“A camel, it has been said, is a horse designed by a committee.”
— Amartya Sen,“The Possibility of Social Choice,” Nobel Lecture, December 1998.
The International Forum of Sovereign Wealth Funds (IFSWF) lists 120 funds as of 2022, of which 48 are members of the IFSWF which committed to adhere to the Santiago Principles (24 generally accepted principles and practices adopted in October 2008 in Santiago, Chile).
Of these 48 members, about half are not funded by commodity revenues, contrary to the common impression that a sovereign fund requires a surplus to begin with.
There are two types of sovereign funds: A sovereign wealth fund (SWF) is borne out of Surplus. A strategic investment fund (SIF) is borne out of Scarcity. (Shanti Divakaran, Havard Halland, Gianni Lorenzato, Paul Rose and Sebastian Sarmiento-Saher, Strategic Investment Funds: Establishment and Procedures, World Bank 2022, page 1)
SWFs from Surplus. The key goals of these SWFs are: to serve as a Stabilization fund in support of government surplus/deficit, as a Savings funds for future liabilities such as pensions, and as a Reserve investment to meet adequate reserve levels. To achieve these, SWFs are tasked to generate optimal returns within reasonable or prudent risk limits. Examples are the Middle East oil exporters (Kuwait 1953, Saudi Arabia, UAE, Qatar, Iran), Norway (oil), Botswana (diamonds) and Chile (copper).
SIFs from Scarcity. The World Bank reported that in the last 20 years, about 40 countries facing fiscal constraints have established strategic investment funds, 20 of them since 2020 to address COVID-19 related constraints (Divakaran, et. al. page 2).
These SIFs are focused on Domestic investments, mainly on infrastructure. These SIFs have the Double Bottom Line goals of achieving optimum financial returns on their liquid assets or investments AND pursuing projects that deliver economic and social returns, (the Ireland Strategic Investment Fund, India’s National Investment and Infrastructure Fund (NIIF), the Nigerian Sovereign Investment Authority). Certain SIFs have a triple bottom line, with the added goal of mobilizing of private capital (Senegal’s FONSIS).
The IMF clearly considers the Maharlika Fund a strategic investment fund. At the conclusion of its 2023 Article IV Mission, its Oct. 2, 2023 statement to the media said that “the Maharlika Investment Corporation (MIC) could contribute to the push for closing infrastructure gaps and green investments by following best practices in strategic investment and accountability frameworks.”
A key principle in strategic planning practice is Form Follows Function (organize to achieve clearly defined objectives).
This article compares the provisions of RA 11954 and the implementing rules and regulations (IRR) with what is considered best practice in governance and accountability, identify what may be missing, and what may need to be corrected by way of amendments to the IRR or by simply invoking the inherent powers of the MIC board.
There are critical committees and line functions important to the effective functioning of a strategic investment fund that were not expressly provided for in RA 11954 or in the IRR. However, the MIC board would have the inherent powers to create or establish them. These are:
1. An Investment Committee. Aside from evaluating financial investments on the fund management side, the SIF model calls for a strong functional expertise in credit evaluation, project evaluation, project finance focused on the commercial viability of the projects long-gestation projects such as infrastructure, beyond the National Economic and Development Authority (NEDA) baseline evaluation of economic and social returns (Section 14, item h and item k, Section 17, item k).
This investment screening capability is important for the MIF to establish credibility with the prospective partners (fellow SIFs, ADB, WB, IFC) and private investors. The Indian NIIF considers the Investment Committee such a crucial function that it was given the “sole power over investment decisions … without government participation in line with global best practices” (World Bank 2022, page 241) for each of its three funds — Master fund, Fund of funds, and Strategic Opportunities fund.
2. A Chief Financial Officer. To oversee the overall financial results of the company, including the separate sub-funds, and ensure that they contribute to the desired overall results. The Indonesian INA has a CFO at the same level as the Chief Risk Officer (CRO) and the Chief Investment Officer (CIO).
3. A Compliance Committee (board level). In the case of Norway, the Compliance and Governance oversight is combined in one committee (ISWF, Santiago Principles: 15 Case Studies, page 119).
Reporting to the Compliance Committee, the Chief Compliance Officer (CCO) ensures compliance with disclosure and transparency mechanisms, standards, policies and procedures set by the Board (Article IV, Section 17.i.), and compliance with numerous laws, regulations and issuances (Sections 16, 29, 39, 40, 41, 48, and 49).
Also, to comply with the 24 Santiago Principles (Article VIII, Section 42) and to promote ESG — environment, social, governance — principles (Article IV, Section 17.b).
4. Related Party Transactions (RPT) Committee (board level). This is one way to implement Santiago Principle No. 13 (“professional and ethical standards should be clearly defined and made known to the fund’s governing bodies, management and staff”). All related party transactions are disclosed as part of the annual report. Indonesia’s INA has an Ethics Committee on its Supervisory Board (2021 Annual Report page 73).
Of the four independent committees, two are provided for in the law and IRR — Risk Management (Section 26, IRR Section 41) and Audit (RA 11954 Article V, Section 21, item r) — while the other two — Compliance/Governance and Related Party Transactions — can be created by the MIC board.
Best practice in corporate governance calls for the majority of the committee members to also be independent directors, including the committee Chair.
In this respect, the provision for the Risk Management Committee (RMC) is not aligned with best practice. It provides for only one independent director (the committee Chair) instead of a majority or three of five members.
The inclusion of the “Key” Risk Officer (the CRO) and another senior executive as members of the RMC presents a conflict of interest for the CRO, who should not be voting on his own recommendations to the RMC.
In some jurisdictions (Malaysia’s Khazanah Nasional and India’s NIIF), the Audit and Risk Committee functions are combined.
OTHER NOTABLE PROVISIONSChief Investment Officer (CIO) (Section 24, IRR Section 40). The position of Chief Investment Officer is crucial. Adding the Operating to the CIO role makes it a confusing dual function, as the CIO and COO functions are very different and require different skills sets. Both Khazanah and INA have the Chief Investment Officer position only.
Terms of Directors (Section 20. Board of Directors). Compared to the three-year term for regular directors, the one-year term may not be conducive for the Independent Directors (ID) to act independently. While the IDs can be reappointed yearly up to the nine-year term limit, the one-year term may be interpreted as signaling a level of uncertainty from a governance viewpoint.
Corporate Life of 35 Years (Section 53, IRR Section 72). This is a very curious provision, given the very long, even multi-generational, time horizon usual for sovereign funds. The Revised Corporation Code of 2019 (RA 11232, Section 11) has already made the life of a corporation perpetual from the previous 50 years. Indeed, “meron nang forever” in corporations! At the recent Montgomery Summit on sovereign funds, it was noted that the Norwegian fund managers have indicated that their investment horizon is 100 years. At the practical level, however, Congress can just renew its “corporate term” after 35 years.
There is a precedent, not widely known, for correcting an error. The Indonesian Investment Authority was thought to have been well studied before its establishment in 2020, but the constitutive law creating the INA was apparently not perfect. The INA 2022 Annual Report reported that the Constitutional Court of Indonesia (Mahkamah Konstituti or MK) ruled in Nov. 25, 2021 that the Omnibus Law creating the INA (Law No. 11 Year 2020 on Job Creation) is “conflicted with the 1945 Constitution of the Republic of Indonesia” (Notes to the audited FS, Note 30 Significant Event, page 65).
However, in the same ruling the court gave a two-year window to rectify the law, and by Dec. 30, 2022, the Indonesian government issued “Government Regulation in Lieu of Law No. 2 of 2022” which replaced the Omnibus Law. Despite the legal issue, the INA website reports its latest assets under management at $10 billion.
The foregoing are by no means exhaustive, and more experienced experts in the field have more thoughtful comments. Hopefully, they could still serve as useful inputs to improve the provisions of the Maharlika Fund closer to what President Ferdinand Marcos, Jr. said would be “closer to perfect” with sufficient clarity that the right pieces are being put together in the proper way, to inspire confidence and attract prospective partners and investors.
Alexander C. Escucha is president of the Institute for Development and Econometric Analysis, Inc., and chairman of the UP Visayas Foundation, Inc. He is a fellow of the Foundation for Economic Freedom and a past president of the Philippine Economic Society. He wrote the handbook on the Overview of the Business of Banking for the BAP. He is an advocate of best practice in corporate governance with over 40 years’ experience in banking and finance, particularly in strategy, communications, technology, and stakeholder/ investor relations.