By Laksiri Fernando –

Dr. Laksiri Fernando

“I promised that the consultative committee of my Ministry would be summoned to discuss the contents of this report. As far as this report is concerned the committee said there was no loss to the Treasury. This report has also criticised the shady transactions that took place from 2012-2015. It is there on the third page of this report. This report is not only about Arjuna Mahendran but also about the pervious Governor. Why not bring Ajith Nivard Cabraal to COPE to ask him how he approved borrowing without a tender committee? Are you protecting him?”

The above is what, unfortunately, Ranil Wickremesinghe has said about the “Report of the Bond Issues of the Central Bank 2015” in Parliament, the day before. I quote from the Daily FT, 22 May 2015. It is ‘unfortunate,’ because when people actively supported the ousting of the former President, Mahinda Rajapaksa, and appointing of Wickremesinghe as the Prime Minister, the hope was for a clean and transparent government or Yahapalanaya. Many people still believe it should be the case, and any return of Rajapaksas would be a disaster and a reversal of the difficult victory gained on the 8th January.

There is no question that Vasudeva Nanayakkara was provocative and blatantly abusive in his interactions with the PM, but even that is not a reason to deny the responsibility on the part of the Government or the PM on the bond issue. It is not merely a question of discussing the contents of the report in Parliament, but acting upon what has transpired through the Report although it has not accused the Central Bank Governor directly for the bond fiasco. It was beyond the mandate of the appointed Committee.

Arguments

It is also not correct for the PM to say that “the committee said there was no loss to the Treasury.” To asses the loss or gain was not within the Terms of Reference (TOR) of the Committee and in fact the members were not at all competent to do so. Corruption is not merely a matter of loss or gain, but about social ethics and rule of law of the country. It is true that the report has also criticized the shady transactions that took place from 2012 to 2014, which Wickremesinghe has ironically stated as ‘from 2012-2015,’ which particularly includes the recent bond fiasco.

The PM has said “This report is not only about Arjuna Mahendran but also about the pervious Governor.” While it is partly true, he should have remembered that the main thrust of the Committee appointed by him were to investigate into (1) the reasons for the recent issue of bonds, initially declared as Rs. 1 billion and (2) the sequence of events with respect to each Primary Dealer in respect of the final allocation. It is to contrast the bids and allocations of the bonds, at the last instance, that the previous auctions and private placements were asked to be reviewed from 2012.

Wickremesinhe has asked from the opposition that “Why not bring Ajith Nivard Cabraal to COPE to ask him how he approved borrowing without a tender committee?” In fact this should have been done primarily when Cabraal was the Central Bank Governor. That time Wickremesignhe was the Leader of the Opposition. Now Cabraal is out, the best option is to bring him before the Financial Crimes Investigation Division (FCID), or the Bribery Commission, which is in fact happening. The ball now is in the Wickremasinghe court to do the right thing in respect of the recent ‘bond fiasco.’ I am naming it as a ‘fiasco’ even based on the report of the Committee that Wickremesinghe has appointed.

The behavior of Wickremesinghe was not acceptable in Parliament on that issue. We know about Vasudeva now as an outright Rajapaksa stooge. He is an invalid coin in politics or left politics. But Wickremesinghe is the PM of the much needed good governance order. He should not behave like old parliamentarians, just defending one’s own side and engaging in sarcastic polemics just to please the gallery. He doesn’t seem to be very serious in his responsibilities. I haven’t seen these type of behavior from a PM or a Leader of the Opposition in Australia. They are frank and even bipartisan in many national issues let alone corruption or mismanagement. That is what you expect from good governance.

Committee Report

Of course there are limitations in the Committee Report on Bond Issues. Those have emerged primarily from the mandate and the type of people appointed into it. Yet, the report transpires many irregularities for which the Governor and also the Prime Minister, as the Minister of Policy Planning and Economic Affairs, are responsible.
The story or the sequence of events goes like the following.

It is customary for the Central Bank (CBSL) to assess the government’s loan or debt requirements prior to their need. Sri Lanka like many other countries is in a situation where many of the activities are conducted on borrowed money. Therefore, this was estimated for the period beginning March in early February and the debt requirement was estimated approximately as 13.5 billion. By this time Arjuna Mahhendran was the Governor. It was determined that the entire funding should be through Treasury Bonds and it was not necessarily a bad policy. The Monetary Board (Chaired by the Governor) decided for 30 year bonds and this time to have Auctions during the same week. The decision was taken on 23 February. Even before the meeting, instructions were given to discourage Direct Placements which was the case before. This is a new policy which is not discussed here.

It has been customary for the CBSL to announce the value of the bonds very much less than the actual requirement. The argument is, if the market (the bidders) know the actual requirement, then they will competitively go for higher interest rates and that is what exactly has happened. This leaves doubts about whether this information was leaked to some bidders! It is possible that some knew the information vaguely, and some others quite precisely. It appears that even some knew that higher interest rates even up to 12.5 would be accepted although the prevailing rate was 9.5. “When the Governor was interviewed by the Committee he explained that the restart of auctions was important” (Report, p.4). The question is who benefitted?

It is also interesting to note the Governor’s answer, when asked, whether there was a direct link or dealing. “When he was asked if he acted in a manner, which favored any particular Primary Dealer, his answer was that he did not do so and that his concern was to raise money for the Government and not to see who is funding it.” (p. 5 and my emphasis).

Awoth Atha Thamai!

The figures given by the Report are very clear on the matter (without much analysis) on who benefitted from the new policy of enhanced ‘market mechanism’ through auctions. All together there had been 16 Primary Dealers bidding for supposedly 1 billion of bonds. The controversial Perpetual Treasuries stand in contrast and some of the other ordinary dealers were Acuity Securities, First Capital, Entrust Securities, EPF, Peoples’ Bank etc. All the other bids put together stand at 4.9 billion except one (exceeding the declared amount marginally) and that was Seylan Bank bidding for 1.2 billion. The average bidding of all of them together was just 326 million.

In contrast, Perpetual Securities made 5 direct bids amounting to 2 billion, and 3 major indirect bids through the Bank of Ceylon amounting to 13 billion. All together they have bid for 15 billion more than triple the amount of all other bidders for seeking some luck! It is interesting note what has transpired between the two obvious culprits, the Chief Dealer of the Bank of Ceylon and CEO of the Perpetual Treasuries as recorded in the Report.

“The Chief Dealer of the BOC also stated that he inquired from the CEO of Perpetual Treasuries as to the reasons of high amount of yield net tax and the reply he received from the CEO of Perpetual Treasuries was ‘Awoth Atha Thamai.”

Ranil’s three member lawyers’ Committee says, ‘the rough meaning of this Awoth Atha is: “a colossal profit, if successful”!

How did the bids become accepted? The Central Bank has decided to accept up to 10 billion of bids from the Primary Dealers, ‘of course given the funding requirements of the Government,’ however 10 times over what was advertised on the same day of 27 February. This is unprecedented.

How does it constitute?

According to the Table given in the Report, the bids amounting to 3.8 billion are from all other 15 dealers. In contrast, the Perpetual Treasuries won the day or the proverbial Atha, having accepted 5.2 billion of their bids.

Over to the Prime Minister

It is strange that the Report (that I have seen, Colombo Telegraph) does not give a date even with the signatures of the Committee members. I assume that it was out early this month. It is true that the Synopsis to the Report states the following in respect of the Governor of the Central Bank. However it is within brackets as follows.

(In terms of the above there is no evidence at this stage to the effect that the Governor of the CBSL had direct participation with regard to the activities of the PDD and the Tender Board Committee as aforesaid other than to issue central directives based on the decisions of the Monetary Board and the Operational Manual of the PDD). (My emphasis).

We need to note: “no evidence at this stage” about “direct participation.”

It is also important to note what the Governor had to say on this matter, as reported by the Sunday Times (8 March 2015). “Mr. Mahendran said there were other dealers who had also offered bids in excess of Rs. 1 billion adding that the regulator in the past too had accepted bids over and above the requested amount.”

However, as I have noted before, there was only one dealer bidding 1.2 billion, slightly over the amount, and it was Seylan Bank. In addition, “ Referring to the allegations against his son-in-law, an issue that also delayed his appointment last month, the Governor said Arjun Aloysius resigned from the family firm and was no longer involved.” Then the Sunday Times further reported the following.

“However when pressed that these issues would continue to nag the Governor in future money market transactions, Mr. Mahendran pondered in his response: “Well … I don’t know. My son-in-law resigned from the firm when the issues arose during the time my appointment was being formalised. I don’t know … maybe I should ask them (the company) to close or not operate in the market.”

This is a clear acceptance of at least a ‘conflict of interest’ or its perception, if not an ‘insider trading,’ I must note to the credit of Arjuna Mahendran. What is strange is the inaction on the part of the Prime Minister, whatever the reason. Whatever the weaknesses of the Committee, on the other hand, they have made a clear recommendation to follow up by the Prime Minister as follows under Recommendations. I am breaking the main recommendation into three parts for clarification.

1. “The Committee at this stage can only make an observation that the bidding pattern of Perpetual Treasuries and securing 50% of the accepted bid as unusual.”
2. “Given the limited scope of the TOR this Committee is not empowered to make any assumption with regard to the aforesaid.”
3. “However, in the interest of the public since the said transaction involves public funds and fiscal regulations of the Government, the Committee observes that a full-scale investigation by a proper Government Authority is warranted.” (My emphasis).

Over to Mr. Prime Minister, Sir!

*Laksiri Fernando is former Senior Professor in Political Science and Public Policy (University of Colombo), with a strong economics background, and also was a Director of the Colombo Stock Exchange (CSE) who resigned in 2011.