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At a time when the Employees’ Trust Fund is celebrating 35 years of existence, it is time to reflect upon its original concept and perhaps look at any re-orientation needs it requires to be compatible withthe current socio-economic environment.
The Employees’ Trust Fund (ETF) and its sister fund, the Employees’ Provident Fund (EPF), have attracted considerable attention in the recent past. Some concerns are justified while others are unfounded and arise to ignorance. Most often whenever these funds come up in conversations, it is surprising to note the many misconceptions that abound. This article attempts to provide some insights into the original concept and objectives of the ETF, correct some of the misconceptions and finally suggest a way forward to achieve desirable objectives.
The open economy introduced in 1978 created a paradigm shift in Government policy. The private sector was expected to be the engine of growth, the Government was to be a facilitator of economic growth, and a massive infrastructure programme was initiated. It was in this environment that the Employees’ Trust Fund was created. It is common knowledge that the ETF was the brainchild of Lalith Athulathmudali, the then Minister of Trade and Shipping who was instrumental in creating the Sri Lanka Ports Authority by amalgamating three entities, and making the Colombo Port an efficient and sought after port.
However there are two opinions on the exact motive for the creation of the ETF. One belief is the publicly declared objective of making every employee a stakeholder of the economy through indirect ownership of shares in private enterprises. Since the EPF was already an established superannuation fund invested primarily in Government securities, and principally to benefit employees on retirement, the ETF was to be a non-contributory fund primarily to invest in industrial and commercial ventures and earn a return from such investments for the benefit of members.
The alternativebelief was that the Government wished to create a new fund which could be utilised to invest in large infrastructure projects. The Government in its endeavour to create rapid economic growth encountered difficulties in financing large infrastructure projects. One such was the Dry Docks which was considered essential for the development of the popularity of the Colombo Port.
The story goes that being a brilliant strategist, Lalith Athulathmudali, after a ‘back of the envelope’ type calculation, realised that taking a small sum equivalent to 3% of the salaries and wages of all employees would amount to a substantial fund which the Government could use and would bebeneficial to employees as well.
The EPF which commenced in 1958 was turning out to be very useful captive fund and growing fast. The EPF funds could not be touched since it had restrictions on investing in commercial ventures. A separate non-contributory fund (contribution by employers only) would therefore be welcome by the working population and also would not be subject to strong objections by employers. This could be an answer to the investment deficit of Colombo Dry Docks Ltd., which was to construct a large dry dock and many other such projects. Some credence could be given to this belief because a substantial amount of ETF funds were in fact invested in the Colombo Drydocks which did not yield any return until its privatisation in 1993.
Analysis of ETF’s portfolio of equity investments in 1990 showed that 51% was invested in Colombo Dockyard and Drydocks, 18 % in Dankotuwa Porcelain and 7% in Lanka Milk Foods, amounting to a massive 76% in three companies while all other equity investments in several companies amounted to only 24%. In addition a further Rs. 140 million was invested in Colombo Drydocks Ltd. as debentures plus Rs. 27 million in Lanka Cement debentures. One would not be wrong to assume that ETF was being used to finance State-owned ventures which did not yield the desired return. However one could argue that the investments were within the provisions of the ETF Act and that these investments did actually benefit the country.
By the way I need to clarify that there existed at that time the Colombo Dockyard Ltd., a private company, and Colombo Drydocks Ltd., a public listed company. Colombo Drydocks Ltd.was only a “shell” and the management was handled by Colombo Dockyard Ltd. Later on, after privatisation of Colombo Drydocks Ltd., and the liquidation of Colombo Dockyard Ltd., and since most foreign agents weremore familiar with the Colombo Dockyard name, Drydocks changed its name to Colombo Dockyard Ltd.
The Colombo Port which was in 139th position worldwide in 1980 in rankings of international container ports came upto 26th position by 1988. ETF could be proud of its contribution in the overall development of the industry, and if in fact the ETF was created for investments in infrastructure as claimed by some it justifies the intention.
A reference to the establishment of a proposed Employee Trust Fund is seen in the White Paper on Employee Relations published in January 1978. This speaks of a contribution of 6% of total earnings of employees to be paid by the employer and credited to individual accounts of the fund to be paid to employees as Gratuity.
According to records available at the Employers’ Federation of Ceylon (EFC), at a meeting held in June 1978 the Minister advised members of trade chambers, associations and the federation that the Government intends to introduce legislation to establish an Employee Trust and Investment Fund. The EFC was co-opted to a liaison committee to study and make recommendations on the draft bill, once available. The suggested name at that time which included “Investment” is significant and hints at the investment objective of the fund.
As per the broad outline of the scheme announced by the Minister at the meeting,
These representations were made on the assumption that employers would not be called upon to bear any further financial liability under any other scheme.At this time there was a suggestion in relation to a pension scheme for the private sector employees and a Gratuities Bill to provide for the payment of gratuity for employees. EFC made it clear that there should not be another burden on employers in addition to the liability under the Trust and Investment Fund or other schemesthat seek to provide for payment on account of services rendered by employees.
In August 1979 the press reported, quoting the Minister of Trade and Shipping that a new Act setting up an Employees’ Investment Fund will be presented in parliament before the end of the year. “This will provide for the distribution of profits among the workers in the public, corporation and private sectors,” the Minister had stated. It was the opinion of the Minister that the economy of the country should be equally distributed and enjoyed by everyone.
In January 1980 it was reported that the Employees’ Trust Fund Act when enacted would require private sector employers to pay an amount equivalent to 3% of the employees’ wages to a special trust fund to provide retirement benefits to those employees. It was further reported that the Sri Lankan scheme is different to those in other countries such as Singaporesince the “funds invested on behalf of the employees would come out of their employers’ pockets”.Contrary to assurances given earlier, in August 1980, just before the ETF Bill was taken up for debate in Parliament, the Minister of Labour announced that a Gratuities Bill would soon follow.
During the 2nd reading of the ETF Bill, Minister of Trade attributed the 3% contribution to the Fund as an immediate salary increase granted to the workers which would amount to a profitable saving of theirs and that the Bill is not in lieu of the gratuity paid to employees.
The Act was passed on 29October 1980 and has been in effect since 1981.The Act, however, allowed those employers who had voluntarily opted to pay to the EPF a higher contribution than the mandatory 12%, to deduct such higher amount upto 3% and make contributions to the ETF. The membership of the ETF was higher than the EPF because even those who contributed to private provident funds had to contribute to the ETF.
Section 7 of the ETF Act 46 of 1980 lists the following as its objects:
a)to promote employee ownership, employee welfare, economic democracy through participation in financing and investment
b)to promote employee participation in management through the acquisition of equity interest in enterprises
c)to provide for non-contributory benefit to employees on retirement; and
d)to do all such other acts or things as may be necessary for, or conducive to, the attainment of the objects specified in paragraphs a, b and c of this section.
When the ETF Act was passed, some of the objects are reported to have caused much concern in the private sector. Particularly the item b was feared as it could be used by the Government in an undesirable manner.Employee participation in management was another cause of concern. Perhaps the Government was inspired by the trends in Sweden and other countries where advanced forms of worker participation existed from the early 1970s. In Sweden workers’ representatives could become members of the Board of Directors. The Sri Lanka Government, too, introduced this system to Government Corporations in 1977 which didn’t quite register the expected benefits. By the time the ETF Act became operational the concept of worker participation in management was dying out. I need to clarify that even today there are many forms of effective worker participation, but what I have alluded to was worker representatives on boards of directors.
The closest the ETF has come to having worker participation was when a union representative was nominated to the Board of the Dankotuwa Porcelain by the Minister of Labour under whom the ETF functioned at that time. ETF by virtue of the fact that it had 50% ownership of Dankotuwa Porcelain was able to make that nomination. This was not a successful decision.
I recommend that this dangerous object clause be removed, since it is clear that the fears of the Employers’ Federation were justified when later ETF acquired significant stakes in companies which were being privatised, thus completely defeating the objective of privatisation. In one instance the ETF acquired 90% of the equity of a company being privatised.
By and large the objects for which the ETF was formed has been achieved but it was in the early 1990s that a clear identification of what ETF stands for and the difference between EPF and ETF was made. This enabled many who argued that the ETF was a mere duplication of EPF to realise the difference. The following table indicates the clear demarcation and the objects in line with the prevailing business and industrial relations climate at the time without deviating from the objects specified in the Act. Perhaps it is time to revisit this and re-define the objectives in line with current requirements.
It was in line with this clear definition that more benefit schemes were initiated by the ETF. The heart surgery scheme was a great boon to workers who could not afford the surgery. There was criticism that this scheme would not benefit the manual workers in the mistaken widely held belief that only senior executives who suffer from work stress succumb to heart problems. This was debunked by many heart specialists and the evidence from the claims too, prove that many manual and clerical workers benefited from this scheme.
The disability scheme and the death benefit scheme as well as the intra-ocular lens implant scheme were also based on recommendations of medical professionals who knew of the difficulties of the less affluent workers. When the ETF reflected on the various schemes it realised that all the hitherto initiated schemes were to assist negative situations and so decided that a scheme for a positive event was desirable. This gave birth to the Year 5 scholarship scheme which lightened the burden of members whose children were star performers and gained admission to better schools.
There is an unfounded fear among many uninformed members that their savings are not actually available because the Government has appropriated them. Even educated private sector managers have expressed this fear. Often an explanation has enlightened them but not everyone is convinced. More communication is required to educate employees that their funds are safe.If one looks at the latest portfolio as seen in the pie chart there should be no doubt that the funds are safe.
A total of 91% is in Government securities, and only 5.6% is in shares and unit trusts. This chart should allay any fears that people 
have regarding the security of their funds. However, this certainly does not mean that the Board should be callous in its equity investment policy. Every investment however small must be transparent and justified. The investment in shares is grossly insufficient and defeats the purpose for which this fund was set up.
A separate study is required to determine whether the EPF and ETF has at least provided a fair return at least equivalent to the savings interest rate of the National Savings Bank.
The chart clearly shows that the EPF returns are more stable while ETF returns are more volatile. The actual situation of ETF returns may be even worse because the correct loss provisions for the diminution of the market value of shares had not been made in some years and the Auditor General had even pointed this out in his report. ETF may not be able to match the EPF returns because the ETF has medical, insurance, and scholarship benefits, the costs of which are set off from the profits of the fund. Furthermore the entire administrative cost of enforcement is set off against the profits whereas in the case of EPF the enforcement activities carried out by the Labour Department are provided by the Labour Department budget.
1. The fish rots from the head, they say, meaning that a strong and competent Board is a sine qua non for any institution. A major lapse in the Act is that the Commissioner General of Labour is not an ex-officio member of the Board. The provision to have a nominee of the Minister in charge of the subject of Trade is no longer relevant and should be replaced perhaps with a nominee of the Central Bank of Sri Lanka. The four members nominated by the Minister should include qualified and experienced professionals in the fields of industry, commerce and banking. During the tenure of the previous Government only one representative of Trade Unions was appointed. This is not desirable. It is also desirable to have the Chairman of the Employers’ Federation of Ceylon (EFC) as an ex-officio member rather than leaving it open for the EFC to decide on the nominee.
2.Governance could be improved by making the Board of Directors more accountable. I suggest that the National Labour Advisory Council has a quarterly agenda item where the performance of the ETF and its investment decisions are subject to discussion.
3.The objects of the Fund should be revised taking cognisance of contemporary requirements. My suggested objects are as follows:
a.To promote economic growth and employee democracy through participation in financing and investment
b.To provide for non-contributory medical, insurance and financial benefits to employees during their working life and on retirement
c.To promote employee welfare, occupational health and safety
d.To promote industrial harmony and higher labour productivity through the promotion of modern techniques of employee involvement, and employee engagement.
e.To do all such other acts or things as may be necessary for, or conducive to, the attainment of the objects specified in paragraphs a, b, c and d of this section.
4.Section 9 should be repealed. It allows the Board to establish and operate industrial and commercial enterprises, and secure shares for employees in any undertaking to promote employee participation in the management of such undertakings. The investment policy should be precise and unambiguous. The focus of the investment should only be confined to realising a fair return at a marginal risk. The Fund should not take any strategic stake in any enterprise and ideally should limit the holding of any company to 10% of its issued capital. The Fund should not invest directly in unlisted equities nor should it invest in start-ups. The experience of the Fund in such start up investments has been disastrous. If the Fund wishes to contribute to economic growth it could invest in venture capital funds which have an abundance of experience in evaluating projects suitable for support.
5.Many years ago the ETF carried out a safety campaign with TV commercials. It later joined with CTC Eagle Ltd to promote a National Safety Award with technical assistance provided by the Factories Division of the Labour Department. I believe the ETF has an obligation to promote occupational health and safety and should actively support such programmes to elevate the health and safety environment in workplace.
6.When the Katunayake Export Processing Zone was reaching its peak in the early 1990s and there was a massive influx of workers to the zone but with woeful accommodation conditions, and the safety of female workers was at risk, the ETF stepped in, joining with the Board of Investment (BOI) to increase the quality and quantity of accommodation. This, too, was in line with welfare of workers.
7.In another exercise, when statistics revealed that the percentage of low birth weight babies in Sri Lanka was high compared with other South Asian nations, perhaps because of a higher percentage of workingfemales, the ETF stepped in and in consultation with Sri Lanka’snutritionists initiated a programme of advice to Employers and Employees. Research carried out in India has proved that a healthier workforce will be more productive, will make lesser errors, and will be less prone to accidents. Therefore,through such interventions,ETF could play a significant role in enhancing the competitiveness rankings of Sri Lanka.
There are moves currently to amalgamate the ETF and the EPF. I hope the policy makers would not lose sight of the useful objects of ETF and would formulate two funds to be managed by one body and continue the programmes that would benefit employees during their working life and continue to promote those techniques which would provide a safer workplace and create healthier workers.
