Last May 31, with lightning speed, the Senate passed the controversial Maharlika Investment Fund (MIF) bill in a plenary session that ran until 2 a.m. Until the end, critical lawmakers’ questions were unanswered and their concerns unaddressed.

Because the House of Representatives subsequently accepted the Senate version in its entirety, the bill was no longer subjected to review and ratification by both chambers of Congress. The remaining step for it to become a law is President Ferdinand Marcos Jr.’s signature.

The Maharlika Investment Fund proponents forced the passage of a contentious bill against the sound arguments and strong sentiments of concerned citizens, the economics profession, and the academe. Such disturbing behavior provides a glimpse of the kind of economic policymaking that can be expected from the second Marcos administration in its remaining five years. The MIF displays not only the administration’s arbitrariness in selecting policy priorities but also the muddled and misguided quality of its policymaking.

The resounding objections to the Maharlika Investment Fund come from all sectors of society. More than 100 economists, academics, public intellectuals, former government officials, including ex-Cabinet secretaries, civil society influencers, businesspersons, and leaders of basic sectors like urban and rural workers, women, and the youth signed on Dec. 7, 2022, a statement drafted by the Action for Economic Reforms (AER) that explains the objections to the bill.

Another statement dated Jan. 26, 2023, co-signed by the Foundation for Economic Freedom, the Management Association of the Philippines and the University of the Philippines School of Economics Alumni Association, presents why the Maharlika Investment Fund is a “highly questionable” strategy.

Most recently, last June 6, 21 professors from the UP School of Economics issued a discussion paper saying that the Maharlika Investment Fund is “still beyond repair” and that it “violates fundamental principles of economics and finance and poses serious risks to the economy and the public sector.”

Related: Continue to oppose Maharlika Investment Fund, says ex-central bank official

Lack of clarity

The primary criticism against the Maharlika Investment Fund is the lack of clarity in its objectives. Its proponents fail to present a coherent rationalization based on sound economic reasoning. Its wording is confused: Is it a sovereign wealth fund, or a mechanism to mobilize investments for programs like infrastructure and energy that serve national development?

Further, the Maharlika Investment Fund is redundant. Its proponents have not convincingly answered the question of how different its functions are from existing investment bodies with shared mandates, like the National Development Corp.

Another important point that critics raise is that the administration is wasting time and political capital on a bill that does not directly tackle the Philippine economy’s binding constraints.

The collective statement drafted by the AER says: “Rather than passing an untimely bill creating an investment fund that upends financial institutions and strains public finance, we believe that we are better off focusing on key measures that address big bottlenecks to growth and investments: the narrower fiscal space, food inflation, inadequate power supply, and weak health system.”

The Maharlika Investment Fund also endangers the stability of existing financial institutions by making use of capital from the Development Bank of the Philippines (DBP), Land Bank of the Philippines (LBP), and Bangko Sentral ng Pilipinas (BSP) as funding sources. To quote former BSP Deputy Governor Diwa Guinigundo, “An investment fund is not worth undermining our existing institutions.”

‘Business proposal’

It is clear that the critique of the Maharlika Investment Fund bill has been thorough and exhaustive.

What has largely escaped public scrutiny is the “business proposal” for the Maharlika Investment Corp. (MIC) submitted by the administration’s Economic Team, composed of Finance Secretary Benjamin Diokno, Economic Planning Secretary Arsenio Balisacan, Budget Secretary Amenah Pangandaman, and BSP Governor Felipe Medalla. Accompanying the business proposal is a certification that “due diligence was conducted showing that the purpose of the proposed MIC is in furtherance of the common good, and that it is economically viable.”

The certification is dated Feb. 22, 2023. Apparently, the submission of the business proposal and certification was a reaction to a question raised by senators a week earlier that the Maharlika Investment Fund lacked a business plan. The certification and the business plan itself anticipate a legal challenge that the MIF violates a constitutional provision (Section 16 Article XII): that the creation of a government-owned or -controlled corporation is “subject to the test of economic viability.”

The business proposal adheres to “dual objectives of optimizing financial returns and accelerating development of infrastructure and other priority projects.” In pursuit of these “dual objectives,” the MIC will maintain two sub-funds: a capital market investment sub-fund to optimize financial returns, consisting of a diversified portfolio of liquid assets, and a sectoral investment sub-fund characterized by “high-return projects” like power, real estate, infrastructure, and logistics.

An examination will show that the business proposal contains the weaknesses that validate the public criticisms raised against the Maharlika Investment Fund.

Government’s role

The fundamental question is: What exactly is the government’s role in the economy?

Is it to use resources to maximize profits or earn high financial returns? This is what the business proposal is offering. Seeking or obtaining high financial returns is expected of the private sector. It is not the essential role of the government. If it were so, the bulk of the government’s revenues should be invested in high-earning commercial activities.

We learn from basic economics that the government’s role in the market economy revolves around:

• Establishment of institutional frameworks, legal or juridical, also known as the rules of the game, that guide or underpin market transactions or economic activities.
• Provision of public goods (leading to high social returns but not necessarily optimal financial returns).
• Correction of market failures (which should likewise include enabling and creating markets) and treatment of externalities (spillover benefits or costs to society arising from production or consumption of a good or service).
• Income redistribution.
• Macroeconomic stabilization.

The only justification for the government to engage in profit-maximizing activities or seeking higher financial returns is when it has excess or surplus funds.

But clearly the funds from the MIF will not come from excess funds, but from existing funds that have their own uses or functions. Worse, by grabbing funds from other institutions like the BSP, LBP and DBP, the MIF will also undermine the essential roles of the government in a market economy.

For example: The MIF will deny the LBP of capital that the latter can use for provision of agricultural public goods or for income redistribution as resources are diverted away from the agrarian reform program. The use of BSP dividends to fund the MIF means delaying the increased capitalization of the BSP. This threatens the BSP’s function of providing monetary stability, thereby potentially upsetting macroeconomic balance.

Questionable is the purpose of the MIF to invest in equities and in companies doing business in natural resources, power, infrastructure, logistics, and real estate. In the first place, the funds intended for these investments are not excess funds. But these investments still cannot be justified in terms of correcting market failures or creating markets. The markets already exist, and these markets—as attested to by the MIF business proposal—are already earning high returns.

But this does not mean that the government’s participation in business activities is restricted. The government’s partnering with the private sector in business activities and creating corporations are welcome if these are consistent with its essential roles, as earlier outlined. The MIF fails in that regard. Worse, it violates the government’s essential roles in a market economy.

Industrial policy

The Maharlika Investment Fund is not even industrial policy (IP), which is meant to address market failures, create markets, and address positive or negative externalities. IP is deliberative and selective; the MIF is a spray gun that wants to hit many targets.

IP takes many forms and approaches, and is not reduced to government participation in businesses. Having the diagnostics is necessary to determine the appropriate intervention.

To repeat, markets exist for energy, infra, natural resources, real estate, and logistics. The MIF business proposal itself claims that these sectors earn high financial returns.

But market imperfections are unavoidable despite the presence of markets. Yet, is the MIF the way to address gaps or imperfections? To answer this, doing diagnostics is necessary. But the Economic Team does not present any.

Take the matter of power. What impedes further investments? According to players in the power sector, despite the rhetoric on renewable energy (RE), the government has not articulated the roadmap well. Priorities must be clear. Without the government explicitly clarifying the rules and priorities within RE, private players will hesitate to commit bulky investments.

It seems the intent of the MIF is for the government to invest in critical areas—including real estate?—and, at the same time, maximize earnings. The assumption is that these critical areas suffer from underinvestment, despite the profits to be amassed. Assuming this is true, shouldn’t the government first determine what factors constrain investments? Experience shows that private investors fear political, legal and regulatory risks. Time and again, the Philippines has reversed policy or overturned contracts. Thus, the solution to private-sector underinvestment is not automatic infusion of government capital.

Conflict of interest is another problem with the business proposal that allows the Maharlika Investment Fund to invest in heavily regulated sectors such as power and infra. Based on how the administration has promoted and structured the MIF, it will be favored over regulators.

And how will the MIC choose where its investments will go? That the MIF can be invested in highly regulated domestic sectors is a condition for cronyism to thrive.

These arguments show that the MIF must hurdle a question more fundamental than just passing the test of economic viability. Its basic problem is that it deviates from the government’s essential functions in the economy.

Moving forward

What can concerned citizens do now that the only thing lacking for the Maharlika Investment Fund to become law is the President’s signature?

The Maharlika Investment Fund has glaring basic problems that even a good set of Implementing Rules and Regulations (IRR) cannot correct. But it is still crucial that the public demand transparency from the IRR drafters (in this case, the Treasurer and Founding Government Financial Institutions), and vigilantly monitor developments. Here is a possibility where the IRR can even worsen a very bad law.

The question of the MIF’s economic viability, which some propose as the basis of the case that may be elevated to the Supreme Court, is not the bill’s biggest issue. The original sin is its misconception.

Albay Rep. Edcel Lagman does not believe that a legal challenge to the MIF will prosper in the Supreme Court. He notes that “congressional wisdom and expediency are not justiciable issues before the Supreme Court” and that “courts do not delve into the policy or wisdom of a statute.”

We take exception to “congressional wisdom.” What the Maharlika Investment Fund shows is the ignorance, if not folly, of the executive branch and of Congress

The experience with the Maharlika Investment Fund should serve as a wake-up call for citizens to demand accountability from policymakers. Its passage, along with the callous dismissal of public opinion, is a preview of what can be expected from the second Marcos administration, which is capable of pouring resources and exerting political pressure to get what it wants. But what it wants can contradict its supposed intention to serve the public interest.

That the administration appears hellbent on pursuing poorly planned legislation with no solid justification is worrisome. The Filipino public and the international community are warned.

In a rare show of unity, the public and the technocrats outside of the administration opposed the MIF bill. The powers bluntly disregarded their voice, but the opposition to the Maharlika Investment Fund continues.

Through collective action, concerned Filipinos must pressure policymakers to use public funds on robust policies and programs that are clear in their objectives, backed by evidence and sound economic reasoning, and will result in high social returns. The government must constantly be reminded not to stray from its essential functions in the economy, and prodded to focus on the key issues confronting the economy and development.

Pia Rodrigo is a policy analyst and Filomeno Sta. Ana III is coordinator of Action for Economic Reforms.