File picture- CPC Chairman and bank CEOs at a press conference on hedging |
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Stunning revelations about an unprecedented deal running into millions of dollars, a court order to reduce the price of petrol, culprits responsible for the sordid transactions walking away ignoring public opinion and escaping the legal net – all in relation to the oil hedging imbroglio is now part of the history of this country. Whether the case will be consigned to the political dustbin is a matter for conjecture. Will the tax payers finally pick-up the bill for clearing up the mess?
The deal
It is no secret now that the CPC (Ceylon Petroleum Corporation) entered into several questionable agreements with some foreign and local banks in respect of oil imports to the country. Further it has come to light that these agreements made CPC a casualty making it liable to pay millions of dollars to the counterparts due to lack of built-in safeguards to cover the risk exposure of the CPC. For the banks these agreements were like –“ heads I win and tails you lose….” situation!
The impugned oil hedging agreements with five banks viz., Standard Chartered, Citi, Deusche, Commercial and People’s have been concluded after lengthy and protracted negotiations preceding the sealing stage. The modus operandi has been heavily canvassed by the banks on behalf of their hedging principles behind the scene with very generous ex-gratias. Money has allegedly flown in to ‘grease’ those responsible for making the necessary recommendations from top to bottom. Ministerial tours, entertainments and bribes to others, including foreign trips, night clubs, golf games in Singapore, sumptuous meals and hosting for other nefarious activities seem to have crossed the borders. The period during which these niceties and goodies have exchanged perfectly coincide with the brooding and hatching of this heinous operation. The fact that this expenditure bill has been footed by one of the banks involved in the deal is of noteworthy significance.
There is also enough proof in the form of payment vouchers of the air tickets provided to certain public officials. No action appears to have been taken against these officers despite the fact that such activities constitute unethical practices which warrant a reprimand and severe punishments under disciplinary codes. While the reason for not initiating disciplinary action against them is not known, the public vigilantly watching the episode are badly disappointed.
The Supreme Court in no uncertain terms has held that the agreements were flawed and the role of the officials involved were questionable. Although the impugned activities warrant immediate reprimand nothing of the sort seems to be happening. The relevant authorities appear to have ignored and disregarded these pronouncements. The Central Bank of Sri Lanka (CB) too has pointed out several lapses and short comings on the part of the banks in this regard.
Particularly the aspersions cast by the CB on the role of the People’s Bank, being a state owned institution are serious. Two of the payment voucher copies happened to be in respect of air tickets issued to two senior officials of the Peoples Bank both of whom are directly involved in the hedging transactions.
A proper investigation will no doubt trigger events that may lead to shocking violations and gross dereliction of public duty on the part of the officials involved for obvious personal reasons. But the immunity they seem to enjoy appears to be strong to provide them the protection for a scot- free walk away.
The landmark order of the Supreme Court was welcomed with a sigh of relief by the general public. The sordid affairs underlying the transactions as revealed caused shock waves throughout the country. People expected the government to take immediate appropriate action to safeguard the public interest but unfortunately it did not so happen.
Effects of hedging agreements
The agreements entered into with five banks remain in force to date. Their validity continues in some cases till Nov 2009.The huge liability accruing due to these agreements continue to grow to huge amounts. As reported the current commitment of the CPC is well over $800 million. After the Supreme Court vacated interim decisions made in the hedging case and dismissed the petitions due to the failure of the government to implement the court decisions relating to fuel pricing, the agreements have become valid once again.
Unless they are specifically declared ab-initio bad in law, null and void, all parties become liable under these agreements, which are said to be one sided and heavily in favour of the banks. The resulting loss to the country will be huge and unbearable.
The CB, following a initial examination which commenced on 17th Nov.2008, in terms of Section 29(1) of the Monetary law Act about the hedging agreements between the CPC and several licensed commercial banks, has pointed out that as Authorized Dealers, banks have not been fully compliant with the provisions in their directions issued as far back as December 2005 on financial derivative products. The CB has stated that these non –compliances extend to directions issued by the Controller of Exchange too.
The Central Bank has indicated the following lapses on the part of the banks-:
- Failure to carry out the Credit risk, Market Risk and Operational Risk assessments;
- Failure to communicate to CPC the risks of using the underlying hedging contracts for speculative purposes;
- Failure to ascertain CPC’s ability to fulfill its obligations arising from the downside risks associated with these hedging contracts;
- Failure to ensure a high level of transparency with respect to risks and other parameters associated with the contracts;
- Failure to adhere to meet the required eligibility criteria (in the case of the PB only) ;
The CPC too as reported has not followed proper procedures before entering into hedging contracts such as by not consulting the AG and obtaining his opinion before going ahead with the sealing of these contracts.
According to newspaper reports the CB has arrived at the conclusion that the CPC should not honour its hedging obligations.
Whether the CB ruling is strong enough to stop the payments due to the banks on these agreements is yet to be seen. Banks are reacting differently in order to get their share and demanding the commitments due to them by the CPC. They may also be applying pressure on the authorities to decide in their favour.
It is also rumoured that the banks are pursuing the possibility of securing these payments even on a delayed basis by offering to reschedule the liability on a restructuring plan. Whether paid immediately or on a staggered basis, the loss to the country on these faulty contracts remains the same. The ostensible extension of a so-called facility to stagger the repayment has to be understood in its correct perspective.
Some economists and experts have opined that a default in these payments by the CPC could shake the investor sentiment in Sri Lanka leading to negative repercussions internationally. This is not a tenable argument.
In the first place no one is suggesting that the CPC should default the payment. But according to the circumstances if the agreement has to be abrogated or cancelled it is a different story.
A private bank committing an error in the preparation of an agreement enforceable in law will have to face the consequences of such lapses or errors when the matters are challenged. It is not an uncommon thing or experience for banks whether local or international to face such eventualities. There are instances where the banks had to abandon claims on customers due to faulty documentations. If it is found that the banks have violated some regulation or practice those officers responsible for the matters would be dealt with by the banks but the banks cannot refuse to absorb the underlying risk liability in such instances.
There is no reason for international investors or donors to get offended on a issue like that. In fact in this instance it is very clear that both banks and CPC have violated procedures, norms, practices and even directives by the regulating authorities,making the agreements bad with regard to their acceptability. The contagion that spread with the revelations of the underlying corruptions related to these transactions is having a worse international critical impact compared to the consequences of an abrogation of such a tainted contract. It is a unilateral, foolhardy action taken by interested parties together in connivance to defraud the country not amounting to a genuine step to safeguard either public interest or even the business interest of the CPC.
It is best that the parties to the agreements resolve the issue amicably among them mutually.
On the other hand if due to some public interest intervention a court has to declare the agreements are flawed, bad in law and therefore not valid, what can the parties to the agreements do.
Now a ministerial committee has been appointed to look at the possibility of a re-negotiation of the hedging contracts. From what has transpired so far in this regard, the powers of the government will best be exercised with the Golden Rule of Law as opposed to the uncertain and much doubted cord of discretion. Rule of Law excludes the existence of arbitrariness of prerogative or wide discretionary authority on the part of the government.
It is difficult to exaggerate the severity of the continuing effects of these faulted agreements and the adversity of their direct impact to the economy of the country. While a cancellation may not lead to any crisis or calamity as made out by some, the continuation of the agreements would definitely be disastrous to the country.
(The writer is a former chairman of the Bank of Ceylon and the National Gem and Jewellery Authority, and President of the People’s Bank Pensioners Association). |
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