Philippine economy

[OPINION] Magic in the air

Edilberto De Jesus
[OPINION] Magic in the air

Guia Abogado/Rappler

'We have watched this movie before. The public has witnessed enough high-profile investigations magically vanishing.'

The sovereign wealth fund (SWF) concept emerged, surprisingly, as the magic, silver bullet to slay the forces impeding Philippine development. Congressional allies hurriedly packaged and passed the Maharlika Investment Fund Act (MIFA) as President Marcos Jr.’s pabaon to share with potential investors at the Davos World Economic Forum. MIFA enumerates many laudable objectives: create jobs; foster technological transformation; achieve energy and food security; preserve and optimize the use of government financial assets; promote intergenerational management. When a proposal sounds too good to be true, it probably is. One might indeed suspect some carnival magic.

Post-Davos pronouncements have since reinterpreted the SWF, illustrating another magical element; the plan appears to shift shape, depending on the audience. Marcos Jr. noted that the SWF implementation must vary according to country-specific conditions and the need to “customize” the concept. Fair enough. But critics point out that the Philippine version lacks the core element of the SWF strategy: a stable source of substantial, uncommitted long-term funds, such as derived, for instance, from developed oil and mineral deposits. Generating great wealth while they last, these assets constitute finite, non-renewable resources. Hoping to bequeath to succeeding generations a share the nation’s God-given patrimony, even less developed countries, like Timor Leste, moved to establish an SWF.

The country’s leading business groups and policy think tanks quickly issued a joint statement manifesting their opposition to MIFA. The battle has basically deployed government against private sector experts, some of whom are now reconsidering their earlier generous praise for the Marcos Jr. economic team. The private sector professionals have the credentials and the credibility, as well as the business experience and the independence that few bureaucrats and politicians can match. But they don’t make laws. Those beholden to the government can count both the likely votes on the legislative floor, as well as the costs and benefits for losers and winners. But they have recently shown signs that they can also read and sense public response to current issues. The private sector experts thus need the attention and support of the electorate, who must depend on them to explain highly technical and complex cases in terms comprehensible to us lay readers.

The MFI is reportedly evolving from an SWF to an investment fund, which raises another set of issues. In this case, the government will divert from its own government financial institutions (GFI) and government-owned and controlled corporations (GOCC) funds that it is already using to cover national needs. What are the implications for the budget items these funds are supporting and the sources to replace them?  

To give it a running start, MIFA will allow the transfer or secondment of qualified government personnel to MIC in its first five years. What reason might we have to think that they will perform better in MIC than in their current assignments? Hopefully, better performance will result from better compensation, a possibility permitted by MIFA. MIC executives and employees will enjoy exemption from the Salary Standardization Act and any subsequent modifications. The board will decide on compensation and bonus levels, benchmarked against international standards, subject only to the approval of the President. But we are assured that the 15-member board, chaired by the DOF Secretary, will not get more than the maximum annual amounts received by the members of the Monetary Board. So, how much will operating the new agency cost?  

For the initial operations, the board can disburse as much as 2% of the capitalization, initially set at P75 billion, but subject to possible increases. The government also expects the MIC to attract foreign investors, the objective of the soft launch of the plan in Davos. Investors will part with their funds if they believe they will reap a profit. MIFA explicitly instructs the board to give priority to projects that “yield the highest return on investments.” The promise of higher yields implies acceptance of higher risks.

Instead of paying taxes or remitting dividends, MIC will remit all of its net profits to the government, 25% for distribution to families falling below the poverty line and the rest for social welfare and infrastructure projects. MIC can invest in a wide range of ventures, some indeed promising handsome returns, including foreign exchange, metals, listed and unlisted equities, real estate. But these are also subject to external forces that magnify the risks. This directive clashes with the core rationale of the SWF —ensuring intergenerational equity. Investors primed to expect high returns on their funds are unlikely to promote the welfare of unborn generations before their own immediate interests.

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What if the investments lead to losses rather than profits? Acknowledging this possibility, MIFA states that “the recognition of profits and losses of the MIC shall be attributable to the GFIs and investors.” MIFA provides a government guarantee for the security or debt instruments issued by the MIC to GFI and GOCC. These guarantees will ultimately be extracted from taxpayers.

Tapping fresh sources of funds is a legitimate objective. “Customizing” the MFW concept will likely include measures to increase its market appeal. The MFIA already provides relief from direct and indirect local and national taxes imposed by the Local Government Code of 1991 and the National Internal Revenue Code of 1997. It will enjoy duty-free importation of supplies and equipment, exemption from provisions of the Government Procurement Reform Act and the GOCC Governance Act of 2011 and the laws on the disposal of government assets.

Business needs protection against burdensome red-tape and excessive regulatory costs. But the chronic problem of corruption, recently manifested again in the government’s pandemic response, must prompt questions about potential risks posed by MIC privileges. We have watched this movie before. The public has witnessed enough high-profile investigations magically vanishing.

Marcos Jr. has admitted the need for further consultations and “customizing” of the MIF, which justifies the reconsideration of the Act brought to Davos. Perhaps, the congressmen and senators can craft a more responsive and responsible MIFA. That would be magical. –

Edilberto de Jesus is a senior research fellow at the Ateneo School of Government.

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