Let’s not hedge ourselves

THE axe that has been hanging for many months finally fell on Monday. The Ceylon Petroleum Corporation (CPC) lost its hedging case in London and was ordered to pay over US$ 162 million to Standard Chartered Bank, with the possibility of having to fork out many more millions in upcoming cases from the rest of the banks.

In response, CPC said it was disappointed with the London High Court ruling and the Government has insisted that it will continue to fight the case and appeal against the verdict. The downside of this is that under the agreements, the claims are payable with commercial rates of interest on a daily compounded basis, so the longer the delay, the higher the payments.

The Central Bank has repeatedly taken steps to assure the public that the hedging fiasco will be dealt with competently.

Yet events have proved otherwise and in perusing the 140 page judgement, it is clear that the initial decision was made without authority as mentioned in the judgement. “Mr. de Mel and Mr. Karunaratne lacked actual authority from the CPC Board to enter into the transactions... CPC also denies that Mr. de Mel and Mr. Karunaratne had ostensible authority to enter into the transactions,” the judgement says on page 6.

It goes onto say: “CPC’s case is that, when considered in its proper factual context, this is not a straightforward claim, as SCB contends, and that there is nothing standard about this case. On the contrary, this is a case concerning a publicly-owned corporation, of critical importance to its national economy, with no experience in commodity derivative transactions, engaging in novel and sophisticated transactions for the first time in a country that itself had no previous experience of such trading. CPC contends that SCB held itself out to CPC as advisor and encouraged it to enter into transactions that did not hedge its risks, but instead provided the prospect of insignificant up-front fixed profits in return for taking on vast and disproportionate downside risk. CPC, which had no appetite to lose money, should never have been sold these products, and it disputes their validity.”

This – coming on the back of several chaotic decisions at home – shows that little has changed in the governance issues faced by CPC. Its repeated debacles have cost the country dear and could end up making a significant dent in the development process. This is a problem that goes beyond just the money, even though that is damaging enough.

The hedging deal initially hit the headlines in 2008 and on 15 December 2008 the Central Bank released a statement insisting that it had only been involved in an advisory capacity in the hedging deal. Nonetheless it admits that the institution was “instrumental in promoting hedging as a means of purchasing petroleum” and urged the CPC to enter the deal as soon as possible to offset high fuel costs.

If the two other foreign banks Citi and Deutsche too win their separate arbitration cases, the total payment for CPC will be over $ 400 million, causing an impact on country’s reserves.

We understand that before the case went open, there was an opportunity for an amicable less costly settlement, but it was avoided for whatever reason. It is very likely that the relationship between the Central Bank which was confident of a favourable outcome and the concerned banks will be strained, but all stakeholders need to handle the way forward more professionally.

The country’s legal system too has to take its own share of the blame for the fiasco. In our In-Depth pages 8 and 9, we also highlight certain points raised by anti corruption activist Nihal Sri Ameresekere, which are noteworthy.

While it is easy to point fingers, in hindsight the Government’s decision to appeal the verdict will only work if the case is handled differently with proper attention and expertise. Dishonouring a contract of this nature will also give a negative view of Sri Lanka’s business environment, which must be avoided to attract external investment. CPC’s own credibility is also at stake.

In the weeks to come, there will be more debate on the fallout of the hedging case, but as a country we need to avoid egos and extremes but learn from mistakes, pick up best practices and get it right in whatever we do in the future. Let’s not hedge ourselves from that collective responsibility.