The bill establishing the Maharlika Wealth Fund (MWF), described as a Sovereign Wealth Fund (SWF), has taken a severe beating. It has been attacked on all fronts.
Representative Joey Salceda laments that critics are “nagpuputak” (cackling). He may have a point if critics had not read the bill. Yet, many of the criticisms, published or broadcast, are based on a thorough reading of the bill. The critics cut across the Philippine social and political spectrum. Ordinary citizens who pay taxes or make contributions to the Social Security System (SSS) and Government Service Insurance System (GSIS). Investors, bankers, economists, and technocrats. Former senior government officials as well as current high-level government officials who understandably cannot express their position loudly. The Governor of the Bangko Sentral ng Pilipinas (BSP). Academics and public intellectuals. Civil society organizations representing different strands of political and economic thinking, from the Left-oriented Ibon Foundation to the economic liberal Foundation for Economic Freedom. The media, as exemplified by the editorial of a pro-establishment The Manila Times. And politicians, even those closely associated with the Marcos administration and family. Senator Imee Marcos’ expression says it all: Diyos ko!
Some criticisms are comprehensive. Other criticisms are pinpoint and highlight a specific matter. Among the issues: the actuarial deficiency of the pension system and adverse effect on members of the SSS and GSIS; financial recklessness, loose risk management, weak prudential standards and lack of oversight and accountability; opacity, moral hazard and conflict of interest, corruption and cronyism, diversion of scarce government resources, erosion of independence of the BSP.
To be sure, some criticisms spring from lack of trust, given the dismal historical record of many government-owned corporations. But precisely because of the MWF’s muddled concept and bad design (which this essay will delve into), getting the trust of stakeholders is next to impossible.
In terms of metaphor, a critic using a shotgun will hit many targets since the MWF bill has so many objects to hit. Those who prefer using a sniper rifle can effortlessly hit the bullseye because it is so glaring as not to miss. More, even a cross-eyed shooter will find his mark.
Given the breadth of issues, which requires a voluminous exposition, I focus on the fundamental reasons why the bill must be scrapped. Yes, discarding the bill is the best option, for even amendments will not solve the problem.
The basic problem is that the very concept of the MWF bill is confused. It has been conceptualized as a SWF. But upon closer scrutiny, the bill is far from being the SWF it purports to be. The MWF is a bastardization of the SWF.
Based on the experience of other countries with SWFs, Norway being the leading example, the SWF works when a sovereign has a huge surplus. This huge surplus is then preserved and enhanced for the inter-generational transfer of wealth, structural transformation, and macroeconomic stabilization. In Norway’s case, the surplus coming from its extractive industries has been accumulated over the long term. Other countries, especially those from East Asia, have created SWFs sourced from their big trade surpluses. These countries, through industrial policy, were able to seize the opportunities from global trade and transformed themselves into export-oriented booming economies.
The Philippines does not have the surplus generated from our extractive industries nor from our (underperforming) exports.
We do have at present a comfortable level of foreign exchange reserves, but they still pale in comparison with the reserves of the economies that have had booming trade surpluses like China, Japan, Hong Kong, Taiwan, Singapore, and South Korea. Further, at this time of extreme volatility, uncertainty, increasing interest rates, and debt defaults all over the world, we must be prudent and conservative in using those reserves. The first version of the MWF intended to use the foreign exchange reserves, but fortunately, this was removed from the bill’s latest version.
So, how can the Philippines have the SWF (or MWF) when it does not even have a sufficient surplus? What the bill intends to do is transfer resources from other public institutions to the MWF. Thus, the SSS, GSIS, LANDBANK, other government financial institutions (GFIs) or corporations, and even the BSP dividends and the general appropriations, including public borrowing, will be used to finance the MWF. This is not wealth creation; this is transferring resources from one pocket to another. This means costly trade-offs, huge opportunity costs, and gross inefficiencies.
Another basic problem is that the proposed MWF strays from the core principles behind the SWF, namely enabling inter-generational transfer of wealth, structural transformation, and macroeconomic stabilization. The bill as worded limits its concern to having “consistent and stable investment returns” and “pooling the investible funds from the GFIs and channeling them to diversified financial assets and development projects.”
But these functions can be done even without creating the MWF. In effect, the bill is not establishing the SWF but a new government corporation, named the Maharlika Wealth Fund Corp. (MWFC). But this government corporation is a redundancy. Worse, the creation of this new government corporation will undermine if not destroy the other GFIs.
Related to this, the MWF, based, too, on the pronouncements of its champions, is going to be used for present projects, particularly infrastructure. It is reported that the President wants to finance dams and the national grid. The policy debate on what is good infrastructure can be set aside. But infrastructure and ordinary development spending can be funded through the National Government budget. Further, present infrastructure spending in itself is not about what SWF stands for: inter-generational wealth transfer, macroeconomic stabilization, or structural transformation.
What makes matters worse is that using the MWF — which involves the funds from the pension system — to finance present development projects is detrimental to the people’s welfare. The funds from the SSS and GSIS are the assets of their members. The SSS and GSIS are fiduciaries and hence must ensure that the resources they manage will be protected and optimized. But using SSS and GSIS resources for investment in public goods will not lead to a higher return for private individuals — the SSS and GSIS members. Sure, infrastructure can lead to high social returns, that is, the benefits are for the whole of society. That is different from the role of SSS and GSIS, which is to protect and boost the benefits of individual members.
The MWF will likewise destroy the credibility and effectiveness of other financial institutions, especially the BSP. Involving the BSP in the MWF will lead to potential conflict of interest, with BSP being part owner of the financial assets and being a regulator. It will likewise weaken the BSP’s independence.
We reiterate some fundamentals discussed above. The creation of a corporation for the MWF, as demonstrated, is redundant. The entity itself is far from being a SWF. The bill’s concept of the SWF is muddled.
And the last fundamental issue: The entity being set up violates the cardinal rules of good governance, risk management, and prudential care. Consider the following (based on the bill’s draft as of Dec. 1, 2022):
Section 4: “The regulatory restrictions on GFIs with respect to the asset class, type, term, and allocation of their investments shall not apply to funds invested in the MWF.”
Section 16: “The President of the Philippines shall sit as the Chairperson.”
Section 28: “MWFC and MWF shall be exempt from local and national taxes, direct and indirect, that may be imposed under the Local Government Code of 1991, and the National Internal Revenue Code of 1997.”
Section 29: “[T]he MWF Investments’ transactions, as well as the necessary connected or related transactions, shall be exempt from the provisions of Republic Act No. 9184, otherwise known as the ‘Government Procurement Reform Act,’ and Republic Act No. 10667, otherwise known as the ‘Philippine Competition Act,’ and their respective IRRs [Implementing Rules and Regulations].
“The MWFC shall be exempt from Republic Act No. 7656, otherwise known as the ‘Dividends Law of 1994.’ The Board shall determine the dividend policy of the MWFC.
“Contracts or agreements to be entered into by the MWFC shall be exempt from the laws, rules, or regulations requiring review by the Office of the Government Corporate Counsel.
“Access to the records shall be upon approval of the Board of Directors or by express provision of the law.”
All these sections make the MWF and MWFC most vulnerable to abetting recklessness, politicization, corruption, rent-seeking, and cronyism. The elimination of basic safeguards will likely lead to a Pharmally redux.
Whatever lofty intention the bill has can be done under existing institutions and mechanisms. What government must do improve is development spending by making the current budget less wasteful and less discretionary and more efficient and productive. Similarly, government can enhance the fiscal space by increasing revenues through a combination of new taxes that are efficient policy and tax administration.
Thus, scrap the bill.
Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.