Policy reforms to prevent future bond scams

The Presidential Commission Report on the Bond Scam of 2015 released last month is historic for a variety of reasons. Never in the history of Sri Lanka (probably in any other South Asian country) has a sitting government’s alleged corruption been investigated to this depth during its own tenure. Secondly, never in the history of Sri Lanka has the Prime Minister of the country testified before such an investigative commission. Thirdly, never in the history of Sri Lanka has a Senior Cabinet Minister tendered his resignation due to the allegations against him in the Commission of Inquiry. Lastly, not the least, this is the father of all financial cum political scams perpetrated in Sri Lanka to date.

While the Bond Scam and the long delay in removal (his term was not extended) of the Central Bank (CB) Governor, who was alleged to be the kingpin of the scam, is abhorrent, the belated action taken by the President of Sri Lanka to appoint a Commission of Inquiry and actually carry-out its recommendations by initiating legal proceedings against the suspected perpetrators of the scam are laudable and indeed revolutionary for Sri Lankan standards of the rule of law and democratic governance.

Legal action and policy reforms

Whilst the legal action against the culprits in order to recover the huge loss to the Treasury is absolutely necessary, it is absolutely insufficient. The root cause of the scam and the enabling institutions of the scam have to be identified and remedial action should be taken so that such scams do not occur, ever again. The foregoing actions have to be taken speedily to re-establish confidence in the ruleof-law in economic governance in the country and perfect competition in the financial market, which is sine qua non for attracting foreign investments to the country and for the success of the proposed Colombo International Financial Centre to be established in the reclaimed land from the sea adjoining the Colombo harbour through a Chinese foreign direct investment, which is the largest ever foreign direct investment in the country.

While the conclusion of the legal action against the culprits could take at least five years, policy reforms to prevent such scams in the future could be undertaken in a much shorter time period if there is real and sufficient political will from at least the two main political parties in the country (such as the UNP and SLFP/SLPP). Whilst the Presidential Commissions of Inquiry primarily base their verdict on circumstantial evidences, such circumstantial evidences have to be proved beyond reasonable doubt for successful prosecution of the accused in a Court of Law. Proving economic or financial crimes beyond reasonable doubt in a Court of Law is a herculean task.

For example, the judicial action against the suspects in the 2G Spectrum Scam (aka 2G Scam), claimed to be the world’s second largest abuse of executive power by the Time Magazine http://content. time.com/time/specials/packages/ arti cle/0,28804,2071839_2071844_207 1866,00.html, took almost eight years to conclude in December 2017, and more importantly all the accused were found not guilty because the prosecution could not prove that the accused were guilty beyond reasonable doubt.

Public funding of political parties at elections

It was rumoured that the great bond scam in 2015 was committed to fund the parliamentary election campaign of the UNP, which has been in opposition for almost two decades since 1994 (barring 20022004) and was in deep and prolonged debt. The system of proportional representation for the parliamentary elections since 1988 has significantly raised the cost of election campaigns, and major political parties have been depending on donations from wealthy businesspersons and illicit businesses such as narcotics trafficking and trade. This has also resulted in unholy alliances between business and politics whereby political campaign donors are repaid by the ruling party through various concessions such as subsidised loans from state-owned banks and financial institutions, corporate income tax exemptions / holidays, write-off of loans obtained from state-owned banks, non-payment or under-payment of indirect taxes by businesses, etc.

Therefore, in order to clean-up the financing of the political campaigns of political parties during election times, the state (through the Election Commission) should fund political parties for their political campaigns during election times based on a formula established taking into account the proportion of votes obtained in the past election/s by each and every political party. New political parties and independent groups could be funded through a different formula.

In order to minimise the cost of election campaigns to the Treasury and thereby to taxpayers, the deposit money imposed on political parties and independent groups for contesting elections should be exponentially increased in order to minimise the number of political parties and independent groups contesting any election. Secondly, the Presidential election and the Parliamentary elections should be held on one and the same day, and the Provincial Council elections and local government elections should be held simultaneously on another day. The foregoing will minimise the number of election campaigns to be funded by the state and thereby minimise the cost to the tax payers.

The public funding of election campaigns has the potential to encourage educated and professional classes of people to contest elections, and thereby improve the quality of elected politicians in the country, who are presently put-off by the very high cost of election campaigns.

Reforming state banks, EPF/ETF

It transpired during the course of the Presidential Commission of Inquiry, how state banks and financial institutions, and the Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF) were abused/manipulated by the CB in the great bond scam of 2015. Therefore, the privatisation of the state banks and financial institutions (such as the Sri Lanka Insurance Corporation-SLIC) and listing these financial institutions in the Colombo Stock Exchange is sine qua non to prevent the abuse of executive power as happened in the case of the bond scam.

It is high time the trade unions in general, and the Ceylon Bank Employees’ Union in particular, should agree to the privatisation of these institutions and to take the management of the EPF/ETF out of the CB to prevent future abuses by the ruling political party and/or politicians. Trade unions in Sri Lanka should evolve with time if at all it wishes to be relevant and effective in the 21st century economy. Globally, the capitalist mode of production has evolved irrevocably in the post-cold war era with the dispersion and atomisation of production processes through the global supply chains and it is high time the labour unions follow suit with its own evolution in order to remain relevant and effective in their services to the working people

he state-owned commercial (e.g. Bank of Ceylon, Peoples’ Bank) and specialised banks (e.g. National Savings Bank) account for around 70 per cent of the total bank deposits in the country, and the SLIC is the single largest player in the insurance market. The EPF/ETF are captive sources of revenue for the government. Hence, the state effectively monopolises the financial sector in Sri Lanka. This monopolisation is the primary reason for fiscal profligacy by successive governments and ineffective and irrational monetary policies in the country. The unsustainable public debt portfolios in the past three decades are also a direct result of the monopolisation of the financial sector by the state.

Appointing the CB Governor

The appointment of the CB Governor should be made completely transparent with in-built vetting processes and should be based on a competitive process through public advertising in order to ingrain the independence of the banking regulator vis-à-vis the Executive and the government in power.

Way forward

Though the great bond scam has negative consequences for the confidence in the financial sector of Sri Lanka in particular and indeed the economic governance of the country in general in the near term, the fact that the President had the audacity to institute a Commission of Inquiry and conclude it in a very short time followed-up by the institution of legal action against the accused marks great strides made against bribery and corruption committed by powerful politicians (especially ruling party ones), which would greatly enhance the confidence in economic governance in the country in the medium and long terms. This augurs well for attracting quality foreign direct investments on competitive basis from advanced countries as opposed to current flows from emerging economies in Asia.

This extraordinary investigation of a scam perpetrated by the incumbent government was made possible because the President and the Prime Minister were from two different political parties. In order to ensure such exemplary judicial action in the future too, it should be made mandatory, constitutionally, that the President and the Prime Minister are from two different political parties.

However, much more needs to be done to cleanse the economy and polity of this country. The Presidential Commission of Inquiry and its aftermath is just the beginning of the long road ahead. By the way, the ghost of the past (2006 - 2014) is knocking the door in the aftermath of the just concluded local government elections. Is this, one step forward, two steps backwards?

(The writer is a Development Economist, and the Founder and Principal Researcher of the Point Pedro Institute of Development, Point Pedro, Northern Province, Sri Lanka. He can be contacted at sarvi@ pointpdero.org)