If only the government pushed through a proposal in the mid-1980s, as our story on the previous page, suggests, the question of how funds from the Employees Provident Fund (EPF) and the Employees Trust Fund (ETF) are being widely and ethically used would never have arisen.
As our story says, when Ronnie de Mel was Finance Minister and Dr W.M Tillekeratne, Treasury Secretary (an era when public servants were still upright and followed guidelines and rules to the letter), there was a proposal from the Treasury to utilise 5 % of the EPF money to invest in the stock market, to boost this sector which was virtually dormant and also provide a better return to EPF members.
There were also proposed safeguards where a mechanism and a set of managers, independent of the Central Bank, would be created to administer these funds. Furthermore it was also suggested that to avoid a conflict of being a powerful and influential stakeholder and possible ‘control’, the fund was to be a passive investor and not seek any board positions. All these were to be written in the investment guidelines.
Unfortunately as our story says, the proposal fell through as the Treasury realised that all available resources including that of the EPF were needed to tackle a yawning budget deficit, a situation that still prevails today.
If this proposal became a reality, the raging debate over alleged mismanagement of the EPF funds would be a thing of the past.
An interesting point on the EPF also emerged at this week’s discussion at the Sunday Times Business Club’s monthly meeting where three eminent panellists and economists – Dr Indrajith Coomaraswamy, K.G. Dheerasinghe and Dr Harsha de Silva – spoke on the global financial crisis and the impact on Sri Lanka.
While Dr De Silva was critical of the Central Bank for the conflict of interests in EPF investments in financial institutions when the Bank runs one (EPF) and regulates the other (commercial banks), Mr Dheerasinghe, who retired as CB Deputy Governor on December 15 and is expected to take over as Commercial Bank chairman (after being appointed this week as a director), noted that the EPF guidelines have now changed.
Asked to clarify this change in investment guidelines, Mr Dheerasinghe said the guidelines were changed through an internal circular whereby the EPF can invest in any securities (in addition to government securities). “If so,” noted Dr De Silva, “make it known to the public.”
Mr Dheerasinghe’s appointment to the Commercial Bank board was also referred to by Mr De Silva, in his comments earlier that day in parliament (on Wednesday) where he wound up the budget speech on behalf of the opposition UNP. He spoke of how Central Bank officials were now being appointed to banking institutions, on retirement, which was a conflict of interest situation. He said the government was also controlling the banks (through the EPF/ETF – second biggest shareholder at HNB and second biggest shareholder at Commercial Bank) by appointing its nominees.
The EPF debate has been going on for months over the conflict of interest in the Central Bank-controlled fund investing in financial institutions.
Mr Dheerasinghe made a valid point in saying that if members of the fund are to get a good return on their investment, then investing in commercial banks and other financial institutions appears to be the best option as this sector virtually controls the market and are among the best-performing stocks.
In fact last year, EFP paid the highest interest (that anyone can get outside) to its members and this was based on its investments in a broad range of securities including instruments in the capital market.
However, the argument levelled against investing in commercial banks is that the government tends to use this to control the banks and commercial institutions which goes against the grain of a private-sector driven economy or Sri Lanka’s private sector being touted as the ‘engine of growth’. The government is not in the business of doing business, which should be left to the private sector with the facilitation part only provided by the state.
In recent times, there are quite a few instances of the state taking control of private institutions, an issue that has also emerged with the new expropriation laws, where sugar companies and a well-run convention centre was taken over.
Another allegation levelled at the authorities is that control of financial institutions could be used to suck up funds for state expenditure while also interfering in the process of a level playing field in the financial sector.
In today’s business and economic structures in Sri Lanka, there are many conflicts of interests and it’s difficult to steer away from such issues when one institution virtually runs a financial sector company, and also performs the role of a regulator.
A joke doing the rounds on a conflict of interest was when -during the late 1980s - a senior Treasury official parallely held the post of chairman of a powerful corporation. When the corporation applied for a tax rebate (under the name of this official), he is supposed to have refused it (wearing his hat as Treasury official) because the letter was written, received by one person and replied by the same person (the official himself)!
If the government is concerned about governance, transparency and accountability, it would do well to go back to that mid-1990s proposal on the EPF and bring in safeguards that would remove any conflicts in its investments. |
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