Management of public funds requires a rethink

The emergence of the chairman and CEO in the IP as well as the presence of other members without proper investment background needs to be reviewed. — Reuters

EVERY year, without fail, the Auditor General’s (AG) report to Parliament will unearth some of the shenanigans out there mismanaging public funds that have been entrusted to them.

This year, the target was a few corporations but the biggest one was on Human Resource Development Corp (HRDC), which is governed under the Human Resource Development Act by the Human Resources Ministry.

Many red flags were raised in the AG’s report, including proceedings with the Public Accounts Committee (PAC). The critical area of concern was those related to the investment activities that were carried out by HRDC in the capital market as well as investment into properties, while governance failures too were evident.

A look at HRDC’s 2023 annual report suggests that the company has been around for the past 30 years and is led by an 18-member board, of which nine were appointed last year and three others took office this year.

Among the board members, eight are employer representatives, two are independent members and one each is from the Finance Ministry (MoF), the Prime Minister’s Department, Higher Education Ministry, Youth and Sports Ministry, and the Human Resources Ministry.

Three other members of the board are the chairman, deputy chairman and the chief executive officer (CEO) of HRDC.

Employer representatives are mainly from chambers of commerce, associations, and private companies.

For the Investment Panel (IP), the chairperson is also the chairman of HRDC while other members include the CEO of HRDC, a representative from the Human Resources Ministry, two are employer representatives, while two others are non-board members.

The governance structure of the IP itself was wrongly structured as both the chairperson and the CEO should not be in the panel while the biodata of the two other non-board members were missing.

One is a representative of the MoF while the other member is a major shareholder of an ACE Market-listed company’s CEO and managing director, involved in information technology services and consulting services.

Interestingly, none of the IP members have excelled in investment-related activities as they are neither licensed by the Securities Commission nor have experience in investing in the capital markets.

Excellent performance

The business of HRDC is collecting funds from key industries and offering training grants to registered employers using its internal mechanism called the Human Resources Development Fund (HRDF).

In 2023, HRDC received some RM2.13bil in levy collection while financial assistance of RM1.76bil was granted. These were significant year-on-year increases of 17.9% and 80.9%, respectively.

Audited by BDO PLT, the 2023 financial accounts showed HRDC generated RM308.4mil in income while its expenses stood at RM210.9mil, giving rise to an operating surplus before tax of RM97.5mil and net operating surplus of RM81.3mil.

Cash and cash equivalents, other than fixed deposits, rose significantly last year to almost RM794mil from just over RM130mil the year before as HRDC generated more than RM600mil from the HRDF.

Active investments

Under the Act, HRDC is allowed to carry out investment activities, and judging by the movement of cashflow from investing activities, the company withdrew RM500.7mil in 2023 for investments as it acquired some RM603mil worth of new investments.

In total, HRDC’s total investment and cash and bank balances stood at RM3.9bil as at the end of 2023 (RM1.45bil in investments and RM2.46bil in cash and cash equivalents and fixed deposits) against RM3.17bil as at the end of 2022.

Based on the company’s investment income of RM186.3mil, the gross investment yield was at 5.2%, which can be said to be rather decent. However, this also includes fair value changes of RM70mil (2022: RM67mil) and are not realised investments.

Excluding the fair value changes, actual realised investment gains for the year were at RM116.3mil, translating to a yield of just 3.3%.

Risky exposures

In terms of exposure, HRDC had some RM135.5mil in the form of unit trust products, RM170.3mil in the form of redeemable cumulative convertible preference shares (RCCPS), RM527.2mil in the form of fixed income products and RM612.8mil in listed equities.

In addition, HRDC also holds a liability position in the form of derivative financial instruments worth some RM34.3mil, of which some RM71.4mil are put options and another RM105.6mil are call options.

These put and call options permit the holder to put or call the shares held by the company back to the original vendor at the HRDC’s original purchase price plus premium ranging between 8% and 8.5% per annum.

The put options shall lapse upon exercise of the call options, and respectively, vice versa.

Fair value changes of this derivative position have been rather significant as HRDC recognised RM53.9mil in non-operating expense in 2022 and this reversed into a non-operating income of RM34.1mil in 2023.

These are seen as rather risky investments as no details were provided as to the nature of the underlying investments in the annual report nor details of HRDC’s equity, fixed income, unit trust, and RCCPS exposure, especially the salient terms of the latter.

There is also no indication of whether the investment book of HRDC complies with its investment policy in terms of exposure or permissible investments.

Governance is key

While HRDC has the authority to manage its business operations as well as carry out investment activities under the law, it must carry out the investment activities responsibly.

The emergence of the chairman and CEO in the IP as well as the presence of other members without proper investment background needs to be reviewed.

In addition, the HRDC annual report does not provide any details of the activities carried out by the IP, especially with respect to its investment guidelines, investment mandate, reporting structure, frequency of meetings as well as risk-mitigating efforts.

For a corporation with more than RM3bil in investible funds, HRDC does not have a board-level risk committee providing a check and balance but perhaps merely relying on its chief risk, integrity and governance officer. HRDC’s board structure also needs to be reviewed as a board with 18 members is rather bloated and at the same time, there is an urgent need to increase the number of independent members, which presently stands at just two members.

In addition, only three members representing 16.7% are women board members, which is a far cry from the 30% board representation required under the Malaysian Code of Corporate Governance.

Clean audit

HRDC was audited by BDO PLT and it gave HRDC a clean bill with health as the financial statements presented were true and fair and there were no clear material matters that were flagged by the external auditors.

The fact that the PAC and the AG have found discrepancies with respect to the financial management of HRDC should not be taken lightly but improved upon to ensure greater governance is in place.

This includes having a Bank Negara representative on its board, a proper reporting structure of the IP, and having independent IPs and more women board members.

Other matters related to investment activities were also of concern, in particular in the manner in which HRDC got involved in purchasing investment properties, without proper authorisation or approval from the board.

Beyond HRDC

When the AG flagged HRDC of its shortcomings, it did not in essence highlight actual losses as even the audited accounts of the company were reported not only to be true and fair representations of the corporation’s financial position but it reported higher net surplus and total assets.

This is in contrast to other government agencies where we have seen actual losses and mismanagement.

This includes not only that of 1Malaysia Development Bhd, or 1MDB, but other agencies as well. In the recent PAC report, agencies like Majlis Amanah Rakyat, or Mara, and the National Professors Council were flagged for losses and misuse of funds or failure to meet targets or delays on projects.

In most of these cases, it is all about proper governance and accountability.

Losses at government agencies are nothing new and will continue if the governance structure is not changed, especially whether the government-linked company (GLC) or government-linked investment company (GLIC) has the necessary skill sets to carry out investment activities.

Having said that, perhaps the government should implement some sort of reforms for these GLCs and GLICs by ensuring that any investments made are done professionally, with proper due diligence and risk management and not at the whims and fancies of the agency’s investment panel or board.

This can be done by either imposing the presence of investment professionals within the investment panel of any agencies or by outsourcing investment activities to licensed asset management companies, which are well-regulated and governed by the SC.

In essence, the management of public funds requires a rethink as Malaysians are tired of reading the AG’s report that flags mismanagement, misuse of funds, losses as well as delays in project implementation and ballooning costs.

In this regard, the Prime Minister’s Office’s statement of a new legislation to be introduced that will govern Federal Statutory Bodies and their subsidiaries is a step in the right direction to improve governance structure.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.