Shehan Chamika Silva, Yohan Perera and Hafeel Farisz
Testifying before the Bond Commission, Prime Minister Ranil Wickremasinghe today said he had directed former Central Bank Governor Arjuna Mahedran to consider issuing Treasury Bonds by way of public auctions in accordance with the Economic Policy of the Government but expected that he would comply with due process in implementing the policy decision.
Premier Wickremesinghe said that he rested on the assurance of Governor Mahendran regarding the divestment of Arjun Aloysius’ ownership in Perpetual Treasuries and had insisted on the divestment prior to Mahendran taking over as Governor. He further said that he relied on the assurance given by Mahendran that there would be no conflict of interest. Prime Minister Wickremesinghe said that he made the same assumption regarding Ravi Karunanayake, when he questioned Karunanayake regarding the “Penthouse” allegations when it was first made by MP Mahindananda Aluthgamage.
“ I asked him ( Karunanayake) about it and he said no. There was no reason to go further”, Prime Minister Wickremesinghe said in response to a question posed by Attorney General Jayantha Jayasuriya.
The Commissions Chairman Justice K.T Chithrasiri read out from a list, the questions to the premier after which Attorney General Jayantha Jayasuriya followed suit.
At the onset of proceedings, Chairman of the Commission Justice K.T. Chitrasiri marked two affidavits submitted by the Prime Minister.
It was explained that the Prime Minister had answered by way of affidavits to 28 questions framed by the Commissioners ( handed over to the Commission on October 20, 2017) and to 20 questions formulated by the Attorney General’s officials (handed over to the Commission on November 18, 2017).
Following the markings at around 10.25 AM Chairman Justice Chithrasiri read out questions which had been prepared by the Commissioners which sought clarifications to the answers given by the Prime Minister by way of affidavits. .
Following are excerpts:
Justice K.T. Chitrasiri: Now in the question number 5 (1) and (2) framed by the Commission, interalia inquired whether you were aware that Mr. Arjun Aloysius was a director and share holder of Perpetual Treasuries Ltd in 2014 and of some times in January 2015 and resigning from PTL after January 16, 2015 and also had questioned whether were you aware that Aloysius was a director of Perpetual Holding companies (Perpetual Capital Holdings and Perpetual Capital Pvt Ltd) even after January 2015. In your answers to question 5 (1) and (2) now you have stated that you were aware that Mr. Aloysius was a director of PTL and that when Arjuna Mahendran who was to be appointed Governor of the Central Bank you insisted that Mahendran must ensure that Aloysius resigns from the office of PTL and not involve himself with business activities of that Company in anyway and also that Aloysius should diverge himself from shares in Perpetual Treasuries Ltd. You have also stated that you have conveyed this to Aloysius also. And further you went on to say in the affidavit that Mahendran assured to you that Aloysius would not under any circumstances play any role of the business activities of the PTL and that you relied on those assurance given by Mahendran.
Now these are the clarifications we need. The first one is were you aware about the holding companies of PTL were Perpetual Capital Holding Pvt Ltd and Perpetual Capital Pvt Ltd ?
Prime Minister Ranil Wickremasinghe: No, I was not aware about the holding structure of those Companies
Justice K.T. Chitrasiri: Were you aware that Aloysius continued to be a director and share holder of those holding Companies even after January 2015?
Prime Minister Ranil Wickremasinghe: No, I was not aware but Mr. Aloysius did say to me he needed a bit of time to dispose his share holding to get good price. (shares of Perpetual Treasuries Ltd or shares he held in other entity in the name of PTL). I met him ( Aloysius) at one or two parties, and there he told me that he was pursuing his interests in Mendis distilleries.
Justice K.T. Chitrasiri: Now, the 10th question framed by this Commission to Prime Minister earlier asked you whether you instructed Mahendran on February 24 , 2015 to immediately stop the practice of Private Placement (Direct Placements). And In reply you have stated that you were aware at the time the practice of the CBSL was to issue the Majority of treasury bonds by way of private placements and that you were of the view that this system was unsatisfactory because it lacked transparency and also artificially suppressed market forces which should ideally determine interest rates and exchange rates. You have stated also in the affidavit that for these reasons you advocated the issuance of treasury bonds at ‘public auctions’. You have then stated that you directed Mahedran to consider issuing treasury bonds by way of public auctions in accordance with the economic policy of the Government and that you expected that he would comply with due procedure
And also replying to our 11th questions you have stated that ‘in the circumstances it was expected Mahendran would take appropriate steps in accordance with due procedures to give effect to the objectives of the Government as possible.
So, now we need clarifications on following: first, were you aware that the Monetary Law Act clearly specifies that it is the Monetary Board which vested with the sole authority to determine the policies and the measures of the Central Bank taken under the Monetary Law Act and that it is the Monetary Board which is the sole authority vested with powers in supervision commission of the CBSL under the Monetary Law Act?
Prime Minister Ranil Wickremasinghe: I’m aware of it but we have gone on the basis that in the constitution that the Government or the cabinet Ministers can determine the policies which applies to all institutions under the Government and in the light of the Secretary to give directions on general policies. So that applies to all institutes. We are on transparency which has to be implemented by the authorities. And secondly, also based on the constitution the control of the public lies with the parliament and it was in question that CBSL was acting and functioning without answering to Parliament. Therefore, all these bodies had to become answerable to parliament and the Auditor General’s powers have to be strengthened.
Justice Prasanna Jayawardena at this moment questioned the PM.
“Now that you have given directions to Mahendran, would you expect that the implementation of that order would be carried out in terms of the due process followed by the institution (CBSL)?
Prime Minister Ranil Wickremasinghe: Yes, he would have consulted. But there are three members in the Monetary Board. Two members were there including Secretary to the Treasury. I’m not aware as to how they proceed in the Monetary Board. But certainly the three members were aware because they were attending meetings. Beyond that I don’t micro manage institutes.
Justice Prasanna Jayawardena: So, would you expect what ever normal procedure had been followed in the CBSL when taking such decision would be followed?
Prime Minister Ranil Wickremasinghe: Yes I would expect
Justice K.T. Chitrasiri: Were you aware Monetary Law clearly specifies that the function of the Governor of the Central Bank is primarily to execute decisions and other tasks with the Monetary Board?
Prime Minister Ranil Wickremasinghe: Yes I was aware of it and wanted that to be restored, because in the previous era the Governor did not act with the Monetary Board but only informed the Monetary Board as to what happened. So, we committed that the Governor functioned under law, subject to what government policies are but we did not interfere in deciding interest rates or others things.
Justice K.T. Chitrasiri : Were you aware that as at February 2015, the policy of the Monetary Board to issue majority overwhelming treasury bonds by way of private placements, in fact in your answer you have acknowledged that it was the practice up to February. So were you aware of that?
Prime Minister Ranil Wickremasinghe: Yes, I was aware. Because, even in Parliament we have been informed on this. And I did ask Mahendran for all copies of every private placements up to 2008 and he gave details up to 2008. Subsequently, Governor Coomaraswamy also produced only up to 2008. So, there was a gray area as to how they were proceeding. Virtually, trillions of dollars have been taken from this and was in question.
Justice K.T. Chitrasiri: Were you aware of the established practice followed by the Monetary Board that when a major decision is to be taken which can effect the Monetary, the Monetary Board will first direct the relevant department of the CBSL about the relevant area to study the issue and submit a detailed board paper and then the Monetary Board will consider that board paper and discuss the relevant issues and only thereafter reach a decision?
Prime Minister Ranil Wickremasinghe: Yes. This was the procedure that they had followed earlier.
Justice K.T. Chitrasiri: In those circumstances, when you directed Mahendran to consider issuing treasury bonds by way of public auctions in accordance with the economic policies of the Government and would you have expected that he would comply with the due process and take appropriate steps in accordance with the due procedures? And did you advise him to give the Monetary Board the first directions and discuss at the Monetary Board?
Prime Minister Ranil Wickremasinghe: Well, I advised him to go ahead and I thought he would follow whatever the procedure which had been followed at that time.
Justice K.T. Chitrasiri: If So, did you expect Mahendran to also discuss at the Monetary Board on how to proceed with the possible shift from the overwhelming dependence on private placements to primary public auction system?
Prime Minister Ranil Wickremasinghe: No, I did not. I just told him what the policies are.
Justice K.T. Chitrasiri: Then, the question number 12 framed by this Commission about the money which was needed from February 2015 onward to fund payments to contractors on account of road projects and other constructions which may have not been previously accounted for and provided by the Ministry in 2014. Then question number 13 also states according to the evidence led before this Commission, the fund required were not included in the some of Rs. 13.5 billion, which the Department of Treasury Operations (TOD) requested the Public Debt Department to raise on March 2, 2015 for which purpose the February 27, 2015 bond auction was held.
This appears to be conferred by the fact that daily cash flow for the month of March 2015 which reflects the Rs. 13.5 billion by march 2 had been prepared by the TOD on or before February 20, 2015 , it was several days prior to the Cabinet sub Committee meeting on February 24, 2015 and breakfast meeting held on February 26, 2015, which you have referred in your answers. Then further, in daily cash flow forecast for the month of March 2015 states that the sum of rupees 13.5 billion required on 2 March, 2015 was primarily to fund the payment of capital expenditure.
So, we need clarifications on these, first is, in the view of aforesaid circumstances would you agree that the requirement of Rs. 13. 5 billion, required on March 2, 2015 which had been computed by department of Treasury Operations on or before February 20, 2015 was not connected with the requirement of additional funds in an amount of Rs. 15 billion which was urgently required as determined at the meetings on 24, and 26 February 2015.
Prime Minister Ranil Wickremasinghe: Yes, those are two separate requirements.
Justice K.T. Chitrasiri: Would you agree that the additional funds in the amount of Rs. 15 billion which was urgently required as determined in the meeting at the February 24 and 26 meetings, had to be raised separately or in addition to the sum stated in the daily cash flows prepared by the TOD?
Prime Minister Ranil Wickremasinghe: Yes, if the Commissioners would allow me I would like to explain. Generally, all the Government expenditure must be stated in the budget. What had happened in the previous years was that there were many projects approved which were not shown in the Appropriation Bill and the Act for the simple reason there was an agreement with the IMF on certain limits. You got around from the limits by not putting them in the books. Then when the money was collected you paid off but you have a problem. Actually we have two streams of payments to make. One is what is in the Appropriation Bill and one is outside that. I think for highways they were talking of primarily for that year including land compensation something around Rs. 75 billion -100 billion, in fact, last week I received a letter from a Singaporean company which had to be paid for doing a part of the Northern part of the expressway in 2013 or 2014. Actually no one knew about it till we got the letter. Even now we have various claims coming in and in the case of Sri Lanka this is not in the books but all the liabilities on the bag, if anything goes bad we still have to fund from the banks about Billions. We are going through it. It’s a forensic examination.
Justice K.T. Chitrasiri: Now, as we had questioned you in the 13 questions in the list, whether you had contacted Mahendran on February 26, or 27 2015 prior to and after the bond auctions, in your answers you have stated that in the evening of February 26, 2015 Mahendran said to you that it may be possible to raise the part of the additional funds required for the ongoing road works at the auction to be held on the next day. Then you have stated after the auction held on February 27, 2015 he informed that he had raised Rs. 10.5 billion.
So, now we need clarifications on that there had been a call from Mahendran’s telephone to a number at 12.39 p.m. on February 27 and then there had been three calls later in the afternoon on that day from Mahendran.
Is that the phone number that you can be contacted?
Prime Minister Ranil Wickremasinghe: Yes. I was contacted on this number and I have different phone numbers in use. But this was the number I was contactable on this day.
Justice Prasanna Jayawardena: Do you answer calls?
Prime Minister Ranil Wickremasinghe: I don’t answer calls personally. Generally since I work in my office room. There is someone outside who would check on the phone and deal with it.
Justice K.T. Chitrasiri : Do you recall the content of the four telephone calls?
PM I remember in the first call (12.39 p.m.) he told me don’t worry that we have enough money that we have raised. Then in the afternoon he gave me a call and described the details of what has happened and that they have taken Rs. 10 billion. And that was the two calls I remember. Other calls may be on some other issues.
At this point the Commissioners said they had concluded their questioning and requested the Attorney General if he had any questions.
Attorney General Jayantha Jayasuriya PC thereafter commenced his questioning, following the pattern of the Commissioners, the Chief Legal Officer of the country read out the questions to the Prime Minister. During the reading out of the questions, Jayasuriya PC did not ask many follow up questions to the answers provided.
Following are the excerpts of the questions put forth by the Attorney General
AG Jayantha Jayasuriya: You were questioned about the change of system that existed in 2015 and that the Governor had affected the change on the instructions that you have provided. And also you explained the due process for the Governor to follow in the new process when he was giving effect to the instructions you have given him. Now in 2017, another change had taken place with regard to the system that is adopted in relation to the Treasury bond auction. In your answer to question 26 (a) in the affidavit you have sent on 18th of November you had said that following past experience and on expert advise the current modified system was devised by the Monetary Board after reviving the working of the ongoing auction based system. That describes the way or the effort that had been taken to effect the change that was done in July 2017. Have you come to know or were you informed at any stage by Mr Arjuna Mahendran when he affected the change in 2015, whether a similar exercise had been carried out or not?
Prime Minister Ranil Wickremesinghe: What happened was, first we went over to the public auction system. We still did not know what the extent of the debt was, or what we had to pay. That was being done by him. It was done by him. It was complete only later on. He told me for instance that it might take upto 2021. Even we had the long term debts, the short term debts. We are going on and on and he advised us that unless we have a growth to pay we will become an indebted state like Greece. So While the Central Bank was working that out we now have developed a growth strategy also. Then subsequently Governor Coomaraswamy took on, but we had a big discussion on this. I think I have referred to it on a discussion with C. P. R. Perera who was called in and that was continued after Mahendran left and we got down a specialist from the US Treasury. The specialist finally gave us this system. The reason for this is when it became clear I would like my staff to hand over to Hon. Commissioners these three papers with figures on liability management , loan placement and also I would like to get agreements done which shows how we had to go ahead with this macro economic liberalization to get integrated into the global economy.
However it said the whole problem came from 2017 onwards because of the large amount debts and the bunching that treasury bonds subscribed for 2018 and 2019 were substation including annual bunching figure, and de-financing such debts on maturity date at a reasonable cost will be a difficult task, if not it may impact on domestic debt market expectedly on the interest rates.
The figure also shows that there is an annual and monthly bunch in the Sri Lanka development bond payments. In 2018 T bond maturity exceeds Rs 90 billion in six days throughout the year.
Then on commercial debts, annual interest bills of ISBs amounts to US $602 million in 2018 , further from 2019, matured amount stand at US $ 1000 to 1500 each year till 2027 except the year 2023 and 2024.
A pro active policy is needed to refinance risks of ISBs from 2019 onwards and then they suggested on the advice of this American that there should be a medium term debt strategy. This is something that evolved from 2015 till 2017.
I have given the commission the debt document, growth document and the agreement with the IMF both in 2016 and in 2017. That shows the whole economic policy of the government.
AG Jayantha Jayasuriya: That shows that you would agree that introducing this change would need extensive studies as well as sustainability of the mechanism that is going to be implemented. Are you aware whether in 2015 , when the change took place a similar exercise had been conducted by the Governor?
Prime Minister Ranil Wickremesinghe: We could not conduct any exercise in the treasury or in the Central Bank because the figures were not there. It took us the whole of 2015 and a part of 2016 to dig up all the figures and this was done as a result of what we did from 2015, that everything was available, transparent, and the Us Treasury advisor had come in, the IMF people had come in. It was not possible to have done it in 2015.
AG Jayantha Jayasuriya: Also you were questioned with regard to the conflict of interest situation that prevailed when Mr Arjuna Mahendran was appointed the Governor of Central Bank and also that in your answer to question 21 of the November 18 affidavit, you said that you believed that Mr Arjun Mahendran acted in good faith with regard to the assurances given to you. However there were at different stages like the public uproar after the auction of February 27 2015, then March 21 and March 31 2016 and then with the meeting with Mr C P R Perera that you referred to and as well as at a later stage when member of Parliament Mr Mahindananda Aluthgamage made a statement in the House in June 2016, the continuation of this conflict of interest situation were traced. Now in that context did you expect ( Now you expected Mr Mahendran to keep the assurances given to you). Was there any opportunity for you to verify whether these assurances were met with?
Prime Minister Wickremesinghe: Well this happened at the end of February and I did speak to him earlier in January and they told me that Aloysius was resigning from Perpetual Treasuries, which he had done.
He has resigned as a director. I was also told that he was going to spend his time developing the Mendis Distillery. He did once or twice and showed me some of the products and talked to me at some parties but not this. However that was all that I knew. Other than that I did not know he had shares. It was the same thing that Arjuna Mahendran told me.
This conflict of interest is something which we raised because the sister of earlier governor was a member of Perpetual Treasuries and it was we who said there should not be any conflict of interests and we asked him to resign. When this happened I appointed the Gamini Pitipana Committee and the committee went for investigation. The Governor went on leave. If there was anything wrong against governor Mahendran he had to resign but there was nothing against him.
However regarding other matters there were various issues that came up with regard to the issues raised by Mr Mahindananda Aluthgamage was about the Minister of Finance who was being questioned about his statement. These documents tabled did not have anything like that but I did ask the minister and the minister (Ravi Karunanayake) said no. so I accepted that. Because with Mr Mahindananda Aluthugamage also there was an inquiry going on and the file had come to your department and you have to decide whether to prosecute him or not.(in a sarcastic manner)
AG Jayantha Jayasuriya Therefore there was no specific information that Mr Arjuna Mahendran in fact did keep those words about the assurances he gave?
Prime Minister Wickremesinghe: I had no information that he deliberately misled me and the Pitipana committee also did not have any information to that effect and I don’t think even the COPE, although it did make some comments, had any findings of that matter.
AG Jayantha Jayasuriya: So, in the backdrop of concerns being raised, did you at any stage consider whether it would be necessary to instruct Mr Mahendran to check how the ongoing issues should take place in the context of the allegations?
PM: Once I finished the Pitipana Committee I put to the hands of Parliament to tell me whatever it thinks wanted. The First COPE committee got Arjun Aloysius down and examined him, the second COPE committee did not get him down but examined Arjuna Mahendran extensively. So once it came to Parliament I did not go to interfere again and I also wanted it done by the House as it had control over public finance. We wanted to establish the principle that Parliament has control over finance. We are now passing a legislation to give the House a budget office so that they will be in complete control in the new monitory law where there will be provisions for them to give the information from the Central banks. Therefore what happened earlier will not happen again in this country.
AG Jayantha Jayasuriya: In your affidavit of October 20 2017, answering questions 21 and 22 and the affidavit of the November 18 2017, answering question 33, you informed this commission that and the various steps that you took in relation to Pitipana report. You have detailed the fact that it has been referred to the Attorney General and also with regard to the reference to the House.
The Pitipana report, in paragraph 19, deals about serious concerns about Perpetual Treasuries securing 50 percent of the accepted bid (Rs. 5 billion out of Rs. 10 billion which was accepted at the auction).
Then paragraph 27 spels out a need of high level of integrity in the conduct of the officials of Central Bank which includes Deputy Governor and the Governor. Then in paragraph 38 of the committee report, the committee makes a humble request from you to take all necessary steps within the powers vested in you, taking further remedial measures that may be necessary. In that regard did you contemplate or have you taken any steps other than what you have described in the two affidavits, I referred to, by taking measures to ensure the integrity of the issuance of treasury bonds or under continuation of Mr Mahendran as the Governor?
PM: As I explained to you earlier, Mr Mahendran’s continuance as the Governor was dependent on the findings in Parliament because the Pitipana committee specifically did not make any recommendations. And when they handed over the report, I asked them is there anything for us to ask Mr Mahendran to resign. They said we can’t tell you that and this is all that we found. They told me kindly to go into the relationship between Perpetual Treasuries and the Bank of Ceylon as to how it could be obtained and what happened there. Pitipana Committee wanted to really to go into that relationship between Bank of Ceylon and Perpetual Treasuries.
The question I think was whether this bond issue was in good faith or bad faith. So we had to establish bad faith. The matter came up and once it went into Parliament I left it there. With regard to remedial measures, Pitipana Committee had made certain recommendations. However since the mandate of the commission involved making recommendations we thought we will wait till the report comes out and then study those recommendations, the recommendations of the Pitipana report and some other recommendations that we have had and go ahead with whatever legislative measures we have to make because we are in the process of drafting a new monetary law, I have asked the Central Bank for its inputs and once that is there we will get the foreign consultants also take into account these views and bring it in.
AG Jayantha Jayasuriya: So in fact the Pitipana report of course confines themselves to the mandate that was given to them by you when you appointed the commission?
PM: Yes, but at the same time COPE was probing it. Mr D. E. W. Gunasekera was chairing it and therefore, I could not run a second inquiry parallel to it as they would have accused me of bad faith. However, COPE went into it. COPE issued a report but there was a big controversy whether they have done it officially or not. On the second occasion we told COPE to go ahead and Mr Sunil Handunetti was made Chairman and they went ahead. I think all the members came to a conclusion that further inquiry was required. They could not come to a final finding there.
AG Jayantha Jayasuriya: At any stage were you made aware of any policy decision to ask the state banks to coordinate and bid at low yield rate at the treasury bonds auction which was to be held on 29th March and 31 March 2016?
PM: No. There was no policy decision. State Banks were told don’t get into speculative bids and to discourage speculative decisions. Beyond that our principle was to be market friendly and let market determine the rates as far as possible.
AG Jayantha Jayasuriya: In your affidavit of November 18 2017, answering question 14, you referred to a meeting with Mr C. P. R. Perera and another official. So such policy decision was not disclosed even at that meeting, or fact that such instructions given to banks?
PM: No, we talked about the monetary affairs. The only thing that came out was that the bank supervision division was weak and with regard to the monitoring of non banking financial institutions were not existent and we should really go in for non banking institution supervision. Many of them were on the verge of collapse and now the present governor is taking steps. We still have some shaky institutions.