25th March 2001
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  • Accountability in Public Expenditure
  • NDB looks at the future armed with new strategies
  • Accountability in Public Expenditure

    Last week we commented on the fictitious nature of budgetary estimates. This was mainly owing to expenditure overruns. There have also been shortfalls in revenue. We pointed out the impact of this on economic growth, as the immediate consequence of the increase in current expenditure has been a cut in capital expenditure. 

    Today we turn to a very different dimension - the public accountability of government expenditure. The World Bank in its recent report entitled "Sri Lanka Recapturing Lost Opportunities," has pointed out that " Financial controls and public and administrative accountability have weakened over time." 

    It draws attention to the fact that actual government expenditure has been much higher than those of the original budget. "The persistent tendency for underestimation of future current expenditures is an illustration of this weak parliamentary oversight function. Actual expenditures have exceeded annual projections almost every year since 1981.

    " The large budget deficits of as much as 9.8 per cent of GDP in 2000 compared to an estimated overall budget deficit of 7.6 per cent in the budget is illustrative of this tendency. This year's budget estimated a deficit of 8.5 per cent of GDP for 2001.

    Most analysts have pointed out that the actual deficit would be much more. The World Bank Report goes on to say that "legislative scrutiny of finances is weak at all levels of government and internal controls and accounting and auditing systems have not been sufficiently modernized in line with international best practice and the changing needs of the economy." 

    Aristotle in his famous treatise, The Politics, defined the concept of accountability very lucidly. He said: " … to protect the Treasury from being defrauded, let all money be issued openly in front of the whole city, and let copies of the accounts be deposited in various wards."

    This concept of accountability and transparency of public expenditures is a deep-seated premise of democratic governments. It has been enshrined in modern democracies in various ways. There are procedures that ensure the control of public expenditure by parliament. It is a fundamental principle of parliamentary democracy that public expenditure should be controlled and monitored by parliament, the people's representatives. Parliament is the people's watchdog over public expenditures.

    There are many ways by which the concept of accountability has been operationalised in modern day democracies. The parliamentary debate of the budget and the vote in parliament is the most important. Then there are the various committees that scrutinize expenditure of individual ministries and corporations and public enterprises.

    While the principle of parliamentary control of public finances is an established principle of democracy and parliament attempts to control public finances in various ways, several studies have pointed out that it has been rather ineffective in Sri Lanka. Further, these studies as well as the Report of the Administrative Reforms Committee have shown that over time there has been a weakening of this control and accountability.

    The pertinent question to ask is: "How could parliament perform this function when the veracity of the figures presented to it is itself in question? 

    "True supplementary estimates too have to be passed by parliament, but these do not get the scrutiny that budget estimates get and the overall picture of public expenditure is more important than piecemeal discussion of specific expenditures. Besides, supplementary estimates tend to be passed by depleted parliaments and presented among numerous other parliamentary votes. They do not get the attention and scrutiny that public expenditure should be subjected to as and when the budget is discussed and debated.

    International agencies and economists have argued that effective public accountability of expenditure ensures higher rates of economic growth, more focused and targeted expenditures and human welfare. All these are sacrificed when the figures of expenditure presented in parliament diverge from the final actual expenditures.

    There is much to be said for the need to bring actual expenditures in line with budgeted figures. This is an issue that parliament itself must address and an agreement reached by all parties. Maybe a limit should be placed on the extent to which supplementary estimates could be permitted. Maybe an institutional device could be found to ensure such a compliance and a greater degree of political accountability of public expenditure. There can be little doubt that the credibility of budgets should be restored and parliamentary control of public finances made more effective. Maybe an all-party parliamentary committee, supported by technical staff should look into this. Ineffective parliamentary control of public finance makes a mockery of democracy.

    NDB looks at the future armed with new strategies

    More to achieve
    Sri Lanka's premier development bank, NDB is fast re-defining the concept of development banking in Sri Lanka. Armed with subsidiaries in diverse businesses ranging from insurance to venture capital, it is also poised to enter the crowded waters of commercial banking through the acquisition of ABN AMRO. NDB Chief Ranjith Fernando spoke to Chanakya Dissanayake of the Sunday Times Business on the future plans of the bank. Excerpts from the interview:

    Ranjith FernandoBT:Some time back you spoke about changing the business model for NDB. How will it be done?

    Ranjith Fernando: Initially, development banks were set up after World War II by the governments and multilateral agencies to restructure war-devastated economies. Governments played a major role in these banks to obtain funds and to obtain the credit lines from multilateral institutes.

    But, now the situation has changed. Governments all over the world are reducing their involvement in development banks. NDB was also privatised in 1993. Those credit lines that were previously available are not there anymore. We have to go to the market and raise our funds, competing with other commercial banks. We have to offer the full range of financial services to the customer, in order to compete effectively in this market.

    The old business model based on obtaining credit lines and lending them is not viable anymore. We have to offer the complete financial services offered by the commercial banks. That is why we are venturing into commercial banking through the take-over of the ABN AMRO bank. That is the change in our business plan.

    How do you plan to combine the commercial banking operation of the ABN AMRO with the development banking strategy of the NDB?

    The NDB has 12 branches and about 1,000 clients. We will introduce commercial banking to all these branches. We will persuade our clients to do their commercial banking transactions, also, with us. And later we will attempt to attract new customers to our commercial banking operation.

    In Sri Lanka we have almost 20 banks, yet the two state banks enjoy a 55 percent plus market share. But, this market share is rapidly eroding and the private banks are gaining. In five years' time we believe 4-5 very big private banks coming up. We, the NDB, certainly want to be one of them, and we are positioning ourselves to achieve that target.

    How do you plan to finance the ABN AMRO take-over and make the subsequent changes?

    First of all we are going to form a company that will buy the ABN AMRO bank. The company will raise the money through debt and public subscription (equity) and we will offer the ownership of this company to our existing shareholders.

    NDB owns many subsidiaries with diverse business activities. Investors were expecting a convergence among them for some time, to exploit the synergies. What is your comment?

    If you look at the businesses we own, we have insurance through our partnership with Zurich Insurance, long-term housing loans in collaboration with two Indian companies, HDL and IFC. We also have a venture capital company-Ayojana. 

    Now, if you look at all of them they are pulling in individual directions. Even though we own them, they run their operations individually.

    We plan to bring these operations together by offering the range of financial services in the same branch. 

    For example if we have a branch in Kandy, we will invite the representatives from all our companies to operate there, under one roof. The customers will be able to move from one window to another to fulfil their development banking, insurance and leasing needs etc. This is the way we plan to combine the marketing of the products and we will have a common back office. This will reduce our costs also. 

    NDB's loan growth has been almost stagnant. But the costs are on an upward trend. What are your plans to rectify this?

    I disagree. Actually, we have managed the costs well. But, you are right about the loan growth. Deliberately we are not aiming at loan growth. We are trying to stabilise and consolidate rather than go for growth in loan volumes. 

    The main reason is that our clients are facing difficult times due to adverse economic conditions.

    If you look at our costs - in operating costs -, the personal costs have increased from Rs 209 million in 1999 to Rs 230 million in 2000. This is only a minor increase mainly due to normal increments given to staff.

    The administrative costs have grown slightly from Rs 198 million to Rs 218 million. 

    This is almost due to inflation. We cannot cut staff levels anymore because we are going to expand. However, we are trying to cut down on support staff to reduce costs.

    NDB's equity portfolio has not been performing well. Is it due to the bad management of the portfolio?

    No. I disagree. 

    It is almost entirely due to the market being down. We have done better than most other portfolios. We have one of the largest equity portfolios in Sri Lanka, which is worth about Rs 2 billion. It includes all the top blue chips. The reduction in the net value of the portfolio is entirely due to the market conditions.

    We have decided to reduce the size of the portfolio this year and we will be unloading some of the stocks. 

    Will it not result in capital losses for the NDB?

    We have already provided for the capital losses. In our books we record the equity portfolio at the market value. Therefore, the capital loss is automatically provided.

    You have been with the NDB right from the beginning. Many would give you the credit for making NDB what it is today. 

    But what is your succession plan? Will it be from within the company or from outside?

    We have anticipated the issue about succession and we have planned for it. NDB has developed a strong second line of managers. We have many good people. 

    For example, Nihal Welikala is a senior DGM and was the CEO of the Citi Bank. We also have Hiran Wickramaratne and Faizal Saliah. All these people are extremely capable and will be ready to get into my shoes, once I leave. Succession will not be a problem.

    NDB used to have the most, strict general provisioning in the market. At the beginning it was 4 percent of all assets. But, now the general provisioning has come down. Are the profits now of the same quality as profits reported during the high general provisioning? 

    The Central Bank has a policy of provisioning applicable to all banks. That is specific provisioning pertaining to loans on arrears. For example if the loan is in arrears for three months you provide 20 percent, for below one year, 50 percent and beyond one year, 100 percent. This is according to directions given by the Central Bank, on which we have no discretion.

    But, the general provisioning is provided on our own initiative on the performing assets of the bank as a prudence measure. We are not compelled to provide general provisioning. In fact many banks do not provide it. Like you said those days we used to provide 4 percent on our performing loan portfolio. But nowadays the margins have come down and you barely make 2 percent margin on a loan. If you make 4 percent provisioning we lose on that loan.

    We cannot continue to do that.

    Now, we do not provide an arbitrary fixed general provisioning. We rate our customers credit worthiness and provide accordingly. 

    Therefore our general provision is fluctuating according to the quality of the loan portfolio. Currently it adds up to 1.63 percent.

    There are rumours in the market that NDB will handle the Sri Lanka Telecom IPO. What is your comment?

    It is difficult to say whether we will handle it. As you know, initially we offered our services to handle the issue of the remaining shares of SLT. At that time we worked with Solomon Smith Barney, who is global leader in telecom and capital markets.

    We have offered our services to the government even now. We like to handle the deal. But there is no final decision.


    British fans seen spurring growth in Sri Lankan tourism

    Matches and catches

    By Feizal Samath
    British nationals sip beer in a downtown Colombo bar. At the local test venue, they raise flags and cheer the test series won by their national team against Sri Lanka, 10 days ago.

    Britain has advised its nationals to avoid Colombo -when visiting Sri Lanka - due to possible attacks by the LTTE. But that did not deter hundreds of British cricket fans swarming into the capital and other parts of the country in the past month for the England tour of the Indian Ocean island.

    Colombo's five-star hotels have reported a full house for the first time since 1983.

    "We are 100 percent full in the past few days with more than 50 percent of the guests being British cricket fans, journalists and officials accompanying the team," said Stefan Pfeiffer, general manager at the plush Hotel Lanka Oberoi.

    "We have had our best couple of weeks in terms of occupancy in years," Chandreenie Kariyawasam, public relations manager at the city's TransAsia Hotel. 

    "I don't think we have had these occupancy rates since the war broke out in 1983."

    The tourist industry is hoping a leap in the number of British tourists plus prospects of an end to the conflict with peace talks between the government and Tamil rebels due to start in May, would revive an industry that has been shattered by the unrest. The number of British nationals visiting here in 2000 totalled 8,049 down from 9,066 in 1999.

    "We are hoping that the peace talks would be fruitful. If that happens, then tourist arrivals - over the next couple of years –could rise by at least 50 percent," noted Renton De Alwis, chairman of the Ceylon Tourist Board (CTB).

    Foreign investment and tourism have been the worst casualties in the 18-year long ethnic conflict that has dragged down the economy to growth rates averaging four to five percent instead of eight percent if there was peace and stalled attempts to establish Colombo as a global financial centre.

    More than 65,000 people have died in the fighting between government troops and Tamil rebels since 1983. The LTTE is demanding a separate state for their minority community but in recent months say they are prepared for devolution of power, instead of independence, in the north and east where most of the Tamils live.

    Norway has been trying to arrange talks between the warring factions for the past year and Oslo's efforts are slowly bearing fruit. Both President Chandrika Kumaratunga, currently touring Europe, and LTTE leader Velupillai Prabhakaran say they are ready for unconditional talks. 

    The rebels have been observing a unilateral ceasefire since last Christmas, rejected however by the government.

    A contingent of about 7,000 British cricket fans has been in the country since February 17 watching their test side beat Sri Lanka 2-1 in a three-test series. The tour ends on March 28 after a series of one-day matches began last week. The fans have crisscrossed the countryside following the team play matches in the southern, central and western regions filling up hotels when matches were on.

    When the third and final test match was played in Colombo, dozens of three-wheel taxis motored British fans, dressed in casual clothes, to the venue in a virtual procession creating a carnival-type atmosphere.

    According to other reports, in Kandy, British fans outnumbered locals during the match while pubs in that city nearly went dry of beer. In Galle, a group of British nationals sat down for a drink at a local pub and apparently ended up with a 250,000-rupee bill after a long drinking session.

    Tourism industry officials hope the increasing numbers of British tourists would spur not only Britain but also other countries to lift travel advisories on Sri Lanka. Germany, France, Japan, Italy, the United States and Britain have issued travel advisories to nationals visiting Sri Lanka.

    These advisories range from warnings for nationals not to visit Colombo because of possible rebel attacks, the eastcoast and other parts of Sri Lanka where the rebels operate. The warnings are a major deterrent to the industry.

    Yet despite these setbacks tourist arrivals reached a record 436,000 in 1999, slightly over the number of arrivals in peacetime 1982, but slowed down to 400,000 last year, due to parliamentary elections in December and a few rebel blasts in the capital.

    "We could do much better if not for the unrest," believes Udaya Nanayakkara, president of the Travel Agents Association in Sri Lanka, noting however that "We need to look beyond the problem and counter a negative press."

    The industry's main grumble is that whenever there is fighting in the north or the east which is several kilometres away from Colombo or the regularly-visited areas by tourists, foreign media reports project the fighting as if it was happening in Colombo.

    "When newspapers overseas run a story with a Colombo dateline of an incident that has taken place out of the city, there is an immediate feeling abroad that Sri Lanka is not safe. We need to counter this and show that Colombo and areas of tourist interest are safe," said an industry official. Foreign correspondents in response say: 

    "You can't hide the fact that there is a conflict in this country. We are merely reporting events that are taking place."

    CTB's De Alwis said the industry was banking on the proposed peace talks being successful to bring the industry to its pre-1983 glory. "Everywhere" everyone says let's wait for the peace talks for the industry to prosper," he said.

    "Ambassadors of countries that have issued travel advisories have also told me -let's wait for the peace talks and then see what we could do about travel warnings."

    The success of the English tour in terms of benefits to tourism has led to authorities to twin international sporting events taking place here with tourism. This is made easy by the fact that tourism and sports come under one minister, Lakshman Kiriella.

    Authorities are promoting special tours and packages for foreigners during the visits of the Indian, West Indies and New Zealand test sides here for matches with their local counterparts. The biggest event however being pursued by the industry is the Asian Athletic Games, Asia's version of the Olympics, due to be held in Colombo next year.

    At least 1,500 athletes across Asia will be taking part and the CTB is hoping they will bring their families, relatives and friends along.

    An end to the war would not only spur tourism and trigger a construction boom in the country to meet the additional demand for rooms and facilities but also bring a whole heap of plus factors to an economy that has been resilient in the face of adversity.

    Government economists have said that Sri Lanka's economic growth averaging 4-5 percent in the past decade has been creditable given the unrest and was all due to a resilient economy driven by strong private sector growth.

    Unfortunately war spending has eroded much of the gains. An expansion in the defence budget at a projected 64 billion rupees this year –six percent of gross domestic product - and an average 50 billion rupees in the past 10 years, has been at the expense of development projects. 

    The economy is set to record lower growth of 4-4.5 percent this year compared to six percent last year and residents, already reeling from a combination of high living costs and rising fuel prices, have been told by the government to tighten their belts for a further six months.

    Tourism, officials hope, may help revive the economy if the war ends. "If tourism grows that would boost investor confidence and show the world that Sri Lanka is once again a safe place plus has tremendous advantages in investing," said a private banker.

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