May 10

A recent newspaper report has indicated that Minister A.H.M.Fowzie and certain officials of the Ceylon Petroleum Corporation (CPC) were given free travelling, accommodation and training abroad to learn about hedging in connection with the purchasing of petroleum in the world market. The training, as far as one could deduce from the information given, did not last more than a few days. Moreover, the cost of air fares, travelling, accommodation etc had apparently been borne by the banks with whom the hedging contracts were to be signed.
The first thing that struck us at the Citizens Movement for Good Governance (CIMOGG) was that we had always been under the impression that price hedging was a skill which financial, economic and commodities experts took years to acquire. It was, therefore, remarkable that the necessary knowledge and expertise was planned to be imparted in such a short while to non-specialists in this field. Were those who were party to this scheme really serious? At the very least, would it not have been more gainful to the country if the persons who went on this training course had spent their time, instead, in following a course of similar length in Sri Lanka conducted by independent experts with in-depth knowledge of oil market hedging?

The second notable feature of this episode was the dubious value of getting training to safeguard Sri Lankas interests from the very institutions which would unquestionably have wanted to safeguard their own interests vis-a-vis Si Lanka. Taking a fair parallel example, we are forced to ask ourselves whether a representative of President Obama would have gone for a two-day course run by Osama bin Laden on how to conduct the war against the al Qaeda.

A third important issue that arises here is whether the Cabinet, which is compelled to spend only a limited amount of time on any matter before it, and largely relies on a brief but succinct summary from the Minister concerned, was really made aware that critical advice and training on the hedging exercise had been secured from the very party or parties with whom such an important contract was to be signed? The conflict of interests here is so plain that it does not require an Einstein to identify it.

The most amazing thing that we have been told is that neither the Minister nor the CPC officials nor anyone else considered the possibility that petroleum prices might drop below the target range. All of us know that, when there is a shortage of, say, papaws, the price of this fruit escalates rapidly. People then reduce the amount of papaws they eat and the price comes down. Did the Minister and the CPC think that this simple law of supply and demand did not apply to petroleum? Were they really taken unawares when, owing to the steep rise in the price of oil, consumers cut back drastically on consumption, leading to a substantial fall in its price? Can the CPC claim that it was not aware that the price of petroleum had fluctuated violently on several earlier occasions? There is no question that it would have been well aware that some huge oil price rises in the past were initially thought to be irreversible but, on more than one occasion, such increases were followed by dramatic drops.

Now, when a reputable chartered engineer, architect or quantity surveyor prepares contract documents for even a relatively small project, he provides for cost escalations to safeguard the contractor against rising prices over which the latter has no control. This is because most people believe that, in the normal course of events, prices generally go up all the time and that it would only be fair to safeguard the contractor against losses which arise from such price changes whilst, at the same time, keeping the contract price as low as possible. Despite the apprehension that prices as a whole are bound to go up, all these professionals routinely insist on providing for corresponding benefits to accrue to the employer in the event of any unexpected price reductions that occur during the currency of the relevant contract. As a result of an appropriate clause being included, there is many an employer who has benefitted from price drops in some important items pertaining to his project. Over the years, the CPC itself must have signed scores of contracts containing such a protective clause. It is, therefore, thoroughly disturbing to note that so experienced an organisation failed to include such a well-established clause in its hedging contract.

CIMOGG is forced to the conclusion that the Cabinet was not given a proper briefing by the Minister nor the other high officials who were involved in this appalling transaction, which is expected to cost the country around USD800,000,000 and the enormous unspecified legal expenses of international arbitration. We can ill afford this kind of wanton waste, which will result in the public being deprived of the vast benefits they could derive by putting such an immense amount of money to productive use. In these highly questionable circumstances, we are of the view that the Cabinet is duty bound to insist on some degree of accountability being assigned to the various persons involved in this unsavoury exercise.

There is also the question of the part played by the Governor and officers of the Central Bank (CB) in the pre-Ministerial briefing they are supposed to have given the Cabinet. Did they not advise the Cabinet that it was unlikely that the Ministry and the CPC had the necessary knowledge and experience to negotiate with the experts who work for international banks and that, therefore, the Ministry and the CPC should not be sent like lambs to the slaughter but be accompanied by reputed, independent experts of their own? The position of the CB, if we have understood the relevant newspaper reports correctly, is that it had washed its hands off the hedging business once it had finished its original presentation to the Cabinet, in which it favoured hedging. Evading its statutory and moral responsibilities seems to be a speciality of the CB, as in the case of unlicensed finance companies to which we have referred in an earlier contribution to the press. For example, the position the CB took up in the matter of unlicensed finance companies was that it had warned the public by publishing a few notices in the newspapers. The fact is that the people are aware that there are experts in the CB who understand pyramid schemes extremely well and they could have safeguarded the life savings of thousands of old age pensioners and other poor depositors if they had taken the trouble to get suitable legislation passed to enable the CB to prevent the wholesale robberies which several unlicensed finance companies have committed over the years.

CIMOGG wishes to emphasise most particularly that it is not questioning here the relative merits of the claims made by the hedging banks and the counterclaims of the CPC. We are only questioning the procedures which were followed prior to the hedging contracts being signed, especially the failure to stick to well-established financial regulations which have to be followed in all governmental transactions.

Dr A.C.Visvalingam
President, CIMOGG
www.cimogg-srilanka.org



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