After the Bond Scam Commission
Posted on December 9th, 2017

No credible explanation of why enormous sums of money belonging to members of the Employees Provident Fund had been invested in Treasury Bonds purchased in the secondary market when the EPF, which is an authorized dealer could have bought them cheaper in the primary market, has yet been forthcoming. The fact that this has been happening for some time and that one particular dealer had been making super profits running into the billion emerged during the proceedings of the Presidential Commission appointed to investigate the so-called bond scam. Presumably the Central Bank is making its own investigations into this scandal and the results of such investigations must be made public. The EPF, after all, is the custodian of the retirement savings of hundreds of thousands of employees and it goes without saying that such funds must be prudently managed for the optimum benefit of the fund’s membership.

Ever since the EPF and the Employees Trust Fund (ETF), which was established some years later was set up, they became captive lenders to the government. Both employer and employee are contributors to the EPF while only employers contribute to the ETF. The amount of money flowing into the coffers of these two funds every month, particularly to the EPF, is enormous and these funds have always been a ready source for government borrowing. Given that galloping inflation has been endemic in Sri Lanka for many years, it has sometimes been argued that savers are losers with inflation often swallowing more than interest earned on savings. There have been schemes to extend housing loans from a proportion of the balance held in an EPF member’s account at rates much cheaper than those of banks and other schemes. But the vast majority of members of the funds draw their money only on retirement. It is a vital social security net for a very large segment of the population who do not enjoy pensions that are paid to retired government servants.

No doubt interest has been annually paid on the balances of members’ accounts in the funds. Such payments have sometimes, though not often, gone as high as 12 percent. But the fact is that tight management of funds lying to the funds’ credit would have made better dividends possible. Apart from lending to the government, the EPF and ETF have also made investments in both quoted and unquoted companies. Former Central Bank Governor Ajith Nivard Cabraal used to often say that as the economy grows, government’s borrowing requirements would diminish and it made sense to invest in good shares with capital growth potential paying attractive dividends. Of course the proportion of funds invested in equities was a relatively small fraction of what went into government securities. Since the EPF and ETF held huge resources, they like the state banks holding depositors funds, were often made to extend government directed credit. It was reported yesterday that in a report presented in Parliament, the parliamentary Committee on Public Accounts (COPA) has reported Rs. 6.3 billion impairments of EPF investments in 2010 and 2013.

This report said that the EPF had invested Rs. 500 million in SriLankan Airlines in July 2010, an investment of Rs. 810 million in a hotel company in May 2010 and Rs. 5 billion in a new hotel complex in at the end of 2013. But these investments have not been profitable. It must be stated in fairness that not all investments come right and the fairer way of assessing the success or otherwise of an investment portfolio is to look at the total picture. If the result as a whole has been negative, then the investment judgment has obviously been faulty. Investing in SriLankan equity, as opposed to lending to the airline on a Treasury guarantee, would have been a risky proposition going by the airline’s track record. It is no secret that EPF, certainly, and the ETF possibly, have made politically directed investments. It is necessary that those running these funds are protected from such direction and devices to do so must necessarily put in place.

Various parliamentary oversight committees like COPA will no doubt go into these matters. But it takes time for them to come up. Too often the horse has bolted before the stable door is barred. But in the matter of the Treasury bonds, the Central Bank hierarchy must find out why several secondary market deals have been made by the EPF without bidding in the primary market where they were available presumably cheaper. Supervisory mechanisms must surely be in place and senior officials should have been aware of continuing bad practice in bond market activities. Such activities should hav been stopped forthwith if they were spotted; if they were not, the concerned authorities must be held to account. Quite apart from the Commission’s forthcoming report, presumably the Central Bank has begun its own investigations although nothing has been publicly said on the subject so far.

The Commission’s term was last week further extended till the end of this month to enable it to finalize its report. No more evidence will be led. Given its exhaustive investigations, writing the report itself would be a daunting task. The people expect the report to be published as quickly as possible following its submission to the president. Such reports are normally published but some recent inquires under the Right to Information Law, instances of suppression have surfaced.

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