Almost a month ago – November 9 - after The Sunday Times exposure on the controversial oil hedging deals hit the streets, the Ceylon Petroleum Corporation (CPC) Chairman Asantha de Mel, in a Standard Chartered Bank (SCB)-called press conference the following day, rejected sections of the story.
The following week, the paper tore apart the claims by the CPC and the banks saying clearly that no proper CPC board approval was given (citing board directors) and that the bank didn’t get a written undertaking from the board that they understood the risks, clearly laid out in the Central Bank guidelines.
The issue exploded after that with opposition and government politicians getting into the debate, public interest groups preparing to canvass the issue in courts and ordinary people concerned about the liability to the banks – which according to some accounts would be anything between $300 and $1 billion by May 2009. The figures are changing as oil prices are sliding on a slippery slope and on Friday was pegged at $41 per barrel, an unbelievable rise of more than $100 since July 2008.
As one could expect when the ‘fat hits the fire’, skeletons are rolling out of cupboards after the running series in The Sunday Times over this scam which we say and repeatedly say, was a wrong hedging structure sold by the two foreign banks – SCB and Citibank – and followed by three other banks with smaller exposure.
In this case, as widely known now, the hedging instrument was a zero cost collar instrument which was so badly structured that it was one-sided and focussed mostly when prices were going up. Chief Justice Sarath N Silva said; ‘What goes up must come down” in comments made during the hearing in the fundamental rights petitions on this issue. And this is where the problem lies with strong accusations backed by facts that SCB and Citibank sold an option which was heavily weighed in favour of the banks rather than CPC instead an option where both sides don’t lose. This week, the focus has been on the opposition – to some extent backed by Petroleum Resources Minister A.H.M. Fowzie – saying that the cabinet was aware and it was Central Bank Governor Ajit Nivard Cabraal who originally proposed hedging to the government. This is incorrect – it was hedge trader Upul Arunajith, a Sri Lankan commodities expert based in Canada – who first proposed this mechanism some years back to ministers and government officials and subsequently the Central Bank which then got activated and came up with its own proposal.
But what hasn’t been said is that while Minister Fowzie talks about cabinet approval being given on a proposal by the Central Bank governor, no proper procedures were followed after that. Was CPC board approval given? No. Were Central Bank guidelines followed? No. Did the banks get a written undertaking from the board understanding the risks? No. Were the board of directors made to fully understand the risks? No.
Ironically Minister Fowzie appoints a hedging risk management committeee on November 17, a few days before the Supreme Court case, to restructure the hedging agreements and minimise the risk. This is akin to closing the stable after the horse has bolted! Why wasn’t this committee set up in early 2007 when hedging began?
While there is no doubt that the cabinet must take full responsibility for this flawed deal, it is also clear that laid down state procedures in procurement, tenders -- and in the case for banks --, Central Bank guidelines were not followed. There is also serious wheeling and dealing, and ‘deals’ going on by some connected parties in a bid to escape the net.
The blame game has begun: Fowzie blames the CB Governor, the Governor blames the CPC Chairman and the CPC Chairman protects the banks saying they should be paid as any default will be perceived as a sovereign debt.
Eventually while the opposition and public interest groups take the government to the ‘cleaners’, the banks would get away without any action unless the authorities bell the cat for a deal in which the country could lose very badly. |
E-mail