By Laksiri Fernando –
The lead article of The Island newspaper (22 November) on “Bond Scams: PM says Govt. Awaiting AG’s Instructions” written by Saman Indrajith has raised several public interest and public policy issues. As he has reported, the Prime Minister has stated in Parliament that “The Attorney General instructed the government to obtain expert knowledge on public auction and private placement methods.”
‘Private placement’ is not the correct term that should be used, but ‘direct placement’ as previously pointed out by Dr W. A. Wijewardena. It may be the jargon at the Central Bank, but it gives a prejudicial view on the latter method in contrast to ‘public’ auctions. It is only few countries that still use the old term ‘private placement.’
More pertinently, the PM has stated (following AG’s instructions) “I wrote to the IMF and the World Bank. There is no point in asking others for instructions.” I wish to dispute the second claim. It may be OK to ask the IMF and the WB, but they clearly favour the auctions in contrast to direct placements (See ‘Guidelines for Debt Management’ by IMF and WB, 2003). It is possible that the previous Governor, or the PM himself, opted for auctions following the IMF and WB guidelines. Therefore, there is no point in asking them.
Even after the IMF/WB guidelines, still there are countries which use both or mixed methods extensively, with so many merits. Australia is one such country. The Netherlands, to the best of my knowledge, uses the direct placement method to issue around 60 percent of their treasury bonds (T-bonds) and Japan around 40 percent. Therefore, completely abolishing the direct placement method in Sri Lanka is highly questionable.
The IMF/WB guidelines to favour the auction method is to develop a strong debt market in the private sector. There can be some merits in this guideline if used cautiously and fairly.
Transparency and accountability are two principles that the IMF/WB have been advocating throughout their guidelines. However, these were the very principles which were violated in the Sri Lankan case.
It may be true that through the auction method a government could utilize quick liquidity in an emergency. Even if that were the case, in February 2015 there was no need to continue with the same method solely throughout the year, disregarding long term repercussions and implications. The direct placement method open to the public sector funds (public banks, public insurance, pension funds etc.) could enhance security and financial viability in those sectors, which is beneficial for the mixed economies like in Sri Lanka. However, if Sri Lankan wants to go for complete ‘neo-liberalism’ and forget about the public sector, the Auction system may be OK. However, in the case of the February 2015 bond issue, there was no need to increase the issue amount from 1 billion to 10 billion without much knowledge of all primary dealers. Here the principle of transparency and fair dealing in the auction was violated.
It is also customary, when auction awards are allocated, not to give a single bidder more than 25 percent. But in the case of the controversial February 2015 bond issue, the Perpetual Treasuries was allocated almost 50 percent. This is highly questionable and dubious. In the USA, where the auction method is extensively used, there are strict rules and many have been convicted for fraud and insider trading. Even an extreme policy of market economics should not allow fraudulent transactions or extreme profit making through insider trading quite detrimental to the public interest of the people.
The PM has also stated “You could file a case. But that would yield no results.” It is not clear why he has reached this conclusion so prematurely.
On the February 2015 bond issue, there was a clear ‘conflict of interest’ as it was apparently admitted by the former Governor of the Central Bank. This may be the case even after his son-in-law resigned from the Perpetual Treasuries, as the COPE report states that the former Governor himself had an interest in the Perpetual Treasuries.
It may be true that the laws in Sri Lanka are vague in curtailing conflicts of interest let alone punishing them. However, from my limited experience as a former Director of the Colombo Stock Exchange (CSE), the laws are clear on punishing ‘insider trading’, although those were not implemented for political and other reasons in the past. As far as I could understand, there have been several issues of ‘insider trading’ between Perpetual Treasuries and the Central Bank that the PM, the Government and the Attorney General should take up. There may be some other laws applicable to punish the wrongdoers.
The PM’s position seems to be to consider the prevailing laws as inadequate. As reported by Saman Indrajit, the PM has said “My duty is to hand over the issue to this House. The COPE is a committee of this House. You cannot file a case without amending laws, if the Attorney General permits it.”
The questions that need to be answered are:
Does or doesn’t the PM think there has been something wrong in the issue of 50 percent of bonds to a single bidder?
Does or doesn’t the PM think that the bidding for such an amount was possible, if not for inside information?
Does or doesn’t the PM think that there was an issue of family and business interest between the former Governor and the Perpetual Treasuries?
Does or doesn’t the PM consider clearing the name of the Central Bank, the Government and his as the PM is necessary to promote transparency, accountability and good governance in this country?
Please see further my initial article “Awoth Atha Thamai: Cabraal is no Excuse for Mahendran” (23 May 2015).