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By Chandani Jayatilleke

A professional capital market expert who has taken great strides to educate and advocate decision makers, government officials and ordinary people on the necessity of expediting the process of financial reforms and developing capital markets to create a new economy in Sri Lanka is Ravi Abeysuriya, the CEO of Fitch Ratings Lanka Ltd.

Abeysuriya's uncanny insight coupled with solid professional experience makes him think far beyond many others in the field. He makes the startling disclosure that Sri Lanka's finance field still lies in the 18th century though many milestones have been passed in other fields such as medicine, mathematics and technology.

That may have been the major reason for Abeysuriya to decide to get involved in implementing financial reforms in terms of professionalism, good governance and sensible regulation.

Abeysuriya who is President of the Sri Lanka Association of Investment Analysts (SLAIA) and a CFA charter holder, is also a member of the think-tank team that was appointed by Prime Minister Ranil Wickremesinghe to advise him on financial reforms which are being implemented currently.

In today's Meeting Point column, he gives readers vital points to ponder. His plea regarding pensioners will be a revelation to society. For me personally, the encounter with him was an eye opener. As we began the interview he said: "you may go back rich in your thinking'". Indeed, I did.

Pension reforms

The priority on Abeysuriya's agenda right now is educating the Government and the people on the introduction of a retirement savings system.

"A country which has gone through many a crisis, Sri Lanka is now heading for another big crisis - pension crisis. Our retirement savings system needs urgent reform," he said.

Sri Lanka is the poorest country with a population which is ageing the fastest. According to recent population projections, the proportion of those over 60 years will increase from the current 9 percent to about 20 percent in 2025. A rapidly ageing population, negative real rates of return, lack of professionalism in fund management are some of the factors contributing to the present dismal state of affairs in the area of pensions.

Sri Lanka has two major pension schemes: Employees Provident Fund (EPF) for the private sector and the pension scheme for the public sector. Public sector employees are entitled to receive 70 to 80 percent of their salary monthly at retirement, while private sector employees get a lump sum, which actuarial calculation indicate will provide only about 25% of their last month salary from the 25 contribution of their month.

The public sector pension scheme is a huge burden on the state and on the long term it will not be sustainable. The EPF has so far failed to deliver or provide good returns to the beneficiaries. The public sector pension scheme is good, but the income does not increase with inflation.

He lamented that EPF had only provided Rs. 12,973 for a member who contributed Rs. 1,000 in January 1, 1980, where as based on official inflation figure he or she will need Rs. 13,070 to buy the same item that would have cost Rs. 1,000 in January 1, 1980. If that Rs. 1,000 was invested on January 1, 1980 in risk free Government of Sri Lanka Treasury Bills he or she would have received Rs. 25,375 today.

If EPF had invested even 5 percent in risky but high return project ventures such as power projects, that member would have easily earned Rs. 100,000

Therefore, we need complete reforms in the retirement savings system. The think tank team has already handed over a report to the Prime Minister Wickremesinghe, outlining the necessity, Mr. Abeysuriya said.

Retirement system

Firstly, we have to create better awareness relating to pension reforms in view of the ageing population and associated problems relating to: the current government's 'pay-as-you-go' system has an unfunded pension liability of around Rs. 540 billion and current negative return on the EPF.

Healthy public debate

A healthy public debate must be encouraged to air all views and address any real or perceived concerns. If broad scale reform is to be successful, the problem should be tackled by taking a non-political and a multi partisan approach to the issue.

"We have also proposed an office of Pension Fund Reform (Pension Fund Regulator) to carry out the needed reforms efficiently."

The Government should also consider the option of allowing the private sector to establish provident and pension funds subject to a clearly laid down regulatory framework and allow the employees the freedom to select provident/pension fund of their choice and shift between funds subject to limitations. Perhaps EPF may remain as one option. Competition alone will make EPF give higher returns to members.

Capital productivity

Sri Lanka has the lowest capital productivity in Asia. Capital productivity is an indicator of the efficiency and effectiveness of use of physical capital to provide goods and services. Capital is the storage device for saving some of current income for future consumption. The accumulation of these savings represents the wealth of a nation.

How well a nation uses its physical capital, affects the return that people get on the money they save. The higher the returns, the less they need to save for the future and the more they can consume today.

However, Government ownership lowers capital productivity in several ways: political interference, constant bailing out of state enterprises in financial trouble, bureaucratic delays and lack of shareholder vigilance and poor corporate governance.

Privatisation

In privatisation, the Government has to play the role of the regulator.

As the IMF Representative in Sri Lanka, Dr. Nadeem Ul Haq says: "When you want to play a cricket match, don't let umpires also play cricket. If you have that situation you don't have the game spirit." Likewise in privatisation the Government has to be the umpire - watch everything - give in and outs - but not play the game."

"We propose the Government to privatise as quickly as and where possible to get Government out of economic activities that are commercial in nature. Government owned enterprises should be privatised as a matter of priority. The Government should announce in advance the privatisation program that would be done for each identified institution," he said.

Changing public opinion about privatisation and the benefits of capital market investing is important. This can be done through a campaign highlighting successful examples of privatisation, long term returns available in the capital market and the regulatory safeguards in force to protect investors and other stakeholders.

"We need to see Government's bureaucratic system changes. In this Government, we have a dynamic Prime Minister and a team of Ministers and MPs who are keen to see changes leading to prosperity. But after that line, there is a problem of bureaucracy, lack of professionalism and not having the right choice to perform duties.

We should absorb young professionals into government institutions. What happens at present is the young, talented people go away searching green pastures. The developed countries take the cream of our professionals.

Now we need action, we need to change age old traditions to attract the best professionals in to the public sector.

Capital market development

Capital market is the barometer of the economy of a country. In Sri Lanka, there is a major problem because profitable sectors are not reflected in the capital market. For instance, apparel and telecom sectors. Because the representatives of these sectors believe that the capital market is not attractive enough them list.

What is fundamental to take off is confidence. This is exactly what is happening on the Colombo bourse at present.

To encourage more instruments/entities to list on the stock market, several ingredients have to be fulfilled. The regulator, in this, the Securities Exchange Commission should ensure a proper regulatory environment in the system. Companies/individuals should not be allowed to make money at the expense of the investor. That issue has to be minimised.

The big companies' focus is to give the highest possible return to the shareholders. But there are other players who take people for a ride. The regulators' responsibility is to ensure that the minority shareholders are not cheated by such players and organisations. Our investment advisory system has not been able to give professional service to prevent such incidents. Quality research is necessary in management discipline.

Investing on stock market

The best methodology to practise in investing on the stock market is to 'get in and get out' . The stock market is a long term investment. One has to be watchful and mindful. The market is changing all the time.

Investments on the stock market may cause good and bad outcomes. The good is obviously the higher return. The bad is that the risk could be high. You have to constantly follow the activities.'

It is also important to focus on fundamentals such as sustainability, corporate governance and operating cash flow.

Professional career

I started my professional career as an accountant armed with the CIMA qualification. But Abeysuriya soon realised that accountancy was not his forte and professionally he should be doing otherwise - perhaps to be in the managerial position. With that idea in mind he completed a Masters degree in Business Administration at the Monash University in Australia.

Since his return, Abeysuriya secured a top managerial position at Pure Beverages Ltd. There, he got a scholarship to follow CFA funded by the US.

"With CFA, I saw a whole new world where I had the opportunity to further develop my career. However, the alluring job opportunities overseas did not tempt him enough to leave the country. Because he comes from a family which is culturally strong.

"I did not want to see our children growing up in an alien environment. Moreover I and my wife are the only children of our families. Therefore, we have a responsibility to look after them," he said.

CFA charter holders

In Sri Lanka there are about 28 CFA charter holders inclusive of Abeysuriya. Internationally, it is a very strong organisation with 50,000 members and 150,000 candidates. As a CFA charter holder, Abeysuriya wants to continue his efforts to train and educate young professionals in the industry.

Fitch rating

"We started as a rating agency but came across many impediments for our growth due to practical problems as people were not much aware of capital markets hence the use was minimum, the debt market itself was not developed, so we started educating people in order to address these problems.

We have a responsibility and a 'national role' to play to ensure that a 'real change' will take place in this field for the betterment of the country.

That's how/why I got involved in financial reforms by sharing my insight with the Central Bank, Finance Ministry and several other institutions connected to finance. 

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