MANILA, Philippines – The Maharlika Investment Fund (MIF) still faces “potential risks” that could jeopardize its success depending on how its management body operates the fund, according to a report by the ASEAN+3 Macroeconomic Research Office (AMRO).

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The independent regional think tank noted that the MIF already has a “strong legal framework,” but the government must ensure that the fund is “run by professionals,” with an independent board of directors.

“Drawing on international experiences, the MIF should be run by professionals and the board should comprise independent directors to ensure that the Fund adheres to its investment objectives,” AMRO wrote in its 2023 Annual Consultation Report on the Philippines.

“At the operational level, the authorities should clearly define its role in infrastructure investment with appropriate governance stipulated to avoid misuse of funds,” AMRO added.

Here are four potential risks related to the operations of the fund flagged by AMRO. 

1. Unclear governance, misuse of funds

First, AMRO warned about a “risk in terms of governance” if the MIF’s role in infrastructure investment is not clear, which could lead to the “misuse of funds and lack of accountability.” 

Under the law creating the MIF and its implementing rules and regulations, the company’s board of directors is tasked to formulate investment policies on how the fund will finance infrastructure projects and other investments.

While the board is left on its own to make the specific investment policies, the law does note that they should be “guided by the principle that priority must be given to investing in government infrastructure and other development impact of lower cost of living and lower cost of basic commodities, as well as in those investment that incorporated ESG considerations and sustainable practices.”

The Maharlika Investment Corporation’s (MIC) board of directors will be composed of the secretary of finance as ex-officio chair, MIC’s president and chief executive officer as vice chair, as well as the heads of the Land Bank of the Philippines (Landbank) and the Development Bank of the Philippines (DBP). It also includes two regular directors and three independent directors, which have yet to be appointed.

To mitigate risks, AMRO also recommended having clear guidelines on which types of assets it can invest in, which has been done. The MIF law and implementing rules and regulations include a list of allowable investments. Besides this, AMRO also said there should be a “rigorous due diligence and risk assessment process [to optimize] the risk-return profile of infrastructure investments.”

2. Trade-off between profit and public good

Another risk that the management should consider is balancing profit and public good when deciding which investments to pursue.

“Given the MIF has to ensure long-term value and promote socio-economic development, there could be a risk that the different goals might be at odds with each other in some investments, for instance, there could be a trade-off between the rate of return and the public good nature of certain projects,” AMRO said.  

Because of the nature of Maharlika as an investment company, it is not just funding projects for national development, it is also expected to generate returns for its investors and shareholders. 

In his first press conference, MIC president and CEO Rafael Consing Jr. called the MIF a “sovereign national development fund” that invests in the needs of the country. Consing further alluded to creating “subfunds” that could focus on, for instance, energy projects.

“Everything that I’ve talked about earlier [is] meant to be generating enough returns in order for us to pay out dividends to our shareholders,” Consing said. (READ: [In This Economy] Unpacking the first press conference of Maharlika’s president-CEO)

The potential trade-offs that AMRO warned about may come when deciding on investing in development projects that don’t bring immediate returns, like roads. According to a paper by the Asian Development Bank, roads may have a low rate of return, such as from limited usage fees and toll, but a high spill-over effect, such as by prompting new business developments around the road.

3. ‘Crowding out’ other expenses 

AMRO also noted that because Maharlika’s seed money comes from contributions by government agencies, there’s a danger it might “crowd out planned expenditure in other areas.”

Under the law, Landbank and DBP will contribute P50 billion and P25 billion, respectively, in starting capital to the fund. Other sources include dividends from the Bangko Sentral ng Pilipinas (BSP), revenues from government-owned gaming operators, and the privatization of government assets.

Because the MIF isn’t using “excess” money but instead pulling money from these sources, that also means diverting these funds from their original purpose. That could mean decreasing Landbank’s and DBP’s loans to farmers and small businesses, and cutting BSP’s dividend contributions to the national budget. 

4. Hurting GFIs in the event of losses

Finally, AMRO pointed out that government financial institutions (GFI) that funded the MIF may be affected if things go sour with Maharlika.

“Although the contributions to the MIF ’s capital from GFIs are relatively small compared with the size of their investible funds, there could be some impact on the institutions’ financial position in the event of losses,” AMRO said.

Landbank’s investment in the MIF represents about 3.7% of its investible funds, while DBP’s investment is about 3% of its investible funds. AMRO noted that these were “reasonable” and would likely not hamper the state banks from meeting their other mandates, but nevertheless advised them to “duly assess the potential impact of their contributions on the financial health of these agencies.”

The GFIs are already starting to feel the effect of their contributions to Maharlika, as both Landbank and DBP have sought for regulatory relief from the BSP’s capital requirements. (READ: Behind ‘regulatory relief’: Landbank, DBP’s challenge after funding Maharlika)

State banks are now expected to keep their earnings rather than remit it to the national government as they strengthen their capital position. Already, President Ferdinand Marcos Jr. exempted Landbank – the country’s second largest bank – from giving any portion of its earnings for calendar year 2022 to the national government in a bid to help it build up its capital again. – Rappler.com