PNG Hospital Contract Allegedly Given To Defunct Company

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Taskforce reports contractor also lacked proper expertise

PORT MORESBY, Papua New Guinea (PNG Post-Courier, March 11, 2013) – In Papua New Guinea, investigations have revealed that a contract worth K9.78 million [US$106,051] for the renovation of the Port Moresby general hospital’s Accident & Emergency department was awarded to a deregistered company with work still incomplete.

Chairman of Task-Force Sweep, Sam Koim, when submitting the final report of their investigations revealed, amongst others, that the contract of K9.78 million was awarded to a company (named) that was and still remains deregistered, according to recent company extracts obtained from the Registrar of Companies.

"By nature, a company is a legal entity or a so-called fictitious person that exists because the law breathes life into it and confers certain rights and obligations upon it. Registration grants a company the legal capacity to enter into legally binding transactions and engage meaningfully in commerce," Mr. Koim said.

"The legal effect of deregistering a corporate entity is that it deprives it of its legal existence. It ceases to exist and doe not have the capacity to enter into any legally binding business transactions," Mr. Koim said.

He said the investigations also revealed that the directors and shareholders of the deregistered company then registered another company with almost an identical name two months after the signing of the contract but kept the bank accounts under the deregistered entity’s name, and interchangeably used the two company names, creating further confusion to the state officials who were dealing with them.

"Not only was the contractor/company taken off the roll, the contractor did not have the finance to carry out the works on its own financial strength,"" Mr. Koim said.

"This is evident by the fact that soon after the contract was signed, the contractor demanded a 30 percent upfront payment which was inconsistent to the terms of contract. The state did not honor that demand and after a long delay, the state finally agreed to make a 15 percent upfront payment and the construction commenced in October 2010."

Mr. Koim said the investigations further revealed that the contractor also lacked the technical expertise and opted to use cheap materials instead of the quality ones specified in the contract.

For instance, the roof was originally designed and contracted as precast concrete systems to match the existing roof but this was changed during the construction to standard metal roofing, apparently at lower price, over steel frames.

The contractor knowingly claimed K1.1 million [US$11,928] for just doing a simple metal roof that would have cost less than K200,000 [US$2,168], Mr Koim said.

"Considering all these, I am wondering whether the CSTB had done its due diligence to satisfy the requirements under section 42 (5) of the Public Finance Management Act? CSTB decided to award the contract to this contractor which was the highest bidder against the pre-bidding preference by the Health department, yet could not get the basics right.

"The State seemed oblivious to the contractor’s legal capacity and further failed to monitor the project, all of which had provided the impetus for poor workmanship and unjust enrichments," Mr. Koim said.

He said the contractor was now claiming more than K15 million [US$162,655] of which around K9 million [US$97,592] was already paid. The works were however substandard and incomplete, leaving the unit unoccupied until another K8 million [US$86,749] was raised to do remedial works and subsequently commissioned by Prime Minister Peter O’Neill on Christmas Eve, 2012. A total of K17 million [US$184,342] was raised and spent on the project that is less than half that amount.

A consortium of independent engineers had been engaged in this investigation and their valuation reveals that merited performance of the contract is valued at K6,090,479.25 [US$66,042].

This means that the State had overpaid the contractor by at least K3 million [US$32,530] at this stage.

"Doing business with a non-existent entity will not inhibit the State’s ability to recover what is owed. Pursuant to section 373 (1) of the Companies Act 1997, upon deregistration, the deregistered company’s shares and assets are vested in the Registrar. We do not know whether the Registrar had exercised that right but we will be writing to him," Mr. Koim said.

"We are also recommending to the Attorney General to consider civil action against the directors of and the deregistered entity on quantum merit basis so as to prevent the contractor and its directors from unjust enrichment," Mr. Koim said.

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