By W.A Wijewardena –

N.M. Perera: Avoiding Parliamentary control over public institutions is undemocratic

An eternal debate between veteran politician and LSSP leader Dr. N.M. Perera and Minister of State and Deputy Prime Minister J.R. Jayewardene in Parliament during 1965-70 had been on Parliamentary control over State-owned limited liability companies.

The latter was fond of creating them – one such creation was Salusala Ltd. – as alternative to traditional public corporations because those limited liability companies, in his opinion, possessed greater commercial freedom to operate. NM did not buy this argument and found fault with JR. He accused JR of trying to degrade the powers of Parliament by creating institutions that did not come within its controls. Parliament had the full control over the public finances and therefore, argued NM, using taxpayers’ money to set up public institutions that operated outside Parliamentary controls was undemocratic.

True to his words, when NM became the Finance Minister in 1970, he absorbed all those State-owned limited liability companies into the public corporation domain under the provisions of the State Trading (General) Corporation Act, a new facilitating law enacted by that Government. The objective was for Parliament to supervise and control all public corporations and guide them in the proper direction if they fail to go by their mandate.

COPE to be supported by Public Enterprise Division of Treasury

Parliament is made up of elected representatives and they need not necessarily be specialists in any subject. Then, how could a Parliament, consisting of people who have no capacity to examine the complex management reports published by corporations, do its job properly? NM found a way to overcome this deficiency by setting up a specialist unit in the Ministry of Finance called the Corporations Division to do the job for the Parliament, according to the veteran civil servant, M. Somasundram (available here  ).

All traditional divisions in the Ministry up to that time had been involved in the control of money, or in other words inputs, spent by various government agencies. NM wanted the new Corporations Division to examine the outputs produced by government agencies. This was later re-designated Public Enterprise Division by Finance Minister Ronnie de Mel with a new mandate for public corporations. That mandate was to change the public corporations from a ‘control and command culture’ to that of a ‘partnership with private enterprises’.

Ronnie was responsible for making another change in the governance structure, says Somasundram. That was to separate the work hitherto done by the Public Accounts Committee into two specialist bodies, one to look at the Government departments called the Committee on Public Accounts or COPA and the other to look at the work of public enterprises called the Committee on Public Enterprises or COPE. According to Somasundram, Ronnie wanted the new Public Enterprise Division, now Department, to provide the essential skills to the newly formed COPE.

The widened mandate  of COPE 

Ronnie also changed the mandate of COPE. Says Somasundram: “Earlier the PAC was charged only with reviewing accounts that is of past activities as presented by the Auditor General. COPE in addition to this responsibility was to monitor (that is review the present) and check on corporate plans (that is analyse the future). In both these activities COPE was to be assisted by Public Enterprise Division or PED, a distinct structural change in governance. By this measure the legislature and the executive were to work in closer collaboration. The PED was able to undertake the activities because it was the focal point for all matters pertaining to public corporations.”

Need for cooperation between COPE and the Executive

Thus, COPE is a mechanism for Parliament and the Executive, namely, the Cabinet led by the President, to cooperate with each other in order to ensure that public moneys have been properly spent in the past, they are being properly spent in the present and they will be properly spent in the future.

Sri Lanka’s economic policy governance requires that COPE should be an agency where there is cooperation between the Executive and the Legislature, on one hand, and the MPs belonging to different political parties to work for a common cause without the usual political rivalry they show in other matters in cooperation with each other, on the other.
Executive has no way of checking on officials’ fraudulent activities

From the point of economic policy governance, there is a valid reason for the Executive to treat COPE as one of its extended arms. An economy is huge, complex and consists of diverse institutions. The Executive is at the centre and those who implement the orders of the Executive are dispersed all over the economy and some working even as far away as the periphery.

There is no way for the Executive to know whether those implementing its orders are doing their jobs properly. Given that ‘man is by nature a selfish creature’ it is always likely that public monies maybe misused by public officers for their personal gains. This is not a new problem but an issue faced by all kings from time immemorial.

Kautilya: Don’t place honey at the tip of anyone’s tongue and expect him not to taste it

Thus, Kautilya, the 3rd century BCE Indian statesman and economist, had to give some fine advice to the king in his treatise on economics, The Arthashastra. He said that, just like a person with honey at the tip of his tongue is unable to resist the temptation to taste a little bit, public officers are unable to resist the temptation to misuse the king’s treasures.
However, the king cannot know it because, according to Kautilya, just like one cannot say whether a fish in water is drinking it or not, the king also cannot say whether a public official is misusing his treasures or not. It is therefore the job of the king to set up necessary safeguards to prevent honey being placed at the tip of public officials’ tongues and reveal them when the so-called fish is drinking water unnoticed.

Kautilya: Loss-making public officials are even robbing the labours of the workers

Kautilya also emphasised that king’s officials should not incur losses in his enterprises. He equated the loss-making public officials to those who even rob the labours of the workers who are employed in such enterprises’ That is because, if they make losses, those enterprises cannot even meet the costs incurred in hiring labour in them. Those who cause losses to the king, he recommended, should be severely punished and even whipped in public.

Kautilya recommended that the king should engage spies to learn of the crafty works of public officials and if there are suspected wrong-doers, to set up traps to capture them red handed. Those spies and informants could be regarded as the ‘king’s third and fourth eyes’ to see things that are happening behind his back.

COPE ‘the third and the fourth eyes’ of the President

Thus, in today’s governance structure, COPE is the third and the fourth eyes of the President of the country requiring him to recognise at all times the useful role played by it in the governance system. However, it appears that over the years COPE’s mandate has been diluted and it has lost its due recognition as the most important machinery of safeguarding and promoting the country’s economic policy governance.

On one side, COPE has concentrated on highlighting the past malpractices of public enterprises refraining from examining the current management practices and future plans of those public enterprises. On the other side, even with respect to past malpractices, its reports have not been used by the Executive to correct the lapses in the country’s economic governance.

The cry for implementing COPE’s recommendations

Highlighting the sad state to which the COPE reports have fallen, Senior Minister and COPE Chairman D.E.W. Gunasekera had to admit in a recent press interview that “COPE can observe and recommend but Executive must act” (available here ).

D.E.W. is not alone in making this cry. Once the COPE reports are out, newspaper editors write editorials and civil society organisations make emphatic demands that the recommendations contained in such reports should be implemented forthwith. This cry is nothing but a cry for proper economic policy governance in the country now known as the fiduciary risk management. Senior University Don W.A. Wiswa Warnapala in his ‘Parliament and Public Accountability in Sri Lanka’ has emphasised on the need for regarding COPE and COPA as integral parts of the governance structure in the country.

It is the impact of the public expenditure programmes that matters

This writer in a previous article in this series titled ‘Sri Lanka has to do a lot to improve its fiduciary risk management’ (available here ) drew the attention of both the legislators and the Executive to the drawbacks in the present system of fiduciary risk management – failure to ensure that other people’s monies are properly used by those who have been entrusted with that job.

In assessing public expenditure programs, it was emphasised that mere production of outputs by a public agency is not sufficient but its impact, intended or unintended, should be examined. For instance, a university may produce graduates which are its output. But the ‘value for money in economic terms’ is realised only when their impact on the economy – how much they have contributed to sustainable economic growth – has been evaluated. That was what was expected of COPE to do in its original mandate duly supported by the Public Enterprise Department of the Treasury.

Principal-Agent Problem at the core of the issue 

There are many instances of creating fiduciary risks in managing public expenditure programmes. UK’s aid agency, Department for International Development or DFID, in a report titled ‘Managing Fiduciary Risk When Providing Financial Aid’ (available here ) has attributed them to lack of capacity or knowledge, inefficiency and corrupt practices.

These are important reasons but the main reason for the occurrence of this malady in public finance is the existence of a problem known as “the Principal-Agent Problem” in economics. In this problem when applied to public finances, the Principal – the taxpayers – want the agents – the politicians and the public servants – to produce the best outcome and through it, the greatest impact, out of approved public expenditure programs at the least costs possible. This is known in economics as cost-efficiency. But the agents have other things in mind, namely, how they could maximise costs and make their living better instead of making the lives of the principals better.

This problem was highlighted by the American economist William Niskanen in early 1970s when he came up with an economic theory of bureaucracy in which public servants had been eternally maximising their personal wellbeing and not the welfare of people.

Sri Lanka’s existing mechanisms to tackle fiduciary risks or ensure economic policy governance

Sri Lanka has created a number of mechanisms to overcome these problems. Budgets presented by governments are to be approved by people’s representatives after subjecting them to the most vigorous probing and criticisms. Here, the parliamentarians are expected to go by their ‘conscience-call’ rather than their affiliation to a given political party.

Once a budget is approved, the Ministry of Finance takes responsibility for its implementation. The Secretary to the Ministry of Finance has been designated the Chief Accounting Officer of the Government to ensure the proper accountability of the use of public funds. Once the expenditures are incurred by spending agencies, they are being audited by the Auditor General of the country.

The Auditor-General’s report is being reviewed by the above mentioned two select committees of the Parliament – in the case of central government departments, COPA and in the case of semi-government institutions, COPE. The nation has created a Central Bank to review the Government’s economic policies apolitically and objectively as an ‘impartial spectator’ and autonomy has been given to the Central Bank to do its job properly.

Sri Lanka’s failure in ensuring economic policy governance

However, the past experience has been that these mechanisms have not been effective in exercising an effective control over public finances of the country. Parliamentarians vote by political party lines and not on the basis of the conscience-calls they are having. Hence, the citizens are betrayed at that point. Though the Ministry of Finance and its Secretary are required to ensure proper accountability, they are handicapped by a lack of capacity, knowledge, bureaucratic inefficiency and the undesirable political overriding of the public service that has prevailed in the country since 1970s.

The Auditor-General does only a financial audit and even then as a post-mortem examination. COPA and COPE are outnumbered by Government party parliamentarians who are reported to have taken a defensive line when irregularities in handling public funds have been pointed out as if they are criticisms levelled against them. The Central Bank’s role as an impartial spectator has been diluted over the years with the Bank seeking to take ownership of policies implemented by successive governments.

The sad state of COPE need be improved

Thus, COPE today is only an observer and recommendation-maker but even then, its mandate has been diluted over the years. The worst outcome is not this reduced role of COPE. It is the disregard of its findings and recommendations by the Executive which should treat it as its ‘third and fourth eyes’ to learn of what is happening behind its back. This shows that there is a serious lapse in the country’s economic policy governance, also known as the fiduciary risk management.

*W.A Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com