Independent regulator for Port

By Mel Gunasekera

The decision to appoint a port regulator was jointly made hours before the country's largest ports deal between the Government of Sri Lanka (GOSL) and South Asia Gateway Terminals (SAGT) was signed last week.

Under the terms of reference, the government has been given a five year period to put the necessary regulatory structure in place, Director John Keells Holdings, Susantha Ratnayake said.

Under the build, operate and transfer deal, SAGT would expand the Queen Elizabeth Quay (QEQ) at an estimated cost of US$ 240 mn and also carry out a feasibility study for a new breakwater at the Colombo port. The need for an independent regulator arose with the P&O being managed by SAGT and the Ports Authority running the Jaya Container Terminal.

Under the proposed regulatory structure, a Ports Competition Commission is to be set up under the World Bank funded Ports Efficiency Improvement Project. The regulator will be set up under the purview of the Ports Ministry and will be accountable to parliament. The regulator will have jurisdiction over all port participants to ensure equality among all operators, prevent anti competitive practices and monitor port tariff.

The regulator will be set up on the model of the Telecommunications Regulatory Commission.

Meanwhile, the Asian Development Bank, the World Bank and the Overseas Economic Co-operation Fund (OECF) have come forward to co-finance the second phase of the breakwater construction and dredging, presently estimated to cost around US$ 400 mn, ADB resident representative, T Kondo said.

The ADB will take the lead by financing the terms of reference to carry out the feasibility study, he said.

The consortium has agreed to contribute up to 50 per cent of the cost of the feasibility study, subject to a maximum of US$ 1 mn. The feasibility study is expected to be commissioned by January 2000 and completed in around 12 months.

The actual cost of the breakwater and the number of outer harbour berths that can be constructed can be determined only after the completion of this feasibility study, he added.

Most companies fail to reveal true figures

Nearly 61% of the listed companies are yet to reach excellence in preparing financial statements in terms of Sri Lanka Accounting Standards and the Companies Act, a Securities and Exchange Commission (SEC) study has revealed.

While 35% qualified as 'excellent', 4% were deemed 'unfavourable', the study done on annual reports published for the financial year ending 1997 and 1997/98 shows.

During the course of the review, the SEC notes there were numerous instances where reference had been made by auditors to issues pertaining to the 'going concern' concept in the annual reports reviewed.

The survey revealed that reference has been made to the issue in around 6% of the annual reports reviewed.

The SEC plans to expand its review to other areas of disclosure such as interim accounts, draft accounts and other information listed companies are required to disseminate and ought to disseminate to the public as a part of its continuing listing obligations.

In instances where the non-compliance had a significant effect on the financial statements, the companies were required to rectify these anomalies.

Some of the more common deviations from accounting standards and companies legislation provisions noted during the course of this review were; non-provision for retirement benefit cost (SLAS 16), non-provision of deferred taxation (SLAS 14), non-disclosure of related party transaction (SLAS 30), failure to adhere to SLAS 22 on requirement on investments, unattested audit reports being circulated with annual reports.

In certain companies there was a lack of disclosure in the consolidated financial statement in areas like non-consolidation of subsidiaries, non- statement of the proportion of ownership direct or indirect through a subsidiary, treatment of investments in subsidiaries and non-treatment of investments in associates in compliance with equity methods when there is no intention to dispose of such investments in the near future (SLAS 27).

There were also three companies who failed to present their cash flow statements (SLAS 9).

City index goes provincial

Central Bank's new consumer index, the Colombo District Consumers' Price Index (CDCPI) is to be extended to the Western Province, Central Bank officials said.

The Bank hopes to extend the index coverage to other provinces except the north and east, Director Statistics Central Bank, Dr. S S Colambage said. We have already started compiling data from Matale, Matara and Anuradhapura, he said.

The weights of the CDCPI are based on the expenditure patterns of the poorest 40% of households (when ranked with income) in the Colombo district based on the Consumer Finance and Socio-Economic Survey of the Central Bank 1996/97. The survey collected detailed data on food and non-durable expenditure from households in the country, excluding northern and eastern provinces. The data is collected from several markets including Pettah, Moratuwa, Homagama, Hanwella and Avisawella.

Since the CDCPI is based in the Colombo district, the Bank may have to change its name as it progresses to cover countrywide. Dr. Colambage admitted the name change may be needed to prevent confusion, but said it was not an immediate issue at present.

Foreign loan takes a back seat

Sri Lanka's sovereign rating and the proposed foreign loan has been put on hold, as the Central Bank is aggressively moving towards loosening up the domestic money market. Even though the brand new rating agency, Duff and Phelps have arrived in Colombo the Sri Lankan government rating together with the US$ 200 mn loan have been set aside for the millennium.

High borrowing rates in international money markets are holding up schedules, Central Bank officials said.

"Although spreads are high around 8% plus, the US treasuries are low. We don't need to borrow at such high rates," Central Bank Governor, A S Jayawardene told the media last week. "We feel there is no need to go now. We can go next year."

He said that the government hoped to retire more public debt this year. Last year the government borrowed Rs. 120 bn in treasury bills and Rs. 39 bn in treasury bonds. Analysts expect the government to retire debt with the proceeds from the proposed sale of 10% of Sri Lanka Telecom for around US$100 mn. The governor said that the budget deficit was expected to be at around 7.8% of GDP less than last year's 9.2%, but added there was a need to lower it further.

"The treasury feels that the budget deficit will be contained at 7.8%. They will take strong measures to control it. I am not condoning the 7.8%,'' he said.

The Governor said he expected the annual point-to-point inflation rate to be around 6% in 1999 against the projected 8%.

Meanwhile the Central Bank last week lowered the statutory reserve requirement (SRR) for commercial banks, in a move to bring down lending rates which it says are among the world's highest.

The reserve requirement will be cut to 11% from 12% from August 20, thereby releasing Rs. 3 bn held by the Central Bank. The Bank was also reducing the bank rate, the rate at which it lends to other commercial banks as the lender of the last resort, from 17% to 16% - the first revision in eight years. The Bank said commercial banks will be asked to maintain 90% of the average daily requirement under the SRR to help maintain domestic interest rate stability.

The SRR has been slashed for both rupee and foreign currency deposits not placed abroad. The Central Bank last cut its statutory reserve requirement in two steps in 1997 to 12% from 15%.

Jayawardena said it was difficult to say how much the interest rates would come down as they were determined by individual banks. The average prime lending rate of Sri Lanka's commercial banks was around 14.95% in the week to August 6, the Central Bank said. The average rate for last week is yet to be released.

"We want the interest rates to come down. Now the banks will have more money to lend at lower rates," Jayawardena said. "The temporary overdraft rates of 26% are among the highest in the world."

"For most industries it is not viable to borrow at such high rates. We are seeing a steady decline in inflation and therefore we expect the lending rates to come down," he said adding that the decline is a significant achievement given Sri Lanka's recent history of relatively high inflation.

Fresh look into day trading after Atlanta (US) Shooting

Crackdown on 'Get-Rich-quick' mantras

Stockbrokers who specialise in so-called day trading are facing a crackdown on deceptive marketing and money-lending schemes, after a study by US state officials revealed last week that ordinary investors are likely to lose all the money they invest as day traders.

A seven-month study, published by the North American Securities Association also last week, condemned day trading firms for using "get-rich quick" marketing ploys similar to those sometimes used for pyramid schemes.

Day trading firms allow investors to buy and sell shares at computer terminals inside firms' offices. Day traders seek to buy and sell several times a day to profit from small changes in stock prices. They can leverage traders by paying for a fraction of their purchases.

The report was published less than two weeks after Mark Barton, a day trader in Atlanta, killed nine people at two firms where he had lost thousands of dollars. Some of the money was borrowed from other traders.

The securities association, which represents state and local securities regulators, called for legal action against individual firms and backed new legislation proposed by Charles Schumer, the New York Senator, to improve the disclosure of risks to ordinary investors.

There are an estimated 5,000 active day traders at more than 60 firms in the US, whose trades represent 15 per cent of daily transactions on the Nasdaq stock market. Day traders are thought to be particularly attracted to internet stocks, which are heavily represented on Nasdaq.

According to the study, 70 per cent of day traders lose money. It says all traders are using strategies which will ultimately lose everything they invest. The study concentrated on trading data from one Massachusetts branch of All-Tech Investment Group - the same firm which Mr Barton joined.

The study found that the traders needed to make returns of more than 56 per cent a year to offset their transaction costs. The largest trading loss on a single transaction was $81,522.

Day trading is seen as distinct from online investing through internet brokers, because day traders typically buy and sell at the offices of specialist firms and have more immediate access to markets.

The report also said firms used misleading advertisements to lure new traders. One newspaper advertisement promised "a six to seven figure income per year", while another web page claimed "a success rate of around 85 per cent".

Peter Hildreth, president of NASAA and New Hampshire's director of securities regulation, said: "This is hucksterism. The fact is that day trading is not investing, it is gambling."

Meanwhile, in Britain a senior US broker is planning to bring day trading to Britain to allow traders to deal in Wall Street shares with full access to the US markets.

Clive Cooke, chief executive of Intercapital USA, the inter-dealer broker, plans to launch a trading floor in London early next year. The move comes in spite of a spate of scare surrounding day trading in the US, which culminated in the shooting of nine people in Atlanta last month by a day trader.

US regulators have warned that the practice - which involves buying and selling shares on the same day - exacerbates risks in the market. Advertisements used by some US day trading firms have also come under fire for exaggerating the opportunities offered.

But Mr Cooke said the operation would use strict screening procedures to ensure customers understood the risks and were familiar with the market.

"If you can create an environment where the success rate of your customers is high, people enjoy themselves and that is good for business," he said.

He plans to link with an unnamed US day trading business to solve software and personnel problems. The deal, to be announced next month, will involve an investment of several million dollars. Staff would be brought to London from New York to train customers to use the complex software, which provides direct access to Nasdaq and the New York Stock Exchange, the world's two largest stockmarkets.

The untitled project, revealed by Investment Adviser, a Financial Times magazine, will be aimed at former traders put out of jobs by new software. "Locals" on the London International Financial Futures and Options Exchange, who trade with their own money, will also be targeted.

Mr Cooke does not expect any major barriers from the regulators. Until now, the Financial Services Authority has been sanguine about day trading, maintaining that stamp duty - a tax on share purchases in the London market - makes day trading impractical in the UK.

"The industry as a whole suffered a terrible blow two weeks ago [from the Atlanta shooting] and that caused a number of people to take a lower profile [on international expansion]," Mr Cooke said. "But it is inevitable that day trading will arrive in London. I do not think the [FSA] will put blocks in the way."

Odd man out sees millennium doom

Despite progress fixing the Y2K computer glitch, there is still a 70 percent chance that it will spark a global recession, Edward Yardeni, a top U.S. economic forecaster, said on Tuesday.

"Indeed, Y2K could cause another energy crisis," Yardeni, chief economist at the investment bank Deutsche Morgan Grenfell in New York, said in an update of his famously gloomy Y2K predictions.

Yardeni said the other most likely cause of a Y2K-related recession were possible breakdowns in the "global just-in-time manufacturing system" because of weak links in the supply chain.

"I am truly amazed by the complacency about Y2K given the lack of good data," he added in a report posted on his Web site, "http://www.yardeni.com" www.yardeni.com.

Yardeni acknowledged that he was alone among noted economists and Wall Street investment strategists to forecast a Y2K-related recession.

Two years ago, when he started to research the software problem's disruptive potential, Yardeni concluded that there was a 30 percent chance of its causing a global downturn.

About a year ago, he raised the odds to 70 percent, adding that he might scale back his forecast if developments warranted.

"I remain at 70 percent," he said in the survey posted on Tuesday. He said he was heartened by upbeat progress reports but concerned that most were not independently verified.

"Even more worrisome is the lack of any good information on preparations around the world," Yardeni said. "Like everyone else, I am hoping for the best. But I think it is a big mistake to plan for the best, rather than for plausible worst-case Y2K scenarios."

He said the most serious Y2K problems were likely to occur in industries that have long and complex global supply chains, lots of suppliers are heavily dependent on information technology systems.

"This certainly describes the oil industry," said Yardeni, who has compared a possible Y2K fallout to the recession that followed the 1973-1974 oil supply cutbacks by the Organization of Petroleum Exporting Countries.

The so-called Y2K glitch could cause computers to misread the year 2000 and potentially cause wide-ranging systems failures.

Bruce McConnell, director of the United Nations-backed International Y2K Cooperation Center, a kind of clearinghouse for Y2K data, urged governments on Tuesday to disclose more about system readiness and about contingency plans for systems that have not yet been upgraded.

"In the absence of information, markets will assume the worst," he said in an interview with Reuters in his Washington office. "We don't know whether this is going to be a 1 on the Richter scale or a 7."

John Koskinen, chair of President Clinton's Council on Year 2000 Conversion, said Thursday that he was increasingly confident that basic U.S. infrastructure — notably telephones, power and aviation—would handle the date change without significant disruptions.

But Koskinen, in the third of four scheduled quarterly reports, said it was still "difficult to gather reliable data about other countries' progress."-(Reuters)

Report raises new questions over IMF loan

The IMF on Friday made public limited parts of an investigation confirming that the central bank of Russia used an obscure Jersey-based company to conceal the true size of its foreign currency reserves and to undertake a number of other questionable transactions, reports the Financial Times.

The report, which was released on the IMFís website after it insisted on publication as a condition for releasing new aid, said that more than US$ 1.8 bn was invested in ways that breached the Russian ministry of financeís own investment criteria.

But the document, written by PriceWaterhouse Coopers, which is also the auditor to the central bank, also omitted many important details, and highlighted the limitations in the scope of the work carried out by the accountancy firm in consultation with the central bank and the IMF, says the story. The report was merely based on unverified financial information provided by persons named in the report, Le Monde cites the accountancy firm as saying, noting that it is unclear whether documents were hidden from the investigators or if some of the documents they saw were false.

The accountancy firm points to the absence of the signature of central bank deputy governor M. Tulin on a transfer of US$ 1.007 bn to the Jersey-based company in 1993. The funds came from an IMF loan for Russian economic reforms, but they were used for short-term speculation on the Russian Treasury bond market.

The report also raises questions concerning the prudence the IMF should have shown, given the considerable sums involved, the story says. The accountancy firm notes that its investigators found not a single document or formal agreement between the Fund and the ministry of finance specifying investment criteria for the funds. The IMF office in Moscow disclosed verbally that no conditions were specified.

The report raises new questions over the decision of the IMF to grant US$ 4.5 bn in additional loans to Russia last month, in spite of the statement by IMF Deputy Managing Director Stanley Fischer that we were lied to, continues the FT. The report says more than US$ 1.2 bn had been channelled through a complicated mechanism into Russian government securities which made profits of US$ 422 mn, and large sums reaching a peak of US$ 300 million in 1996 when President Boris Yeltsin was re-elected were lent to a number of unspecified Russian commercial banks, with the loans ultimately underwritten by the central bank.

The information released does not include details of a number of elements requested by the Fund, including the fate of US$ 4.8 bn loaned to Russia last year, notes the story. The IMF said it hoped to release further reports on the central bank of Russia over the next few days.

The IMF board saw the report of the investigation before approving the most recent loan. The fund says it was not aware of the Jersey companyís activities until this year.

The IMF executive board has concluded that these activities were in violation of Russiaís obligations to the Fund and has communicated its disapproval in no uncertain terms to Russian administrators, the letter adds.

The news comes as world chess champion and Wall Street Journal contributing editor Garry Kasparov writes that there is a new glow of optimism about Russia radiating from Western policy and financial circles. The US administration and international financial institutions have declared the government of Prime Minister Sergei Stepashin one they can do business with. But Russia's leaders have failed to tackle the structural problems that prevent real growth and investment from taking off, Kasparov says. It makes little sense to paper over failed IMF and World Bank policies with fresh credits at the price of further discrediting in the eyes of ordinary Russians the very reforms the West is trying to promote.

ADB: Turning to poverty reduction

The Asian Development Bank plans to refocus its activities to concentrate on poverty reduction in the world's most populous region, according to a draft strategy circulated to members, Financial Times reported last week.

The proposal, which would involve significant changes in the bank's operations with a greater focus on rural development and such issues as the environment and social welfare, is a sign that the bank's new president, Tadao Chino, is making his mark on the organisation.

But the bank is still only at the stage of seeking comment on its proposals, some of which may prove controversial. It remains to be seen how many will be adopted in practice.

The desire for a more clearly defined role for the ADB reflects the frustration of some of its staff at the way the institution was used to pump emergency funds into countries caught up in the Asian crisis.

That has left its balance sheet stretched and limited the resources available for basic development support.

The proposal also reflects the continuing pressure from development lobbyists in the US and elsewhere who are sceptical about the role of development banks and their sometimes close relations with private sector business.

Thus the 27-page document, entitled The Bank's Poverty Reduction Strategy, pays scant regard to large infrastructure projects, which were financed by the ADB in the past, or to the more recent focus on financial sector reform.

Instead it stresses that, with 900 mn Asians still subsisting on an income of less than US$ 1 a day, poverty reduction must become the overriding objective. This will mean reversing the drift away from the rural sector, more emphasis on social welfare issues, including child labour, and greater collaboration with non-government organisations.

By next year the bank will develop strategies on social welfare, micro-finance, education and forestry.

"By sharpening its focus thus on anti-poverty activities, the bank hopes to encourage borrowing countries to seek it as a partner in abolishing absolute poverty from the region," it said.

The private sector could also play an important role in poverty reduction, but greater effort would be needed to ensure good governance. The right regulatory framework would have to be developed to ensure essential services reached the poor and workers were treated fairly after privatisation, it added.

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