The Sunday Leader

Can They Use Our Money? Captive Sources Belong To Us

by Mahesh Senanayake

Reliance on captive sources to meet government debts probably has not been debated in the public domain as it is a subject that the public would not pay attention to and since it is understood as a complicated financial or economic activity.

In a country where financial literacy is not seen at all as social strata, except only among a less percentage of the population, this matter has not emerged as a topic for public discourse while the proponents of the use of captive sources to furnish government debts argue for, in most cases, with a political motive in mind or with lack of knowledge in the best way to use captive sources where the contributors of these sources are fairly paid off.

The captive sources in the Sri Lankan context are held by the Employees’ Provident Fund (EPF), Employees’ Trust Fund (ETF), State owned banks such as Bank of Ceylon and People’s Bank, and state owned companies such as Sri Lanka Insurance Corporation (SLIC). These funds and entities hold a large amount of funds which are developed and maintained through the contributions from the public either as deposits, insurance premiums, statutory contributions from the wages earned  by the working class or contributions by the employers. For example, EPF and ETF collectively hold nearly LKR 1.7 trillion while the SLIC holds a total life fund of nearly LKR 78 billion.

If further elaborated, this means that 1.7 trillion EPF-ETF held funds are the outcome of the contributions by the employees and the employers. 78 billion Life fund of the SLIC is the result of the individual signing up for life insurance policies by using their personal money. These three organisations are incorporated by Government Acts and the mandate is bestowed on the management and the respective government arms to manage these funds with prudence and foresight with a view to safeguard the public funds. This principle applies to the government banks which draw deposits from the public and provide credit to the public (referred in the context of government held captive sources and does not mean to say that the same principle is not applied to private banks).

It is an obvious financial doctrine that these kinds of funds should be invested in economic activities which can generate satisfactory income and profit which can be shared among the contributors or depositors. This will help to match the depreciation and volatile market conditions by considering the time value of money. By doing this, for example, EPF and ETF are able to pay higher returns to the working class while the SLIC is able to pay higher bonuses to the policy holders.

Given the magnitude and the seriousness of managing these funds, stringent policies have been introduced and practised in order to ensure even the governments are not allowed to misuse or abuse these funds to meet difficulties arising due to financial indiscipline or to have recourse to these funds as a measure of cheap budget financing. The conflict of interest arises as the government is the custodian who can misuse these funds for their own consumption – means budgetary purposes. The custodian should act in the best interest of the people who rely upon the custodian who in turn is regulated by way of law and statutory provisions. Thus, the custodian should play the role of the guardian of the life savings of the people.

The ways and means a government misuses or abuses these captive sources are quite unnoticeable to the public who are facing the day to day challenges in ensuring that their ends meet. Further, a politically marred social fabric would not allow the public to ponder over whether their savings are being properly managed and used for their betterment. Then how does the government misuse or abuse these funds? It is simple, since the government has the accesses to these captive sources, whenever a debt requirement arises, it can easily turn to these funds and borrow or persuade for investment at low interest rates or at no interest (in the cases the captive sources are used for government projects as capital) without paying attention to the market equilibrium determined interest rates.

There are many pieces of evidence in the past on how the captive sources have been thus misused. One of the main duties of the Central Bank of Sri Lanka is to meet debt requirements demanded by the Treasury by using several tools such as treasury bills, bonds and sovereign bonds. Let us look at one example where the EPF funds were used to invest in government bonds. The government bonds were introduced in 1997 as a substitution to ‘rupee loans’, which was a timely move as the investment in government securities are made by the private sector, thus it is considered as a window for the government to borrow from the private sector at competitive interest rates. The EPF was allowed to bid for government bonds from the inception as a measure to be competitive and pay higher dividends to its contributors. In 2008, the then management of the Central Bank obtained a special approval from the Monetary Board to use the EPF funds at very much low rates as a temporary measure to tackle the rising interest rates and consequent inflation. The approval, it is reported, was only for three months from August to December 2008.

However, the then Central Bank Governor and the Deputy Governor, who were involved in public debt management, decided to continue the practice beyond the approved period. This led the authorities in the Central Bank to manipulate the EPF and contemplate in using them for the advantage of private parties. Otherwise stringently managed EPF, now become an open option and could be used to meet government debts and even to direct towards investing in loss making businesses or businesses that were not even off the ground at that time. The EPF investment in Hyatt and investment in loss making five-star hotels can be shown as examples. During this period, statistics show, that EPF money was drawn at much lower rates, at times even lower than 50 – 40 per cent of the prevailing market determined interest rates. In one such occasion when the interest rates were in the region of 11-13 per cent, EPF money had been used at 7 per cent. This means that the EPF was deprived of earning the due interest income for its investment.

A startling revelation is that W. A. Wijewardene, who is a vociferous critic of the processes and the principles connected to public debt management, was the then Deputy Governor in charge of the public debt department as well as the EPF, meaning the lender and the borrower were same. It is said that he was a proponent of using the EPF and other captive sources at much below the market rates, at the behest of the government of the day. He is also reported to be an officer who has encouraged and facilitated private placement (a process where only two parties are involved and the details are kept out of the public domain) which led to severe corruptions in the bond market.

The seriousness of touching the EPF was well marked in the history in 2011 when the previous UPFA government attempted to abuse the fund by introducing a pension bill and subsequent uproar by the working class, mainly by the workers of the Katunayake Free Trade Zone (KTZ), which ultimately earned protestors the wrath of the government. They were batton charged and the government resistance cost the life of 21-year-old Roshen Shanaka. The JVP usurped the opportunity and supported the protesting workers to push the government to abandon the purported pension bill, citing the government attempt was to use the EPF money.

Similarly, there are many instances where the State banks and SLIC were pushed to grant loans, made investments and sponsored projects as well as events which did not garner sufficient positive economic returns to the investors of the fund making them poorer by the passage of time. Unfortunately, no media or public was aware of the erosion of value of the money belonged to them by way of poorer investment choice under the influence of the Mahinda Rajapaksa UPFA government, in which some of the stalwarts in the present good governance government were leading members.

The present government has got a mandate from the people to rectify the mistakes of the previous successive governments. The captive sources belong to the people of the country. They are not ATM machines for the government to draw cash, as and when required. The funds composed of sweat and blood of the working class. The fiduciary duty is entrusted on the custodians of the funds and those custodians should act in a prudent manner in carrying out investments using captive funds.

The prudent management of the captive sources is the obligation of the government towards the public who believe that their savings would be wisely managed. The incumbent premier has opined and pointed out in several occasions the importance of making the captive sources independent and manage them prudently without political interference by the professionals. He has proposed that the EPF- ETF be amalgamated into one and be removed from the control of the Central Bank, which has the access to reach those funds to meet the debt requirement at their disposal. The management of the captive sources should be separated and should be largely independent of the government influence in order to let them undertake economically viable investment decisions. The captive sources are not there to control interest rates or inflation of the country. Management of the country’s fiscal or monetary policy is the responsibility of the government, which should be done without abusing or passing a burden on the captive sources that belong to the hard working people of the country.

1 Comment for “Can They Use Our Money? Captive Sources Belong To Us”

  1. Dear Sir
    Great Article,thank for educating us on the information of the captive sources.i am sure that you are well aware of the term quantitative easing and the way this game is played out in the US and how other governments have also joined the bandwagon including the EU. hope that you have read The Articles by MrW.A.Wijewardena on crypt o concurrency.The underlying principle in this is what is called a distributed ledger.where every thing will be open to the public.the Indian government has created The AADHAAR project and it is already in action.I think that it is time we in Sri LANKA do a similar one.we the knowledgeable computer literate and it savy people should not led by our noses by our governments and conglomerates any more.remember we elect governments to serve us .hope the next gen and social media will help as well

Comments are closed

Photo Gallery

Log in | Designed by Gabfire themes