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This statement by Khairy Jamaluddin was first published here.
When I first read about the scheme where Employees Provident Fund (EPF) monies would be used to fund loans for the purchase of public housing by individuals who would otherwise not qualify for loans from commercial banks, I could not but share the concerns of my Parliamentary colleague, YB Tony Pua.
Although I have been a proponent of making it easier for the public to own their homes and advocated for programs like Projek Perumahan Rakyat 1Malaysia (PR1MA) and Skim Rumah Pertamaku, I am also wary of any attempts by the government to dip into EPF monies to bankroll risky investments and ventures. As a Member of Parliament, I defend the basic principle that EPF monies belong to its contributors and that the government and the institution which manages the fund does so in trust from Malaysian employees.
Having read more statements from both government and opposition politicians, I would like to make some comments and raise some questions regarding this scheme.
Although initially I agreed with YB Tony’s response, a closer examination of the facts has led me to believe that some of the comments made by him and others from Pakatan Rakyat on this scheme are misleading. Among the damning charges against this scheme is that it is illegal (against the EPF Act) and exposes EPF to ‘subprime’ borrowers who cannot qualify for loans from commercial banks (due to the absence of steady income and/or personal assets to guarantee such loan) and thus pose a greater risk of not servicing and ultimately defaulting on loans. Let us look at the legal issue first.
YB Tony says that section 26 of the EPF Act does not permit EPF to make loans to individuals. Therefore, this scheme must be illegal since it provides loans to individual home buyers. For this charge to hold, we need to examine the structure of this scheme. Is EPF lending directly to individuals? Or is EPF lending to the government via a government agency? Based on comments from government sources, EPF will lend money to the government via a foundation that is to be set up for this purpose. If this is true the question of legality does not arise.
Moving on to the more contentious issue of ‘subprime’ lending, I would agree with views that this is a reckless and risky investment by EPF if they were lending directly to individuals with poor credit ratings. But if EPF is lending to the government, what is the risk to EPF? I am going to make some assumptions here because the quality of response from our government leaders on this issue has been poor and has given room for YB Tony and others to attack the government based on faulty arguments.
I am assuming that the scheme is financed by EPF as a loan to the government, not to individuals. If this is correct, the loan from EPF is not ‘subprime’ because it is made to the government of Malaysia which has a good credit rating. It is not even the case where the loan is made directly to individual home purchasers and guaranteed by the government. Its a direct loan from EPF to the government. So the credit risk that EPF takes on is that of the Malaysian government, not individual borrowers who cannot secure loans at commercial banks.
The Prime Minister recently commented that EPF contributors’ interests would be protected because “the houses can be sold for a much higher price.” I am assuming the PM is referring to the security cover that EPF gets from giving this loan to the government. To put it simply, if the government is borrowing from EPF, what is the collateral the government is putting up? The PM’s statement is only half useful because it refers to the some houses as security cover for EPF but does not go into details.
My questions to the government and EPF would be: What government assets are being used to secure the loan? What “houses” are the PM referring to? I assume that PM is referring to existing government-owned properties that are being used as collateral for this scheme. The PM also said that the “houses can be sold for a much higher price (than the loan value).” If so, what is the value of the collateral in relation to the loan? Will the government also be required to secure the loan with some cash (it would be prudent for EPF to ask for a part physical asset collateral and a part cash collateral)? Given that this is an EPF loan to the government, I am assuming it will be adequately secured with good collateral. But details would be good for the comfort of EPF contributors.
Answers to the questions that I have posed would also address public concerns much more effectively than a blanket announcement from the relevant minister and a one liner from the PM. At the same time, my assumptions based on the limited information available has debunked opposition claims that this would expose EPF to ‘subprime’ borrowers. The other criticism of this scheme is the opportunity cost to EPF. In other words, if EPF makes this loan to the government for this scheme, would it be able to generate competitive returns compared to other investments EPF makes?
We need to remember that EPF invests in many different areas. EPF invests in companies. It also makes investments in the capital markets — both shares or equities and also debt. On the debt side, it can either buy bonds or lend. That principle applies to the government as well — EPF can either buy Malaysian Government Securities (MGS) or lend directly. So from EPF’s perspective, they are treating this as another loan to the government. But what are the expected returns from this loan? I read somewhere an interest rate of 5.5% for this loan. How does that compare to returns from MGS? Will this loan generate less returns than simply buying Malaysian government bonds? Will EPF contributors lose out on better returns because of a social obligation that the government wants to fulfill funded by an EPF loan?
My view is if EPF can secure good returns from the government for this loan benchmarked against investments in a similar asset class, why shouldn’t it give the loan? If my assumptions hold, then the issues raised by YB Tony and his colleagues are red herrings. It’s not really EPF monies we should worry about because the loan is made to the government and therefore has a government guarantee. That’s the best guarantee you can get in town.
The real issue which the opposition have completely missed is not EPF monies but money from the government — and by extension the rakyat. The risk with this scheme is not borne by EPF but by the government. Even if the home buyer cannot service his loan to the government, the government will still have to pay EPF. So the credit risk is entirely carried by the government. It is the government that is making ‘subprime’ loans, not EPF. It is the government that is exposing itself to unsecured loans, not EPF.
As a Member of Parliament and custodian of my voters’ trust, I want to know what the process for vetting loan applications under this scheme would be? What risk management processes will the government institute before giving out these loans? If borrowers are those that would otherwise be rejected by commercial banks, what criteria will the government use to approve a loan application? These are far more important questions than the irrelevant ones that opposition MPs have come up with because ultimately the exposure will be to the entire rakyat’s money, not EPF.
On a final note, I just wanted to point out the hypocrisy of the opposition on this issue. Their charge is that EPF is being forced to make risky loans to fund a populist government social program. I think that argument has been refuted. But speaking of risky EPF investments, let me remind them of something they promised in their Buku Jingga election manifesto.
One of their promises is if they win, they would take over the entire assets and operations of PLUS highway and abolish tolls. They would do this by instructing government bodies that already own part of PLUS to buy out minority shareholders and then abolish tolls. The government bodies that own PLUS are Khazanah and EPF. EPF invested in PLUS because it gives good returns from income generated by tolls.
If the opposition come into power and make good on their promise to abolish tolls, EPF will lose entirely returns from their investment in PLUS. This is worse than EPF making ‘subprime’ loans (which still have a chance of being paid off) and far worse than EPF making a secured loan to the government.
If the opposition accuse the government of reckless use of EPF monies in this latest housing scheme, it is not as irresponsible as their Buku Jingga promise which would basically leave EPF without any returns from their investment in PLUS! So, its best YB Tony and his colleagues look at their own irresponsible, unrealistic and reckless promises which can wipe out billions of employee contributions in EPF before making half-baked accusations against the government.
I await the government and EPF to answer the questions that I have posed. Apart from the opposition not knowing the right questions to ask and conveniently forgetting their more reckless proposal involving EPF monies, I would also like to point out that the government response to this issue has also been substandard. The government cannot announce a scheme like this without necessary details and timely rebuttals.
The quality of information coming from the government has been poor and response has been slow. If ministers cannot grasp policy details, allow professionals to quickly explain issues to the public. Grand announcements and one-liner responses to the opposition just won’t cut it.
MP for Rembau
Chairman of BN Youth
8 February 2012