The saga of the Maharlika Investment Fund continues… and will likely continue some more given what I saw on the replay on YouTube of the Senate deliberations.
The Senate just concluded the second public hearing of its version as the private sector took center stage with the Foundation for Economic Freedom eloquently expounding on their concerns and patiently explaining the nuances of sophisticated capital market tools and banking buzzwords, such as “put options’’ and “absorptive capacity,” that were put forward by the good senators that belied one’s comfort that the legislators have yet to achieve mastery over the MIF’s intricate features that could engender a host of complex ramifications unless properly understood and structured.
The economic managers, on the other hand, did their level best to put up a brave front to elucidate and defend the more controversial features of the MIF.
There were a few awkward moments such as the exchanges on the possible investee projects and the desired yield of the MIF. When pressed for examples of projects and the possible returns, there were none explained by the economic managers credible enough to convince, unfortunately. The Minority also noted the apparent inconsistencies regarding exceptions on allowable investments, operating expenses, and the overlap with the DSWD on the ayudas that could be extended directly to the poor.
It was also pointed out that the bill is not clear on how the profits to third-party private investors will be handled given the unconventional dividend structure. Adding to the MIF’s fuzziness is the deletion of reference to a “sovereign” wealth fund in the explanatory note and yet, in the bill proper, still finding a reference to the Santiago Principles, the international governance convention adhered to by sovereign funds.
All these points prompted a telling and embarrassing retort from the Minority that the whole process was a “very expensive public brainstorming… not well thought out.” I believe the good senator from the Minority was spot on in his observations. There are definitely still several features of the bill that require a more thorough evaluation and redrafting.
How perhaps should an MIF version 3.0 look like? Like any enterprise, one begins with the objectives, which if clearly articulated, the corresponding strategy to achieve the goals will naturally follow suit.
With the MIF, from the bill’s explanatory note, the main aim is to “attain economic transformation, growth and sustainability… a powerful tool for sustaining high impact infrastructure projects, urban and rural development, agricultural support.”
The bill itself states in the preamble, the MIF shall be “investing national funds… coordinating and strengthening the investment activities of the country’s top-performing government financial institutions.” Clearly, the fund is meant to be developmental, which means the payback period will be long-term. I guess this means no less than a 20 to 25-year investment horizon, which suggests the returns for the investors will not be realized over a short period. Or in other words, a highly illiquid investment.
Furthermore, a developmental project typically will generate relatively low but steady returns and typically only after an extended initial operating period of minimal or even negative returns marked by the need for continuing capital calls to maintain operational feasibility. Definitely, the overall return will be unlikely in the double-digit range in real terms. So given these features, what kind of investors should the MIF have? Given the regulations governing the banking institutions, are Landbank and DBP, or for that matter BSP, the ideal investors? And if the proposed solution is to relieve these GFIs from these regulations and even cover their downside risk, what are the consequences? Do we really want to have a distorted playing field in the banking industry which currently is already humming perfectly well?
In this regard, I agree with the FEF’s position that we leave out the GFIs and either create a new government-owned entity fully funded by the national government or beef up the existing National Development Corporation, an agency under the Department of Trade and Industry mandated to perform the same functions envisioned in the MIF.
There are other issues to consider such as sourcing the seed funding if not the GFIs and how possible to create a multiplier effect on the size of the fund but that’s for another article.
Until next week… OBF!
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