“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.
Heneral Lunacy 