TMCnet News

[December 08, 2008]


(English IPS News Via Acquire Media NewsEdge)
COLOMBO, Sri Lanka, Dec. 8, 2008 (IPS/GIN) -- As global oil
prices dive, the Sri Lankan government finds itself saddled with
a complicated oil hedging deal that could cost the country close
to $1 billion.

State officials have been accused of high corruption over the
deal with two foreign banks.

All that was brewing as a Sri Lankan group that advocates
transparency prepared to mark Anti-Corruption Day on Tuesday.

Banking sources said the foreign banks involved, CitiBank and
Standard Chartered Bank, are trying to restructure the hedging
transactions with the government to minimize losses to the state.
However one proposal being prepared by SCB could worsen the state
petroleum agency's plight.

Putting further pressure on the controversial oil deal is a
no-confidence motion being brought up against the government by the
main opposition United National Party citing several corruption
issues, including the oil hedging deal and one over a bankrupt
budget airline.

The government is under "severe pressure" over this issue, said
UNP parliamentarian Dayasiri Jayasekera, who has been raising many
issues of state corruption in the legislature.

Transparency International-Sri Lanka's executive director J.C.
Weliamuna said the deals have exposed poor governance and
corruption in the state mechanism. Neither the regulatory mechanism
nor the Cabinet have grappled with them nor were they alert on
questionable deals in the country. "

The state-owned Ceylon Petroleum Corp. entered into contracts
with five banks led by SCB, since January 2007, to protect itself
against rising prices. When prices were over $135 per barrel in
mid-2008, the CPC benefited as it had sought protection on the

But with prices crashing after that and now sitting at $41 per
barrel, the CPC ended up owing the banks, and the latest liability
could be as high as $1 billion by May 2009, at current crude
prices. If it falls to $25 dollars, as reported in the British
Financial Times on Friday, based on a report by investment bank
Merrill Lynch, the liability would be higher.

The Supreme Court, on Nov. 28, temporarily stopped CPC payments
to the banks until two petitions, alleging fraud and corruption in
the hedging deals, were dealt with. The next hearing will be Dec.

Under fire, the government on Thursday reduced gasoline prices
and said it was preparing a new fuel pricing formula, in response
to criticism that the benefits of falling oil prices were not being
passed on to consumers.

The court suspended the CPC chairman and asked President Mahinda
Rajapaksa to consider replacing Mohamed Fowzie as petroleum
minister. Fowzie has been accused of not properly supervising the
CPC on the hedging deals.

After the crisis blew, the Cabinet, on Nov. 17, appointed a risk
management committee to review all hedging contracts and minimize
the losses.

But petroleum industry officials said this was like closing the
stable after the horse has bolted and point to the fact that two
CPC officials, implicated in the deal, are also on the committee.

"Should not such a committee have been appointed at the
beginning, when hedging took place after January 2007? Isn't there
a serious conflict of interest in appointing officials implicated
in the deal?" one analyst asked.

After the court's intervention the committee stopped


"All these [hedging and Mihin Air] are gambles at a huge cost
to the country. This corruption won't stop until the government
shows political will to stem the rot. No one is accountable,"
Weliamuna said.

TI is marking Anti-Corruption Day this week with a seminar in
Colombo on Tuesday on governance issues relating to the global
financial crisis and its impact in Sri Lanka. Peter Eigen, founder
and former chairman of the Berlin-based anti-corruption watchdog,
was to participate.

Mihin Air is a government budget airline set up two years ago
that has been swirling in debt of more than $50 million and was
forced to suspend operations earlier this year. It is to be
re-started this month with a fresh injection of millions of rupees
from the Treasury Department.

Allegations of widespread corruption has dogged President
Mahinda Rajapakse's government, centering around his three
brothers, Chamal, Gotabaya and Basil. Chamal is aviation and ports
minister, Gotabaya is defense secretary and Basil is presidential

Local bankers, unconnected to the deal, say foreign trips paid
for by foreign banks for CPC officials to learn about hedging were

A senior banking industry official, who declined to be named,
expressed the view that impropriety accusations in the hedging
agreements entered into with SCB and CitiBank are valid. "If it is
a proper commercial transaction, you don't need to take the CPC
chairman on foreign trips," one official said.

The official added that head offices of these international
banks should think twice before pursuing any legal action for
non-payments because these are highly questionable deals and raise
ethical issues.

If the CPC fails to make the payments, the local branches of SCB
and CitiBank may lose millions of dollars, bankers say.

Commercial Bank, a local bank that has a smaller exposure in the
hedging contracts, said in a statement Friday that if the
suspension of CPC payments continues, "our liability under our
contract to make payments to our back-to-back market risk
counterparty would total $8.93 million."

On the question of whether the suspended payments could result
in Sri Lanka being perceived as a country that defaults payments,
Chandra Jayaratne, a former chairman of the Ceylon Chamber of
Commerce, said the court has stopped payments only temporarily.

"If the court holds that the hedging agreements are tainted with
grand corruption, fraud or misrepresentation, then a contract is
invalid," Jayaratne said. "If the contract is determined to be void
after the Supreme Court judgment, I don't think anything is wrong."

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