By

C.A.Chandraprema

The Committee on Public Enterprises in parliament has 26 members and of them only three – Mahindananda Aluthgamage, Chandrasiri Gajadeera and Weerakumara Dissanayake are members of the Joint Opposition. The other 23 are members of the yahapalana coalition that brought President Maithripala Sirisena into power. Yet the recommendations of COPE were made almost unanimously with only Ranjan Ramanayake not being available to endorse the recommendations. The COPE report itself is however divided into two with a ‘majority report’ consisting of the main document voted for by 16 members and ‘minority observations’ consisting of footnotes to the main document submitted by nine UNP members. There was no minority report as such because all that the dissenting minority did was to tag their own observations as footnotes to matters stated in the main report.

As regards the COPE report, the UNP has been abandoned by their allies. Even the four TNA members who don’t usually take any interest in national matters held with the anti-UNP group in COPE and the nine members of the UNP were left to fend for themselves. The Prime Minister in his usual flippant manner was trying to make light of the COPE report but it was a kick in the teeth nevertheless as the UNP is now left holding the bond baby alone on the street. After holding out valiantly, the UNP made a colossal political mistake by finally endorsing the recommendations (which also included certain assertions) of the committee. The recommendations were somewhat long winded and repetitive but can be summarised as follows: (This article is based on the Sinhala version)

1. There is evidence to show that former Central Bank Governor Arjina Mahendran intervened or influenced the bond issue made on 27 February 2015 and that appropriate legal action should be taken against him.

2.Some bond transactions between February 2015 and May 2016 lacked transparency and are of such nature as to bring the integrity of the Central Bank into question.

3.It can be observed that through the transactions carried out during this period one primary dealer – Perpetual Treasuries had made enormous profits.

4.Legal action should be taken to punish the Central Bank officials and institutions responsible for this and the loss caused to the state or to the people of Sri Lanka should be recovered from them.

5. Parliament should directly interve in ensuring that the recommended punitive action is carried out and that steps are taken to put in place the necessary oversight mechanisms to ensure that a repetition of this does not occur.

6. An oversight mechanism should be established by the executive to supervise the financial tenders and awards made by the Central Bank.

7. In trying to meet the cash requirements of the government by issuing bonds, priority should be given to state owned financial institutions.

8. Steps should be taken to monitor the activities of primary dealers and also the transactions in the secondary market.

Even though COPE has made these recommendations, that does not necessarily mean that any of them will be implemented. Giving an indication of what will happen to this COPE report, Lakshman Kiriella was heard shouting in parliament that the previous government had relegated 30(?!) COPE reports to the dustbin and that COPE chairman Wijedasa Rajapakshe had been sacked. He also said that Sunil Handunneti was not suited to chair an inquiry into the bond issue because it was he who held the first press conference challenging the bond issue. So nobody should have any illusions about what will happen to the recommendations made in this report. The main impact of the COPE report will be in the public domain where the UNP has got right royally tarred and feathered and labelled as white collar thieves.

In a way perhaps, the UNP’s yahapalana friends should not be blamed for abandoning them because the evidence about the February 27, 2015 bond issue was simply too damning to defend. This was once instance when the UNP was really caught with their pants down. Even the three member committee that Prime Minister Ranil Wickremesinghe first appointed and which released its report on May 19, 2015 had not actually tried to defend Arjuna Mahendran. That committee of inquiry was made up of three lawyers, Gamini Pitipana, Mahesh Kalugampitiya, and Chandimal Mendis. In fact it was the report of this committee that triggered the setting up of the COPE sub-committee headed by D.E.W.Gunasekera to examine the bond scam in the last parliament.

The findings of the three-member committee appointed by the PM, as regards the bond issue of February 27, 2015 were that: (a) It was unusual that Perpetual Treasuries won 50% of the bids accepted and that this bond issue should be audited by an appropriate authority. (b) That a forensic audit of the goings on in the dealer room of the Central Bank on that day should be carried out. (c) That a suitable mechanism should be set up to supervise the relationship between the Public Debt Department and the primary dealers. The recommendations of the three member committee appointed by the Prime Minister were also discussed extensively by COPE. Given what the PM’s committee had said about the need to bring in the auditors, perhaps the UNP’s goose was cooked from the beginning – because the present COPE report has based their findings on the Auditor General’s report.

The central matter examined in the COPE report is the question of selling bonds by auction versus private placements. Back in May this year, The Island interviewed the then Governor Arjuna Mahendran as his term was coming up for renewal, and the first question we asked him was whether all the problems that he was facing was not due to the fact that he started having bond auctions instead of direct placements as was the earlier practice. The way Mahendran justified his decision to hold bond auctions instead of direct placements was to say that in the modern economy the government can’t manipulate market prices and the determination of interest rates should be left to market forces but that it was being done administratively by the people in the Central Bank.

Mahendran argued that the rate of interest should be determined at an auction, and that in the past they (meaning the Rajapaksa government) were using the EPF, the Insurance Corporation and the state banks to fund the government’s borrowing and administratively set the interest rate at whatever level they wanted to. Mahendran charged that because of this system, EPF contributors were being short-changed by not being given the kind of interest they would otherwise have got. However the Auditor General has held solidly in favour of direct placements, the majority of the COPE has also endorsed what the Auditor General said on this matter and finally even the UNP group had agreed to the recommendation that when the government needs to raise money through bonds, priority should be given to the state institutions that have the capacity to provide funds – which is what direct placement is about.

So now we find every political party represented in parliament rooting for what was a cornerstone of the Rajapaksa era economic policy! In discussing this matter, the COPE report observes that the Central Bank started issuing bonds in 1997 and that according to a Monetary Board paper that was issued that year, from March 1997, bonds would be sold to primary dealers through auctions except when there was a dearth of money in the market or in instances where interest rates were spiraling upwards, in which case money could be obtained through direct placements with the EPF. Later in 2008 another Monetary Board paper had authorized the issuance bonds through direct placements with the EPF and other captive sources. In the course of its inquiry, COPE found that the 2008 decision of the Monetary Board had not been incorporated in the handbook used by the Public Debt Department and Central Bank officials had said that the handbook still states that bonds should be sold ‘as much as possible through auctions’.

(This was a point that was forcefully stressed in the footnotes to the COPE report submitted by the UNP. They argued that when in 2008, direct placements were given priority by a Monetary Board decision, that was only for specified periods during 2008 and that the Monetary Board decision was not valid beyond the end of 2008. Furthermore they pointed out that the Operational Handbook of the Public Debt Department had stated very clearly that when raising money they had to do it ‘as much as possible through auctions’ and that the Auditor General has erred in considering direct placements to be the accepted system. Elsewhere in the footnotes, the UNP had contended that since the Monetary Board had not made a decision to give priority to direct placements after 2008, the direct placements that had been made between 2009 and 2014 were illegal and needed to be investigated – a view that was not shared by any other party in parliament.)

The Auditor General had given COPE the breakdown of the manner in which money has been raised through auctions or direct placements between January 2014 and May 2016. The contrast between the practices of the previous government and the present one couldn’t be starker. From January 2014 till January 2015, money was raised mostly through direct placements. Auctions were certainly held during this period, but only for very small amounts compared to the amounts being sold through private placements. But after the new government came into power in January 2015, and especially after March 2015, direct placements cease completely and bonds are sold exclusively by auction. Pages 11 to 52 of the COPE report is in fact devoted to an examination of this question of auctions versus direct placements and the manner in which the auction of 27 Feberuary 2015 and other auctions were conducted.

The preferred method of the Rajapaksa government was direct placements which the former Governor Mahendran sneered at in the aforementioned interview with The Island as a case of the government administratively fixing interest rates – an outdated system which even Cuba has given up and was followed only by North Korea! However on page 44, the COPE report quoting the Auditor General has observed that the auctions system has increased the cost of raising money for the government and worked to the benefit of the primary dealers who have been able to dispose of their bonds in the secondary market at higher rates. The Auditor General had observed that this has resulted in a benefit that should go to the government, going to the primary dealers instead. (The UNP responded to this with a footnote that said that legally, priority had to be given to auctions according to the operational handbook of the Public Debt Department.)

The COPE report also noted that the Auditor General has held that because of the switch to auctions, state institutions like the EPF and the state banks who are also primary dealers have fallen behind and had not been able to derive any benefit from the auctions. The Auditor General had also observed that the auctions system had given rise to a situation where primary dealers had begun putting in bids at very high rates of interest – in excess of what the Central Bank was willing to pay and this had led to all bids being rejected on five occasions between January 2015 and May 2016. (Neither of these assertions were contested by the UNP in footnotes.) One of the key recommendations of COPE which was endorsed by all its members was that in trying to meet the financial needs of the government, priority should be given to state institutions – which in effect means giving priority to private placements. COPE had also recommended that the operational handbook of the Central Bank and other documents should be amended for this to become the norm and the UNP group also endorsed that recommendation.

Thus the entire COPE committee has ended up endorsing the Rajapaksa government’s policy of selling bonds mainly through direct placements. This whole question from the very beginning was all about auctions versus direct placements. As for the bond issues themselves, the COPE report which is based on the Auditor General’s report had zeroed in on two particular bond issues on 27 February 2015 and another on 29 March 2016. With regard to the 27 February 2015 bond issue, the COPE report had noted the following:

1. That on 25 February the Central Bank had announced the sale of 30 year bonds worth one billion rupees at 12.50% interest.

2. In the week prior to this bond issue, the going interest rate for 30 year bonds on the secondary market was 9.48%. (The UNP group had added a footnote to this saying that this 9.48% was an administratively fixed interest rate under the old direct placements regime and not an interest rate decided by the market.)

3. Even though bids had been called for bonds worth Rs. one billion, on the instructions of the CB Governor, the Central Bank sold over Rs. 10 billion worth of bonds. (The UNP’s footnotes contended that the decision to accept Rs. 10 billion worth of bids was made by the tender committee headed by a Deputy Governor of the Central Bank P. Samarasiri, and that the latter had accepted that this was a professional decision and that the CB Governor did not force them to make that decision and that the latter had merely asked them ‘Why don’t you go for 10?’.)

4. On that day Rs. 20 billion worth of bids had been received, 15 billion of which was by Perpetual Treasuries. This raised the question as to why Rs. 20 billion in bids came in when the advertised amount was only one billion. (The UNP group had added a footnote to this saying that on a previous day Central Bank officials had called all primary dealers including Perpetual Treasuries wanting to know whether they would be willing to buy Rs. 10 billion worth of bonds. By this the UNP was trying to say that all the primary dealers had received a signal that the government needed more than the Rs. one billion advertised.)

5. Perpetual Treasuries had bid for Rs. two billion worth of bonds on their own and for Rs. 13 billion through the Bank of Ceylon – the first time that one primary dealer had bid on behalf of another primary dealer.

6. Of the total bids worth Rs. 15 billion put in on behalf of Perpetual Treasuries, bids for 13 billion had come in during the last eight minutes before the bidding closed.

7. Of the total 20 billion in bids received, 10 billion was accepted and five billion of these high interest yielding bonds went to Perpetual Treasuries.

The 27 February 2015 bond issue was the subject of an exhaustive examination even in the last parliament as well. One question that persists is why an interest rate of 12.50% was fixed for this bond issue when the prevailing rate for 30 year bonds was only 9.48%. The Auditor General’s report pointed out that even a slight increase in the interest rate for a 30 year bond would cause a huge loss to the government because of the duration of the payment. (On page 44, the UNP had put in a footnote saying that Central Bank officials had informed the AG’s department that this rate of 12.50% had been fixed on the basis of a formula but that on the day that this interest rate was advertised, the yield for 30 year bonds was 10.14% and that special attention should be focused on this matter – which seems to indicate that the UNP too agreed that 12.50% was too high given the prevailing rates at that time.)

A bond issue made on 29 March 2016 also came in for scrutiny by COPE. In this instance the Central Bank had called for bids to sell four bond issues of Rs. 10 billion each with varying maturities. After the bids came in, the Central Bank had accepted nearly Rs.78 billion worth of bonds. Of the Rs. 37 billion worth of bids over and above the advertised amount accepted that day, over 60% had gone to Perpetual Treasuries. The Auditor General had estimated that by selling 78 billion worth of bonds when the amount advertised was 40 billion, a loss of Rs. 785 million had been incurred by the government. (The UNP had in a footnote pointed out that the AG had provided COPE with details of 25 bond issues which took place between January 2015 and May 2016 but that COPE had not examined 23 of them and restricted themselves to just two issues on 27 February 2015 and another on 29 March 2016 and even of these they had heard evidence only on the issue of 27 February 2016 and that therefore the COPE report has been based on inadequate data. In a surprising turn of events, the last footnote inserted by the UNP on page 52, they have said that as regards the bond issue made on 29 March 2016, Perpetual Treasuries had obtained a loan of Rs. 29 billion from the Central Bank itself at a low interest rate to pay for the bonds they bought from the CB and that this shows that Perpetual Treasuries had made an undue profit and that this should be the subject of a separate inquiry.)

The AG had also determined that if the losses incurred in all the bond transactions that took place after March 2015 when direct placements were suspended in favour of auctions, is calculated, the losses to the government could be very high. The AG had made several recommendations to the government in his report on the bond issues which COPE had highlighted.

* When the Central Bank makes policy decisions or changes an existing practice, its impact on the national economy should be assessed and the relevant authorities should have proof to show that they took those considerations into account when arriving at their decisions.

* The Central Bank does not have adequate data to supervise the secondary market in bonds. From the time a bond is issued until it becomes due for payment, the Central Bank should know how it had changed hands during that entire period.

* If conflicts of interest exist between top officials of the central bank and the institutions they deal with, such should be revealed without utilizing loopholes in the law or accounting standards to avoid such disclosure.

* That article 45 relating to secrecy in the Finance Act be suitably amended so as to preclude that law being used to prevent inquiry into decisions that affect the economy and the nation.

* The EPF which functions under the Central Bank can bid at the bond auctions but it has shown a tendency to buy bonds on the secondary market instead. Hence there is a need to turn the EPF into a primary dealer able to act independently of the Central Bank.

* That advance projections for the cash requirements of the government be sent to the Central Bank three months ahead instead of one month ahead. And decide early on how this money was going to be raised.

In conclusion it can be said that nothing much may result from the COPE report, but the UNP has ended up with egg on their faces and the policy of direct placements followed by the Central Bank in issuing bonds during the Rajapaksa era has received a glowing endorsement. The UNP’s legalistic argument that the priority given to direct placements during 2009-2014 was not in accord with the decisions of the Monetary Board has been rejected by everyone else and in the end the UNP too has joined everyone else in calling for the restoration of the direct placements system.

Courtesy:Sunday Island