THE PHILIPPINES could benefit from the proposed Maharlika Investment Fund (MIF) as long as the government can ensure that its first sovereign wealth fund (SWF) is independent and efficient, according to a report by the Milken Institute.
However, the think tank also warned of political risks arising from the use of existing government funds for the MIF.
“(SWFs) have been drivers that enabled a number of emerging economies to achieve national development milestones and become players in the global economy. The Philippines could similarly benefit,” the Milken Institute said in its report titled “Best Practices of Sovereign Wealth Funds: The Case for the Philippines.”
It noted the Philippines should look at other SWF examples on “how to structure the MIF into a robust, independent, efficient and effective national treasure.”
“The Philippines could use its SWF to attract foreign direct investment, reducing the state’s burden to finance infrastructure through taxes and debt,” the Milken Institute said, citing Indonesia’s SWF that raised over $20 billion.
President Ferdinand R. Marcos, Jr. earlier this month pitched still-unapproved MIF to business leaders at the World Economic Forum in Davos, Switzerland.
The Milken Institute said the Philippine government should first determine the SWF’s goals and the strategies for achieving it, as well as establish appropriate and realistic funding sources.
“Political risks accompany the use of existing government revenue funds, especially from national savings programs and pension funds,” it said.
Under the latest version, the proposed MIF will secure funds from government-owned and -controlled corporations (GOCCs), and will require a lower initial capital of P110 billion from P250 billion previously. An earlier version of the bill drew criticism for proposing to secure funding from pension funds.
The Milken Institute said the Philippine government may not be able to tap into foreign reserves due to International Monetary Fund (IMF) accounting rules that prevent their domestic use.
Instead, it noted the Philippines may consider other funding options such as bond issuances or one-time budgetary allocations from a national surplus.
“These funding options are helpful, but are also much more vulnerable to political interference and potential conflict of interest,” it said.
The think tank also recommended monetizing sources of capital through the privatization of GOCCs, similar to the approach used by Singapore’s Temasek Holdings in 1974.
“In the Philippines’ case, of 108 GOCCs, from insurance and financing to charity work and gaming, the top 31 GOCCs hold assets worth $323 billion, representing half of gross domestic product,” the Milken Institute said.
The Philippines could also use “less tangible” assets as a funding source for the MIF, such as resource exploration rights and use of assets in telecommunications or tourism sectors.
“Any legislation for the new SWF should disclose how it will ‘ring fence’ or protect the funding, both to minimize the risk of political conflict of interest and to allow flexibility for the inclusion of new revenue sources,” the institute said.
It also emphasized that governance is key to ensuring the success of the Philippines’ first SWF, which is why “disclosure, transparency, and clarity of ownership and oversight are important.”
“Any government fund is at risk of political interference, as well as the temptation to withdraw from the fund in tougher economic times — both of which jeopardize the health and longevity of the SWF,” it said.
The Milken Institute noted that the MIF must design its operations and management systems to minimize risks of mishandling and lessen political influence.
The Philippine government should also determine its long-term investment strategy for the wealth fund, as well as specific asset allocation, it said.
For instance, it should decide if the MIF will invest locally or internationally, noting that most SWFs pick overseas investments “as these generally perform better in terms of maximizing returns for future generations or smoothing revenue from traditional industries,” the think tank said.
“Ultimately, a well-structured SWF attracts foreign investment, increases the return on investment in national savings, and promotes growth and social development,” the Milken Institute said. — L.M.J.C.Jocson