Just less than eight months since it was first proposed in the House of Representatives, the Maharlika Investment Fund bill is now a law.

On July 18, 2023, President Ferdinand Marcos Jr. signed Republic Act 11954 in Malacañang Palace amid smiles and cheers from lawmaker friends as well as his economic team.

The thing is, the entire thing remains problematic to this day, even after its enactment.

First, even the proponents still don’t know what it really is.

In his speech, Marcos referred to Maharlika as the country’s first sovereign wealth fund – when in fact, it isn’t. It’s more properly called a “strategic investment fund” since it can invest not just in financial instruments (stocks, bonds), but also in economic projects. (Interestingly, the President at one point called Maharlika Investment Fund “IMF” rather than “MIF.”)

Second, the fund was signed into law way too fast by international standards. Other countries take years, not months, to carefully craft their own strategic investment funds, especially since public funds are on the line.

As a result of the railroading of this measure, Maharlika was passed without consulting the public whose monies will be put into this fund.

A Social Weather Stations survey showed that as of late March 2023, 47% or almost half of adult respondents, knew “almost nothing or nothing” about the Maharlika bill, and a full third said they had “only a little” knowledge about it. (Do they include some of the lawmakers who unthinkingly voted in favor of the bill?)

In his speech right after signing the law, Marcos said, “Perhaps it’s time that we clarify all the questions and answer all the questions that have been raised about the Maharlika fund. What is its intent? What is it supposed to be? How is it supposed to work?”

Wrong. All these questions should have been answered while the law was being deliberated in Congress. (This calls to mind how Marcos diligently avoided debates and fora during the 2022 campaign trail.)

Third, after both houses of Congress agreed to adopt the bill’s Senate version, some provisions were tweaked and fixed surreptitiously.

For instance, while the Senate bill included two prescriptive periods (10 years for crimes, 20 years for offenses), the final law includes only one (10 years for “crimes/offenses”). Who exactly made these tweaks? Are these secret amendments – made after the bill was approved by the Senate – valid?

Fourth, and most importantly, many of the fundamental defects of the law have not been fixed. As many UP School of Economics faculty members (including myself) wrote in a discussion paper dated June 6, Maharlika “violates fundamental principles of economics and finance and poses serious risks to the economy and the public sector…”

That remains true to this day.

Risks to the public coffers

Marcos said in his July 18 speech, Maharlika will “leverage a small fraction of the considerable but underutilized investible funds of government and stimulate the economy without the disadvantage of adding additional fiscal and debt burden.”

Also, “Instead of taking on additional borrowings and having to work to pay for the interest and roll over the principal every so often, we now have a fund which will itself make money…”

Note, however, that Maharlika can issue debt instruments: Article II, Section 10 provides that “The MIC may issue all kinds of bonds, debentures, and securities…” Although it also says, “In no instance shall the Philippine government guarantee any Bonds issued by the MIC,” the government may still implicitly shoulder losses in the end.

More crucially, as we said in the UPSE discussion paper, “It is quite telling that the MIF bill contains no provisions regarding bankruptcy and resolution. This might mean that, implicitly, the Philippine government will still shoulder in the end any liabilities or losses that may arise from the MIF.”

In other words, public funds put into Maharlika may end up vanishing in thin air in the event of losses.

Rather than “widen the government’s fiscal space and ease pressure in financing public infrastructure projects,” Maharlika may very well add to the country’s already huge debt burden and crowd out funds for key government programs and investments.

Diversion of funds

Marcos also claimed that amid “underutilized” public funds, “The instincts of any financial manager is that money must work for you. It must not sit in the bank and earning…an interest rate that is almost up to the level of the cost of money and that’s why we go in and out of these accounts.” (What?)

This is wrong, too. It’s not as if those scarce public funds – coming from, say, the Land Bank of the Philippines (LBP), the Development Bank of the Philippines (DBP), the Philippine Amusement and Gaming Corporation (Pagcor), and the Bangko Sentral ng Pilipinas (BSP) – are idle.

The state-owned banks, for instance, need that capital to fulfill their mandates to “spur countryside development” and “[provide] banking services for the medium- and long-term needs of small and medium enterprises (SMEs) in the agricultural and industrial sector, particularly those operating in the countryside.”

(The President said that the DBP “will pull together non-debt financial resources as to not crowd out other lending obligations that they need to fulfill under their respective mandates.” But this will eat away at much-needed capital.)

Meanwhile, the BSP needs money to raise its own capital based on its amended charter.

By diverting public funds from these institutions, Maharlika will compromise the ability of these institutions to fulfill their respective mandates.

As we said in the UPSE discussion paper, the proponents of Maharlika failed to explain the opportunity cost of “using the MIF to invest in projects versus direct government spending on public goods today.”

Can government projects really be implemented faster through Maharlika than through the budget process? Will it be able to spur rural development better than what the LBP and DBP are currently doing? Who knows.

Governance risks

Marcos said, “Let us make sure that the fund is well run. Let us make sure that these are professionals. Let us make sure that the decisions that are being made for the fund are not political decisions, that they are financial decisions…”

He even said that they studied the experiences of other countries so past mistakes are not repeated.

But they are precisely going to repeat past mistakes.

For instance, everyone in the board of the Maharlika Investment Corporation will be presidential appointees. Where’s the political independence there?

The President laughed off supposed criticisms that public funds ought to be put in key sectors like agriculture and energy development – instead of a strategic investment fund. He said, “Where do you think we will spend that money? Buying luxury cars, big yachts? It makes me laugh because that is so far from the truth.”

But we just have to look at what happened to Malaysia’s sovereign wealth fund called 1MDB, from which $4.5 billion were “diverted to offshore bank accounts and shell companies” – precisely because of lack of independence from politics.

Marcos claimed that we have the “best economic managers” whom we can count on to run the Maharlika fund properly. Is he talking about the PhD economists who so blatantly disregarded the lessons of economics and provided all-out support for this inherently flawed fund?

Marcos also said, “Inevitably, if you put me or the secretary of finance or in the decision-making loop, those decisions will be colored by political considerations, and that must not be the case [applause].” He added, “We removed the political decisions from the fund…”

Does he even know what he signed? Because Article V, Section 20(a) of the new law provides that “The Secretary of Finance shall sit as the Chairperson [of the Maharlika board] in an ex officio capacity.”

Embarrassingly, the President is contradicting himself. Did he even read the law?

Picking winners

Marcos added, “The fund will fail if we do not make money on the fund. But there are so many that we cannot allow to slip by.” Maharlika will supposedly allow the government “to join in those investments, be part of that, put in the government counterpart for any of these projects…”

This is disturbing since Maharlika may very well be used to finance companies or businesses of politicians; in economics this is called “picking winners.”

For instance, in the three-page (yes, three) business proposal submitted by the Treasury to the Senate, some of those investments will include “stock price of a reputable real estate organization listed in the [Philippine Stock Exchange or PSE]” as well as “companies developing mixed-use and commercial properties.”

Which political families are heavily involved in real estate again? Can you name some?

Lofty claims

Even more basically, Maharlika’s goals and objectives remain confused. What is it for, really?

Marcos said that previous ways of attracting capital, like public-private partnerships (PPPs), joint ventures, government-to-government (G2G) arrangements, all “come under the category of borrowings.”

This is wrong. Many PPPs, for example, involve the private sector setting up infrastructure projects then recouping their investments for certain years – without entailing extra debt on the part of government.

(Marcos then mentioned that, “We are at present, if I’m not mistaken, 63% GDP-to-debt ratio.” He is mistaken: the correct term is “debt-to-GDP ratio,” and the correct number is 61% as of March 2023.)

He added that Maharlika is “designed to drive economic development” and “provide us the seed money for investments and to attract other foreign investments and for us to be able to participate in those operations, in those investments, without additional borrowings.”

Marcos makes it sound like we have great difficulty attracting investments. But government officials themselves have repeatedly claimed that, through the President’s myriad foreign trips in his first year in office, they were able to secure P3.48 trillion in investment pledges. So what is it really? Are investors flocking in droves or not? Their story isn’t consistent.

Moreover, if the Philippines is really such an attractive investment destination now, investors should be entering the country by themselves, even without a new strategic investment fund.

The problem is that Maharlika does nothing to solve barriers to entry of foreign investors, including red tape, high cost of power, and lack of rule of law.

Empty promises

Now that the Maharlika fund is law, certain groups can now contest the constitutionality of the law before the Supreme Court. In matters of policy, however, the Supreme Court tends to give Congress much leeway and discretion. Chances of a successful legal challenge are slim.

So I guess what we can do is to continue to be vigilant as this law is implemented – and try to hold the President accountable.

Marcos gave assurances the fund “will be managed by highly competent personnel with a good track record and outstanding integrity,” in keeping with a commitment to “transparency, accountability, and good governance.” Also, he assured the public that “the resources entrusted to the fund are taken care of with utmost prudence and integrity.”

Given his own track record, though, these will likely be promises as concrete and believable as his campaign vow (which later became an “aspiration”) of reducing rice prices to P20 per kilogram. – Rappler.com

JC Punongbayan, PhD is an assistant professor at the UP School of Economics and the author of False Nostalgia: The Marcos “Golden Age” Myths and How to Debunk Them. JC’s views are independent of his affiliations. Follow him on Twitter (@jcpunongbayan) and Usapang Econ Podcast.