Financial Times

Fraud dominates year of mixed fortunes

2008 Biz Round Up:

By Natasha Gunaratne
This year saw landmark judgments from the Supreme Court on corporate fraud and corruption which brought down a high ranking public official and brought ill repute to one of Sri Lanka's most respected companies. The Court's intervention in the oil hedging debacle with the Ceylon Petroleum Corporation (CPC) has also resulted in lower petrol prices for consumers, issues that The Sunday Times FT following diligently and kept its readers informed. The following are some of the more memorable and noteworthy events in the world of business.

Corporate Governance Code for banks
The Central Bank (CB) announced in February the new directions for the maintenance of Capital Adequacy by Banks under the Basel II. The CB Supervision Department also published a Mandatory Code of Corporate Governance for licensed banks in Sri Lanka.

Chillies and SCAM Screening Process
The Chillies 2008 Steering Committee, in consultation with the IAA and 4 A's and its representatives introduced a scam screening process meant to counter the entry of scam ad and marcom material. This step was taken in response to the advertising fraternity's concerns about scam advertising winning metals in the Chillies 2007, and the Chillies Steering Committee was confident that the stringent process would mitigate, if not totally eliminate the entry and winning of scam ads, the committee said in a statement.

However, leading up to and following the Chillies 2008 Awards ceremony, there were still complaints from agencies about scam ads.

SC greenlights Maxis purchase of SLT shares
Former Minister Mangala Samaraweera took over as petitioner in the fundamental rights case filed by Sripathi Sooriyarachchi, following his death in a car crash, against the proposed sale of 25.3% of Sri Lanka Telecom (SLT) shares to Malaysian telecommunications giant, Maxis Communications.
Following an interim order in which the Supreme Court barred the sale from going through, the petition was terminated in March 2008, allowing the sale to go through as long as proceedings were conducted in a transparent manner.

Cairn India gets Oil Exploration Block
Cairn India was awarded the contract to commence offshore oil and gas exploration in the Mannar Basin in June 2008 and is due to commence sometime in 2009. The company was one of three to bid for the block. Some experts have told The Sunday Times FT that with prices of oil having dipped below US$60, oil exploration will not prove to be feasible and that the company may decide to leave.
However, the Minister of Petroleum and Petroleum Resources Development said Cairn has linked up with a local partner and will start operations within the next few months.

Inland Revenue chief forced out
Former Inland Revenue Department (IRD) Commissioner General Mr. A.A. Wijepala was forced to retire in March 2008 after a probe by the Committee on Public Enterprises (COPE) on the Rs.3.57 billion VAT scam. COPE also said Treasury Secretary Dr. P.B. Jayasundera was safeguarding him at that time. The IRD trade unions and staff also staged a protest demonstration in front of the IRD offices, urging Mr. Wijepala to retire.

The new tax chief, Mr. S. Angammana said his immediate task was to make a paradigm change at the IRD, creating a tax culture conducive for the people where officials will not have to go after them to collect taxes. He added that tax payers should be motivated to pay their dues voluntarily under a self assessment scheme.

Failed Pramuka Bank reopens
The failed Pramuka Bank officially re-launched its operations in March 2008 but a majority of depositors said they will have to wait a long period to withdraw their money. According to the scheme formulated by the Finance Ministry, the Treasury and the Central Bank along with members of the Pramuka depositors and stake holders Association, only 17% of around 14,600 depositors who had deposited Rs.100,000 or less would be allowed to withdraw their deposits after June 3 while the rest will have to wait another four to nine years.

CPC gets US$5.42 mln from Citibank for hedging
The Ceylon Petroleum Corporation (CPC) was paid US$5.42 million by Citibank Sri Lanka through hedging in April 2008. Months before the hedging debacle came into the public consciousness, the CPC and Citibank made a show of the handing over of the cheque, similar to another event held by Standard Chartered Bank and the CPC a few months later.

ADB approves Colombo Port project with stringent conditions
The Asian Development Bank (ADB) asked the Sri Lankan government in May 2008 to include the Attorney General or his nominee in the project committee for the re-bidding on the Colombo Port Expansion Project, one of several conditions for a US$300 million loan.

Sunday Times FT Poll: Fuel hike hurts companies
A Sunday Times FT poll in June 2008 of a range of Sri Lankan companies found that fuel and energy costs are 'hurting' the corporate bottom line and cutting profits. The email poll also revealed the anger of most people over rising government expenditurewhile the state urges the public to cut consumption and tighten one's belt.

New US$150 mln loan to fund state projects
The Sri Lankan government raised a US$150 million syndicated loan in June 2008, another commercial borrowing to fund infrastructure projects. Economists said that similar to a US$500 million loan taken in November 2007 which was used to pay off debt on ongoing infrastructure development projects, this loan will also only result in greater accumulated debt burden.

WB approves US$900 mln assistance
The World Bank (WB) approved a US$900 million Country Assistance Strategy (CAS) for Sri Lanka in June 2008 for the period July 2008 to June 2011. The money will go towards expanding economic opportunities in lagging regions, improving the investment climate and competitiveness to encourage private sector investments and growth and to enhance quality services and accountability to improve education, health, social safety nets and environmental protection.

Harry J fights with other directors
Two directors in Stassen's and Milford, two companies controlled by Harry Jayawardene, took him to court in July 2008 saying they lost confidence in Mr. Jayawardene and sought to exit the company or buy out his shares. The petitioners also asked for an interim order preventing the company and or Mr. Jayawardene taking any step whatsoever to alter the present status quo of the Board of Directors of the company until the final hearing and determination of this action. Mr. Jayawardene has submitted objections in December 2008.

Landmark Supreme Court Judgment on LMS
The 21 July 2008 Supreme Court judgment on Lanka Marine Services (LMS) has been called a 'landmark' decision. The Court deemed the privatization of LMS to be fraudulent in which John Keells Holdings (JKH) Chairman Susantha Ratnayake and Treasury Secretary Dr. P.B. Jayasundera were said to have acted in concert in the corrupt deal.

Proceedings were dismissed earlier this month but the judgment has led to the resignation of Dr. P.B. Jayasundera who the Court said was unfit to hold public office. He is also one of the highest ranking public officials to be fined to the tune of Rs.500,000 as compensation to the state. Furthermore, one of Sri Lanka's most respected blue chip conglomerates, JKH has seen its share price and reputation plummet since the judgment. Although Mr. Ratnayake has stayed as Chairman, the Criminal Investigation Division (CID) and the Bribery Commission are continuing their investigations into the deal.

AMW sells to Dubai company
Associated Motorways PLC changed ownership in August 2008 with Dubai-based Al Futtaim Engineering LLC buying a majority 71% stake in the company. The 71% stake came from Associated Electrical Company (AEC) and 20% from John Keells Holdings (JKH) which bought into the company in June 2006 to jointly get involved in property development.

Global financial crisis begins
Governments across western markets moved to stem the global financial crisis and restore confidence in battered markets following the US financial crisis in September 2008. The US government stepped in to rescue several financial institutions including IG, Fannie Mae and Freddie Mac while Lehman Brothers filed for bankruptcy and Merill Lynch was bailed out by the Bank of America.

Garment industry sees 'Really Tough' 2009
The garment industry is to expect a "really tough" first half next year with the US, Sri Lanka's single biggest buyer of garments, heading deeper into recession. "The impact of the US recession will hit us in the first half of next year. The whole of next year will be difficult, but the first half will be really tough," Chairman/CEO of MAS Holdings, Mahesh Amalean told The Sunday Times FT in October 2008 after delivering a speech on 'lean manufacturing' to the local garment industry, at a forum organised by the Sri Lanka Apparel Exporters Association.

Crude oil prices collapse
Crude oil prices hit its lowest levels in more than two years in October 2008, pegged at US$61.52. Prices have continued to collapse in the ensuing months, reaching a low in the US$40 range in December 2008.

Master Plan of Water's Edge after SC judgment
The Water's Edge resort near Parliament is being remodeled under a new master plan by government agencies after the Supreme Court ruled that the land acquisition and sale was an illegal transaction. Former President Chandrika Bandaranayake was fined Rs.2 million and has until January to pay compensation to the state.

A 6-member committee appointed by the Urban Development Minister submitted a project proposal for the master plan in October 2008.

CPC oil hedging fiasco
The oil hedging fiasco involving the Ceylon Petroleum Corporation (CPC) and international and local banks was brought into light through a Sunday Times FT article in November 2008, detailing the huge payments the CPC would have to make to the banks through the zero cost collar hedging instrument. While consumers and markets cheered the fall in fuel prices as a budget proposal, the CPC which was already strapped for cash, was looking at payments of approximately US$600 to US$800 million as a result of the hedging agreements.

The CPC Chairman at the time, Asantha De Mel, was removed by the Supreme Court through a series of fundamental rights petitions filed on the hedging deals. Furthermore, the CPC's Deputy General Manager of Finance Lalith Karunaratne who with Mr. De Mel engineered all the hedging contracts, was also suspended.

Market analysts pointed out that banks, in particular, Standard Chartered Bank did not advise the CPC sufficiently on the risks involved in the deal announced in January 2007 at a time when fuel prices were around $56 per barrel. They described the deal as 'ill advised' and 'misguided' and said it was the reason the CPC is unable to lower fuel prices apart from a budget reduction.

In a subsequent interview with The Sunday Times FT, Mr. De Mel conceded that the CPC did not go with the best hedging option. It was later discovered that the agreements were signed without proper cabinet approval or the approval of the CPC Board, only a Cabinet Memorandum submitted by Minister of Petroleum and Petroleum Resources Mr. A.H.M. Fowzie. The Supreme Court also suggested that Mr. Fowzie should be stripped of his portfolio although up to now, he remains as Minister of that subject.
The Supreme Court handed over the purchase of petroleum products to the Treasury Department and also called for a fuel price revision in which the price of petrol was set at Rs.100.

Sri Lanka on GSP+ Beneficiary List
Sri Lanka is among the list of GSP+ beneficiary countries from 2009 to 2011, pending the outcome of the current investigation, the European Commission (EC) said in December 2008. The EC announced in a statement that 16 countries will be awarded the GSP+ facility under the new GSP+ cycle from 2009 to 2011. However, two countries in the list, El Salvador and Sri Lanka, are under investigation and could retain, or lose, the GSP+ depending on the outcome of the investigation. Nevertheless, the EC said that during the period of investigation, Sri Lanka and El Salvador will be able to use the GSP+. The EC also said in an email to The Sunday FT last week that the investigation itself, should end within one year but could be extended.

Stockmarket moves into gloomy 2009
Analysts said uncertainty in political and economic spheres in Sri Lanka is creating a topsy-turvy stock market. This month, analysts said the clash between the judiciary and the executive is causing a lot of discomfort, adding that the markets are in disarray as foreigners are also seeking to exit.
Some large stocks on offer are lacking in bids and while the fuel crisis didn't directly impact the market, the uncertainty after the Supreme Court judgment on petrol prices has unnerved investors.

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