The MIF 2.0: An Economic and Political Behemoth In The Making

“If it walks like a duck and talks like a duck it must be a duck.”

In record time the House is passing HB6608. The bill will create the Maharlika Investment Fund (MIF) and Maharlika Investment Company (MIC). The former will house the money, the latter will manage it. The management fee is 2% of the Fund plus possible performance bonuses. The President certified the bill as urgent so he may showcase this brainchild on his upcoming foreign trips notably to the World Economic Forum in Davaos early next year.

The first version of the bill was met with suspicion from business, the public, academe, workers and farmer groups. Even some of our economic managers expressed reservations but have since recanted in the face of pressure from their colleagues and presumably the Palace. HB6608 represents the revised version which has then to go to the Senate for approval.

The MIF proponents liken the Fund to the Sovereign Wealth Funds of Norway, Singapore, China, and Middle East oil producers; even if is not. The essence of a SWF is the seed money is derived from organic surpluses like commodities or trade. Looking at the money trail our MIF is funded ultimately from borrowings making it more like a Sovereign Poverty Fund.

The MIF per se does not add to economic development. It simply replaces roles already performed by the GFIs without the hefty management fees to an outside Fund manager and without the dangers of fund concentration. Once fully formed the MIF could represent an institution “too big to fail”, a systemic risk to our financial (and our political) foundation but more on these later.

The MIF brings to mind failed financial adventures of the last 40 years – the Coconut Levy Fund, the Oil Stabilization Fund, the National Development Co., the Road Tax, Philhealth – confirming what happens when a Government agency is gifted with a concentration of financial resources that bypass established rules of governance and risk.

The purposes of the MIF are the usual odes “to promote growth and social development, to make profitable investments, to obtain the optimal absolute return and satisfy the requirements of safety and yield” i.e. everything one looks for in an investment but rarely finds.

The MIF will “establish a diversified portfolio of investments in the local and global markets. It will prioritize PH infra projects to promote economic development”. These two investment goals could not be further apart. The former are risky opportunistic plays; the latter 7-10 year project finance exercises with no liquidity. The better model would be to divide the MIF into dedicated platforms with their own sub-specialties e.g. a MIF Infra Fund and say a MIF Absolute Return Fund; just like mutual funds offer Tech funds, Commodity Funds, Consumer funds.

The MIF was to be initially capitalized at P250 billion but was subsequently reduced to P75 billion when the public’s jaw dropped: P50 billion from the LBP (equivalent to 25% of its capital) and P25 billion from the DBP (equivalent to 36% of its capital). As a context the Aquino Administration injected P53 billion into these two GFIs a few years back to shore up their finances. The MIF bill will now carve out 1 1/2 times that sum intended for farmers and SMEs; and reallocate the money to a Fund with no track record, no disclosed management and an unconstrained playing field. Is this our new way of helping agriculture and manufacturing?

The DBP and the LBP are BSP regulated bank charters with their own boards and developmental missions. What added value is there in obliging these two banks to contribute 28% of their combined capital to a Fund which will simply replicate their duties and so many unknowns? Are there constitutional impediments to the funding mechanisms of the MIF? Does the BSP agree to this use of GFI money? To overcome  possible BSP objections the MIF bill states that the National Government will guarantee the GFIs’ exposures. Should these claims be called upon the Filipino taxpayer will once again be stuck with the bill. Will the National Budget provide for such contingencies?

Once the Fund is established every year the BSP is mandated to allocate 50-100% of its dividends (my estimate: P30-75 billion) to the MIF for at least its first 5 years and possibly in perpetuity thereafter. PAGCOR will chip in annually at least 10% of its Gross Gaming Revenues: The latter was P76 billion in 2019 prior to the pandemic so the MIF gets P7.6 billion. The MIF is still looking for other funding sources like privatization proceeds.

When in full flight the MIF can expect to receive close to P100 billion a year in mandated contributions. In this structure the DBP and the Landbank will in due course be diluted to minority investors with only a 2/15 representation on the MIF Board and no effective say on where and how their contributions will be deployed. Worse, since under the proposed law the MIF cannot take majority positions in any investment, these GFIs will now have an even less input in the final decision making; leaving them with not one but two degrees of separation from their money. There is a 5 year lock up on MIF contributions so the next time the GFIs will see their money is by the end of this administration.

This dilution will similarly impact any third party investors in the Fund who will see their percentage ownership eroded unless they are prepared to match the Government’s yearly capital raising, an unlikely proposition. If only for this institutionals in my opinion may co-invest “with” but not “in” the Fund.

As we are reminded by Malaysia’s 1MDB fiasco, there are also the governance issues.The MIF bill provides for a Board of Directors with one third independent, an Advisory Council, internal and external auditors and COA, and legislative oversight. Nearly all our failed enterprises had similar controls to no avail. Historically our economic managers have either been too busy or too obedient to oversee corporate governance. Technocrats provide the optics but rarely the safeguards.

The outside Advisory Board is powerless. When the President recently solicited comments on the MIF I am told no Private Sector Advisory member raised their hand. As for legislative oversight I would not hold my breath. It is interesting that withstanding all the protection clauses in the bill, the MIF was not considered a safe enough investment outlet for the GSIS and the SSS but are safe enough for the GFIs.

The truth is the MIF will operate at the will of the President whether this one or the next.

 To conclude the MIF does not add economic value to the country. On the contrary if it follows the way of all our prior failed experiments the MIF could be a systemic risk to the country by its sheer size and its undefined and unconstrained investment mandate. Through its obligatory Government contributions MIF’s capital could in the next 5 years exceed the combined net worth of the GFIs and the BSP, more so if the Fund decides to leverage itself. The Senate version should prohibit the MIF from any form of borrowings that will dangerously make it bigger than it already will be.

The MIF bill calls for an immidiate capital raise (and a P1 billion check for start up expenses!) even if we do not have the absorptive capacity. There are reported billions of stranded infra projects. The flood of MIF money could in the meantime be better used for education and healthcare rather than burn a hole in the MIF pocket and tempt politicians with dangerous uses for the money.

HB 6680 has a political dimension. The Maharlika Investment Company will be exempted from income taxes but must instead allocate the equivalent for social amelioration (read vote gathering and pork barrel) projects. It is not small money. On a P250 billion fund the management fee is P5 billion.

The MIF will be the Mother of All Funds. It will be an economic state within a state, a disguised political action committee and an unconstrained investment pool rolled into one. It will be the personal sandbox of whoever sits in the Palace much as 1MDB became the ATM for the Malaysian PM and family. Once the genie is out of the bottle there is no putting it back in.

The business sector should beware. The Coconut Levy Fund started as a means to help the coconut farmers. It ultimately became a Trojan horse for the largest corporate takeover in the country. The MIF will have the country’s largest war chest in history to do as it pleases including hostile take overs with favored partners or driving political business groups out of existence. If the MIF had been in existence then it might have anchored a buy out of ABS-CBN or Manila Water on the cheap. The combination of regulatory powers, a willing Congress, judicial complacency, 31 million in political capital, an unsuspecting public, willing cronies and a financial behemoth growing in perpetuity with allegiance principally to political sponsors; is a scary thought.

In the MIF the House has presented PBBM and all incoming Presidents with the best Christmas gift they could wish for. If only the House could, in equally immediate form, now do the same for the Filipino people.

The MIF: What If Everybody Else Is Right?

The reaction of the public, business, labor, farmer groups, civil society and the academe was not only universal, it was, shall we say, glacial.

I am referring to House Bill 6839 creating the Maharlika Investment Fund, a wanna-be P250 billion sovereign wealth fund (SWF) that would among other superlatives “reinvigorate the economy and create jobs”. The MIF would be funded by the GFIs – GSIS, SSS, Landbank, DBP; annual allocations from the National  Budget and BSP dividends. This drop dead idea was apparently so hot every political animal in our economic team, the House Speaker, the economic whiz kids in Congress, and the son of the President sought to claim credit for what is, if one is to believe the press releases, the silver bullet we need.

The proponents were therefore surprised at the blowback to what they assumed was a slam dunk.

There are many deficiencies in the bill the main one being its claims are often contradictory or cannot be supported.

We are told what the MIF will supposedly do for the country but we are not told how and at what cost. 

We are not told that the MIF fails in its basic premise. The MIF is supposed to be a “rainy day” fund which we can access in an emergency. Its funding must therefore come from natural savings and organic surpluses from either trade, services or commodities. Of the top 11 SWFs in the world 6 are from oil producing nations (Norway and 5 Middle East countries) and 4 from China with its trade surpluses. The Philippines does not have such surpluses. We are not a trust fund baby who can live off God-given oil reserves and make mistakes. We are a deficit, import dependent nation with P13.5 trillion in debt and over 20 million Filipinos in poverty; whose scarce resources must be spent carefully because they are all borrowed. To ask our country to put away money for a rainy day is like asking an indigent family in Tondo to establish a college fund for its children even if it means dispensing with three meals a day to do so. 

We are not told every P250 billion that goes to the MIF is P250 billion less for education and social amelioration.

We are not told how the dots are connected, how a law that would authorize the MIF to buy TESLA shares in Wall Street benefits a Filipino farmer. 

We are not told what is the MIF’s added value. We are not told, for example, why the Landbank and the DBP cannot directly invest in the TESLA shares.

We are not told of the MIF’s investment program. Even a P20 million IPO is required by the SEC and the PSE to produce a multi-page prospectus disclosing its governance, how and where funds will be invested, the expected returns and the risks. Yet here we are legislating a P250 billion fund with no such material information. The only thing we are assured of is the MIF will produce extraordinary returns with minimal risk. That, as every money manager will tell you, does not work that way. Extraordinary returns require extraordinary risks. I have seen better presentations from multi-level marketers.

We are not told that the MIF can lose money and if it does the Filipino taxpayer will have to shoulder the bill.  Norway’s SWF, the largest in the world, lost $40 billion in the quarter just ended.

In the latest development the GSIS and SSS will no longer invest in the MIF because it may be too risky for their pensioners. We are not told why something that is too risky for our pensioners is not too risky for the DBP, the Landbank and their depositors.

We are not told that the DBP and Landbank’s combined contribution to the MIF of P150 billion is more than their combined paid-up capital and possibly the single borrowers’ limit of these two institutions.

The MIF proponents say the investments are riskless because the National Government will guaranty all contributions from the GFIs. We are not told the money for this will eventually come from the taxpayer.

We are not told why the MIF funds are being invested abroad when we are begging foreigners to invest in the Philippines.

We are not told the MIF needs to consistently earn over 6% p.a. in risk free investments to cover the Government’s marginal cost of borrowings. We are not told such an investment does not exist and if it does why not let us all in on it?

We are not told that the P200 billion contribution from the GFIs and the BSP to the MIF is P200 billion that will not be available for agriculture, commerce and industry, healthcare and better classrooms.

We are not told that investing the BSP dividends in MIF is according to ex-CJ Tony Carpio constitutionally doubtful. We are not told the BSP will henceforth be pressured to declare big dividends thereby jeopardizing its independence and the credit rating of the Philippines.

Notwithstanding the universal opposition our economic managers are digging in. We are not told what our economic managers will do if they are wrong and everybody else is right.

The widespread and unprecedented opposition to the MIF bill prompted the authors of the MIF bill to finger point: A Congresswoman co-author blamed our economic managers for not consulting with the stakeholders on a half-cooked proposal (Lady, you signed off on it.) The heads of the SSS and GSIS said they are out. Even BSP Gov. Medalla expressed his reservations but subsequently recanted after being allegedly accused by some of his colleagues of not being a team player. What happened to the oath to the Constitution and not to your buddies? Even their UP economist colleagues were aghast.

The MIF bill is so full of holes it is scary. If our “best and brightest” can produce a legislation so flawed in concept, in design and in motive and believe they can pull the wool over our eyes; should we be concerned? One wonders what is next?

The MIF proponents are now suggesting ways to defang the monster they created: One, the GSIS and the SSS will no longer fund the proposal. Two, the MIF Board will be populated by independent directors. Three, the annual budgetary allocations will not be automatic. Four, the BSP will take the proposal under advisement. The fund has been downsized to P125 billion or half the original size. Unfortunately making the MIF only half pregnant does not help. A bad proposal however big or small is still a bad proposal.

Political skeptics wonder how much of the proposed legislation came from the President. PBBM was reportedly impressed with the Singapore and Indonesian experience when he was last there. The fact that his son, Sandro, is a co-author of the bill suggests the matter must have been discussed at the family dinner. Sen. Imee apparently did not receive the memo since she has reportedly voiced her opposition to the idea. The Senator, I always thought, has the best political instincts in the family.

Imee must have figured the timing, if nothing else, was awful. Our economy is still not out of the woods. The MIF brings to mind all the terrible things that have been said of the family not least of which is the controversial Coconut Levy Fund to which the MIF has several parallels. The MIF is now being hoisted by the Marcos critics as evidence the family is already on to its evil ways less than 6 months in office.

The MIF is politically toxic. The economic managers are doubling down on their sentiment but it is not they who will suffer the political fall-out, it is the President who will. No, fighting the public, business and everybody else on something as fundamentally flawed as the MIF is, in my opinion, not a good use of the President’s political capital.

The Maharlika Fund: A Pricey Stud Or A Milking Cow?

Congress and the Executive branch are excited over their latest brainchild: The House is about to approve in record time the creation of the Maharlika Investment Fund, a Government vehicle that will invest in local and foreign private and public enterprises. The MF will be chaired by the President or his designate, with the head of the GSIS as Vice-Chair and other Government officials as Directors.

The stated mission of the MIF is “to reinvigorate job creation and reduce poverty”. The Maharlika Fund (MIF) is said to parallel sovereign wealth funds in among others Saudi Arabia, Norway, China and Singapore. The MIF will start with a P250 billion kitty to which the Budget will contribute P25 billion annually, GSIS P100 billion, SSS P50 billion, DBP P50 billion; with PAGCOR (10% of its gross gaming revenues) and BSP (50% of its dividends) to follow. The investments by the GFIs in the MIF shall be guaranteed by the National Government.

The Maharlika Fund is, with all due respects, a really bad idea. Here is why:

1.The MIF will not help the economy; in fact it will do the opposite – The MIF will be allowed to invest in foreign entities as part of its mandate. In effect the MIF will divert scarce Philippines savings to buy foreign stocks and bonds. To tell you how crazy that is President Marcos is flying around the world courting foreign investors to invest in our country yet here we are mandating our Treasury and GFIs to invest offshore.

2. The MIF has no added value – The MIF will be duplicating functions already being done by our GFIs without any assurance it will do a better job. The MIF is a cross between what Wall Street calls a Special Purpose Acquisition Company (SPAC), a publicly listed vehicle with no plans and no purpose other than a promise of riches; and a hedge fund with an unconstrained mandate. Most of the SPACS have collapsed including one involving Donald Trump. Over 80% of hedge funds under perform the market. Why will the MIF do better?

3. The Philippines has no savings to reinvest – Countries with sovereign wealth funds like Saudi Arabia, Qatar, Kuwait and Norway have petro-dollars that need to be re-cycled. The Philippines has no such surpluses. In fact we will be borrowing to finance the Government’s contribution to the MIF at a time of limited fiscal space. The annual contribution of the Treasury of P25 billion could be better spent on education and social amelioration.

4. Our Government has a dismal record in managing money – Our economic landscape is littered with the carcasses of Government funds that promised everything and delivered nothing. In 1971 Ferdinand Marcos legislated the infamous Coconut Investment Fund by imposing a P0.55 levy for every 100 kg of copra. The money was to support coconut farmers but ended up allegedly financing the take over of San Miguel Corp. by one of the cronies. The ownership of the Cocofund is today still being disputed in court.

The Coconut Fund also financed the United Coconut Planters Bank. UCPB got into trouble and had to be rescued by a merger with LandBank.

The National Development Co. (NDC) was another funding vehicle established by the first Marcos Government to support investments. The NDC is now a skeleton of itself with a sprinkling of real estate holdings. The NDC is so moribund its website does not even list a General Manager.

Then there was the Government managed Road Fund, a levy on private motor vehicles to support our infrastructure. This tax is the third largest source of Government revenue after the BIR and Customs. In 2009 Sen. Miriam Santiago exposed P61 billion in anomalies in the Road Fund. God only knows what has become of that disaster since.

Philhealth was established to finance universal care in the Philippines. In 2020 Philhealth was discovered to be some P200 billion in the hole from massive corruption. None of its officials were jailed.

The Maharlika Fund will I believe suffer the same fate as the others. Only this time the victims will be the SSS and GSIS pensioners, the Landbank, the DBP and the Filipino taxpayer. The authors of the proposed MIF bill claim there will layers upon layers of Government oversight but the same was said of the other funds that collapsed. With the President as its Chair who will dare challenge the governance of the MF? There will be independent directors in the MIF and an external auditor to protect the public interest but we all know how that works.

5. The MIF is fraught with risks – Congressional authors of the MIF bill claim the GFIs will have “zero risk” because their investment will be guaranteed by the National Government. What they do not tell us is any claim on the Government guarantee will ultimately have to be paid by taxpayers.

6. The Landbank, the DBP and the BSP have no business investing in the MIF – The Land Bank is supposed to support the agricultural sector, the DBP the commercial and industrial sector. How does their investment in the MIF help further their mission?

The BSP is an independent body established to protect our financial system. Why should 50% of their dividends be plowed into a fund over which they have no say? When asked if the BSP would contribute to the MIF, Gov. Felipe Medalla said he will do so only under duress or words to that effect. He was concerned about possible anomalies in the Fund: “The experience of 1MDB in Malaysia is the biggest risk”. Finally, a man who speaks to the truth .

7. The MIF will not attract foreign money managers as its sponsors claim – Foreign managers will not invest in a vehicle that simply replicates what they do especially given our country’s record in that space.

The truth is the Maharlika Fund is likely to be yet another political slush fund to support the new cronies just like the Coconut Fund was used to support the old cronies. But this time it is the pensioners and the ordinary taxpayer who will take the hit. The MIF will fly under the scrutiny of regulators, the media and the public. Under the proposed draft bill that I saw the control mechanisms on GFIs and GOCCs will not apply to the MIF. Employees of the Fund will not be subject to Government Salary Standardization limits so its officers and directors can be paid enormous benefits. The MIF will be excluded from Government Procurement protocols.

Filipino taxpayers and pensioners will end up footing the bill, writing a P250 billion check to an entity with no investment program, no track record and no mission other than motherhood statements like “to reinvigorate job creation and reduce poverty”. No one has explained how making investments abroad through the MIF will do that.

The MIF looks to me like a fattened cow waiting to be milked. We have seen it elsewhere: 1MDB, the Malaysian Sovereign Wealth Fund, was scammed of four billion dollars by the then Prime Minister and his wife aided by a prominent U.S. investment bank.

If the bill becomes law the Maharlika Fund could well become the mother of all heists.