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Tuesday, 7 February 2017 00:00 - - {{hitsCtrl.values.hits}}
By Hector Appuhamy, MP
The article reveals that W.A. Wijewardena, being an interested retired employee of the Central Bank, has now started a failing battle to whitewash the Auditor General and the private placements scandal.
He unreasonably helps the Auditor General to play to the gallery despite his public responsibilities with insufficient knowledge on the subject of bonds as he claimed in his report to COPE. I wish to directly answer main points made by Wijewardena in his article.
Blaming the Prime Minister for making a statement in Parliament immediately after the bond issuance on 27February2015 using the term private placement instead of direct placements and private placement system as the norm rather than an exception for issuance of bonds Answer:
a)The Public Debt Department Manual also uses the term “private placements” as it is the pet name used by the Central Bank to 
issue bonds directly or privately to investors. The term used in global finance in respect of raising funds through issuance of tradable securities outside formal exchanges is the “direct placements” which follows certain transparent process to avoid abuses detrimental to the underlying market.
b)If 80% to 95% of bonds are issued on such placements and all bonds are effectively kept open to satisfy investor preference of any maturity and coupon rates, what do you call this system other than the norm in bond issuances?
c)Detailed information provided by the Auditor General shows that same bond has been issued to different investors at vastly different prices within the same day or within a few days. Some bonds have never been auctioned. Are these direct issuances or private placements? How do you interpret the issuance governance in Government/public securities in this manner? I invite financial and economic professionals to give their view whether such massive scale of bond issuances (2,136 instances during 2008-2016, according to Auditor General) are direct placements or private placements.
d)Wijewardena may research and educate the public on best practices on direct placements and whether Sri Lankan bond issuances fall within such direct placements.
The Central Bank continued direct placements after 27 February 2015 Answer:
Placements referred to here are the Central Bank purchases of Treasury bills for monetary policy purposes under the Monetary Law Act through a very transparent approval procedure for each such issuance and rare issuances of bonds to State banks for the purpose of balance sheet reform and repayment of debt of a few State institutions as decided and formally communicated by the Government.
These issuances are very transparent and legally permitted on-a-case-by-case basis. How can Wijewardena compare these issuances with placements made to investors under a separate system without any transparent procedure?
The present Government uses direct placements when making foreign borrowings. Answer:
a)Borrowings from banks and a few other sources referred to by Wijewardenaare the standard loans procured transparently with agreements signed accordingly with the approval of the Government/Cabinet of Ministers. There is a large number of such project loans and commercial borrowings raised in the past this manner. Does Wijewardena state that these are direct placements in the category of bond placements made under reference? Direct placements are issuances of securities such as bonds, stocks and other financial instruments with transparent and temporary exceptions in line with market environment but not an 80%-95% substitute to the market.
b)However, Wijewardena explains the issuance of sovereign bonds by calling competitive bids from prospective investors and that the competitive atmosphere prevailing in the book building process (or bidding process and selection of bids) is expected to give the best rates structure to the Government. If so why is that book-building or competitive bidding/tender/auction process bad for Government bonds issued to its citizens inside Sri Lanka? Can’t that also be expected to give the best rates structure as in the case of sovereign bonds? Why not? Why does he use double standards for markets? One for Sri Lankans and another for foreigners? Why did he introduce these double standards when he was the Deputy Governor supervising Public Debt, EPF and Open Market Operations? How will he claim his good governance was carried out by holding the post of Deputy Governor in charge of Monetary Policy, Public Debt, Chairman of Tender Board and EPF simultaneously? Did he at least maintain minutes of the Tender Board meetings? Why does he talk about conflict of interest now?
Auditor General’s observation that 57% of direct placements made during nine years had been made at yield rates below or around the prevailing market rates desirable to reduce the cost to the Government. Answer:
a)This is where both the Auditor General and Wijewardena lost financial and governance professionalism. Where were those market rates, since there wasn’t any known or reported secondary market? The Auditor General in his first report to the COPE stated that there was no information in the Central Bank on yield rates on bond transactions in the secondary market. If so, what are the secondary market rates which are compared in this report to give his view and what is the source of this secondary market information? Did the Auditor General check the authenticity of those secondary market rates? If secondary market rates are correct, the finding the Auditor General made in the report to the COPE that secondary market information was not available is incorrect.
b)What is this 57%? Is it a percentage of the total number of placements or a percentage of the total amount raised through placements? How much is the special issuances made to the Central Bank? What is the total discount involved in direct issuances to private investors? Without this analysis, this 57%-based conclusion is just playing to the gallery. Wijewardena being a former Deputy Governor very well knows the number crunching and analyses.
c)Why didn’t Wijewardena comment on the Auditor General’s finding that 99% of total value of bonds issued under placements has been made outside the yield rates that should be calculated by adding five basis points to secondary market yield rates and resulting non-compliance with the Monetary Board decisions? Who decided or calculated those yield rates as and when placements are made since there was no database for secondary market rates?
d)What is the rationale for the Monetary Board to offer yield rates of five basis points higher than the secondary market yield rates as proposed by Wijewardena himself alone? Did they want to kill the secondary market and promote only private placements with private investors? This is contrary to the same point Wijewardena made stating that primary dealers have been trying to push the prices up under the auction system (by selling the name of A.S. Jayawardena) and private placements were at lower prices.
e)It is Wijewardena who proposed to the Monetary Board that the EPF and captive investors should actively participate in the secondary market to create liquidity for development of the Government securities market after purchasing bonds from placements at five basis points above the secondary market rates. If so, those placements yield rates should have reduced auction prices.
Auditor General’s statement that direct placements have been made without the approval of the Monetary Board had not caught his attention. Answer:
a)Why didn’t Wijewardena question why the Auditor General did not pay attention and audit whether Monetary Board approval has been obtained for direct placements? Whether the due approval of the Monetary Board has been obtained is the crux of the subject.
b)The Auditor General says that the Monetary Board approvals granted in 2008 are for the specific yield rates to be used for placements and not for direct placements per se.Information is available that direct placements have been there before 2008 since 2005 and Central Bank has stated that there is no documentary evidence on the Monetary Board approval on such placements.The Central Bank has stated that direct placements have not been made without due approval process. If so, any auditor will say that direct placements have been made without due approval of the Monetary Board.
c)Auditor General states that issuance of direct placements is in the Public Debt Department Manual and approval of a due authority has not been obtained for the Manual. If so, how come direct placements become legal due to the fact that they have been made in terms of the Manual?
d)The Auditor General states that although the Central Bank has introduced internal controls and decision-making process to ensure transparency and prevent irregularities in direct placements, such controls and processes were not adequate and there have been breaches and possible breaches of these controls. He gives the following reasons for such inadequacy and breaches (page 48 – Volume 1).
i. Non-introduction of a procedure to obtain approvals of the Monetary Board or a collective approval of a committee. Although Chairman of the Tender Committee has given the signature on the placements information sheet, such issuances have been made without any evaluation by the Tender Board (Tender Board Chairman is responsible for this irregularity)
ii. Non-availability of CCTV and voice-recording in the dealing room.
iii. Non-availability of due approval for the Manual that provides for direct placements.
iv. Non-availability of controls introduced in the Manual in direct placements relative to auction system. For example,
nNon-introduction or non-implementation of a definite system to invite bids from primary dealers for direct issuances.
nNon-availability of a definite system to decide primary dealers from whom bids are invited.
nNon-introduction of a definite system to communicate all primary dealers by giving equal opportunity for bids.
e)Can Wijewardena comment on the above observations of the Auditor General and still whitewash direct placements of such a massive scale as legal?
A.S. Jayawardena introduced direct placements system with EPF in 1997 as a check on primary dealers’
attempt to push the prices up. Answer:
a)In 1997, the Monetary Board approved the EPF to submit competitive bids to auctions without routing through a primary dealer. That is not a direct placement system. The Monetary Board approval to issue bonds is for the auction system. It would be great if Wijewardena reveals the source of evidence that Jayawardena had the power to change the Monetary Board decision on bond issuance through auctions to make those through placements. Wijewardena is good at referring to such distinguished retired public servants to convince professionals that his views are correct. Wijewardena being a former Superintendent of EPF and Deputy Governor chairing the Tender Board knows it. As the EPF had direct bidding facility and traded actively in the secondary market, the EPF was a de-facto primary dealer.
b)If Wijewardena/Central Bank had known that primary dealers were not desirable, why had the primary dealer system been permitted to continue despite the Monetary Board’s instructions given in 2008 to review it?
c)If so why were all direct placements open to primary dealers in addition to EPF, ETF, NSB and other captive sources at higher yield rate of five basis points above the secondary market rates as approved by the Monetary Board? Where are the captive sources defined? Are the primary dealers the captive sources? What is their role stipulated in the primary dealer license?Wijewardena should know it better than anybody else.
Rationale behind introduction of special yield rates structure for direct placements. Answer:
a)According to reports of the Auditor General and COPE, the Monetary Board has approved a special interest rates structure to EPF, ETF and NSB initially for January-March 2008 and subsequently in April extended until the end of December 2008 in respect of direct placements for medium and long-term bonds in order to address concerns on high cost of borrowing arising from historically high interest rates (Treasury bill rates around 18% with very tight monetary policy due to historically high inflation around 28%) in the country at that time. Again, the Monetary Board approved a new interest rates structure as secondary market rates plus five basis points. This Monetary Board paper was submitted by the Public Debt management line to propose this special yield rates to the EPF. In this Board paper, the recommendation was amended by Wijewardena in his handwriting as the Deputy Governor to include “other captive sources” also for the special treatment without changing the main body of the Board paper. This was observed by a member of the COPE as a fraudulent action. After that, all primary dealers were treated as captive sources. Can Wijewardena explain the rationale for this change in recommendation and why primary dealers were treated as captive sources?
b)Can Wijewardena explain why direct placements were continued even when interest rates went down to historically low levels in 2010-11 (Treasury bill rates below 8% with relaxed monetary policy and low inflation at mid-single digit or blow) once concerns over high inflation and high interest rates had been resolved?
Release of market sensitive information to the Auditor General. Answer:
a)Wijewardena safeguards the Auditor General by stating that he is not bound by any confidentiality provision. If so why did Wijewardena submit to the Monetary Board in 2005 not to reveal certain information relating to third parties to the Auditor General based on the advice given by the Attorney General and communicated to theFinance and Planning Secretary accordingly? This information was revealed to the press by the Central Bank inJune 2016. However, following same legal advice, the Auditor General maintained the secrecy relating to non-State primary dealers in his first Report to the COPE on bond issuances. The individual information contained in the report on direct placements is more market sensitive than information covered in the first report. If so, did he get legal advice from the Attorney General otherwise before releasing this information? Has Wijewardena changed his original stance now for this subject in his favour since he is the most significant party to the direct placement system?
b)Wijewardena states that Section 43(2) of the Monetary Law Act relates to reports which the Minister might request the Auditor General to complete examination of accounts of the Central Bank and, therefore, the Auditor General is not under obligation to furnish it to the Minister. Yet, in view of the national interest which the subject in question has evoked, the Auditor General has chosen to oblige the Minister. Wijewardena is grossly incorrect here. Reporting obligation on annual report of examination of books of the Central Bank by the Auditor General is given in Section 42(2). It is the Minister of Finance who is obliged to lay before the Parliament the annual reports on the accounts of the Central Bank submitted by the Auditor General. The Auditor General has no mandate to directly report to the Parliament on the audit of the Central Bank under the Monetary Law Act.
c)Therefore, Section 43(2) is a separate legal provision that gives the mandate to the Minister to fix such other intervals to furnish reports setting out the results of the examination of books of the Central Bank. This legal provision or any other legal provisions do not contain any mandate of the Auditor General to decide the nature of national interest regarding furnishing reports stipulated under such legal provisions. He must comply with the law of the land if he is interested in the national interest. What national interest does the Auditor General have more than the Minister of Finance in the case of issuance of public debt and debt management and reporting to the Parliament and Public? Any person who reads plain English will easily understand the meaning of Section 43(2) which was drafted in 1949 not by a politician but by a renowned economistJohn Exter, whom Wijewardena holds in great regard. Therefore, Wijewardena purposely misinterprets the law of the land to whitewash the Auditor General, himself and his colleagues in the rogue ring on the bond market. Let legal professionals and the Judiciary decide the interpretation of legal provisions and validity of all bond issuances.
Market mechanism believed and practiced by Wijewardena
Throughout his career in the Central Bank, Wijewardena preached and practiced market principles and believed that there is no free lunch in this world. His writings on economics for babies were focused on market principles in line with vision of Adam Smith, Father of Economics, and the open economy policy approach of UNP Governments.
I wish to invite Wijewardena to clarify why he does not now believe market principles in the case of the Government securities market by drawing examples from Western countries. Should we go back to the pre-1977 era again? Can Wijewardena comment if he had developed market-based issuance of Treasury bonds through competitive auctions and if the Central Bank had suspended it and gone for placements system at the auction held on 27February2015?
In today’s context of Sri Lanka’s ‘Yahapalana’ regime, will Wijewardena and his ring of colleagues welcome the new policy?
