The final makeup of the Maharlika Investment Fund will likely be unique to the Philippine situation, far different from what it was first envisioned, and unlike any other sovereign wealth fund.
The final “perfected” version as President Ferdinand “Bongbong” Marcos Jr. would want it, will fit the needs of Filipinos.
The Washington-based Milken Institute, in its report “Best Practices of Sovereign Wealth Funds: The Case for the Philippines,” believes the money pool will work to achieve the intention of the government if it is custom-built or designed to address the urgent needs of the country.
The fund’s purpose and investment strategies are typically driven in part by the type of funding available, according to the study.
In the coming weeks, the government will decide where and at what levels it will acquire funding but political risks accompany the use of revenue funds, especially from national savings programs and pension funds.
The reworked version presented by President Marcos during the recent World Economic Forum in Davos, Switzerland was an evolution of what was provided in the House of Representatives bill, which was transmitted to the Senate.
The House iteration of the MIF was already different from the original proposal that called for capitalization from state agencies like the Land Bank of the Philippines and the Development Bank of the Philippines, as well as dividends from the Bangko Sentral ng Pilipinas and other potential revenue sources.
The use of foreign currency stock, one of the proposals, can be done “as a common first step” but the study indicated that IMF accounting rules place restrictions on their domestic use, a particular challenge for a new SWF with a local development focus.
The proponents of MIF did well in excluding national savings and pension plans as a source of funds because they constitute a risk in that they won’t provide additionality since they count as existing funding.
Some countries have issued bonds to fund their SWFs or made one-time budgetary allocations from a national surplus.
“These funding options are helpful, but they are also much more vulnerable to political interference and potential conflict of interest,” it added.
A better option would be for the country to monetize sources of capital through the privatization of government-owned and -controlled corporations.
The Milken Institute said the approach was used by Singapore’s Temasek Holdings in 1974 when it started with a portfolio of shares in 35 companies, startups, and joint ventures previously held by the government.
”In the Philippines’ case, of 108 GOCCs (government-owned and -controlled corporations), from insurance and financing to charity work and gaming, the biggest of the state firms hold assets worth $323 billion, representing half of the country’s economic output.
The state gaming corporation, Philippine Amusement and Gaming Corporation, which owns and operates 10 casinos in prime locations across the country, and had a total income in 2019 of $1.87 billion can be sold off to private ownership, based on the study.
It said that less tangible assets could also be a potential funding source.
“For instance, resource exploration rights, which have been traditionally very conservatively managed, could be monetized, as could the utilization of assets in the telecommunications or tourism sectors to drive additional sources of revenue,” the American think tank indicated.
For example, in 2019, the tourism industry accounted for 12.8 percent of the gross domestic product and represented 20 percent of total service exports.
Another proposal propounded in the study is for government to model different levy scenarios on tourism activities that would be significant enough to raise funds for the SWF “but not so onerous that they would deter growth in the sector.”
All of the options presented by the Milken Institute would require community support and political will to move forward.
Any legislation for the new sovereign wealth fund 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 evolving proposals mean that the proponents are learning from existing sovereign wealth funds to make the MIF robust, in line with it being an independent and efficient tool for development.