraging factor.

Q: I think we are going to come to the specific matters pretty soon, are we not?

MR VARITIMOS: Yes. Exhibit 103 indicates PNGBC had a capital adequacy ratio in March 2001 of 1.5 per cent, June 2001 0.23 per cent, September 2001 -0.02 per cent, December 2001 1.49 per cent, and March 2002 5.74 per cent. Now, they are figures that were obtained from the Central Bank. Ms Gima actually, I think produced that exhibit.

A: So, yes that certainly confirms what you have said. 20 Q: Now, of course, the question of future profitability of the bank would have depended on who the management was. If Mr McIlwain went and was replaced by someone else that may have impacted on the price down the track.

A: That is correct.

Q: Could I just take you to exhibit 150 and 151 which are five year historicals of both BSP and PNGBC and I will give you a copy. I have a copy that I can hand up to the commissioners. Do you have your calculator there? 30 [11.10 am] A: Yes I do.

Q: Do you have exhibit 150 and 151 in front of you?

A: Yes.

Q: Exhibit 150 is the historical financial performance of BSP, years 1995 to 2001. Do you see that?

40 A: Yes.

Q: And exhibit 151 is the five year financial summary of PNGBC 1997 to 2001. Do you have that?

A: Yes.

Q: Now, in terms of BSP, if we just look at the operating income, there was a progressive improvement at least between 1995 and 2000 of the operating income. Do you see that? 50 A: Yes.

Q: The operating income in 1995 was 29,631,000?

A: Correct.

Q: 1996, 40,466,000.

A: Correct. 60 Q: Do you see that?

A: Yes.

PNGBCCOM 13/02/2003 2640 Q: Although it went down in 1997, 34,897?

A: Yes.

Q: And was 65,685,000 in 1998?

A: Correct.

Q: 82,606,000 in 1999? 10 A: Yes.

Q: And 86,615,000 in 2000?

A: Correct.

Q: And 83,315,000 in 2001?

A: Correct. 20 Q: Now that would support your statement that you indicated yesterday that BSP had reached a watershed?

A: That is correct.

[11.13 am] Q: There appeared between 1999 and 2001 to effectively be little or no growth in operating income?

A: Yes, that is right. 30 Q: In terms of operating profit after tax could I suggest to you that in 2001 there was operating profit after tax of K18,971,000?

A: Correct.

Q: And that that figure represents about 22.8 per cent of the operating income?

A: Yes, that will be right.

40 Q: And in relation to operating income for 2000 against the operating profit after tax that that figure represents about 18 per cent?

A: This is for 2000?

Q: For 2000?

A: 18.07.

Q: Yes. And for 1999 the operating profit after tax was 19,570,000 which I suggest 50 represents a percentage of 23.7 per cent?

[11.14 am] A: That is correct.

Q: In 1998, the operating profit after tax was 14,146,000 which represents 21.5 percent?

A: That is also correct.

Q: Now, if we then turn to exhibit 151 and we will deal with 1998 first. I suggest that 60 the total income of PNGBC in 1998 was K205,938,000 which is represented by the interest income plus the non interest income?

A: How much is that figure again?

PNGBCCOM 13/02/2003 2641 Q: 205,983,000. Well, first of all do you agree that to determine that figure, one has to look at the interest income and add the non interest income?

A: That is correct. Which is 9.28.

[11.15 am] Q: Yes. 9.3 percent approximately. That is you agree that the total income in 1998 of PNGBC was 205,983,000?

A: Yes, that is right. 10 Q: And the profit after tax that year was 19,135,000?

A: Correct.

Q: Which represents 9.3 percent?

A: Correct.

Q: Now, in 1998 the operating income of BSP was 65,685,000? 20 A: Yes.

Q: See that. In comparison to the operating income of PNGBC of nearly K206,000,000. See that?

A: Yes.

Q: Yet the operating profit after tax with BSP in 1998 was just over K14,000,000, see that? 30 A: Yes.

Q: Against an operating income of about 65 and a half million kina?

A: That is right.

Q: Yet PNGBC in 1998 with an operating income of about 206 million only made a profit after tax of about 19 million as against BSP’s operating profit after tax of about 14 million. You see that? 40 A: Yes, yes.

[11.16 am] Q: Now, just to do the exercise if one in fact looks at 1997 on exhibit 151 the total income of PNGBC that year I suggest was 127,806,000 dollars and the profit after tax was 20,363,000 dollars which I suggest represents a percentage of 15.9 per cent?

A: That is correct.

50 Q: Now, one will see that in 1997 on a operating income of 127 million as against an operating income in 1998 for the bank of PNGBC of 206 million that the profit after tax was in fact more in 1997 for PNGBC than the profit after tax in 1998 for PNGBC?

A: That is correct.

Q: Now, in 1999 I suggest that PNGBC made a staggering income, operating income of K256,010,000.00. Do you agree with that?

60 A: That is right.

Q: Yet the profit after tax was only K5,178,000?

A: That is right.

PNGBCCOM 13/02/2003 2642

[11.18 am] Q: Which represents, I think you will see, 2 per cent?

A: That is right.

Q: In the year 2000, PNGBC made, I suggest, an income of 209,256,000. See that?

A: Yes.

10 Q: Yet it made a loss of nearly K31,000,000?

A: That is correct.

Q: In 2001, PNGBC made an income of 194,127,000. You accept that?

A: Yes.

Q: But made a profit of only 18,227,000?

20 A: That is right.

Q: Which represents a percentage of profit after tax as against income of about 9.38 per cent?

A: Correct.

Q: Could I suggest to you that there were enormous economies of scale available to BSP in acquiring PNGBC?

30 A: Yes, that is right.

Q: And, properly run, I suggest, the amalgamated entity should be making a percentage of profit after tax as against operating income of well in excess of 22 per cent?

[11.20 am] A: That is right.

Q: Because BSP had historically from 1998 on a much smaller operating income been making these figures I suggest as a percentage of operating profit after tax as 40 against income. In 1997 16.7 percent but only on an operating income of K35 million but in 1998 following the percentage was this 21.5 percent, 23.7 percent in 1999, 18.07 percent in 2000 and 22.8 percent in 2001, you agree with that?

A: Correct.

Q: Now given your banking experience and now having worked under the amalgamated system, properly run and managed, what percentage of operating profit after tax as against operating income should the bank, the amalgamated bank expect to achieve? 50 [11.21 am] A: That depends on the situation relative to the economic conditions that existed etcetera, etcetera, etcetera but I would be disappointed if were not able achieve a figure of over 20 percent. I mean it is quite obvious what the influencing factors are. That stands out like a beacon. And that at the end of the day I guess was one of the reasons that gave us some encouragement to bid when we sat down and started looking at these figures and I had not ever done that before. It is quite obvious as I think you are suggesting that if the bank was prudently managed that the returns would be significantly higher. And it is quite obvious from looking at these figures that they were not as high as they should have been 60 because of the inherent problems in that very sharp increase in the net loans and advances in the period of 1998 where an extraordinary growth had been achieved and then it really came home to roost in the year 2000 when all of those write offs had to occur to as it were clear the decks.

PNGBCCOM 13/02/2003 2643 [11.23 am] Q: Well, could I suggest to you that it is not appropriate to necessarily look at a particular year and blame the management for that particular year for the poor result because a write off can occur because of bad loans effectively being written earlier?

A: Yes, that is correct.

Q: But certainly exhibit 151 gives you some trend, I suggest?

10 A: Yes.

Q: Now, given your banking experience, could you answer this question. Had PNGBC been properly managed during that period 1997 to 2001, would it be your opinion that the percentage of profit after tax as against income generated by PNGBC should have exceeded consistently 20 percent?

A: Yes, I agree.

Q: Because, could I suggest that given the size of PNGBC and the benefits that you 20 have indicated yesterday including the large network, if one takes that into account, could I suggest to you that properly managed PNGBC should generally have been obtaining a percentage of operating profit after tax for a particular year at a higher percentage than that achieved by BSP for that same year?

[11.25 am] A: Yes, that is a fair comment.

Q: Because it is correct to say that economic factors obviously influence the profitability of the bank from one period to another, do you agree with that?

30 A: Yes.

Q: But in terms of doing a comparison, do you agree that it is a fairly credible exercise to compare the performance of BSP in a particular year as against the performance of PNGBC in a particular year?

A: Yes.

Q: If we look at these figures, exhibit 150 and 151, you will see Mr Smith that in exhibit 151 1999 year the income of the bank was about 256 million going to 209 40 million in 2000 approximately and to about 194 million in 2001, do you see that?

A: Yes.

Q: Now, you were aware that the bank under Mr McIlwain’s chairmanship was being more cautious on the loans it was approving?

A: That is right.

[11.27 am] Q: And you were aware that there was an attempt to increase the quality of the loan 50 book during Mr McIlwain’s period?

A: That is correct.

Q: And that in part could be the reason for the total income decreasing?

A: Definitely.

Q: But, it also, I suggest, could be a reason for the bank turning into profit in 2001 as opposed to a loss in 2000? 60 A: That is correct. And there also is a very important factor there in terms of the non-interest income and I believe that that would relate to the operations of the foreign exchange market. And that is a key consideration too, because there would be a huge variance between the capacity for BSP for example to generate

PNGBCCOM 13/02/2003 2644 that sort of non-interest income compared to PNGBC because of the very nature of the business of the company, that it had more exporters and an ability to operate in the foreign market whereas BSP was quite vulnerable to the players.

[11.29 am] Q: Now if we then could try and do an assessment of both exhibit 150 and 151, could I make some suggestions to you, to see if you agree with them. BSP would have been confident I suggest on amalgamation of holding its existing clients and customers.

10 A: Yes.

Q: And could I suggest that the PNGBC customers had significant loyalty to PNGBC?

A: Yes.

Q: And in fact in many parts of PNG the only bank in the locality was PNGBC.

A: That is correct.

20 Q: So by default they obtained clients.

A: That is right.

Q: Could I suggest this that on amalgamation, when you say, did this assessment of the viability of purchasing PNGBC and before you lodged your bid I suggest that you would have been confident that the operating income or in determining the operating income of the new entity one could project that it was likely to be around the combination of the 2001 figure of BSP of about K83 million and the total K194 million for PNGBC. 30 [11.30 am] A: Yes, I agree with that.

Q: Which would have meant that in your mind you had projected that the likely operating income of the amalgamated entity was going to be approximately K277 million?

A: Correct.

Q: And, could I suggest that that projection that you had made was likely to occur in 40 the first year of operation?

A: Correct.

Q: Now, if one then uses the percentage of operating profit after tax against operating income of 20 per cent, one will then see that that arrives at a profit after tax of about K55 million. Do you agree with that?

A: That is right.

50 Q: And, if one was to use 25 per cent because of the benefit of economies of scale, could you just indicate what that percentage is on K277 million?

[11.31 pm] A: 69 and a quarter million.

Q: That is net profit after tax?

A: That is correct.

Q: And could I suggest that you were fairly confident before lodging the bid in 60 November 2001 that the amalgamated bank could achieve a net profit after tax in the first year of about 63 million?

A: No, we did not get to a figure much like that in fact. I mean, there were a number of issues that were going to impact on the results in the first year.

PNGBCCOM 13/02/2003 2645

Q: Well, those issues would have been capital expenditure I suggest in relation to upgrading the computers, et cetera. Is that what you are referring to?

A: No, not necessarily. For example, we identified that there was additional provisioning of 10.8 million which would have to be included. And we were very much aware of the increasing focus by the Central Bank on the guidelines for ensuring an appropriate level of safety was achieved. So we knew that there was a changing attitude towards the subject of provisioning. 10 [11.34 pm] And that in fact has occurred. But also you do have to take into account that the first quarter of the former PNGBC business related to the actual settlement, the amalgamation settlement. So you would have in projecting forward you would have the four quarters of the BSP contribution as it were but only three quarters for the PNGBC.

Q: Well, let us proceed on the basis that you have 12 months after amalgamation.

A: Yes, Okay. 20 Q: If you were to proceed on the basis, in terms of projecting the income or percentage of profit after tax as against income prior to lodging the bid could I suggest that you would have anticipated a percentage under the new entity of certainly over 20 per cent.

A: Yes, I agree with that.

Q: And over say a year after the period of say allowing a year’s grace to get things organized which they would take time to get organized I suggest, is it correct? 30 [11.35 am] A: Yes, we are only a small way into the actual integration phase of the business. We have actually only integrated or converted one branch to the ICBS system. So there is a lot of work to be done there. But there is significant operating costs being achieved which we had to take into account. You know, there is this enormous change program. We are doing an enormous amount of advertising which is all operating cost. And there is a major undertaking through the conversion where - just a very simple example is the uniforms that we are providing all the staff which will be completed by end of March this year. That is done at a cost of half a million. 40 Q: Well, let us give you two years grace.

THE CHAIRMAN: Did you design new uniforms for the amalgamated bank?

A: Yes, it is about K520,000 the cost of the uniforms and as a sort of a gesture to the staff we told them that the bank would provide that. Normally the bank subsidises that sort of thing, but we said that we would provide that for all staff. So that is a cost, but you know the - you know, just things like changing stationery, signage, there has been a lot of emphasis on advertising to create a new image in the 50 market place. But you are on the right track. I understand where you are coming from and that potential clearly existed and that was one of the attractive things. I felt that there had been a turn around in the performance of the bank under Garth McIlwain’s management purely because he was a banker and his predecessors were not. And I was extremely confident with the combined strengths of both banks that we could not fail to make a success. There had to be some major negative influencing factor that would bring it undone and we could not identify what that was. There was always an enormous scope to turn it around, and that is what is happening.

[11.38 am60] MR VARITIMOS: Well, in terms of the enormous scope to turn around, do you recall giving some evidence yesterday about additional services or products that could be provided by the bank?

A: Yes.

PNGBCCOM 13/02/2003 2646

Q: Do you understand that?

A: Yes.

Q: Now, can I take it that, given that the bank is trying to organise other matters in relation to the amalgamation you have not yet moved, or BSP has not yet moved to the next stage of development in terms of offering other products and services?

10 A: Well, I am not sure that that is right. I mean we do have a business plan and we are moving towards it. For example, we have a submission before PANGTEL at the moment for a licence relative to introducing a branch satellite network because with our more sophisticated system and such a widespread of branches right around PNG, there is a need to ensure that communications are effective. And unfortunately we just cannot rely on Telikom, and we are receiving a lot of criticism and it is not criticism that I had heard before in regard to PNGBC. It is criticism we are receiving now for supposedly not providing service, which is right outside our control. So we have identified the need to spend K5.3 million on our own branch satellite network, and that leads to the next stage of our development. 20 As soon as that is in, we will be - and we have already factored in and planned for the installation of ATMs at branches that have not previously had them and additional ATMs in branches where there is a high volume turnover like - and one example to quickly cover the point is we are putting an additional two ATMs in Kimbe and one in at Bialla. Now, Bialla is like many other remote branches where the communications are very poor, the branch does not provide the service that is expected by customers. But notwithstanding that, there is this huge potential to increase business because we are talking about an industry sector in the oil palm, an industry that has huge numbers of employees and other associated growers. And when I visited Bialla a few months ago I spoke at length with the manager of 30 Hargy Oil Palm and he pointed out to me that they were about to put 3000 people on to the debit card system. They were going to issue 3000 Kundu cards, and I said, well, it is not really going to help if we do not have a delivery system to accommodate it, what are you going to do? And he said, well, it is a matter of what you are going to do. Are you going to upgrade the branch and you are going to do all these sorts of things and I said, well, I would like to do that, and we will do it as soon as we can. And we will in fact have that done at Bialla by the end of July.

Q: If we can deal with some figures now in light of your experience. I think you 40 agreed with me that prior to lodging the binding bid you would have anticipated or projected an operating income of the amalgamated entity in the region of about K277 million for a 12 month period. Is that the position?

[11.43 am] A: Roughly, yes.

Q: Now, given your experience now, if one was to project with the benefit of actual figures the income and look at the period for 12 months from amalgamation, what would you anticipate would be the operating income of the amalgamated entity?

50 A: You really caught me on the hop there. I do not want to produce figures to you that I should be thinking more carefully about just for the purpose of answering.

Q: I will let you have some time to think about that and consult your records and I will go on to another topic. Mr Smith, you were on leave in July 2001, is that correct?

A: That is correct.

Q: And you were on holidays I think in England and also I think you went to 60 Australia?

A: That is right.

Q: And I see from your diary that you seem to be an AFL supporter?

PNGBCCOM 13/02/2003 2647

A: That is right.

Q: You do not seem to have Brisbane in there though, Mr Smith?

A: No. I have got a home in Brisbane but the Lions would be the last team I would support.

Q: Now, you have produced your diary for 2001 and it would appear that you 10 returned to Port Moresby in August, is that correct?

A: On the 13th, yes.

Q: Now, it appears that you went on leave on or about - you finished it looks like on about 12 July in Port Moresby, is that correct?

A: Yes.

[11.46 am] Q: You appear to have caught a flight out, a Qantas flight out from Port Moresby to 20 Brisbane on 12 July. Is that correct?

A: That is correct.

Q: And you had some appointments in Australia and then it appears that you then left to fly to London from Australia on 16 or 17 July, is that correct?

A: That is correct.

Q: Now, did you have any contact with your office between 12 July and your 30 departure on 16 or 17 July?

A: Not that I recall.

Q: Then you returned as you say to Australia on Sunday, 12th. You appear to have arrived in Sydney, 12 August.

A: That is right.

Q: And then you caught a flight from Sydney to Port Moresby on 13 August. 40 A: That is correct.

Q: Now, when did you actually return to work? Monday was 13 August. You seem to have a reference on 15 August to a Boroko site meeting but no entries in your diary for Tuesday, 14 August.

[11.46 am] A: Yes, I would suggest that Tuesday was very much a catch up day.

Q: Do you know whether you went to work on Tuesday, 14 August? 50 A: I went to work on Monday the 13th.

Q: In the afternoon?

A: Yes.

Q: And you started having appointments did you on 15 August, the Wednesday?

A: Well, I do not have my diary in front of me and the purpose of having this 60 chronology was to sort of jog my memory. I had a lunch with Steamships on 15 August as my - - -

PNGBCCOM 13/02/2003 2648 Q: Well, let us just stop at 13 August when you returned to Port Moresby. Prior to your return on 13 August, did you speak to anyone about BSP lodging a bid or expressing any interest for a bid or anything on the subject of PNGBC acquisition?

A: No, absolutely not. I have a rule that when I go on holidays, I go on holidays.

Q: So, you did not discuss the issue at all?

A: Not at all. 10 Q: Now, it was whilst you were on holidays that you re-visited the issue of perhaps BSP lodging an expression of interest in relation to PNGBC?

A: That is correct.

[11.47 am] Q: But prior to your departure on holidays you had formed the view that effectively it was a waste of time and money for BSP to lodge a bid?

A: I am not sure that I used the terminology a waste of time and money. I felt that it 20 was going to be difficult in terms of raising sufficient capital to make a competitive bid. And as I explained, I was taking at that stage a fairly selfish view about the impact that it was going to have on my time, my inability to achieve results which we have done before. I had spent a lot time looking at and experiencing due diligences and we have not gone ahead with them and I did talk to you about the problems identified in marrying two diverse cultures and I could do without a militant union making my life difficult. I just felt that at that stage it was something that I did not want to pursue but if the chairman would have knocked on my door and said, it is about time you started thinking about a bid. Well, obviously, I would have done that because the board employs me and they have 30 employed me since 1993. But as no one did that and certainly I was not pressed by the management to consider it rightly or wrongly we did not address it.

[11.49 am] THE CHAIRMAN: Where was the Steamships lunch; where was it held?

A: I cannot remember. I think it was probably at the Bacchus Restaurant because we had Ron McDonald who was one of our senior credit people there and I think he would have been operating out of the commercial centre at that stage so, yes, from memory, I think it was the Bacchus Restaurant.

40 Q: And was it some special occasion or a regular lunch?

A: No, I was invited to that by the relationship manager for the bank and Steamships connection. And I regularly am invited and accept luncheons with senior management when they are talking to customers because there is a view that I would be able to add some value to the discussion as in my position as chairman of the commercial bankers association and the extent of dialogue I have with the Central Bank at meetings and I am involved in other areas that give me some exposure to what goes on in the community. And I think the managers generally think that it is of assistance to them if a customer wants to talk about economic 50 conditions and foreign exchange reserves and the monetary policy of the day et cetera.

MR VARITIMOS: In relation to a lunch at Steamships on 15 August and there is a reference in your diary, Ron McDonald, John Dunlop, Eddie Ruhar?

A: That is right.

Q: And then you have crossed that out so I assume that you attended the lunch?

60 A: That is right.

Q: When was the first time that you raised the issue of BSP giving consideration to a possible acquisition of PNGBC?

PNGBCCOM 13/02/2003 2649 [11.51 pm] A: As I previously said, when I got back from leave having thought carefully about it and decided that I had a responsibility to the board and the bank to have an appropriate go-forward plan and the bank was bigger than Noel Smith and I had better really think the strategy, I sat down with Brian Storm and Tony Westaway. And, that would have been probably the Tuesday. I mean, we- - -

Q: Fourteenth of August?

A: Yes. We, as an administration, were very lean, mean and lean. But, it was very 10 easy to communicate. Our offices were all together. We were continually having dialogue. The three of us constituted the risk policy unit. We would have sat down in my office and had a long discussion about it and we would have talked about what are the benefits and whether they were comfortable. I believe I said that I would not have gone ahead with it if I could not have got the support of Brian and Tony because this was going to be a major undertaking and unless I could get- - -

THE CHAIRMAN: Did you raise the topic?

20 A: I am sorry?

Q: When you got together in your office, did you raise the topic specifically?

A: Yes.

Q: What did you say?

[11.53 am] A: I have absolutely no idea what I said. I would have said something along the lines that while I was on holidays I thought seriously about the concept of getting 30 involved in the acquisition of PNGBC. What do you think of that? Is that pie in the sky stuff? And it is obviously going to be a big ask because we will have to raise an enormous amount of capital. Is that capital available in the market? You know, from that discussion it led to talking to other people about what are the alternatives. Can one assume that you can raise off shore capital? And in fact I did have discussion along those very lines with people from KPMG.

Q: Now, just dealing with the meeting with Storm and Westaway, what was discussed there about your possibilities of getting capital, raising capital? What suggestions did they make? 40 A: They suggested that because of the very narrow market that exists in PNG in terms of investment capacity, there should be an opportunity there to raise significant funds from the superfunds, and we are talking about NPF and POSF. We felt that- - -

Q: Who raised that first? Was that you or was that a contribution of Mr Storm or Mr Westaway?

[11.55 am] A: It was probably - I would say that it would be - I mean introducing that to the 50 conversation is no great criterion. It could have been any one of us. We know that POSF and NPF have huge investment portfolios and as I said the NPF experience of recent years shows that there is merit in investing prudently and the opportunities are not that great. And so we were fairly confident that we would be able to entice the super funds to be involved and we assumed that, for example, and we only assumed that Credit Corporation would do everything they could to maintain their number one status in the bank because that seemed to be a desire of Noreo Beangke and rightly so. It was a company that had supported the bank right from the outset. As it turned out they did not take up additional equity at all. And we thought about who else could we approach. I think it will be in the 60 documents that we have tendered in evidence that there was quite a list. I talked to them about IFC as a possibility, IFC International Finance Corporation had indicated a strong desire to be involved with BSP as a first step to having some exposure in PNG.

PNGBCCOM 13/02/2003 2650 [11.57 am] And they had actually offered us about 6 and a half million US dollars which we had earlier declined. But we thought, well, if worst came to the worst and we had to raise some money they would definitely be an option.

Q: Were they - I think you told me yesterday they are a subsidiary of the World Bank.

A: That is correct, yes.

Q: Yes, all right. They were initially, at all times were talking about an investment of 10 what, approximately 6 million US?

A: That is correct.

Q: Were they going to buy shares in the bank or, in BSP or how were they going to get into a venture with you?

A: They came up with a number of alternatives when we discussed it with them. They were more looking at a tier two situation like a convertible note or some sort of subordinated loan. As I understand it was not their intention to be in there for the 20 very long haul. They were looking to establish a relationship on a commercial basis with an aim to introduce us to other foreign organisations that would help in the development of the bank. That is - - -

Q: Have you had any negotiations with them after the amalgamation or during the amalgamation?

[11.58 am] A: To their chagrin, no. They have approached us on - - -

Q: They have approached you? 30 A: They have approached us, yes.

Q: When did they approach you?

A: We did have discussions, you know subsequent discussions, with IFC people from Hong Kong and we had dinner with them at the Crowne Plaza I can remember.

Q: When was that?

40 A: I do not think that appears on my chronology because I did not think it was all that relevant but it is in my diary somewhere.

Q: Was that before or after you put the bid in?

A: That would have been before.

Q: Before you put the bid in?

A: Yes. 50 Q: All right.

A: We canvassed various things like a debt sharing arrangement and perhaps introducing some computerised approach to loan assessment but I was always of the view that IFC were probably just a little bit too commercial for us. As I said yesterday they were sort of looking for these fancy add-ons, equity kickers and this sort of thing and we did not want anything that fancy. We had confidence in ourselves to grow our business ourselves. We just needed the financial support. We did not want to give away what we were projecting to achieve. 60 Q: At the time when you had the dinner with them or had the meeting with them, you said it was before the bid. But did they know that you intended to make a bid?

PNGBCCOM 13/02/2003 2651 [12.00 pm] A: Yes, they did. I did get a - I did get contacted from Washington from one of the guys that I had earlier spoken to. It is very hard to recall. I sort of hate giving an answer without being sure. To be quite honest I am not absolutely positive that it was before the bid. It might have been after the bid. I would dearly like to have a look through the- - -

Q: Yes.

MR VARITIMOS: At lunch time I will give you access to your diary. 10 A: Okay.

THE CHAIRMAN: Well, I think it is nearly lunch time now, 12 o’clock. We will adjourn until 1.30.

LUNCHEON ADJOURNMENT

[1.30 pm20] THE CHAIRMAN: Now, I think we are going to identify the date on which you had meeting with people from IFC.

A: Yes Mr Chairman, that date was Monday 18 February 2002.

Q: And who were the people you saw there?

A: Two people from IFC who operate out of Hong Kong and the names were Javed Hamid and Azmat Taufique and also Philip Olsen from the South Pacific Project Facility another subsidiary of the World Bank. 30 Q: And was Mr Philip Olsen resident in Port Moresby, was he?

A: No, he is a resident in Sydney. He regularly calls on me possibly once a quarter for discussion and he would have been responsible for introducing these people to the concept of coming to Port Moresby and talking.

[1.32 pm] Q: What exactly does Philip Olsen do in Port Moresby.

A: He has a regional role and he comes here, he goes to other countries in the South 40 Pacific. He usually does a tour around PNG on his visits. He usually stays in Moresby for a couple of days then would move on. I think one of his tasks is to get a feel for the state of the economy, what opportunities there might be for SPPF to do business in PNG. We have not actually done any business with SPPF but I guess he feels that I am in a position where I can contribute to the sort of information he wants. I am probably one of his first ports of call as it were.

Q: All right, what was the purpose of introducing you to these people from Hong Kong?

50 A: They would have had discussion with the people that came over from Washington originally and who did a in depth due diligence on the bank and so there was probably some discussion within the organisation that there could be an opportunity here in PNG to do something and they of their own volition raised the spectre of the possibility that there could be some debt sharing done. When I say debt sharing, one of the guidelines with which we have had some difficulty over the years in conforming to is the 25 percent rule on lending to individuals and groups. It is a guideline imposed by the Central Bank and quite appropriately to minimise the risk and ensuring that a bank is not exposed unduly to one entity who of course might fall over. And we thought that it was quite a good idea if we 60 identified a large proposal that require lending of above the 25 per cent that IFC could be considered as an option to participate in the sharing of that debt. So, in the old BSP, we were basically limited to about 20 million, which was just prior to amalgamation. That meant our net assets would have been around the 80 million mark. If we identified a deal for 30 million, well, we would not be able to do it and

PNGBCCOM 13/02/2003 2652 I would not have been all that keen as a primary option to share it with ANZ or Westpac; and I thought that was a good idea. So, we talked about that.

[1.35 pm] We did also talk about the prospect of implementing a system here which they had introduced into China which related to a - well, it was actually a computer program which identified all the risks. You put information into it and the program told you whether you should be approving it or not.

We had actual- - - 10 Q: For loans?

A: That is right, in the small to medium enterprise area. We had interest in that in as much as we - and we are going down the track with them now to identify the suitability to implement that in BSP and align it to our personal loan lending as opposed to MSE’s. Quite frankly, I am not sure that you can use a computer program when you are lending to a business because the primary concern is to know the people and get out there and kick the tyres, as the saying is, understand what is going on. Whereas a personal loan, that has to more rigidly adhere to 20 some guidelines and, of course, the main one being capacity to repay. So, for a personal loan, the main guideline is: What is the disposal income available to make the repayments.

So, a computer is probably going to come up with an answer which could be time saving; and we are looking at doing that because of the extent of personal loan lending potential in PNG.

[1.37 pm] Q: You mentioned that they had done an in-depth due diligence on the bank. Is that BSP pre amalgamation? 30 A: Yes.

Q: All right. Now, the debt sharing, how does that work? Supposing, for example, you got a request for 40 million, will you be able to lend the 20 million direct to the customer and how does the customer get the remaining 20 million?

A: Well, we would have to establish some facility with IFC and we would have to provide them with the application and the analysis that we had done and they would just have to treat it as a lending deal also. I did not get down to the fine 40 detail of how it would work in the end. But I suspect that there would be a facility that they would have set up with a bank in Hong Kong and when they gave the sign off on their participation, they would either transfer the funds or we would draw down on some facility.

Q: So that your customer will get the money from BSP or direct from the IFC?

A: We would act as the agent as it were.

Q: The agent? 50 A: Yes. From a customer’s point of view, I think it might have been cumbersome for them to be dealing with more than one organisation. So, I would suggest that we would have a separate facility with IFC. We draw it down and we would give the total amount to the customer. And we would have an agreement with IFC as to the extent of liability under the loan.

[1.39 pm] Q: I noticed, I think, you mentioned before lunch something about two tier capital note issues. What was that?

60 A: Yes, that goes back to the original discussion we had with two people who came out from Washington and did the due diligence and it was interesting that they had not had any exposure in PNG and I think, I mean, we actually have a representative from PNG in Washington located at the World Bank. And obviously there had been some discussion at sometime about the opportunities that might

PNGBCCOM 13/02/2003 2653 exist in a developing country and you know perhaps you should be over there trying to identify something.

Q: When you say we had a representative, is that the BSP?

A: No, a government representative, yes.

Q: The government, PNG had a representative, yes. That was the governor of the bank, was it not? 10 A: Sorry?

Q: The governor of the Central Bank was on the World Bank?

A: I am not sure, I am not sure what his position is, but yes the government of PNG has a representative over there. So they came over and they - I mean we had correspondence, extensive correspondence by e-mail first and we identified that there could be an opportunity for them to assist and we had to pay their costs to come out and do the due diligence and from memory it cost us about K45,000.00. 20 So basically we covered their transport costs and some accommodation, I think. I guess they could justify the time involved because at the end of the investigation there might be a benefit for them. I was not under a misapprehension, but I assumed that they would have a different mandate than they ultimately did. I thought as a subsidiary of the World Bank perhaps they had some charter to assist in developing industries in a developing country and may be there might be some preferential rate or something like that. But it became obvious that this was purely a commercial deal and we would be really paying for the assistance. In fact, when we got the detail of what it would be, we just completely lost interest and they were very disappointed about that. They saw it as a real leg into PNG 30 and they saw that BSP had a tremendous potential or so they told us. They might have been just saying warm and fuzzy things to us.

Q: Yes, when was that? Can you put a time frame on that?

A: That would have been early 2001.

[1.40 pm] A: Late 2000 and early 2001, I cannot remember exactly. And we did have subsequent contact from them. They would have been monitoring our results and that sort of thing. And so I remember I had a phone call from one of those guys 40 who visited us and it was at the time of our bid and he expressed real disappointment that I had not approached him. And I was able to comfortably say to him well, thank you for your interest but one of strengths of our bid is that it is a bid on behalf of a nationally owned company and I was placing great emphasis on the benefits to the country in terms of retention of dividends and contributing to national economic growth, etc cetera. And their involvement would have weakened my case and I think they probably understood that.

Q: Who was the person? What was the name of the person you spoke to about that?

50 A: It is a German type name and I cannot remember it but I can advise the Commission tomorrow morning.

Q: All right, thank you. And he expressed disappointment that you had not approached them, what with respect to raising capital?

A: And participating in the equity raising.

Q: Participate in the share issue?

60 A: Yes.

[1.44 pm] COMMISSIONER WAROKRA: At that time the government was negotiating a loan agreement between the World Bank - around that period the PNG government was negotiating a loan agreement with the World Bank?

PNGBCCOM 13/02/2003 2654

A: Yes, for government funding- - -

Q: That is right.

A: Relative to the economy, yes.

Q: And this subsidiary of the World Bank was looking at opportunities of doing business in this country, do you not see a connection there? 10 A: Yes, there is some connection, and I guess in some ways it is a pity that we were not able to do something. I was keen to do it, but it had to be at the right price because I saw the involvement of IFC in BSP as a big plus. I thought that it gave us some improved credibility, because we were a small bank, a small stand alone bank in PNG and when I have done my regular calls on our correspondent banks, particularly in Australia, it would have been really good to say we have a new shareholder in the name of so and so and they are introducing us to other foreign banks, that sort of thing, to perhaps create money market lines or stand by LCs whatever it might be. And so that would have been a real plus. And I was 20 disappointed that we were not able to achieve that after a fair amount of work. But at the end of the day the deal had to be something that was appropriate for BSP. We had shareholders with expectations of returns and it was unreasonable to let a, sort of a johnny come lately, get on the band wagon, when we were achieving reasonable results and participating in the profits. So that is really why we did not proceed.

[1.46 pm] Q: We have on the one hand the World Bank applying pressure on the government to do certain things including selling PNGBC in order to secure US$20 billion. And on the other hand the World Bank through its subsidiary knocking on the doors of 30 PNG and trying to buy off the asset that was being sold?

A: Yes.

Q: And you were asked whether you were approached to be an agent to participate in this or to enable the UN subsidiary?

A: Yes.

Q: And the World Bank subsidiary to participate to make sure this deal got through? 40 A: Yes. But I think we have got to look at the timing, the discussion we had with IFC in regard to equity participation in BSP was in fact prior to the actual bid process. So I do not think there is probably any linkage. But I think you are making a very valid point because PNG needs every assistance it can get to generate development: projects, employment whatever it might be. And it would have been good to have IFC here and it might have been a spring board for if they had a successful relationship with BSP it might have been a spring board for them to go on to something else.

50 THE CHAIRMAN: I think when you are looking for the German type name would you mind just trying to check the day or the time on which you had that telephone conversation with him in which he expressed disappointment at not being approached for capital raising.

[1.48 pm] A: I will endeavour to do that chairman but I have to confess that I am not known for recording detail but I will pursue that tonight and advise you in the morning.

MR VARITIMOS: We have got to the stage where you recall that it was likely that you had some conversation with Mr Westaway and Mr Storm? 60 A: Yes.

Q: And to the best of your recollection that was likely to have been 14 August 2001?

PNGBCCOM 13/02/2003 2655 A: That is correct.

Q: Can you recall in any more detail the discussion that occurred on that date other than what you have indicated prior to lunch?

A: I would really be doing not a lot more than speculating because I just cannot recall that.

THE CHAIRMAN: Did the three of you discuss at all how much capital you thought you 10 might have to raise?

A: No, we did not talk about amount because we had no idea what we would need to raise. But it was a matter of what was the availability of the capital rather than - we had not a clue how much we would have to raise because we had not a clue about what the price might be.

Q: So you identified a likely source of capital being these superannuation funds. Did you have any discussion at that time about the amount of money you might be able to get from each superannuation fund? 20 [1.50 pm] A: No, not at that point. That came in early September when I sat down and really put pen to paper about who I was going to approach. Now, I know that I do have a schedule in my file of this whole process and it is quite - well, I was going to say lengthy but, it is not a lengthy list. There is probably about 8 or ten names on it and I sort guesstimated or had an idea how much we would ask these people for. I can vividly remember that because we had been developing a strong relationship with MRDC, Mineral Resources Development Commission or Corporation. And we knew that they were acting as trustees for landowners and we knew that there were significant amounts of money being generated through royalties and so, we 30 saw MRDC as a chance. We saw NPF because of their large portfolio and same with POSF. And we basically said, we will ask each of them for K25 million or - I am just talking out loud here, thinking out loud.

[1.52 pm] Yes, so 25 million was sort of a starting point and we talked to other parties, existing shareholders, some of whom did not participate at the end of the day. I am referring to the Lutheran Church Superannuation Fund who were a large shareholder at the time.

Q: Why did they decide not to participate? Do you know? 40 A: The Lutheran Church has some significant associations with other operations in the Madang and Morobe Province and one of those is a company called Luship. That is the business arm of the church. And they had significant interests in shipping and it was my understanding that they did not have free cash at the time because they were looking to utilise those with the business arm. And that was borne out later when subsequent to the sale process concluding and the settlement occurring, the Lutheran Church actually sold a large chunk of shares in BSP. I think they sold about three quarters of a million shares. So, that would have generated 6 or 7 million or whatever it was. So, they obviously needed those funds and yes, I was 50 disappointed that - I had actually pencilled them in as I had pencilled in Credit Corporation. I think I pencilled Credit Corporation in for either 10 or 15 million. But I will produce that list tomorrow.

Q: Thank you.

[1.54 pm] MR VARITIMOS: When was that list prepared, Mr Smith?

A: Early September but in my file it probably does not have a date. They would have- - - 60 THE CHAIRMAN: Did you do that on your own or in conjunction with Mr Westaway and Mr Storm?

PNGBCCOM 13/02/2003 2656 A: No. Brian and Tony were not involved at all in the capital raising side of it, they were heavily involved in the strategic thinking and input to the model. And on a couple of occasions when I was away, Tony Westaway acted for me and had some involvement, brief involvement with some of these people. But by and large, the capital raising was done by, primarily by myself but also Graham Reid and Peter Rollason from Deloittes. We had discussions jointly with each of these. They usually accompanied me to the presentations to the boards. And I know that Noreo Beangke as the Chairman off his own bat contacted some people and what brings that to mind is that he told me that he was going down to Sydney on one 10 occasion for a rugby union game and he wanted to provide hospitality to the POSF Board members. So he was looking to do his bit as it were in assisting in the equity raising.

Q: Was that at the time when you were looking for capital?

A: I am sorry?

Q: That time when he took these people down to Sydney, was at the time when you were looking for capital? 20 A: Yes, that is correct.

Q: Rugby league final would- - -

A: This was Union.

Q: Union?

A: Yes. 30 Q: Rugby Union.

[1.56 pm] A: I think it was a major game between the Wallabies and someone.

Q: Who did he take down from POSF?

A: I think that he might have gone down on his own. He was meeting with them. I think they were all invited to a sponsors box. I do not know who the sponsor was, but I think he took them out to drinks and dinner after the game, something- - - 40 Q: Yes, while they were down there.

A: And he spoke to me about the cost factor involved and- - -

Q: Who were the people that he took out?

A: He did not actually tell me that, but I assumed that one would have been the managing director, Ces Iewago. I am not sure whether - I do not know whether Robert Igara, the chairman, was there. But obviously Noreo being a citizen had a 50 very close knowledge of all the people who were on the board, which I did not. He would have felt that he could lend some assistance and influence there that perhaps I could not.

MR VARITIMOS: Mr Smith in relation to this schedule, the list you referred to, you said that that was in your file. You have got some file that you kept, did you, in relation to this bid process?

[1.58 pm] A: Absolutely, that was one thing that I comprehensively did to ensure that we had a record and all the documents that we have tendered here would have been out of 60 those two files. They are two files like those black ones.

Q: Two lever arch files?

A: Yes.

PNGBCCOM 13/02/2003 2657

Q: Now, your statement which is exhibit 12 and the 6 volumes of attached documents?

A: It could very well be amongst those.

Q: Well, that schedule I am fairly sure that you referred to as the way you describe it is not in those 6 volumes?

10 A: Right.

Q: Would you mind bringing tomorrow those two lever arch files that you have identified?

A: Sure.

Q: And if you could have someone cross reference if you do not mind. Probably Ms Bird might do it because she probably organised the 6 volumes, I am not sure, to see what documents are missing from your file in comparison to the 6 volumes. 20 A: I would be surprised if there are any documents missing because my two files were the basis of the documents that were presented. In fact I had those two files and a cupboard full of all the other documents like the bid document, the information memorandum, the original sales document. So, maybe it was not exhibited because it was a very memoish thing without a date and just some sort of scribble on it. In fact it might be a typed one but it is a very informal thing and perhaps it was not considered that relevant.

Q: Well, if you do not mind putting that on your list, thank you. 30 A: Sure.

Q: If we could come back to this August date - you spoke Storm and Westaway probably on 14 August?

[2.00 pm] Q: At the end of the meeting, would it be correct to say that there had been no formal decision that any expression of interest would in fact be lodged?

A: Oh absolutely because we had to put something to the board and get their 40 approval.

Q: So you agree with me at that stage it was still very much up in the air as to whether an expression of interest would be lodged?

A: That is right, but we were all putting our minds to the matter because you will appreciate that it had become rather urgent and when I went to the board I had to be in the best position possible to discuss it if any one asked me a question. So I would have been talking to my business associates about just trying to get a little bit of comfort and perhaps talking about whether they knew who was bidding, 50 what do they think PNGBC would be worth.

Q: That ground work had to be done and those investigations had to be done?

A: Very quickly, yes.

Q: In terms of the urgency you were aware by 14 August that advertisements had been placed in various newspapers including local newspapers in April and early May 2001 in relation to the proposed sale of the bank?

60 A: That is right.

Q: And calling for expressions of interest?

A: That is right.

PNGBCCOM 13/02/2003 2658

[2.02 pm] Q: So you were aware that you did in fact have an extremely tight timetable?

A: Absolutely.

Q: When you spoke to Mr Storm and Westaway on or about 14 August 2001, were you aware of what the timetable was in terms of lodging bids et cetera?

A: No, I was not. 10 Q: So in fact by 14 August the time for lodging bids may have in fact expired?

A: It may have, that is right.

Q: But you did not know at the time that you spoke to Mr Storm or Westaway what the position was?

A: No, we probably talked about that very thing. I wonder if it is too late. So that was the reason why I would have started talking to people and I knew that you 20 would ask me that question because I saw in the transcript of information you asked it of someone else and that was basically the reason why I did that little chronology and I listed some of the people that I probably spoke to, but I have no record and I had no intention to create a record of with whom I spoke.

Q: Do you have a copy in front of you of exhibit 199 and exhibit 200?

A: Yes.

Q: And for your benefit Mr Smith, we photocopied over the luncheon adjournment 30 which is in a manila folder in front of you on blue photocopy paper a copy of your diary from August through to December 2001?

A: Right.

Q: If you cannot read any of the writing on the photocopy, just let me know and I will show you the original.

[2.07 pm] A: That is okay. Yes, that is very clear.

40 Q: Now just to clarify the position in relation to your diary. You presented a diary yesterday for 2001 and 2002 which are both your personal diaries, is that correct?

A: That is correct.

Q: And you maintain these diaries not a secretary or someone else?

A: Sometimes a secretary would take a phone call in my absence if I was doing a branch visit or at a board meeting or at the Central Bank or somewhere and they would record so if there is some foreign handwriting there that would have been 50 my secretary by the name of Lee B-a-r-u and so she would record an appointment and on the basis that I would confirm it when I got back. But basically that would be me recording in there.

Q: And what is your procedure in relation to recording entries or remarks in your diary?

A: Basically I do not write any remarks at all, it is just where I have to be at what time basically. And sometimes when I was dealing with someone I noticed as I was going through that I would just put down dinner on that day. I knew who I 60 was having dinner with but I did not actually write the names down.

Q: Well if one looks at your 2001 diary and 2002 diary, what you have produced is the diary but also you have attached white stickers on various pages, is that correct?

PNGBCCOM 13/02/2003 2659

A: Yes, that was at your request to flag them, yes.

[2.06 pm] Q: Now the purpose of the stickers is to highlight what you perceived to be relevant entries?

A: That is right.

Q: And the writing on the stickers is your writing? 10 A: That is correct.

Q: And you have personally done the exercise of going through the diaries and placing a sticker against the entries that you considered were relevant?

A: That is correct.

Q: And then from access to your diaries you have effectively produced exhibit 199 and exhibit 200- - - 20 A: That is correct.

Q: With perhaps in some instances the assistance of your wife’s diary?

A: That is correct.

Q: Now if one turns to the 14 August meeting, can I say that it was effectively - or the meeting was concluded by the three of you agreeing that further enquiries would be made? 30 A: Yes, it was not a formal meeting at all. It was- - -

Q: It was an informal discussion?

A: Yes, come into my office we want to sit down and - so we set aside - well, it would have been a couple of hours. We set aside that time just to concentrate our minds on whether this was a pie in the sky thing, you know, have I got sort of carried away while I was on holidays and do you think it is too late, how much money is in the market to raise funds, do you think it would be necessary to go off-shore, and 40 we thought it might be. And for that reason I pursued off-shore funding. But, we were just trying to muster enough information so that I could be ready for any discussion at the board table.

[2.08 pm] THE CHAIRMAN: You said, there were two things that you talked about there. First of all, you were wondering if you were too late to put in the bid. What steps did you take to find out whether you were too late or not?

A: I did not exactly take any steps until we had discussion and after a couple of days I formed the view that, yes, this is a logical thing to do. And I would have 50 contacted, at that stage I would have been under the misapprehension that it was the local firm of KPMG that was handling it. And I would have contacted my friend Rob Southwell, the senior partner to find out who it is that I talk to. And from memory, and I can not recall whether I spoke to Ian Cameron or Ian Cameron spoke to me. But I did have a meeting with Ian Cameron; in fact I had a couple of meetings. And they were interesting meeting in as much as we did not talk about the bid, though I think they asked why did not you put your bid earlier. And I said because of exactly the reason why we had discussed. But by the time we got to that stage I was thinking about how it was no good going to the board and saying I think we should do this because they would say where are you going to get the 60 money from. So I needed a little bit of ammunition there and Noreo Beangke would have offered his assistance because of his position in the community and he had the ability to pick up the phone and talk to people. I mean he could ring Wilson Kamit and just have a casual discussion whereas I probably could not. My approach to Wilson would have had to be on a more formal basis. And so I needed

PNGBCCOM 13/02/2003 2660 to get to the board meeting and be able to say just a little bit more than well we are going to contact, if you approve this we are going to contact a few local organisations.

[2.10 pm] And the discussion that I had with Ian Cameron was purely about the concept of raising funds offshore but firstly, is it too late to enter this race. And Ian Cameron did not actually give too much away not that he had too, of course.

Our focus was on offshore funding and he raised the matter of raising funds in 10 Singapore. And we actually discussed that on a couple of occasions and I was - I think I will just use the word intrigued but maybe that is not the right word. Why would he be pushing an offshore company. This was a venture capital firm. I do not know their name but I believe it was associated with the Singaporean government. And I sort of got the distinct impression that there was probably an introduction fee or commission or something that KPMG might have got for being responsible for raising it.

But I quickly put that option aside because in discussion with the board and further discussion with our senior people, it became fairly obvious that the strength of our 20 bid was going to be - we had to have some platform to work from. And I can vividly remember that people like Noreo Beangke, Tom Fox the deputy chairman, they thought that it was pretty relevant that ownership of PNGBC should stay in PNG and for the reasons that we all know about retention of dividends et cetera.

[2.12 pm] It was then that Noreo offered to sort of do a ring around, as it were, and see if he could make some contacts; and I believe that it was he who contacted POSF on my behalf.

We actually formed a committee of three people at the board level, and that was 30 the Chairman Noreo Beangke, the Deputy Chairman Tom Fox and myself. We called ourselves the Acquisition Committee. So, anything of importance emanating from discussions I had, I would talk to those two. We had various lunches and discussions and we, of course, continued on the information building process in the bank. As the dates will show, we made contact with the advisers.

Q: What was the upshot of the Cameron meeting about - you asked him whether it was too late to put in a bid?

A: Well, he said it was not too late. 40 Q: It was not. Did he say that you would have to write?

A: Yes, and I admit to mis-interpreting what he said. He said that, you should write to the commission, and he might have said through to us. But, I wrote to the commission, and I should have written to KPMG which was an error.

[2.14 pm] Not that is was all that relevant I did not think because I wrote to the commission and got their acknowledgment and we did receive the document that I was looking for and then I signed a confidentiality agreement the following day and that was 50 late August. That was about 28, 29 August. So, I had made the expression of interest, I had received the document and we were away. And then Cameron rang me about three weeks later and said, you have not put your expression of interest in. And I said yes, I have. And so, I had to do another expression of interest and I sent that to Paul Foxlee of KPMG in Brisbane. And I do recall somewhere in the commission evidence that, it was commented that we made our expression of interest on 29 September or late September. Well, that was the second letter to Paul Foxlee in Brisbane. My view was that we had made expression of interest late in August.

60 Q: I think you said yesterday when you got the memorandum, the information memorandum rather, you wrote the amended timetable into that document.

A: Yes, that was advised to me by Ian Cameron.

PNGBCCOM 13/02/2003 2661 Q: And when did he advise you that? You were not advised of those revised dates when you got the information memorandum, you got that from the privatisation commission, did you, copy of the memorandum?

[2.16 pm] A: No, I think it came through, no I am not sure but we got it the day after. We got it the day after and it was probably delivered, yes.

Q: When were you told about the amended dates that you wrote in the 10 memorandum?

A: I am not sure on that Mr Chairman. In fact I do not know but it did come from a telephone call with Ian Cameron and I rang him because I read through the document and I thought, those dates are haywire. This cannot be so, so I rang him and I said well, how much time have we got and he gave me the dates and I said, well, you know there is still not a lot of time there. And subsequently there was a further extension. Whether they were still looking for more bidders, I do not know but I always thought it was rather interesting that we came in so late and were able to meet the time frame but people who did read the advertisements in 20 the paper early in the year, and obviously started the process months and months earlier than us, they did not make the time frame.

[2.18 pm] MR VARITIMOS: Could I just clarify something, Mr Smith?

THE CHAIRMAN: Just before we go on there. The second thing that was discussed between yourself and Mr Storm and Mr Westaway was to try to ascertain who else was bidding, do we know who else was bidding. What steps did you take to ascertain who else might have been bidding? 30 A: We really did not make any steps at all. We had at that stage I had not spoken to any advisers so I could not get any information from them. I did not say we knew that ANZ were a bidder, that is not right. We assumed ANZ were a bidder and we did not know about any one else.

Q: All right. All right, well now getting back to your exhibit 199 where these dates and things were identified as opportunities when you may have discussed the acquisition. The first one of those is 15 August the Steamships lunch. Who did you speak to at that lunch about the proposed, your proposed bid or anything to 40 do with the proposed bid?

A: There would have been a brief discussion only about our thoughts about becoming involved because the luncheon was primarily as a relationship manager contact with the customer and we were more talking about Steamships business, their performance, future requirements, whether we could lend them any more money, whether they were happy with the rates et cetera, et cetera.

Q: Who did you have any - brief as it may have been, who did you have any discussion with about it? 50 [2.20 pm] A: It would have only been John Dunlop. I placed some value on his word because is an experienced businessman, being here in PNG for quite a long time, at least the same amount of time I have. And it would have only been a very general discussion, nothing specific. It was inappropriate to do that.

Q: What did you say to him and what did he say to you, as best you can recall?

A: Well, I cannot recall exactly what I said. I have no hope of doing that. The conversation would have gone along the lines the fact that we were belatedly 60 thinking about an approach or involving ourselves as a bidder but at this stage it was not formal because I had not discussed it with the board, and do you know who the bidders are. Most people that I spoke to about that really did not sort of know much at all. And that obviously meant that there were not too many bidders

PNGBCCOM 13/02/2003 2662 around, and as it turned out, there were only two others. And it is not surprising that KPMG would have been happy to see BSP join the race, albeit very late.

Q: What about the next function, the Chevron function that you have got down for 20 August?

A; Yes, that was a dinner function at Kelly Taureka’s place. He is now over in Thailand as a senior executive of Chevron’s operation over there. Kelly was a one time manager of Port Moresby office in Bank South Pacific around 1990. 10 [2.22 pm] And he had quite good experience in the business community in PNG as a former head of Telikom and he was involved in a finance company. I am not sure which one it was. There is quite a number of them. It may have been Investment Corporation, I am not sure. But Kelly is a very intelligent fellow and I placed importance on his view and I would have had a casual discussion with him and I certainly would have asked him what did he know about the privatisation process, who were the bidders, who is the front runner, do you think? That sort of conversation.

20 Q: And did he venture an opinion on any of those matters who might be the front runner?

A: No. As I said before it was surprising that not many people knew much at all which was an indication that it was a small field and - but there should not have been much information around either because the way we ran our approach to this it was on a very strictly confidential basis and I think I mentioned - I do not know whether I did mention it earlier but I know that Tony Taylor the chief financial officer for PNGBC at that time was unaware of our interest until we started to do our due diligence because we simply did not talk to anyone. After we made a 30 decision at the board level we just went about our business as good as we could but obviously if we were approaching various investors, those investors or the people representing those investors would have been talking to other people. So there would have been a knowledge in the business community, whether I told anyone or not that BSP was involved in the bid process. But interestingly it did not get back to PNGBC and obviously by design we knew that there was no point in talking to anyone there because they would have been subject to confidentiality agreements anyway.

[2.24 pm] Q: Mr Taureka, is his sister Patricia? 40 MR ANDERSEN: If I could assist. The answer to that is, yes.

THE CHAIRMAN: Yes, and she is the principal legal officer of POSF?

A: Yes, I was not aware of that.

Q: Mr Andersen might be able to give some more evidence about that.

MR ANDERSEN: She is now, I am not sure if she would have been at that time. 50 THE CHAIRMAN: She appears in one of the minutes, I think I am just wondering. Okay, well then, if we come to 22 August, the lunch with Ian Cameron and David McDougall, they are both of KPMG.

A: That is right.

MR VARITIMOS: Excuse me Mr Chairman, if one looks at the diary which you have a photocopy of now, there are some other references.

60 THE CHAIRMAN: Oh, all right. Well, I will leave it to you.

MR VARITIMOS: The reference of 16 August you have written on a sticker above 16 August lunch, Mike M? Is that a reference to Michael Mayberry?

PNGBCCOM 13/02/2003 2663 A: No, that is Michael Manning. And, yes, I have been to lunch with Mike a couple of times and more often than not he is not available because he gets around the place.

Q: Anyway that lunch probably did not occur on the 16th by the looks of it?

A: No, I did not.

Q: Ian Clarke? 10 A: Yes, Ian Clarke. That was the first discussion I would have had with Ian about a concept of him acting for the bank if the board approved it, yes.

Q: Mr Clarke was from Gadens in Sydney?

A: That is right, yes. And he must have been visiting the local office at that time.

[2.26 pm] Q: And what did you raise with Mr Clarke on that occasion?

20 A: That was a very simple matter. I said that the management of the bank had concluded that there was some merit in looking at bidding for PNGBC and that I intended to put a paper together which would go to the board the following week. We always hold our board meetings on a Friday so it had to be the 24th and I said, I will get back to you if I need your services and he seemed quite pleased about that.

Q: Then on Friday, the 17th there is a reference to David Murray. Is that David Murray from Deloittes?

30 A: Yes. David Murray and I had a good association and it was politic to talk to him before anyone else.

Q: And that was a discussion in Port Moresby, was it?

A: Yes. David or Deloittes office was just across the road from BSP. They are in Deloitte Tower so he used to like early meetings so 8.30 was accurate and that would have been a general one but he made the contact with Sydney ultimately. I would have said to him, we are thinking of doing this, I am going to put a paper to the board would you be interested in acting for us or more particularly have you 40 got the capacity to do that from your resources and he said, no, it would be appropriate to bring in Deloitte corporate advisory out of Sydney and my immediate thought was well, that is going to be more expensive, is that necessary. He said, well, he would be responsible for the overall supervision of it and his staff would be able to be involved in the due diligence process and, one of his key people in that area was a fellow by the name of Sal Algeri, S-a-l Algeri. He is a liquidation type expert. So, he was nominated as being the person who would lead from the local front, the due diligence. I was a little bit surprised, actually, that there were a few people who came up from Sydney with Deloittes to do the due diligence. Because of the tight time frame, I think, they identified that there was a 50 need to really jump in and get it done. So, we certainly had plenty of resources there on the ground.

[2.28 pm] Q: Well, if we just stop in terms of what was discussed at that meeting, it was a general discussion, you said?

A: Yes.

Q: Then, we get to a situation that on 20 August 2001 - you have a copy of the diary in front of you, do you? You have a copy of the diary in front of you on your left? 60 A: Yes.

Q: If you could keep it open.

PNGBCCOM 13/02/2003 2664 A: Okay.

Q: On 20 August. Now, if there are some entries that are relevant to the issue generally of possible acquisition by BSP and I do not pick them up, could you let me know, please?

A: Sure, sure.

Q: There is a reference there “Trevor Wisemantl/Ray Clarke”, “Wisemantl” spelt W-i- 10 s-e-m-a-n-t-l. Mr Wisemantl had a senior position at Westpac at the time?

A: Yes, he was and still is the managing director of Westpac.

[2.31 pm] Q: PNG?

A: That is right.

Q: And who is Mr Ray Clarke?

20 A: He is the executive director of the PNG Banks and Business Management. The college of knowledge as we call it. The college for the banking industry.

Q: Does he also work with Westpac or not?

A: No. He runs the college.

Q: What was the purpose of - I assume that you had a meeting, is this correct, with Mr Wisemantl and Mr Clarke on 20 August?

30 A: Yes, that may have been - it could have been one of a number of things. It would not have been a board meeting. I am currently the chairman of the board. If it had been a board meeting, I would have put board meeting.

Q: Of which board are you referring to now?

A: That is the PNG Institute of Bankers and Business Management.

Q: Well, there is a reference 24 January- - -

40 THE CHAIRMAN: Wait a minute. On 20 August, you were talking to the Port Moresby manager of Westpac?

A: That is right.

Q: Did you ask him whether Westpac was putting in a bid?

A: No.

Q: Did he discuss the sale of the bank at all? 50 A: Not at all. Trevor and I would not be the closest of friends. We are just sort of business acquaintances. Yes, it is not the sort of question I would ask him. He might tell me to mind my own business.

Q: This is the sort of question you would love to ask though, would you not? I mean surely if you wanted to find out who the competitors were. He would want to know too, would he not? Two bankers talking together about the time when the bids are coming in on another bank.

[2.33 pm60] A: With the third - in front of a third party, I do not think so.

Q: Ian Cameron’s name is in there too with a bracket around it?

PNGBCCOM 13/02/2003 2665 A: Yes that was probably a phone call. It could not, he is not associated with that and he would not have been at the meeting. He might have said that he was going to ring at that time or something and yes.

Q: But he seems to have rung back or something at half past two in the afternoon?

A: Yes that is right. And I cannot recall what that meeting was. It may have had something to do with the renewal of Ray’s contact and we needed or we might have had to get something signed but certainly it would not have been a board 10 meeting. It would be about a PNG Institute of Bankers and Business Management related matter.

MR VARITIMOS: Well at that time, I just want to come back to Mr Wisemantl but on 24 January 2001, you have a reference to Allan Marlin and Trevor Wisemantl , Marlin is spelt M-a-r-l-i-n.

A: Which one is that?

Q: It is actually not in the copy that you have but I have just picked it up for 24 20 January 2001. There is a reference, 4.00 pm, Allan Marlin, Trevor Wismantl.

A: Yes that would be - I am Chairman of the Commercial Bankers Association and I have to keep in contact with them regarding industry matters whether it be a formal board meeting or it might have been a matter arising out of one the consultative meetings that we had at the Central Bank. We have a regular one of those on the last Friday of every month.

[2.35 pm] And, you know, there are a number of issues that do come up from time to time that banks have to sort of compare notes or get together on. That might have 30 been something to do with the development of an effective electronic funds transfer system in PNG.

Q: Mr Allan Marlin held a senior position at ANZ?

A: He is the managing director of ANZ.

Q: And he was managing director during the entire 2001 period?

A: Yes. 40 Q: Now, could I suggest to you that you obviously knew both Mr Wisemantl or Mr Marlin recently well?

A: Yes, Allan Marlin is better known to me as a strong supporter of the Essendon Bombers.

Q: Well, you - I suggest you could have easily asked Mr Wisemantl or Mr Marlin whether their respective banks were going to bid for PNGBC?

50 A: Yes, I could have, but I still feel that that was a bit of a rude question. They might have expected a little bit more diplomacy from me because they might not have wanted to tell me and I would not have wanted to embarrass them.

THE CHAIRMAN: Well, you have got the three leading bankers, or bankers of three leading banks all together at a time when the largest bank of Papua New Guinea was about to be sold and nobody mentioned anything about the sale.

A: That might seem strange to you, but in PNG it is a very competitive industry. There is not a lot of love lost between the three managing directors, I can assure 60 you.

[2.37 pm] MR VARITIMOS: Well, as at 20 August 2001 did you know whether Westpac were considering lodging a bid?

PNGBCCOM 13/02/2003 2666 A: No, I did not know. I did not know until a considerable time later about any matters of correspondence that have come up in regard to Westpac.

Q: Well, you have indicated that you have been reading the transcript.

A: Yes, I have.

Q: And is it the case that you are referring to the correspondence from the central bank office or the governor’s office of July 2001? 10 A: That is right.

Q: And you are saying you were not aware that that letter had been written?

A: Absolutely not.

Q: As I understand it - sorry, when do you say that you became aware that a letter of 2 July had been written?

20 A: I would not have known about that until the Westpac regional manager discussed it with me at a conference in Sydney early in December last year.

Q: December 2002?

A: Yes.

Q: And who did you have a discussion with at Westpac?

A: The - his name escapes me, but he is the person that Trevor Wisemantl would 30 report to.

THE CHAIRMAN: Allan Walters, is it?

A: That is right.

MR VARITIMOS: So you had a discussion with him about that topic in December 2002?

A: Yes, very brief discussion at lunch on the first day of the conference and he spoke to me very briefly. Now that you raise the matter yes, he would have raised the 40 matter with me. And he made the comment that you know there was something going on regarding that matter and Westpac had already made the decision not to bid. So it was a bit of a he did not say this in so many words, you know mountain out of a mole hill but it was a sort of a non issue because they had decided not to bid.

[2.39 pm] Q: And that was the substance of the conversation.

A: Yes, that is right. And we did not say any more than that because it was inappropriate. It was at a table where there were about seven or eight people. 50 THE CHAIRMAN: Did he indicate that he had been speaking to Mr Varitimos about it?

A: No. He did not mention any other names, it was just a sort of a passing comment. There was really no discussion.

MR VARITIMOS: Prior to that conversation in December 2002, did you have any knowledge whatsoever that there might be some form of restriction on a bid by Westpac?

A: No, I did not. 60 [2.41 pm] Q: On the 20 August entry there is two references to Ian Cameron. The second is Ian Cameron, 2.30. Could I suggest that that was likely to have been a meeting with Mr Cameron?

PNGBCCOM 13/02/2003 2667 A: Yes, he would have called on me.

Q: And can you recall what was discussed in substance at that meeting?

A: No, I am sorry I have not a clue about what we discussed, but I assume it was about the off shore finance issue. I really did not have any reason to talk to him about anything else except the concept of BSP joining the bid. We might have discussed, you know, when is your board meeting, you know, how long before you formalise this? Along those lines, but there could not have been much to discuss 10 because I am always reluctant to and always have been reluctant to talk about issues until I have the blessing of the board because you know it is a really small community and I would hate people to be talking to members of the board casually about discussions I might have had without having raised it formally with them.

Q: If I can put things in context, you indicated to the chairman before that you got the information memorandum you said the day after. I wish to clarify something on that. There was the information memorandum of March 2001. Do you recall that?

20 A: Yes.

Q: That you referred to yesterday. And there was the information memorandum of April 2001 which you referred to yesterday. Do you recall that?

[2.43 pm] A: Yes.

Q: Now there were two expressions of interest lodged by BSP. Do you recall that?

A: Yes. 30 Q: One was the expression of interest which was dated about 27 August, which was sent directly to the privatisation commission?

A: Correct.

Q: The second one was dated towards the end of September 2001 to Mr Foxlee?

A: That is right.

40 Q: Now as I recall your evidence yesterday, you indicated that you received the information memorandum of the March date and the April date at the end of August?

A: No, I think - did I say I received them both at the end of August?

Q: That was my understanding. But tell me what the position is to the best of your recollection.

A: Yes, I hope I did not mislead you there. Because I definitely received something 50 back from KPMG after the September one and that may have been the April one.

Q: Well, could I suggest there was in fact a July document?

A: Well, it might have been too.

Q: I do not know whether you received that or not.

A: Yes, it might have been.

60 Q: But, in terms of the information memorandums of March and April, is it the case that you did not receive them until after 27 August?

A: I believe I received the larger document, which would have been the March one- - -

PNGBCCOM 13/02/2003 2668

Q: March one.

A: The day after lodging the expression of interest.

Q: But is that the day after lodging an expression of interest with the privatisation commission?

A: Yes, the privatisation commission. 10 [2.44 pm] Q: So how did you actually get to receive the first information memorandum of March 2001?

A: Well, it would have been delivered I guess. But I did sign a confidentiality agreement and I would have had to give that to them and I simply cannot recall how I did that. But I do have a copy of the confidentiality agreement on file and I assume when I handed that over they would have given me the information memorandum. But I really did need that information memorandum to get cracking and those - it is interesting because that means that the dates that I amended 20 would have come much later because and therefore the discussion with Cameron must have come much later about the timing of the revised schedule because as I remember the amendments were in the smaller document of either April or July.

Q: If I could suggest to you that your evidence before was to the effect that Mr Cameron contacted you and said in substance, why have not you lodged an expression of interest, do you recall saying that?

A: Yes.

30 Q: Then is it the case that very promptly after Mr Cameron advising you or asking you why have not you lodged an expression of interest that that caused you very promptly to write a letter to Mr Foxlee in September?

A: Oh, yes.

[2.46 pm] Q: So could I suggest that within a day or two of the conversation with Mr Cameron along the lines of why have not you lodged an expression of interest yet, you forwarded a letter to Mr Foxlee.

40 A: No. Are you saying that that would have come shortly after that meeting?

Q: I am suggesting that shortly after Mr Cameron indicated to you or suggested to you why have not you lodged an expression of interest yet that that caused you to send a letter to KPMG?

A: Yes, and that came later in September because I did not lodge that letter to KPMG in Brisbane until 26 September.

Q: So could I ask you, was the conversation with Mr Cameron then along the lines of 50 why have not you lodged an expression of interest yet? Could I ask you did that occur within a matter of a few days prior to 26 September?

A: Yes, would have.

Q: Now does that assist you in determining when and from whom you received the information memorandums of March and April 2001?

A: I would need to refer to my file because I am sure that there is something there where they say we enclose something. And that would have occurred late in 60 September.

Q: On 22 August there is a reference, Ian Cameron, David McDougall lunch. I take it that you did have lunch with both those gentlemen on that date?

PNGBCCOM 13/02/2003 2669 [2.48 pm] A: Yes, and I have been thinking about that. And I really cannot recall David McDougall being at that luncheon because I had a later dinner engagement with two people from KPMG. And I felt that I had never met David McDougall until I met him during the due diligence process. So, I doubt whether David McDougall was at that meeting. I think it was probably just Ian Cameron. Maybe David McDougall was going to be at it and I think that was the case but he did not get up here for some reason. Of course, these guys are spending a lot of time travelling to and from Brisbane. And so David McDougall I do not think was at that lunch.

10 Q: And where was that lunch held?

A: That would have been - it probably would have been at the Crowne Plaza. The reason why I would say that is it is cheaper for me to take customers or business associates there because of use of a Pacific Privilege Card.

Q: Are you satisfied that having recorded Mr Cameron lunch and having crossed it out that there was in fact a lunch on that occasion?

A: Yes, it was my usual practice to cross it out when the event had occurred. 20 [2.50 pm] Q: What was discussed at that lunch?

THE CHAIRMAN: Can you recall whether Cameron rang you to arrange it or you rang Cameron?

A: It was probably more likely that Ian Cameron would ring me but I cannot categorically state who rang whom.

MR VARITIMOS: What was the purpose of the meeting? 30 A: Well, I was still pursuing the concept of the availability of funding, that sort of thing, trying to get clear in my mind before I had the board meeting on the Friday. So this was the Wednesday prior to our board meeting over in Madang and I would have obviously gone to Madang on the Thursday to do a branch visit in the afternoon before the board meeting on Friday. And so it was probably our last opportunity to have a talk to him about this funding business.

THE CHAIRMAN: Had you spoken to Ian Cameron prior to this about the bid process at all? 40 A: Yes I think there was one earlier occasion.

MR VARITIMOS: There is a reference there on 20 August to Mr Cameron?

A: Yes.

Q: So you spoke to Mr Cameron or had a meeting with him I suggest on 20 August?

A: Yes that is right. 50 Q: Now- - -

A: I think- - -

Q: Sorry by 20 August, you were obviously aware that Mr Cameron was a partner of KPMG International?

A: Yes.

60 Q: Now did you know Mr Cameron prior to 20 August?

[2.52 pm] A: Yes, I knew him not well. I knew him from a few years previously when we would have played golf. I am a sort of an on-and-off golfer. He did play golf and then he sort of disappeared from the scene, and that may be when he

PNGBCCOM 13/02/2003 2670 transferred to Brisbane; I do not know. But, yes, I had met him before but I was not - I had played golf with him one or two times, but that is all.

Q: In terms of 20 August meeting, was that the first time that you had any meeting with Mr Cameron on this subject?

A: Yes.

Q: You knew that KPMG International were involved in acting for the Privatisation 10 Commission?

A: Yes.

Q: In relation to the proposed sale of PNGBC?

A: Yes. He would have told me that or confirmed that.

Q: Well, I am just trying to ascertain. You had a discussion with Mr Cameron. You obviously ascertained that he was a key figure in relation to the sale of the bank. 20 Is that correct?

A: Yes.

Q: Now, I am trying to ascertain how you found out that that was in fact the case?

[2.54 pm] A: Well, more than likely Rob Southwell would have told me. Rob Southwell and I are good friends you know to the extent that my wife and I flew to Darwin last year for the wedding of his son.

30 Q: Well, prior to 2o August 2001, do you believe that you may have spoken or probably spoken to Mr Southwell to obtain Mr Cameron’s contacts?

A: Yes.

THE CHAIRMAN: Did Mr Smith say earlier that he might have rung David Wardley. Did he say he rang?

MR VARITIMOS: No, I do not believe he said that.

40 THE CHAIRMAN: Have I got my wires on that?

A: Yes, I said Rob Southwell.

MR VARITIMOS: It was a dinner that involved Mr Wardley and Mr Southwell?

A: That is right. But I did know David Wardley very well and indeed I have had discussions with him from time to time. David Wardley was in fact the auditor for BSP when I first came to PNG. So it is not surprising that I would have had some contact with him, but it certainly was not in relation to this particular matter. 50 [2.55 pm] Q: On 20 August 2001 entry as the chairman indicated, there is a reference as against 9 o’clock, Ian Cameron, in brackets, which is also next to Trevor Wisemantl, Ray Clarke.

A: Yes.

Q: That is crossed out. And then 2.30 circled, Ian Cameron, and crossed out. Now racking your brain, can you inform the commission as to who contacted whom in relation to this meeting? 60 A: I imagine that the first one was that Ian Cameron rang while I was tied up doing something and someone informed me of that. So I wrote his name down in brackets on the basis that I had to maybe ring him back, now that is one possible scenario, and we organised the meeting for 2.30. Now that is speculation.

PNGBCCOM 13/02/2003 2671

Q: Well, you had the meeting at 2.30.

A: Yes.

Q: And you raised some general issues about possibly bidding, is that correct, or lodging an expression of interest?

A: It was subject to the board approving - I mean here I am still exploring the 10 possibility of doing something that was a major transaction in the history of the bank and it is logical that I would talk to some people and if there was a person there connected with KPMG International, I think it is fairly reasonable to assume that he would be of some assistance to me in the concept of raising funds off- shore.

[2.57 pm] And that would have been the reason but as I said earlier, I am not known for the detail of recording minutes of meetings, that sort of thing. I am more of a doer than a recorder and I regret I cannot really give you any more concrete information about that. 20 Q: On 22 August you had the meeting with Mr Cameron, can you remember in substance what was discussed at that meeting and who organised the meeting?

A: I would have organised that meeting.

Q: And what in substance was discussed?

A: I cannot recall.

30 Q: Certainly the issue of PNGBC sale was discussed, you were not meeting him for some other purpose?

THE CHAIRMAN: On exhibit 199, you have got a note, lunch, offshore funding?

A: Yes, it would have been about that. That is quite clear. But I am just wondering, what else we could have discussed in the circumstances.

Q: You must have said something about whether you were too late to put a bid in for the bank? 40 A: Yes, well, we with all due respect Mr Chairman, I thought we had sort of covered that ground.

Q: Yes, but you thought you might have asked him that earlier than that?

A: Yes. And we would have talked about the fact that I had this board meeting on Friday and I intended to complete a paper which probably was in draft form at that stage.

[2.59 p50m] In fact the paper would have already been submitted as part of the board papers and I would have been just looking for as much comfort as I could about the prospect of raising funds. Because I think at that stage that I had doubts about how we were going to raise an unknown amount of money and I would looked a bit stupid if I had gone to the board meeting and said, well, we are going to try and raise the money in PNG. And the board asked me, well, what influenced you to think you can do that and I replied, well, we live in hopes. I had to be able to paint some sort of a picture and give the board some sort of understanding about the possibility. So, that was the main reason for that meeting. But I would expect that people who are acting for the Privatisation Commission were probably not 60 going to be in a position to say much to me anyway.

Q: Did they suggest you might get some money from Singapore?

PNGBCCOM 13/02/2003 2672 A: Yes, that is right. There is no doubt that that was the main part of the conversation. And I was surprised that they were pushing that view and indeed when I had a later meeting with Ian Cameron - I mentioned before that we had dinner later, they were really pushing the idea that this was a good idea. And I had to ultimately disappoint them and say, well, we really do not want offshore funding because it is going to weaken the rationale for the bid.

[3.01 pm] MR VARITIMOS: In relation to this off-shore funding, that was a suggestion that came from Mr Cameron, was it? 10 A: That is right.

Q: That is - it was a suggestion that BSP should look at some offshore funding to assist it in a bid for PNGBC?

A: That is right.

Q: And is it Mr Cameron who suggested that funding maybe available from Singapore? 20 A: That is right.

Q: Now you said in evidence before that you got the impression that KPMG may get some introduction fee for putting the deal together?

A: Well I just wondered why they would be pushing that line. I just felt that there probably had to be something in it for them. And eventually when I told Ian that we were not going to pursue it, he was a little bit surprised.

30 Q: Did Mr Cameron or anyone else from KPMG suggest the amount of funding that may be available offshore?

A: No, no he did not. I could not really talk to him about specifics because you know just at that stage I still had not discussed it with the board in a formal sense.

Q: Or did Mr Cameron actually go sofar as to suggest that KPMG could assist in obtaining some offshore funding for the bid?

[3.03 pm] A: He did not actually discuss how it would be done. He was just 40 saying that there was a venture fund in Singapore with whom he had a contact and that will be a source of funding. I think what he was really driving at was that he was encouraging me to put in the bid, yes.

Q: In what respects was he encouraging you, how did he encourage you?

THE CHAIRMAN: By suggesting where you might get capital from.

A: That is right. See at that stage I was not convinced that we were going to be able to finance the bid. You know it was very much up in the air stuff. (a) I did not 50 know how much we would need because I did not know what amount we would be bidding for. So it was very esoteric stuff.

MR VARITIMOS: Well, we get to a situation where you had the lunch with Mr Cameron, how long did that lunch take approximately by the way?

A: I am not in to long lunches. It would have only been an hour, an hour and a quarter.

Q: And the meeting on 20 August with Mr Cameron. How long would that have taken 60 approximately?

A: As I recall that would have been a fairly short meeting.

PNGBCCOM 13/02/2003 2673 [3.05 pm] Q: Now, we get to a situation where you attended a board meeting at Madang on 24 August. Is that correct?

A: That is right.

Q: Now, to enable consideration by the board you prepared a memorandum for the board. Is that correct?

A: That is correct. 10 Q: Now, apart from the discussions that you have referred to in your evidence today, were there discussions with any other members of the accounting or business community that you had in relation to the sale of PNGBC prior to 24 August?

A: I probably would have had discussion with Paul McClaren of Capital Stock Brokers who is a business associate and friend.

Q: And when is that conversation likely to have occurred?

20 A: No, I am sorry I have no idea.

Q: Do you know whether you had an actual meeting with him?

A: No, it would not have been a meeting. It might have been over a drink at the Crowne Plaza or it might have been lunch at Rickshaws or it might have been at the Pap Club.

Q: Well, do you recall whether you in fact had any discussion with Mr McClaren on the topic? Speculating? 30 [3.07 pm] A: Yes, it is speculating but he is a good friend and he is in the finance and broking industry. It would have been absolutely logical for me to talk to him about it and indeed he did endeavour to raise equity for me ultimately. And in fact there was a time where it looked as though he had organised a landowner group to contribute substantial funds. And they did not participate because of a timing issue. Sort of key principals were actually on holidays in Australia and they did not get back in time to commit the funds. Yes, I was looking at this landowner group who I believe are from Enga province. I was sort of putting them into the box of providing the funding. 40 Q: In terms of the day of the board meeting being 24 August, could you indicate whether you were aware prior to the meeting of 24 August 2001, whether any members of your board had discussions with members of the accounting and business community prior to that date about the sale of PNGBC.

[3.08 pm] A: No, I could not speak for them. I simply do not know. But, I would be very surprised if Noreo Beangke had not had discussion. I would be surprised if Tom Fox had not had discussion. We had two members of the board who were located in 50 Australia: Barry Hansen and Bruce Flynn. So, they would not have done that. But, you know, those two fellows that I have just mentioned, the chairman and deputy chairman, are very well known in the community and have a broad range of friends. And, if you are asking for my opinion rather than stating a fact, I think it would have been inevitable that they would have mentioned to someone or talked to someone about the possibility of raising funds in the local market to - because at that stage, I would have obviously spoken to Noreo and Tom. As I said earlier, we had a very close liaison and I talked to them about key issues.

Q: You told both those gentlemen that you were investigating possible expression of 60 interest for PNGBC?

A: They would have already received the board paper. We tried to get - mostly unsuccessfully - we try to get it out a week before the board.

PNGBCCOM 13/02/2003 2674 [3.10 pm] Q: Well, do you recall that there was a memorandum for the board prepared by you dated 24 August 2001?

A: That is right.

Q: But the board meeting, as I recall it, was in fact held on 24 August 2001?

A: That is right.

10 Q: So can I take it that this memorandum was not circulated prior to 24 August?

A: Yes, it was.

Q: It was?

A: Oh absolutely.

Q: Even though it had 24 August on it, that was just a reference to the board meeting date, was it? 20 A: That is right.

Q: Not the preparation date?

A: No, no, there was never a preparation date on the board papers that I have been involved in.

Q: So you think that this - well, let me take you to the specific document. Go to exhibit 12, volume 1, document 3. 30 A: Yes, I have that.

Q: That is a memorandum for the board that you prepared?

A: That is right.

Q: Specifically in relation to the concept of BSP acquiring PNGBC?

A: That is right. 40 Q: And do you see on the top in bold ‘Memorandum for board - 24 August 2001’?

A: Yes.

Q: Now the board meeting was held on 24 August 2001?

A: Yes.

Q: Now you are saying that you prepared this well prior to 24 August? 50 [3.12 pm] A: I do not know exactly what date I did that but given that, I did not get back from leave until 13 August and we normally tried to get the papers to the board a week before but invariably they got them on the Monday or Tuesday. I suggest that I would have prepared that on the previous Friday so it was probably 17th, 18th. It might have been early that week, possibly, could have been. You have to remember that the local board members were readily available. Noreo Beangke’s office was just around the corner from mine so it was easy to deliver papers, prepare something, deliver it same day to them. In the case of the Australian board members, we never sent them to Australia, they picked them up 60 as soon as they arrived and they would normally arrive on a Wednesday or Thursday. So they had a bit of reading to do as soon as they arrived. Yes, it could have been early that week.

PNGBCCOM 13/02/2003 2675 Q: When is it likely that you finalised this memorandum for the board? Not distributed, finalised.

[3.14 pm] A: Yes. It is probably the 17th or 18th.

Q: And when was it likely to have been distributed to the local members of the board?

A: I would say it would be early in that week of the 24th.

10 Q: So, the 24th was a Friday so Monday or Tuesday?

A: Yes, probably 21st.

Q: Could you just explain for my benefit. The second page of that document has got MD/NRS. That is obviously a reference to you.

A: Yes.

Q: And it has got 24/8/2001 immediately under that reference, you see that? 20 A: Yes.

Q: Does that not suggest that it was probably prepared on 24 August or not so?

A: Mr Varitimos, it could not possibly have been completed on the 24th. We were in Madang at that stage and I went over on the day before. I would not have carried a computer and a printer with me. As I suggested or as I intimated that it would have been prepared on the previous Friday the 17th or maybe Monday the 20th and distributed on the 21st. 30 Q: The fact that there is a reference to a date under your initials on the second page in your mind does not deviate from the fact that it was prepared earlier than that date?

[3.15 pm] A: No.

Q: Because in fact your diary seems to suggest that you visited Madang on the 23rd?

A: That is right, yes. 40 Q: So you are very confident that it was prepared by no later than Monday 20 August?

A: That is right.

Q: If I could take you to that document. The first sentence says, following discussion with members of the accounting and business community over the past 10 days it is clear that the perception is that ANZ remains the front runner for the acquisition of both PNGBC and Bank of Hawaii. Do you see that?

50 A: That is correct.

Q: You prepared this memorandum yourself, did you?

A: Yes.

Q: Which members of the accounting and business community did you speak to over the past 10 days which gave you the clear perception or the perception that ANZ remained the front runner for the acquisition of both PNGBC and Bank of Hawaii?

60 A: I gave you a list of people at the top just for your particular benefit and- - -

Q: This is on the top of exhibit 199?

PNGBCCOM 13/02/2003 2676 A: Yes, that is right. Ian Clarke, David Murray, Rob Southwell, Paul McLaren and to a lesser extent Philip Olsen and then he probably would not have had any contribution to that.

[3.17 pm] Q: Just try to clarify this, we have got a memorandum to the board as 24 August, but you have explained that it was prepared no later than 20 August. Do you agree with - that is what you said. Do you agree with that?

A: Yes. 10 Q: You prepared it no later than 20 August?

A: Yes.

Q: Now, this is talking about discussions with members of the accounting and business community over the past 10 days. Do you see that?

A: That is right, yes.

20 Q: So that will take you back to the 10th in theory, 10 August?

A: No, 14 August.

Q: You are talking the 10 days back from the 24 August even though it was prepared?

A: That is right.

Q: On the 20th?

30 A: That is right. This document is tabled on the 24th. It is dated the 24th and I am talking about the 10 days prior to the 24th so do not let us sort of read too much into this. I do not really understand just what you are driving at and I cannot tell you more than what is in this memorandum or what I have already told you about discussions because you are going to try and lead me into speculating and perhaps inappropriately misleading you.

Q: I do not want you to speculate and I do not want you to mislead any one, Mr Smith.

40 A: And I do not see what that is going to achieve.

MR ANDERSEN: Well, I think Mr Commissioner that is the end of it. I mean he said I have got no better recollection. Anything else would be speculation and possibly misleading. I mean that is the end of it, surely.

MR VARITIMOS: I am not going to ask him a question.

THE CHAIRMAN: Well, I am not satisfied. I am not satisfied with that. You see Mr Smith you came back from overseas on 13 August. You have now said that you had the meeting 50 with Storm and Westaway on the 14th?

A: Correct.

Q: And you wrote this memorandum on the 20th. That was the latest time that you would have written the memorandum. So the opportunities of speaking to people are between the 14th and 20th. That is only a 6 day period?

[3.19 pm] A: That is correct.

60 Q: Now what members of the accounting and business community did you speak to during that six day period to gain the perception that ANZ remains the front runner?

A: Ian Clarke, David Murray, Robert Southwell and Paul McLaren, Mr Chairman.

PNGBCCOM 13/02/2003 2677

Q: Well, you have not got anything in your diaries to suggest that you spoke to those people before the 20th. The only people that you have mentioned in your diary are the Steamships lunch on the 15th and the Chevron function on the 20th.

A: Yes that is correct.

Q: Now you did not mention talking to Ian Clarke and David Murray and Southwell or McLaren or Philip Olsen at either of those two functions? 10 A: I am sorry but I do not understand what you are saying.

Q: Well it is fairly clear, you wrote a memorandum to the board saying that you had discussions with members of the accounting and business community over a period of time.

A: Which I do on a day-to-day - sorry which I do a day-to-day basis.

Q: Well surely you could say who it was in that six day period that you spoke to about 20 the bid?

A: Mr Chairman, for the benefit of the Commission I have gone out of my way to do a chronology of events and a suggestion of people with whom I believe I would have spoken to. I did that of my own volition for the purpose of assisting you in getting through this process. So I can only repeat what I said to you. The people with whom I would have spoken in the period prior to the board meeting are Ian Clarke who is a lawyer and has had a long experience in PNG. He visits PNG regularly, he would have a good knowledge of just what is going on because he has a firm operating here and the partners of that firm would be giving him information. 30 David Murray, who is the auditor for BSP. He is involved in a number of different - he was involved in a number of different organisations as senior partner of Deloittes. Rob Southwell has been here for over 10 years. Paul McLaren is involved in - I mean trying to convey that those are the sorts of people that I would have been speaking to, but I cannot be categorically definitive about specifically who I had a discussion with. But, with due respect, what is the importance of that?

[3.21 pm] MR VARITIMOS: Perhaps I should ask you some questions, Mr Smith. The memorandum for the board which has at the top, date 24 August 2001 was prepared by you. Are you 40 satisfied with that? Is that correct?

A: Yes, I did say that earlier, Mr Varitimos.

Q: Yes, thank you Mr Smith. And, the position is that - or would you agree that the matters contained in the submission or the memorandum to the board were accurate?

A: Absolutely.

50 Q: Now, you have indicated in that memorandum for the board, that following discussion with members of the accounting and business community over the past 10 days, it is clear that the perception is that ANZ remains the front runner for the acquisition of both PNGBC and Bank of Hawaii. Do you see that?

[3.23 pm] A: Yes, that is right.

Q: I take it that that statement, it is clear that the perception is that ANZ remains the front runner, was obviously obtained by you following those discussions with the members of the accounting and business community? 60 A: That is correct.

Q: You have had the benefit of reference to your diary in evidence today?

PNGBCCOM 13/02/2003 2678 A: That is correct.

Q: I asked you a considerable number of questions about discussions that you had with various people mentioned in your diary. You agree with that?

A: Yes, that is correct.

Q: You of your own volition, as you correctly stated, prepared the document which forms exhibit 199 and the document that forms exhibit 200? 10 A: That is right.

Q: They were prepared, to a large extent, to assist you in your recollection of events?

A: That is correct.

Q: Including recollection of discussions that you had with various people about a potential bid or acquisition for PNGBC?

20 A: Yes.

Q: As I recall your evidence, you indicated that the matters contained in exhibit 199 and exhibit 200 were correct?

A: That is right.

Q: But, that the position was that there may have been meetings or discussions with other persons not mentioned in exhibit 199 and 200 relevant to this acquisition?

[3.25 pm30] A: That is right.

Q: Now, it is my recollection with respect that during your evidence today when I asked you about discussions with various persons in relation to the acquisition of PNGBC that you did not make any mention of any discussions with members of the accounting and business community who suggested to you that ANZ remained the front runner for the acquisition of both PNGBC and Bank of Hawaii. Do you agree that in your evidence today and in fact previously you did not identify any members of the accounting and business community prior to 24 August 2001 who gave you any information to suggest that ANZ remained the front runner for the 40 acquisition of both PNGBC and Bank of Hawaii?

A: Whilst I did not have a formal - - -

Q: No, sorry, do you agree if that is correct what I have put to you?

A: Could you repeat the question please?

Q: Do you agree that during the course of your evidence including today you did not identify conversations with any persons prior to 24 August 2001 along the lines 50 that ANZ remained the front runner for the acquisition of both PNGBC and Bank of Hawaii?

[3.27 pm] A: That is correct.

Q: Now, could you please identify the members of the accounting and business community who you spoke to prior to 24 August 2001 which enabled you to form the view that ANZ remained the front runner for the acquisition of both PNGBC and Bank of Hawaii?

60 A: I think that it is reasonable for you to accept when I say that that would have been Ian Clarke of Gadens with whom I had had discussion. David Murray who whilst I did not have a formal meeting, he is after all the senior partner of Deloitte Touche Tohmatsu who are the bank’s auditors and I would have thought it was reasonable for you to accept that I could have a discussion with him. Rob Southwell who I

PNGBCCOM 13/02/2003 2679 have explained is a personal friend and a senior partner in an accountancy firm and Paul McLaren who is involved in the business community. But I am not saying that that is an exhaustive list. There could have been others but unfortunately, as I have explained before it is not my practice to do detailed recordings of telephone calls or meetings and sometimes indeed I have meetings that I fail to record in my diary.

[3.29 pm] THE CHAIRMAN: It must have been at that time - if you bear in mind that the expressions of interest would have closed by 24 August, the initial expressions of interest. So, if you 10 say that the perception is that the ANZ remains the front line, it must have been knowledge in the business or accounting community that the ANZ had expressed interest in buying BSP - I am sorry, in buying PNGBC?

A: But Mr Chairman, you were in fact right when you said BSP because they had previously expressed an interest in buying BSP. But in respect to the purchase of PNGBC, I think the majority of people in the business community would have accepted just from the fact that there was local knowledge or discussion whether it be in dinner talk or bar talk that ANZ were indeed a front runner. Because I think there would have been a perception that BSP would not have had the resources to 20 do it so whether they knew we were interested or not, they would have discounted us.

I knew that ANZ would be vitally interested because the regional manager for the Asia Pacific region had said to me that it is their business plan to double their business in the Asia Pacific region within two years. And there was no way they could do that by organic growth. They would have to buy or they would have to make an acquisition and Bank of Hawaii was not going to achieve that extent of growth. So, they were an absolute certainty to be vitally interested in buying PNGBC. And I really believe that people would have thought that because of their 30 ability to generate huge profits in Australian dollars would have suggested that it would not have been difficult for them to find the capital.

And I have to say that right along during the process, my fear was that they could just write out a cheque for whatever amount was needed. And at the end of the day, I was absolutely amazed that they did not put in a larger bid.

Q: What about Westpac on 24 August 2001?

[3.32 pm] A: You see Westpac had not been a great performer in PNG. And if someone would 40 have asked me, is Westpac going to bid, I would have said, well, they are not that aggressive. When I came to PNG in 1991 Westpac had around 24, 25 per cent of the market. By the time we got to the end of 2000 we had had 5 per cent of the market in ‘92 and we had past them. So they went backwards from 24, 25 and I believe their percentage at the moment is about 16, might be a little bit more than that, might be 17. But they had lost ground and it did not seem to concern them. I discounted them because of that fact. I mean they had actually closed some branches around PNG. They did not seem to be an aggressive bank to me, whereas ANZ was completely different. We saw them as the major competitor. And as I said, I had first hand knowledge from Allen Marlin’s boss that he was 50 focussed on growing the business. And I think everyone else felt that way. I mean you can determine how the players operate in a business community, and ANZ stood out as an aggressive performer and they had the resources. They had a huge advantage over us, and I was not all that confident, I must admit, that we were going to win this. And for that reason I was placing great store on the national platform, and then with much relief that Deloittes were able to come up with an entrepreneurial approach to reduce the need for raising a significant- - -

Q: Is the accounting and business community in Port Moresby a fairly small group?

60 A: It is.

Q: And they like to gossip, no doubt, like other people about business matters?

A: Yes, that is right.

PNGBCCOM 13/02/2003 2680

Q: And a matter such as the sale of a bank surely would be a matter of topic of conversation whenever they gathered over a drink?

A: That is right.

Q: And it would not be beyond the realm of possibility that people would know who had expressed interest in selling in buying the bank?

[3.35 pm10] A: It would be an assumed thing. I could not see how they could be aware of that specifically. But, you are quite right about the small size of the community and how people get to talk. And, that is why I feel that it is not an inappropriate comment to say, you know, from my discussions with members of the accounting and business community. I mean I did have to make a lead in comment of some sort. I could not start off the memo, “We should buy the PNGBC”. I had to lead in with a comment.

Q: Well, just coming back to the things that we are interested in at the moment. There are two sources of information, accurate sources of information if I could call 20 it that, as to who had put in expressions of interest. Now, I am not saying that people would tell you directly who have, or who have not put in. But, KPMG would be capable of knowing who had put in expressions of interest by 24 August?

A: KPMG International would have specifically.

Q: And they are in the same office, or the same building as KPMG local.

A: Are they?

30 Q: I do not know. Are they?

A: No, I do not- - -

Q: They are not?

A: No, I do not think so.

MR ANDERSEN: I gave evidence at times they were and at other times they were not. They were located in Pacific Place building, whereas KPMG’s accounting is in Mogoru Moto. 40 THE CHAIRMAN: The World Bank is another opportunity, who seemed to know that?

A: Yes.

Q: Because the World Bank had Dr Fallon; he was the project manager for the Privatisation Commission. So, the World Bank would know who had put in expressions of interest?

A: Mr Chairman, I did not have any dialogue with the World Bank except for 50 infrequent meetings. They would sort of call an industry meeting and I would attend as the chairman of the Commercial Bankers Association or as the representative of BSP. But, they were fairly infrequent meetings; maybe only once every six months or something like that. But, I do accept your point and it is a valid point. I have volunteered the information, and I had a number of meetings with Ian Cameron who indeed was advising the Privatisation Commission. But - - -

[3.38 pm] Q: And would be able to say whether there had been much interest in it or any interest at all in it?

60 A: Yes. But there is no reason why Ian Cameron would be one to give me any leg up. He was an acquaintance, not a friend. It was purely a business thing and he was - I think his mission was to ensure that there was another bidder on the scene and his focus was to make sure that I was very aware that I should not drop the ball because I had some concerns about raising the capital.

PNGBCCOM 13/02/2003 2681

Q: Yes. Well, you see that in itself, that in itself would lead to a deduction there was not much interest in the bank if Mr Cameron was trying to interest the BSP into putting in a bid, putting in a late bid.

A: Yes. And I think he would not be doing his job if he did not do exactly that. In my view he did it too well. Not only did he encourage me to put in a bid, you know, with the - giving me the knowledge, hey, you can raise funds offshore if you need to. When we ultimately put in a bid he arranged for us to increase the bid. So, he 10 did a very good job for the privatisation commission I would suggest.

[3.39 pm] MR VARITIMOS: Mr Smith, was it the position that at the time that you lodged the expression of interest on or about 27 August 2001 that you were aware that there was in fact very little interest in an acquisition of PNGBC?

A: Yes that is correct.

Q: And you managed to gather that information from speaking to members of the accounting and business community? 20 A: That is correct.

Q: And did Mr Cameron, was Mr Cameron one of the members of the accounting or business community that you gained that knowledge from?

A: No, I did not gain any knowledge from Mr Cameron about who were the bidders. I would have thought that it was necessary if he was going to carry out his job properly that he could not talk about that sort of thing. The knowledge in the industry was that there were other bidders but no-one really knew. I was told 30 that there was a Malaysian bidder and I thought well, that is interesting because I wonder who that is. I discounted that it would be Maybank. I thought that it might have been the bank that should some interest in acquiring BSP in the early 90s. There was a crowd called Dragon. In fact I came up here at a time when Westpac had made an offer to acquire BSP. That was the reason why I came to PNG in the first place to turn the lights out and send everyone back but the Government stepped in and blocked the sale.

[3.41 pm] I was here a minister without portfolio and I had to stay and see if I could make some money for the National Australia Bank. And there was this Malaysian 40 company who was a bidder, who was interested at the same time as Westpac and Bank of Hawaii indeed was talking to NAB in Melbourne about it at the same time. So, yes I thought well I wonder who this Malaysian company is, but I had no clue until just a little bit later on when we got together meaningfully with Gadens that it became - that I knew that it was Elders.

Q: In terms of enabling you to write in the memorandum for the board that there was - that it is clear that the perception is that ANZ remains a front runner for the acquisition of both PNGBC and the Bank of Hawaii. You gained that information or can you say whether you gained that information from in fact Ian Clarke, Mr 50 Murray, Mr Southwell or Mr McLaren?

A: I would - if I had to attribute it to one person, it would have been David Murray because I had a lot of discussion with David. David was the one with whom I gave the sort of dummy expression of interest for - with Bank of Hawaii. And because David was the senior partner of our auditor I had a lot of discussion with him and- - -

Q: Which included who may bid, who may be the front runners, et cetera?

60 A: That is right. Yes. David is a very reputable person, well respected in the community, he has been here for a long time. Had a lot of contacts and you know if he said to me that ANZ is a front runner or as far as I am concerned ANZ would have been the front runner, no-one would have been in a better position than David Murray, I would have thought.

PNGBCCOM 13/02/2003 2682

Q: Why is that? Why was he in such a good position, Mr Murray?

A: Because of the breadth of contacts he has in the business community and of course he heads up a very big team of people who also have contacts in the community and he would be having staff meetings or whatever and they would be talking about what is going on, what opportunities are there for us to act for someone. I can tell you that David appeared highly delighted when I suggested that he should act for BSP. 10 [3.43 pm] And I mean David is not stupid. He sees an eye to the main chance like everyone else and he would have been very keen to talk to me about it I would suggest. But I have got to come back to my statement that these are recollections, they are absolutely not specific and I regret in some ways not being more particular about recording things so that I can make a better fist of answering your questions.

Q: You go on in that same memorandum you prepared for the board to say however ANZ’s results of 62 percent share of the market is not considered the best outcome for the country. Where did you obtain that information from? 20 A: Well I used to monitor very closely market shares. Immediately information came out of the Central Bank, I would record it, I would look at who is putting on lending. The 62 percent share related to my view of real market share and that is the size of the loan book. Some people will say, oh well, what about the deposit book. You can go out and buy deposits any day you like but you cannot go out and lend money every day you like. We talked about capitalisation the other day. That is not all that meaningful in my view. The real measurement is the amount of business you are doing in the market and sorry, I was just going to go and say that I simply added ANZ’s market share, PNGBC’s market share and Bank of 30 Hawaii’s market share together and it added up to 62.

Q: Well, you were aware of the figure 62 percent but the second part of the sentence. It goes on, says however ANZ’s result of 62 percent share of the market. Then it says is not considered the best outcome for the country. Where did you obtain that information from?

[3.45 pm] THE CHAIRMAN: Well, who considered it, not to be the best outcome for the country?

40 A: Well, me.

Q: You did?

A: Yes. Over the 10 years I have been here, I have been involved in a lot of industry groups, consultative groups, information groups. I have spoken at various seminars, I have spoken at the national development forum. I am involved in the consultative monitoring, the CIMC, consultative, whatever. And so the national aspect has always been very important to me. I was running a nationally owned private sector bank. And I am invariably asked, what are the economic conditions, 50 why is the country not developing and what are the foreign currency reserves, why are we not exporting this industry better than we are not, why are we not creating any employment? I was thinking about what is in the best interests of the country. And I do not think there is - my view is that there would not be anyone in the banking industry who knows more about the banking industry than Noel Smith. And because I have been here for 10 years, people would expect me to know that.

Q: How would you rate the governor of the central bank?

60 A: How would I rate him?

Q: Yes, in pecking order of knowing about the banking industry in PNG?

PNGBCCOM 13/02/2003 2683 A: I probably would not rate the governor because he is a central banker as opposed to a commercial banker, but he has a very long experience in the industry through his supervisory and regulatory responsibilities. He is highly respected and highly regarded.

Q: But he might have a view about the concentration of the banking industry?

[3.47 pm] A: Well, I think I said yesterday or the day before that that would surely be a concern if a foreign bank had a dominant position in the market and then decided for 10 whatever reason like National Australia Bank did in 1993 to pull out of the country. I do not think that would be a very good outcome for the Central Bank or the government and they would be somewhat on tenterhooks I would suggest if the business was going to be up for sale and they did not know who was going to win it. I can tell you that the government were extremely disappointed with the National Australia Bank pulling out. So I saw it maybe as a risk to have a foreigner having such a dominant share of the market. I thought it would be better for a nationally owned company who was not going to go anywhere and when you consider that the bank that I now manage as an extremely strong supporter of the government in terms of assisting in it funding its domestic book, 20 we have got at the moment K504 million invested in treasury bills. We are a major lender to the major institutions.

Q: This is the amalgamated company?

A: That is right. But even before that the bank was involved in lending to organisations like Elcom and Telikom but I believe that it is better for a well run nationally owned company who understands the needs of the country like BSP now does and lends significant amounts to organisations like Air Niugini which I would suggest foreign banks might be reluctant to do and 30 [3.49 pm] I also suggest that foreign banks would be reluctant to have the exposure that our bank has to the government in terms of an investment portfolio because the thing that foreign banks think about is sovereign risk and one could form the view that may be it is not the most prudent policy to expose ones self to the extent that BSP is to this government.

Q: Well, of course, you have got the guarantee for what it is worth.

A: No, I do not think we have. 40 Q: Guarantee that the government will meet the debts of state organisations.

A: To individual organisations, yes, that is right, but as- - -

Q: Yes, so if you lend to a government organisation you have a guarantee from the state that they will pay the debt?

A: Not in all cases. PNGBC prior to BSP amalgamating with them did not have a state guarantee for the entire debt. The only reason, not the only reason why, one of 50 the reasons that influenced us to lend to Air Niugini recently was the fact that we could obtain a guarantee and at the same time we obtained a guarantee sufficient to secure the whole exposure that we had which we thought was a win. But I think - I am just making the point there, Mr Chairman, that it was a reasonable view to have that - it was not considered the best outcome to have a foreign bank having such a major share. And as Mr Varitimos and I discussed yesterday or the day before that we saw a dominant ANZ as a major threat to us and I do not think the Central Bank would have been happy to see the nationally owned private sector bank losing market share and seeing a foreign bank increase its share from 62 per cent to a larger figure. 60 [3.52 pm] Q: Have you ever been in a seminar or a function where the governor of the Central Bank expressed a view similar to yours about a foreign bank owning the majority interest of the banking industry in PNG?

PNGBCCOM 13/02/2003 2684 A: No, I have not. The first knowledge I had of that sort of view and the words were concentration was recently and it might have even been in the transcript of evidence at this inquiry, that is the only- - -

Q: Yes. And that was reason why he gave for telling Westpac that they would not succeed in the bid to acquire PNGBC and the bank of Hawaii. Now if you follow that rationale, the ANZ bank would have no chance of succeeding in their bid either?

10 A: That is right.

Q: Yes.

MR VARITIMOS: In relation, Mr Smith, to the reference in the memorandum, however ANZ’s resultant 62 percent share of the market is considered the best outcome for the country. Had other persons expressed that view to you at any time or a similar view?

A: No, that was just a view I had and I expressed it when I was writing the memorandum. 20 Q: You go on to immediately say indeed there is a belief in the community that PNGBC should remain a national institution. In relation to that reference to a belief in the community where did you obtain that information from?

[3.54 pm] The main thrust that I had was the nationally owned factor and the benefits to the economy and I would have expressed those views to the people that I spoke to and whether they were agreeing with me just for the sake of agreeing or whether that was their genuine view, I do not know. But the people that I spoke to were in agreement that it would be the best thing for the country for ownership to stay. 30 And I do not think you can argue with that providing you get a very sound management. And obviously the concept of PNGBC being sold to the public as someone suggested certainly would not have been the answer. I think it is an absurdity to think that you can solve the problems that an organisation as big as PNGBC were by not changing the management structure or increasing the management skills or making significant change and just worrying about the capital structure of the company. It was obvious that it was going to be in the best interests of the bank, the government and the people to do this as a trade sale and have the skills come to the organisation to manage it effectively and to maximise the huge potential that existed to generate profit and dividends in the 40 future.

[3.56 pm] COMMISSIONER WAROKRA: The national interest concept was adopted by the board and the chairman of the board would have pushed this idea in his discussions with other leaders or other business people.

A: You are right Commissioner. The chairman is a very nationalistic person. He is very proud of his country. He is a former Finance Department secretary and he was very keen to see us be successful in this bid. He saw that it was as good a thing that could possibly happen. 50 Q: This would also have been one of the considerations apart from the economics of it that you would have discussed with people like the governor of the bank?

A: I do not think I had a meeting with the governor between when I got back from holidays and we had the board meeting but very soon after we had the board meeting I called on the governor as a matter of courtesy with Noreo Beangke and discussed it.

Q: What about the meeting with the Prime Minister? 60 A: Yes, that was a courtesy call given that the Prime Minister was a former Central Bank governor with whom I reported to and a former chief executive of PNGBC. And he was a strong acquaintance of the chairman. We thought it was politic or appropriate to formally advise him that we were indeed making a bid.

PNGBCCOM 13/02/2003 2685

Q: By the 24th, the board would have known that ANZ was the front runner so you would have chosen the national interest perspective to push the agenda that we need to keep PNGBC a national institution and using that concept you have talked to a number of people including the Prime Minister and making sure or at least supporting BSP in its bid for purchase of PNGBC?

[3.58 pm] A: You are right Commissioner, I think it is fair to say that we did need the support of the various parties associated. We needed the support of the privatisation 10 commission as much as they needed, we needed them to accept our non- conforming bid. We needed the support of the Central Bank because our capital adequacy was under the prudential guideline. And if it got down to a flick of the coin as to which bank should win it if the bidding was close, I would have been extremely disappointed to find that the privatisation commission awarded it to the ANZ, if there was virtually no difference in the price. Because I would have thought there were greater inherent benefits in BSP winning the bid than ANZ. And I tried to reflect that in the memorandum to the board.

Q: Would the national interest also had been a consideration in extending what was a 20 - extending the date for the initial expression of interest in bidding process?

A: I do not know whether that is right specifically. I think it was moreso that the more bidders the higher it was likely that the bid process would, you know, the bidding would get to. I mean if there was only one or two bidders and one was a very large international bank and the other one was a very small New Zealand company where one had clearly huge resources and the other did not, it would be better to have another one, two or three bidders in there to try and get some competition going and to ratchet up the price because the price concern of KPMG would have been to get the highest possible price and satisfy themselves that it 30 was a fair and reasonable bid. So the more, the merrier, I would have thought.

[4.01 pm] THE CHAIRMAN: Just before we adjourn, the meeting that you and Mr Beangke had with the Prime Minister was on 12 September according to the diary note that you made, 12 September 2001. When was the meeting that you had with the governor Mr Kamit? That you and Mr Beangke went to see him?

A: Yes. I do not think my diary shows that. I can distinctly remember going to see Mr Kamit with Noreo Beangke and we certainly had subsequent meetings in- - -

40 Q: Yes. There is another meeting on 26 September with Mr Kamit apparently in your diary. But I am just wondering when you mentioned that one that you went with Mr Beangke whether it was closer to the visit to the Prime Minister?

A: Yes. It is unfortunate that I have not recorded that meeting but it would have happened early in September. I suggest the meeting with the Prime Minister was later because he is probably a very difficult person to see. But I did not drive that. That was Noreo Beangke who made the contact and - that was a relatively short meeting with the PM. It probably only went for it- - -

50 Q: 30 minutes I think you had noted in your diary.

A: Yes, that is right.

[4.03 pm] Q: You think that you would have seen the governor before you saw the Prime Minister?

A: Absolutely, absolutely.

Q: All right, thank you. We will adjourn now until 9.30 in the morning at which time 60 Mr Littlemore and Mr Andersen will ask you some questions, and I think they can decide overnight which one goes first.

MR VARITIMOS: Sorry, Mr Chairman and Commissioner- - -

PNGBCCOM 13/02/2003 2686 MR LITTLEMORE: Unless Mr Yama comes first, of course.

MR VARITIMOS: I have spoken to both Mr Littlemore and my learned friend Mr Eric Andersen, and they are both happy to start at 11 o’clock because they will not be long.

THE CHAIRMAN: Yes, all right.

THE WITNESS WITHDREW 10

AT 4.04 PM, THE COMMISSION OF INQUIRY WAS ADJOURNED UNTIL FRIDAY 14 FEBRUARY 2003 AT 9.30 AM.

INDEX OF PROCEEDINGS

WITNESS PAGE

20 NOEL RAYMOND SMITH, RECALLED 2633

XN: MR VARITIMOS 2633

THE WITNESS WITHDREW 2731

PNGBCCOM 13/02/2003 2687