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  CB hedges over hedging as CPC hits back


To house Port Authority staff Chamal looks to buy five star hotel


Chamal Rajapakse and Nahil Wijesuriya

By Sonali Samarasinghe

In an act of brigandage of gargantuan proportions the Sri Lanka Ports Authority is attempting to purchase the five star Ceylon Continental Hotel to house an administrative office complex sources say at a massive negotiable price of US$ 45 million (Rs.5 billion) ostensibly for no other reason than that the hotel rooms have a nice view of the South Harbour Terminals.

Chamal at it again

A Cabinet Paper has now been tabled by President's elder brother and Minister of Ports and Aviation Chamal Rajapakse seeking approval to appoint a Cabinet Appointed Procurement Committee and a Project Committee to evaluate and make recommendations for the purchase of Continental Hotel and its premises at No. 48, Janadhipathi Mawatha, Colombo 1 to be used.wait for this. "as the Central Administrative Secretariat of the SLPA."

This is the same Minister who not too long ago and amidst a global recession and economic devastation at home got cabinet to approve Rs. 1,100 million to wet lease one aircraft and re-launch Mihin Lanka operations by tomorrow. That Cabinet Paper he tabled on October 11. It is just one month later that he now decides to bestow this latest twisted Christmas gift on the people.

Nahil's hotel

A Singapore based consortium led by businessman and stock market player Nahil Wijesuriya bought the controlling stake of Continental Hotel in April this year from U.K. Sharma, an Indian who sold his stake in the owning company Hotel Services Ceylon (Ltd.) at Rs. 138 per share.

Wijesuriya bought the shares through a Special Purpose Vehicle (SPV) called Green Care International floated by some Singaporean businessmen, who came into the consortium through this SPV.

Sharma who was the largest shareholder of Hotel Services Plc., the owning company of the Ceylon Continental initially reportedly sold 9.4 million shares (53 percent) to the Singapore based off shore consortium Care International Limited led by Wijesuriya.

Hotel Services Limited held 97.33 percent of the hotel under the chairmanship of Sharma. This deal was concluded at Rs. 138 a share for a total consideration of Rs. 1.3 billion. Later Nahil would buy more shares from shareholders at the mandated price of Rs.138.

Leasehold to freehold

Earlier this year Wijesuriya had reportedly told media he was looking at buying the leasehold property of the hotel from the Sri Lanka Tourist Board (SLTB). In 1970 the hotel was built on land obtained from the SLTB on a 99 year lease. The hotel pays an annual operating lease rental of Rs. 2.3 million to SLTB. 

Chairman SLTB Bernard Goonetilleke confirmed to The Sunday Leader the land still belonged to the Tourist Board and was on a 99 year lease.

 When The Sunday Leader contacted Nahil Wijesuriya he said that in the present climate all his properties except his house in Kandy were up for sale. Admitting that the government was interested in buying the hotel he said many others had also expressed interest. "This is purely a share transaction done through my brokers," he said, "as the owning company is a public quoted company."

"But," he also said, "It is absurd to sell the real estate of the company." When asked whether he was currently in negotiations with the government, he said many have shown interest including the government but declined to give any indication of the price being bandied around.

A killing

Wijesuriya, an astute businessman who is no stranger to buying and selling prime property is set to make a huge profit if the government does eventually buy the hotel.

The tabling of this Cabinet Memorandum last month is even more picaresque considering that the country is now in dire straits having to contend with over US$ 489 million in losses over the disastrous hedging deals. (See box for full text of Cabinet Paper)

However, let's go through the Cabinet Memorandum in earnest. Titled "Purchase Of The Continental Hotel To Be Used As The Central Administrative Secretariat Of Sri Lanka Ports Authority," the memorandum gives the background to the proposal as follows:

"The administrative functions of the Sri Lanka Ports Authority are scattered throughout the port premises due to lack of infrastructure facilities. This has caused difficulties in communicating effectively in various divisions and sections. Therefore Sri Lanka Ports Authority urgently requires to have a head office building to accommodate its staff. (Which is more than 12,000 in numbers currently) and its activities under one roof."

Let us stop here to reflect for a moment. According to investigations conducted by this newspaper the full cadre of the SLPA is actually about 14,000, that is inclusive of Trincomalee, Galle, Oluvil, Kankesanthurai etc. In Colombo the cadre remains at about 9000.

Job cow

First and foremost this must be said. Like the Ceylon Petroleum Corporation, Ceylon Electricity Board and other government entities, the Sri Lanka Ports authority has been from stem to stern a favourite dumping ground for politicians of every hue, for political stooges and political appointees. 

Shipping industry experts say that rather than expanding, the SLPA should for the sake of efficiency tighten up its man power infrastructure. Informed sources said a maximum of 2500 top quality cadre was ample for running the Colombo Port even though Colombo rates among the first 25% of the worlds 400 ports.

Political realities

Even if such a scenario was not practical given the political realities of granting employment to election campaign help karayas and members of one's constituencies, the SLPA is bursting at the seams. There is no justification whatsoever says an analyst to spend more money to house redundant staff while the present space is more than sufficient.       

Be that as it may let's get back to the Cabinet Memo. Here's how it continues:

"The Continental Hotel situated at No. 48, Janadhipathi Mawatha, Colombo 01 is earmarked to be sold by the ownership. This is an ideal building, which could be converted as the Central Administrative Building of the Sri Lanka Ports Authority. The main features of the said building are:

a.  Approximately 250 rooms, 3 nos. banquet halls, 3 nos. restaurants, 1 swimming pool, large kitchen etc.

b. The total floor area is approximately 300,000 sq. ft. and it covers only 30% of the land of 712 perches.

c. This building is located very close to the port premises and each room is having the view of the new South Harbour Terminals.

d. Could be easily converted to an office and transfer all the administrative staff.

e. An access could also be provided from the Church Street.

f. Hotel kitchen could be used as SLPA kitchen with minor modifications.

g. All the services such as central air conditioning, water, electricity, sewer and waste disposal systems are available."

Bedazzled 

Let's pause again if you will. It is obvious that the SLPA has been dazzled by the swimming pool and the large kitchen not to mention the central air conditioning.

One can only say that it ill becomes a government institution to guzzle electricity through central air conditioning of an office when it arbitrarily and at random cuts off power for consumers at least to purportedly conserve electricity.

Room with a view

The other justification is that each room has a view of the South Harbour Terminals.

Some SLPA sources say this is just hogwash. The SLPA runs only one terminal, the Jaya Container Terminal (JCT). All you need is the main terminal building and a small office from which you can view the terminal to house about 400 administrative staff, they say.

Industry sources say there is no justification for basing the purchase on a view as the New South Harbour Terminals will be built, operated, and maintained by private investors with the SLPA only earning royalties on the project. Thus any view if any will be more appropriate for the employees of the private parties if at all and not for the SLPA.

No justification

It is also learnt that administrative staff in other ports around the world are sometimes located miles away from the port itself and there is absolutely no justification for purchasing a five star hotel building merely for this purpose at public expense.   

In any event the South Harbour Terminal Project was to run into controversy even as sibling rivalry between Chamal and Basil Rajapakse over who should get the deal threatened to rip the project asunder. The original bidders have since pulled out and though the SLPA has again called for fresh bids, in the prevailing global climate experts say it is unlikely any bidders will bite the bait.

SLPA says the project will be a non starter even though the project attracted some USD 225 million from the ADB.

The Sri Lanka Ports Authority under Chairman Saliya Wickremesuriya was pushing to award a container terminal concession in Colombo to Hutchison Port Holdings despite a technical committee nod for rival Port of Singapore Authority (PSA).

This was despite recommendations made by the Cabinet-Appointed Negotiating Committee (CANC) and the Technical Evaluation Committee (TEC) to award the same to PSA.

Shipping industry officials during the squabble feared the delay could cause Colombo to lose the race in the trans-shipment hub port business as other rival ports might build new capacity faster, especially in India, and attract shipping lines.

Unlikely bidders

Sources say it is unlikely PSA or Hutchison will now be able to raise that kind of money as they have no additional business outside their territory. Ports like Dubai, Doha and Abu Dhabi with good balance sheets are finding it tough to obtain funding or attract investors for new projects in the current climate, it is not surprising analysts say that Colombo will find it even tougher.

SLPA sources also told The Sunday Leader the Authority is currently running on a massive overdraft. 

The South Asia Gateway Terminal (SAGT) is owned and operated by John Keells where they have built an office at the end of the terminal. Thus the SLPA which has nothing to do with this terminal either, need not worry its head as to where it will place the bottoms of these 9000 employees, many of them lotus eaters in any case.

But now back to the Cabinet Memorandum where it states,

"Sri Lanka Ports Authority urgently needs to expand its yard area in order to cater for the increasing demand for container cargo operations. It is not possible to expand the boundaries towards the Colombo city and the only option is to use the existing port lands efficiently.

"Lands inside the Colombo Port is currently used for administrative purposes, which could be used for commercial activities within the proposed arrangements. In view of the above having Central Administrative Complex close to the port premises is essential to relocate these offices in order to cater for the immediate demand of increasing container cargo operation. Constructing a new Secretariat Building would take at least five years and SLPA is not in a position to delay this development since all other rival ports are developing fast."

A company of snails?

Firstly unless the SLPA is in the habit of hiring a construction company entirely made up of snails it is unlikely that constructing a new secretariat building will take five years. This is simply absurd.

As for the increase in cargo operations, according to SLPA sources, cargo operations dipped by about 15 percent just last month and all indications point to a steady decline for some years to come given the global crisis.

Sources say that SAGT has increased its volume to about 600,000 TEUs while the JCT has come down to about one million TEUs. Thus the SLPA terminal is losing volume to SAGT which belies the very basis of the Cabinet Paper which speaks of an increase in cargo volume.

Further more analysts say there must be a Demand Study Analysis of the JCT in order to ascertain the needs before rushing into such a massive purchase which in any event is unnecessary and smacks of jiggery pokery.

However while a building inside the port premises will take five years to built according to the Minister, he reckons that the "hotel could be converted to a modern administrative building within nearly nine months period and the land area could be used for future development works."

Perhaps Chamal Rajapakse by some curious mathematics thinks that since it is outside the SLPA's current premises, these 'future development works' will take less than five years to construct.

Funds

The Cabinet Paper also talks of the necessary funds for the purchase of the above property, to be arranged through credit facilities from a reputed commercial bank in Sri Lanka. 

This is ironic considering that any transaction with a commercial bank and the Rajapakse regime has usually ended up with the bank having to fight tooth and nail to recover its dues. The hedging deals are an excellent case in point. This regime has lost all credibility as a bona fide debtor or reliable party in any kind of financial dealings.

 However the contents of the Cabinet Paper get even more spicy.

"Since the Colombo Port Expansion Project is now commenced and to ensure the smooth traffic flow of the new terminal and to improve the inter-terminal transfers it is necessary to upgrade the port internal road to six lanes, which may need demolishing of number of buildings within the port," it says.

SLPA sources are shocked at the contents. Firstly the Colombo Port Expansion Project they reiterate has not in fact commenced and will prove to be a non starter due to a lack of viable bidders.

In any event sources say, the four new terminals to be built on the south side of the harbour under these projects will be built and operated by a private party. If perchance a private party does take over the project they will do so only if they are able to recuperate their investment and the only way that could be done is to increase their volume.

The more the volume increases on the south side the volume of the Jaya Container Terminal run by the SLPA would decrease. 

Six lanes absurd

Certainly for the four new terminals there will be inter terminal trucking on the south side of the harbour (this is merely assuming that the project has commenced which it has not contrary to what the Cabinet Paper claims). But that is a matter that need not concern the SLPA as the south port terminals will be built by a private party.

There is certainly no justification say SLPA officials for any new lanes between old and new terminals. That is why sources say a Demand Analysis Study has to be done immediately to evaluate the volume and capacity of the JCT.

It is absurd they say to upgrade the port internal road to six lanes. The existing two lane road is sufficient and the SLPA premises vast. If any lanes are needed certain buildings could even be demolished to make room, sources said.

If the cabinet seeks to increase the road to six lanes then by the same token they must show a six fold increase in the volume of imports into the country, says an angry SLPA official.

In any event sources say, the congestion usually occurs as traffic goes out of the gate and not on the internal roads.

The bottom line, industry sources say, is that the SLPA has absolutely no justification for purchasing the Ceylon Continental Hotel especially at such a high price.

Jittery

Meanwhile Ceylon Continental employees are getting jittery. Already large numbers are approaching managers of other city hotels seeking jobs as the spectre of a SLPA administrative office complex looms large before them.

For Chamal Rajapakse however it's just another day on the job. It was only in October he had cabinet approve a massive Rs.1,100 million to purchase an aircraft from an internet based company for a failing budget airline.

He still has the Weerawila Airport to play around with. In the meantime it's the Ceylon Continental at public expense.

If Chamal comes down the chimney this Christmas it would only be to hand over a massive profit to Nahil Wijesuriya. Guess whose picking up the tab?

Cabinet Memorandum

CABINET MEMORANDUM

Ministry of Ports and Aviation

Cabinet Paper No:

Reference No. PD/S/A.D/I/l(i)

Date: 11.2008

PURCHASE OF THE CONTINENTAL HOTEL TO BE USED AS THE CENTRAL ADMINISTRATIVE SECRETARIAT OF SRI LANKA PORTS AUTHORITY

1. Background

The administrative functions of the Sri Lanka Ports Authority are scattered throughout the port premises due to lack of infrastructure facilities. This has caused difficulties in communicating effectively in various divisions and sections. Therefore Sri Lanka Ports Authority urgently requires to have a Head Office Building to accommodate its staff. (Which is more than 12,000 in numbers currently) and its activities, under one roof.

2. Comments

The Continental Hotel situated at No.48, Janadhipathi Mawatha, Colombo 01 is earmarked to be sold by the ownership. This is an ideal building, which could be converted as the Central Administrative Building of the Sri Lanka Ports Authority. The main features of the said building are;

a. Approximately 250 rooms, 3 Nos. banquet halls, 3 Nos. restaurants, 1 swimming pool, large kitchen etc.

The total floor area is approximately 300,000 sq. ft. and it covers only 30% of the land of 712 perches.

c. This building is located very close to the port premises and each room is having the view of the new South Harbour Terminals

d. Could be easily converted to an office and transfer all the administrative staff.

e. An access could also be provided from the Church Street.

f. Hotel kitchen could be used as SLPA kitchen with minor modifications

g. All the services such as central air conditioning, water, electricity, sewer and waste water disposal systems are available.

Sri Lanka Ports Authority urgently needs to expand its yard area in order to cater for the increasing demand for container cargo operations. It is not possible to expand the boundaries towards the Colombo City and the only option is to use the existing port lands efficiently.

Lands inside the Colombo Port is currently used for administrative purposes, which could be used for commercial activities within the proposed arrangements. In view of the above having a Central Administrative Complex close to the port premises is essential to relocate these offices in order to cater for the immediate demand of increasing container cargo operations.

Constructing a new Secretariat Building would take at least 5 years and SLPA is not in a position to delay this development since all other rival ports are developing fast.

This hotel could be converted to a modern administrative building within nearly 9 months period and the land area could be used for future development works. SLPA has informed that the necessary funds for the purchase of the above property, will be arranged through credit facilities from a reputed commercial bank in Sri Lanka.

Since the Colombo Port Expansion Project is now commenced and to ensure the smooth traffic flow of the new terminal and to improve the inter-terminal transfers it is necessary to upgrade the port internal road to 6 lanes, which may need demolishing of a number of buildings within the port.

In view of the above, Board of Directors of SLPA, decided to seek the approval of Cabinet of Ministers to appoint a Cabinet Appointed Procurement Committee together with a Project Committee to evaluate the proposal of purchasing this hotel. (SLPA Report and the Board Decision attached - Annexure 01.)

3. Approval Sought

In view of the above, approval of the Cabinet of Ministers is sought to;

Appoint a Cabinet Appointed Procurement Committee and a Project Committee to evaluate and make recommendations for the purchase of Continental Hotel and its premises at No. 48, Janadhipathi Mawatha, Colombo 01, to be used as the Central Administrative Secretariat of the SLPA.

Arrange financial credit facilities from a reputed commercial bank registered under the Central Bank of Sri Lanka.

Chamal Rajapaksa M.P.

Minister of Ports & Aviation

Ministry of Ports & Aviation

No. 45, Leyden Bastian Road, Colombo 01.


CB hedges over hedging as CPC hits back


Asantha de Mel, Nivard Cabraal,
A.H. M. Fowzie and Mahinda Rajapakse

By Sonali Samarasinghe

While the hedging scandal has now become fair game for public interest litigants and politically motivated elements alike causing a flurry of fresh Fundamental Rights applications and intervenient petitioners, more evidence surfaces on the tight reign of control over the issue exercised by the Central Bank of Sri Lanka.

Further to our exposes on the subject in the past two weeks, evidence in our possession suggests that the Central Bank and its governor were even closely monitoring the now infamous press conference given by the CPC and the banks on November 10 defending the hedging agreements and promising a restructure of the arrangements.

President approves

Not only that, President Mahinda Rajapakse had as far back as January 31, 2007 also given his consent to the much maligned zero cost collar as recommended by the cabinet and the Treasury appointed study group.

Recall that a Cabinet Memo was tabled on January 13, 2007 and approved on January 24, 2007. (See last week's The Sunday Leader) Just five days later President Rajapakse submits a Cabinet Memorandum on January 31, with his observations stating "I have no objection to the proposal." (See box for Cabinet Memo)

The Supreme Court on November 28 was to castigate the suspended Ceylon Petroleum Corporation Chairman Asantha De Mel for his part in defending the banks and distributing a press statement, admitted by De Mel in court to have been prepared by the Standard Chartered Bank, which stated that a default of payment to the banks will be as good as a sovereign default.

Petitions filed 

Two petitions filed in court on November 26, by Laugfs Gas Chairman W. Wegapitiya, UNP MP Ravi Karunanayake and two others sought to cancel the deals. The court, at an earlier hearing, suspended the CPC Chairman, stopped payments to the banks until the case is concluded, and requested  President Rajapakse to remove the present Minister of Petroleum Resources, A.H.M. Fowzie and appoint a new minister. The deals could cost the government anything from USD 489 million to about USD 900 million according to some sources.  

Cabraal guides De Mel    

However it is now revealed that it was in fact Nivard Cabraal who had provided in writing the guidelines to the above said press brief that very morning at a meeting in his office at the Central Bank.

Earlier a hive of activity was to mark the week prior to the press briefing with business circles buzzing on a non payment of dues by the CPC on the hedging contracts to the two foreign banks, Standard Chartered Bank and Citi Bank.

This was followed by an SMS surge on Friday, November 7 indicating that the Governor of the Central Bank, Nivard Cabraal had advised the CPC not to pay the banks, with weekend newspaper headlines also announcing a possible CPC default on November 9. This prompted the Central Bank to call a hurried meeting on the morning of November 10, Monday.

Cabraal moots non payment to banks

It is reliably learned that Governor Cabraal had privately called up CPC Chairman De Mel and advised him to stop payments to the banks. He was to even have called Deputy General Manager (Finance), CPC, Lalith Karunaratne in the morning of November 10 and expressed this view. Cabraal's argument was that the banks did not issue proper guidelines and misrepresented facts in entering into the hedging deals.

This newspaper called both the Governor and the CPC Chairman, and also Karunaratne but Cabraal refused to comment stating the matter is before court and De Mel was not available for comment. Lalith Karunaratne had a lapse of memory. 

Cabraal silent in company

If indeed this was Cabraal's opinion he was to keep his own counsel at the morning meeting in his office. The meeting included Cabraal, Deputy General Manager (Finance) Lalith Karunaratne, two Deputy Governors of the Central Bank, Ranee Jayamaha being one, and two other Central Bank officials.     

The CB officials at least at this meeting were of the view that any default to the foreign banks would impact adversely on the country's economy and credit status. There was a discussion on whether the payments should be made and the wide consensus among responsible officials was that it should as the country could not afford a problem with the banks at this juncture.    

The Sunday Leader sources indicate that even though the CPC had on Friday, November 7, paid a sum of US$ 6.5 mn on the contracts, a balance sum of USD 7 mn was being withheld by the CPC due to conflict on whether payment should in fact be made to the banks given the mis-selling  motif now brought to the table.

However with a media blitz at the weekend Cabraal who presided at the meeting said that it was purely a commercial decision for the CPC.

It was Cabraal who had suggested that the CPC hold a press conference that evening and get the CEOs of the banks to reiterate that there was no default as claimed by the weekend media.

Cabraal went further. After the meeting he allegedly whipped out a typed press release titled "CPC assures its obligations under hedging arrangements and intends to renegotiate deals to minimise losses." There is however controversy over this document with sources close to the CPC Chairman vowing the release was handed over to the Chairman while Lalith Karunaratne also at the meeting stated to The Sunday Leader that he had no knowledge of the release.

Cabraal could not be contacted as this edition went to print. Last week Cabraal told this newspaper he would not like to comment as the matter was before court.

However the said release is to be filed tomorrow in court as part and parcel of Asantha De Mel's objections.

Cabraal and the press release 

Be that as it may Cabraal allegedly suggested that De Mel distribute a press release on the lines given by him and assure the public that there is no default and the CPC would renegotiate to cut losses and thus put all the rumours to rest. (See box for full text of press release given to De Mel by Cabraal on November 9)

A section of the press release read as follows demonstrating how closely linked the CB Governor was to the hedging deals even using the word 'cautious' when referring to the actions of the CPC. 

"Upon the approval of Cabinet of Ministers, CPC has been entering into hedging arrangements cautiously with several international and local banks in order to minimise the impact of sharply rising petroleum prices in international markets since the early part of 2008. When the oil prices were rising sharply until October 2008, such hedging arrangements provided some benefits to the CPC.

"However the country still had to incur higher cost for petroleum imports as petroleum prices were rising sharply and hedging arrangements covered only about 30% of imports. As a result of the eruption of the global financial crisis and subsequent sharp and unexpected drop in world petroleum prices, some hedging arrangements have now become unfavourable to the CPC but overall benefits of the sharp decline have been much more favourable than some losses arising from exiting hedging arrangements.

"Such benefits have already been passed to the economy by way of reducing domestic petroleum prices both to general public and for electricity generation. As a result, Ceylon Electricity Board (CPC) has already assured CPC that CEB is now in a position to settle outstanding bills to CPC." (See box for full text)

De Mel however, had, on coming back to office, perhaps feeling that the banks had more ability to arrange a press con and draft a release on the lines of the CB statement and no doubt drawing on his close family friendship with the SCB CEO, Clive Haswell, requested that the banks arrange the briefing, which they did only too well by adding to the press release restructured by them also the offending sentence, "A default by the CPC will be as good as a sovereign default, which could have serious consequences to the country and its growth prospects."

Judicial wrath

A line that was to later earn the wrath of the Supreme Court. The Supreme Court for their trouble issued interim order November 28 that any payments to the banks by the CPC be immediately stopped.

De Mel at the press conference had explained that the SCB payment was due only on November 14 and therefore there was no question of a default and that the Citi Bank was paid on November 10.

Blaming the banks 

Indeed many blame the banks for the fiasco. It is averred in the Fundamental Rights Application No 535/2008 of Laugfs Chairman and majority shareholder W.K.H. Wegapitiya lodged on November 26, that the apex court should consider whether the banks had adhered to the regulations of the Central Bank.

In terms of the directions of the financial derivative products issued by the Central Bank of Sri Lanka on December 21, 2005 and November 28, 2006 banks are required to ensure the following:

1. Obtain an undertaking from customers using derivative products that they have understood the risk associated with such product

2. Maintain high level of transparency by appraising customers of the risk involved and providing sufficient information on conditions and clauses.

According to the Petition it is necessary for the banks to ensure that the board of directors of a corporation clearly understand the risk of the instrument/products and draw up/lay down adequate plans to mitigate the risks involved in products that a corporation is buying.

While these are now matters before court a top source in government on condition of anonymity told The Sunday Leader the banks should not be paid as they had mis-sold the product. "This is what is happening today even to the public," this official said. "Many banks are misrepresenting interest rates, duping customers who are ignorant of the full range of facilities, or selling hard products like savings accounts while withholding valuable information on other options available to the customer that would give a higher interest rate such as a short term fixed deposit."

"We have to fight these banks," he said. 

However The Sunday Leader reliably learns that the five banks involved in the hedging deals with the CPC have been regularly sending monthly reports to the Central Bank. The Sunday Leader contacted Managing Director, Citi Bank, Ravin Basnayake however he refused to comment. Many  calls were made to both CEO Dennis Hussey of Citi Bank and CEO Standard Chartered, Clive Haswell that went unanswered.

Asantha protects banks            

However suspended CPC Chairman De Mel at least during the infamous press con on November 10, was loathe to blame the banks. Taking a cue from Cabraal's guidelines he said the CPC will restructure the hedging arrangements with the banks that have entered into hedging arrangements to mitigate losses arising from lower crude oil prices in the global market.

Defending the banks tooth and nail for reasons best known to him, De Mel reportedly said the risks had been fully explained by all the banks. "As a result there is no question of mis-selling of these products by banks," de Mel said. "Since starting our hedging programme, the different banks have explained to CPC the various downside risks associated with each product and we entered into these deals with full knowledge of these risks," he reportedly had said.

Vasu, Nihal file petitions

Meanwhile last Wednesday Vasudeva Nanayakkara and Nihal Sri Ameresekere now emerging as public interest litigants filed intervening petitions in the Supreme Court in the oil hedging cases, blaming the banks for selling a one-sided deal to the state-owned Ceylon Petroleum Corporation (CPC).

The petitions seek to declare the transactions as null and void on the grounds that the foreign banks negotiated a deal that could cause a foreign exchange crisis in this country, among other matters.

UNP files against Nivard, Monetary Board

Also last week a fundamental rights petition on the hedging was filed by the UNP in the Supreme Court citing the Central Bank Governor Nivard Cabraal, the Monetary Board, former Treasury Secretary, P.B. Jayasundera, Petroleum Minister A.H.M. Fowzie and former Chairman Asantha De Mel  among the 17 respondents.

The petition was filed by Puttalam District MP Ranga Bandara through Attorney Iqbal Mohamed. The petition cites the alleged role played by the Central Bank Governor, Cabinet of Ministers and the Finance Ministry in the oil hedging process.

Two petitions on the oil hedging deal are already before the Supreme Court but neither the Central Bank Governor nor the Monetary Board were made respondents in those two cases.

Bandara's Petition states that in terms of the Monetary Law the Governor, CB is not only the principal representative of the Central Bank and Monetary Board but also determines policies and measures to be adopted and is responsible for the management, operations and administration of the bank.

Ably assisted

The Petition also states that the Governor was ably assisted by the Cabinet of Ministers who approved the hedges even referring to the Central Bank Governor's recommendations when doing so.

Separately, banking sources say, if the CB was doing its job it would have at the slightest suspicion called for the books of all the banks engaged in the hedging including Standard Chartered and Citi Bank and monitored  the instruments closely. Certainly the Central Bank could have easily done so if the banks were sending monthly reports on its transactions to the CB. Why didn't the Central Bank or the Governor detect any problem?                  

The Central Bank Governor last week refused to comment when contacted by this newspaper but immediately thereafter issued a statement on the hedging deals citing among other things two letters written in support of the hedge by Cabraal to De Mel as exclusively reported by The Sunday Leader.

What is important to note is that Cabraal in the statement while defending the tenor of his letters (See The Sunday Leader of the past two weeks) urging immediate hedging by the CPC states;

"Such advice to the country's largest single importer was obviously, sensible and timely. Accordingly, it is clear that the advice cannot, in any way, be considered imprudent or irresponsible. In fact, the events of 2007 and 2008 clearly indicate how vital and important this advice had been."

Thus the Governor on the one hand admits the value of hedging while on the other refuses like a petulant child to take responsibility for the hedges. Moreover it is Canadian Economist Upul Arunajith's contention that hedging was first mooted within the Central Bank by him much earlier than 2006 and it was only after he left the Central Bank having on many occasions explained to a reluctant Cabraal that hedging if done right could be a valuable financial tool that Cabraal allegedly hijacked the idea and presented it as his own at the now much publicized presentation on September 6, 2006 to the Cabinet of Ministers and President Rajapakse.

CPC was to hire Arunajith

In fact even in January 2007 the CPC was toying with the idea of hiring Upul Arunajith, a proven expert in hedging and risk management as a consultant to the CPC for hedging. But it did not materialise.

Arunajith however had always mooted a less risky premium option rather than the zero cost collar recommended by a report dated November 11, 2006 by the high level study group appointed by the former Treasury Secretary P.B. Jayasundera on the directions of cabinet including CB officials and as approved by the cabinet decision that followed on January 24, 2007.

Purloining

It ill becomes a governor accused rightly or wrongly by Arunajith of purloining his idea and presenting it as his own to now completely do a Pontius Pilate number and slip away from the scene of the crime.

That said here's the deal. As at end of October Sri Lanka's foreign reserves had fallen to 2,374 million US dollars from 3,185.4 million dollars in September according to the Central Bank. This was amidst heavy intervention in forex markets with LBO reporting as much as 587.70 million dollars worth of intervention.

 But November intervention volumes which usually come at the end of the month, have not yet been released.

According to economists the country has been steadily losing forex reserves due to foreign investors pulling out of domestic government securities markets and because of the astronomical figures spent to cover trade transactions because CB was "maintaining an unsustainable peg with the US dollar," LBO reported. 

With the bad hedge deals now set to be a further drag on the country's depleted foreign reserves, the CPC itself is reeling under a bunch of debtors with the worst offenders being the Ceylon Electricity Board (CEB), Railways (CGR), Mihin Air and the Ceylon Transport Board (CTB).

A bunch of debtors

 The armed forces and police as at November 30, 2008 owed the CPC some Rs.7.4 billion while the CEB, CGR and the CTB owe Rs. 47.5 billion coming to a grand total of Rs 54.97 billion. Not forgetting that everybody's favourite budget airline Mihin Lanka owes Rs.645 million and the Maga Neguma project another Rs. 228.65 million.

Mind you these are the hefty figures the CPC can ill afford that are still outstanding even after deducting a set off against taxes of Rs. 5,560 million obtained recently from the Treasury. This set off against import taxes seems to be the only way the CPC is able to recover its debts owed by other government bodies.

Never a benefit to the masses

Meanwhile the CPC maintained that it could not pass the full benefits of world fuel price drops to the people because it was suffering heavy losses and overdue payments amounting to about Rs. 80 billion.

Despite international prices of crude oil dropping from US$ 147 a barrel in July to under US$ 45 this week the government has only marginally reduced prices. This however could change tomorrow as the matter is taken up for hearing in the Supreme Court.

On the last date Chief Justice Sarath Silva directed the Treasury and MP Ravi Karunanayake to study the present pricing formula and possible reduction to prices and present a report to court.

But it is in the pricing that the killing is made at the expense of the public be it the fully government owned CPC or a private enterprise. 

Laugfing all the way to the bank

For instance take LP gas sales. The selling price to Laugfs in December 2008 was Rs. 37.25 a kg. The cost per 12.5 kg cylinder of gas is then Rs.465.6. However Laugfs continues to sell a cylinder at Rs.1679.00 while a 5 kg cylinder is Rs. 760.00. That is a profit of over Rs.1000 considering that Laugfs does not have storage facilities as the company picks up its deliveries on a daily basis and thus storage is free at the CPC premises.

Storing the cylinders would make the locally based Wegapitiya uncompetitive in the market as it would become a costly exercise. Shell however has tankage and massive infrastructure for the purpose.

Wegapitiya in Turkey with MR  

Meanwhile, Wegapitiya was part of a business delegation of eight that accompanied President Rajapakse to Turkey on December 2nd and 3rd. Together with the President was also BOI Chairman Dammika Perera who it will be recalled (see last week's The Sunday Leader) was very much a part of a high level observer team who sat in at CPC board meetings all through the hedging contracts saga. One is entitled to speculate that there may have been some discussion on the subject in Turkey.

Certainly this is just six days after Wegapitiya lodged the Supreme Court application wherein he also pleaded as part of his case not only the hedging deal in the public interest but also the calling of tenders for the supply of LPG gas cylinders and a filling plant in October 2008.

It is Wegapitiya's contention that the CPC has no business to engage in the LPG downstream business as they are already supplying to Laugfs Gas (Pvt) Ltd and because the government still has a 49% stake of Shell Gas Lanka Ltd., which has the majority market share.

However CPC sources said Laugfs purchase just 10 percent of the total gas requirement in the country.  

The Petition also sought to stop the CPC from venturing into the LPG business for itself stating the CPC would run into further financial difficulties and the likes of De Mel venturing into new businesses was arbitrary and irrational.

Business interests

Therefore it is amidst conflicting business interests that the hedging controversy rages on given impetus no doubt by monetary concerns and personal and commercial considerations as well.

Certainly it would seem that something was bound to happen every time President Rajapakse ventured abroad.

 Earlier in November The Sunday Leader has it on good authority, having visited India he had just about stepped onto Lankan soil when Governor Nivard Cabraal was tugging at his raiment and whispering in his ear that CPC Chairman Asantha De Mel was in fact the main cause for the downfall of Sri Lanka's economy.

On the strength of this, President Rajapakse was to immediately summon Asantha De Mel and grill him on the specifics. Later it will be recalled Rajapakse was to even support De Mel at a cabinet meeting.

Following this meeting however on November 17, 2008 Petroleum Minister Fowzie tabled a Cabinet Memorandum regarding a 'Hedging Risk Management Committee' referencing the cabinet decision of January 24, 2007  approving hedging with immediate effect as recommended by the Central Bank.

The committee included W.B. Ganegala - Secretary Ministry of Petroleum, appointed chairman/convenor, Dr. R.H. Samaratunge - Deputy Secretary Treasury, D. Widanagamachchi - Director State Accounts Department, Asantha De Mel - Chairman CPC, Dr. P.M. Weerasinghe - Chief Economist CBSL, R.A.A. Jayalath - Additional Director International Operations, CBSL, Lalith Karunaratne - Deputy General Manager (Finance) CPC.

The Terms of Reference (TOR) for the Committee included the following:

(1) Negotiate with present hedge providers to restructure hedge positions in order to minimise possible hedge losses.

(2) Evaluate the present risk of active hedge contracts of CPC in relation to the forecasted international price movements.

(3) Obtain hedge proposals and evaluate them.

(4) Evaluate the hedging instruments proposed by the hedging providers.

(5) Select the most appropriate hedging instruments as per the forecasts of following

(a) international oil price trends

(b) Cash flow of CPC

(6) Devise a documentation procedure to record and report on hedging transactions

(7) Suggest a damage control system which could be used to identify the probable risk of hedge contracts and propose suitable risk preventive arrangements during contract period.

Therefore it can be seen that the government or the cabinet has not decided to do away with the concept of hedging. Indeed hedging is no dirty word. But in the present global financial crisis it is hedge funds that are being closed helter skelter as bank credit dries up and the meltdown continues.

Lanka Indian Oil Company (LIOC) for instance also engaged in hedging during this period. Sources say LIOC did some 18 contracts of which 10 were leveraged and currently two remain outstanding with Citi Bank where LIOC is also losing money.

Newly appointed Managing Director, LIOC, K.R. Suresh Kumar confirmed to The Sunday Leader that the LIOC is engaged in hedging and that with the sudden crash in crude oil prices they too were suffering losses.

Press release handed over to Asantha by Nivard

Press release on hedging handed over to Asantha De Mel by Nivard Cabraal for distribution on November 10, 2008 at a meeting in the Governor's office

"Ceylon Petroleum Corporation (CPC) vehemently denies a media report published in Sunday Times dated November 9, 2008 which suggests that there is a crisis over hedging deals and would like to issue the following clarification.

"Upon the approval of cabinet of ministers, CPC has been entering into hedging arrangements cautiously with several international and local banks in order to minimise the impact of sharply rising petroleum prices in international markets since the early part of 2008. When the oil prices were rising sharply until October 2008, such hedging arrangements provided some benefits to the CPC. However the country still had to incur higher cost for petroleum imports as petroleum prices were rising sharply and hedging arrangements covered only about 30% of imports.

"As a result of the eruption of the global financial crisis and subsequent sharp and unexpected drop in world petroleum prices, some hedging arrangements have now become unfavourable to the CPC but overall benefits of the sharp decline have been much more favourable than some losses arising from exiting hedging arrangements. Such benefits have already been passed to the economy by way of reducing domestic petroleum prices both to general public and for electricity generation.

"As a result, Ceylon Electricity Board (CPC) has already assured CPC that CEB is now in a position to settle outstanding bills to CPC. The pricing package introduced in the budget will improve financial positions of both CPC and CEB through the benefits of lower international petroleum prices.

"In this situation, there is no crisis or no reason to panic as reported by Sunday Times. CPC assures to all commercial banks that it will ensure meeting all obligations under existing hedging arrangements and, of course, explores possibilities of renegotiating some hedging arrangements under the clauses of such arrangements, as some arrangements have now turned unfavourable due to the unexpected drop in  petroleum prices. In addition, CPC intends entering into new hedging arrangements in order to extend the benefits of current low petroleum prices in the future.

"There was a delay in making a part payment to the Citi Bank under one hedging arrangement due to a delay in obtaining legal clearance before making the payment. As a responsible state owned enterprise, CPC always follows proper governance procedures in making large payments to outside parties. Since the legal clearance was obtained only after the closing of banking business hours on last Friday, there was an understanding between the Citi Bank and CPC that the balance had to be paid only on Monday. There has been no any other delay or default with regard to the other hedging arrangements. It is regrettable to note that certain media has exaggerated a small delay and attempted to tarnish the reputation of the CPC."


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