Investment antics: In boom market, CDA shows how not to invest

Agency invested over Rs1.5 billion in 2007, has seen returns go from bad to worse every year.

ISLAMABAD:

The cash-strapped Capital Development Authority (CDA) has incurred heavy loss on investments made in high risk companies. The civic agency invested over Rs1 billion in the stock market, on which it has gotten a paltry return of 0.5% this year.

The relative loss incurred due to these high risk, low return investments can be judged by the fact that some private banks — including those the civic agency bought shares from — are offering returns of over 10 per cent on term deposit accounts.

The civic agency’s first dive into the stock market came with a Rs1.51 billion investment in 2007. The investment was made in the light of an order issued by then-finance minister Shaukat Aziz in July 2003 allowing public sector organisations to invest surplus funds in non-government securities; term finance certificates and shares up to a ceiling of 20 per cent of the total funds under management.

The investment was aimed at investing an unspent surplus funds through short and long-term investment strategies.

However, the policy has been an abject failure vis-a-vis the CDA. Although the first year — during which the stock was doing well — saw a 9.99 per cent, or Rs150.8 million, return on investment (RoI), things have gone downhill since.

The companies and organisations, the civic agency invested in included leading banks and financial service providers, oil, chemical, cement, telecom and insurance companies.

Document submitted by the CDA before the Senate in response to a question from a senator showed that in the years since 2007, RoI has fallen every year. In 2008, the return was barely half of the previous year’s figure, at 5.34 per cent, while the next two years the RoI dropped to 2.61 per cent and 2.34 per cent respectively.

In 2011, the CDA withdrew Rs402 million from its total investment in the market. The RoI improved marginally at 2.45 per cent. This year, although the stock market scaled new heights and crossed 16,000 points, the The civic managers did not share the success of many investors, presenting a minuscule return of 0.48 per cent.

An official in the CDA finance wing who requested not to be named, said that main reason for the loss was the reduction in their investment. “At that time, we had a healthy surplus, so a decision was taken to invest, but since the civic agency is facing financial crunch now, it should review its decision and withdraw the whole investment”.

Another CDA official told The Express Tribune that “the idea was a futile exercise. At the time, the CDA board took advantage of the notification and invested its surplus amount of Rs1.51 billion, but only managed to earn good returns in the first year. Since then, there has only been disappointment.”

Meanwhile, a retired taxation official told The Express Tribune that the aim behind the 2003 change in regulations during the finance minister Shaukat Aziz was to increase investment in the stock market and create the illusion of economic growth.

The former bureaucrat opined that the government should never have allowed public money to be invested in high risk investments such as the stock market. He quoted rules and said “investment could only be made in a government-owned bank but this rule was also changed to help increase growth in the banking sector”.

He also recalled that the issue, and some of the bureaucrats involved, are near identical to a recent financial scam relating to a logistics company.

Published in The Express Tribune, December 20^th, 2012.