Petroleum Resources Minister A.H.M Fowzie made a statement in parliament this week, to vindicate himself over the oil hedging issue, where he said the proposal was made by the Central Bank Governor Ajith Nivard Cabraal, where a committee of experts was appointed and cabinet sanction given.
However informed sources told The Sunday Times FT that the Cabinet memorandum on oil hedging was hurriedly prepared on the directions of the Minister and handed over to the then Secretary to the Ministry Petroleum Resources on the morning of January 16, 2007 without giving him time even to go through the document.
The then secretary was given a ‘hard copy’ of the power point presentation on oil hedging, made by the Governor of the Central Bank, by Chairman CPC Asantha de Mel when he (secretary) had made a request from him to submit a comprehensive report on the hedging instrument. “A detailed project report was sought but what was received was the Governor’s power point presentation,” one source said The normal practice is that if there were any technical matters involved in a particular arrangement or a project which required cabinet approval for implementation the secretary of the relevant ministry has the powers to refer the Cabinet memorandum to a technical evaluation committee to clear all doubts.
But in this particular instance this practice was not followed as the then secretary was pressurised to prepare the cabinet memorandum and submit it to the cabinet on the afternoon of January 17, 2007.The sources said the then secretary had no alternative other than to follow instructions of the minister.
On the other hand he was made to understand that the Governor of the Central Bank has made the suggestion to go for hedging and it was endorsed by the then Secretary of the Finance Ministry Dr. P.B Jayasundara based on a report submitted by a committee which had M.W.B.Weerasekera, Assistant Governor - Central Bank, Dr. H.N Thenuwara, Assistant Governor - Central Bank, Saliya Rajakaruna, Chief Financial Officer - Bank of Ceylon, Ms. Kanthi Wijetunge, Additional Secretary to the Ministry of Petroleum and Petroleum Resources Development, Kapila Ariyaratne, Head of Corporate and Institutional Banking -People’s Bank, Lalith Karunaratne, Deputy General Manager Finance –CPC and V.Kanagasabapathy, Financial Management Advisor, Ministry of Finance and Planning. The Cabinet had suggested to appoint this committee after the Governor’s presentation on hedging on September 6, 2006. In terms of their recommendations the cabinet paper was prepared and presented to the cabinet. On January 17, 2007 the Cabinet deferred its decision for the next meeting awaiting the observations of the Finance Ministry.
On January 24, 2007, the Cabinet decided that oil hedging be implemented without delay as suggested by the Central Bank but it has not specifically granted approval to a particular instrument of hedging, although the committee report has made a suggestion to use Zero Cost Collar option.
Bribery Commission probes CPC corrupt dealings
The Bribery or Corruption Investigation Commission has initiated a probe into other corrupt dealings in some sections of the Ceylon Petroleum Corporation under the chairmanship of Asantha de Mel on complaints received by them but hasn’t got any complaints as yet relating to the oil hedging case. A senior official of the Commission said while investigations are on into other allegations, they are yet to receive a complaint in relation to the oil hedging issue. In a separate interview the Commission Chairman Ameer Ismail told The Sunday Times FT that the Commission is vested with powers to probe corrupt deals of foreign banks operating in Sri Lanka if there is a complaint against them. He added that these banks are operating under a licence given to them by the Central Bank of Sri Lanka and its transactions should be carried out in accordance with the country’s law.
He noted that the Commission has so far not received any communication with regard to alleged favours given by them to CPC authorities to clinch the hedging deal.
Banks sold wrong hedge to CPC -experts
The Report of the Study Group on oil hedging recommended the zero cost collar hedge to protect against very high fuel prices but the banks proposed a very one sided variant of a hedge which could no longer be called zero cost collar hedge. Experts said the crux of the matter is not the direction oil prices were expected to take and not the merits of hedging but the lopsided, asymmetric nature of contracts the banks clearly mis-sold to the Ceylon Petroleum Corporation (CPC).
According to experts, a standard zero cost as clearly described in the study group report, which was presented to the Secretary to the Ministry of Finance & Planning and the Treasury Secretary in November 2006, has the banks paying the CPC the full difference per barrel when prices go over the high collar and the CPC paying the full difference when prices go below.
Experts said the structure that Standard Chartered Bank (SCB) and others proposed to the CPC was not a hedge but like ‘Russian Roulette’ --riskier than a gamble. In terms of its structure, if oil prices went over the upper limit, there was a very tight cap for the banks to limit their exposure to a payment of US$15 a barrel. Thereafter, the full contract gets automatically cancelled. This, according to experts, absolutely defeats the purpose of the stated objective of the Central Bank and study group as approved by Cabinet, to protect against very high oil prices i.e. if oil prices rise more than US$15, the CPC doesn't get paid.
On the downside, the contracts proposed by the banks and accepted by the CPC had no cap to protect the CPC, unlike in the case of an upside where the banks are protected by a maximum US$15 a barrel payout to the CPC. The contracts do not automatically get cancelled but go on for the full 12 months until mid 2009. Most insidiously, experts said the banks have structured contracts so that the quantum of barrels CPC hedges is automatically doubled when the price falls below the low collar and the CPC has to pay the banks. |
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