Let us reflect on process and progress. The more common source of failure to progress is “circling”—moving round and round in circles, only to arrive at the original location.
Many things have been said about the proposed “Maharlika Wealth Fund” (MWF). Now the framers are scrambling to make the legislation enabling it, House Bill No. 6398 politically palatable by exempting the Social Security System (SSS) and Government Service Insurance System (GSIS) as sources of financing. They could go further in the interest of political palatability. They could take out the President as chair or lift some other exemptions, as from scrutiny as a government-owned and -controlled corporation.
But these will not solve its fundamental problem, which is economic.
As my friend, infrastructure expert Rene Santiago, observes from long experience about the problem of infrastructure provision in the Philippines: “The problem was thin pipeline, not thin funding.” Thin pipeline is not just a lack of bridges and/or dams; there is a nauseating surfeit of that. Before a project becomes shovel-ready, it must be situated within a proper regulatory and rule-of- law ecology that makes the risk-adjusted return attractive for market players. The latter is the proper role of the government, and where we badly need improvement.
The Philippines’ rule-of-law ranking remains very dismal—97th of 140 countries, World Justice Project, and 13th of 15 countries in East Asia, better only than Myanmar and Cambodia. A rule-of-law ranking of 70 or lower would do better for the very low Philippine investment rate than any Maharlika Wealth Fund. There are more than enough investment funds—both domestic and foreign—awaiting a properly curated pipeline.
This is what PPP (private-public partnership) expert Cosette Canilao correctly observes about the infrastructure financing in the Philippines and the MWF: “A well-structured PPP will achieve what [the Maharlika advocates] want to do.” PPP reduces for the state treasury the financing hurdle to large infrastructure projects. When many PPP projects are getting delayed and/or burning cash needlessly is when the government fails to deliver its part of the contract in the form of timely right of way.
A case in point is the delayed Cavite-Laguna Expressway project. To analogous effect, Felipe Medalla, governor of the Bangko Sentral ng Pilipinas, once made a statement on picking winners, which I paraphrase as: Who can’t collect garbage properly has not earned the right to pick winners! Get the institutions and rule of law right first.
The first question I tell my students to raise whenever government intervention is being proposed is: “What is the market failure?” (In the case of the MWF, the previous paragraph is, as it were, a scream: “The emperor has no clothes!” Then we segue into discussing why government intervention in the absence of a market failure always leads to a government failure and how government interventions, even in the presence of true market failures could lead to government failures because of weak institutions and associated exorbitant transaction costs from, say, corruption and wastage.
A government failure is bruising to the polity. It led to a bankrupt Philippine National Bank (PNB) and Development Bank of the Philippines (DBP) and a debt service nightmare in the second half of the 1980s, which set the Philippines on a course to the bottom of the Asean heap.
The vaunted Oil Price Stabilization Fund (OPSF) started out as a high-minded government response to the oil crisis and was intended to recoup the welfare gained from reduced pump price volatility. But as is normal in government projects, the required price adjustments were politicized and the OPSF became a black hole of fiscal resources threatening to bankrupt the state. No money for construction and repair of roads and bridges, yet massive subsidy for private cars and SUVs. Since the 1990s, we have correctly jettisoned the OPSF, gotten the government out of power generation, attenuated the Department of Public Works and Highways in favor of PPP, and retreated from water service in Metro Manila.
The idea of the government backtracking from direct market activities to those it can do better has served the country well. This is the legacy of the Ramos watch, with its recognition of weak state institutions. But the role of the state as enabler, as provider of the rule of law, has become even more important. The Maharlika Wealth Fund gets it very wrong by contriving that the main problem in Philippine infrastructure provision is financing, and that the government returning once more as a market player in the risk-return space is the way forward.
That we have surpluses lying idle is a dangerous illusion. Commentators (the statement of concern of the Foundation for Economic Freedom being the most sober and best argued) are correct in pointing out fiscal minefields on top of current problems of a historically high fiscal deficit and a massive debt load that has to be outgrown. As it is, the GSIS and SSS face dangerously shortened actuarial lives; that the automatic escalation of military pensions will destroy fiscal solvency is a matter of when, not of whether.
All our resources should be trained toward economic growth through increased domestic physical and human capital investment. The former is already being addressed via PPP which, despite its limits, has produced, among others, the Tarlac-Pangasinan-La Union Expressway, the Wawa bulk water dam, Skyway 3, etc.. The Philippines still has huge investment deficits in hard and soft (human capital) and, worse, in simple basic nutrition. As many as 33% of Filipinos grow up stunted due to nutritional deficit in infancy. And physical stunting is minor compared to the mental stunting when brain neurons for higher faculties are lost during the first 1,000 days of life.
Winston Churchill wisely advised long ago: “There is no finer investment for any community than putting milk in the mouths of babies.” You do not need a sovereign wealth fund to put milk into babies. And the returns here are heavily social and long-term, not financial, and thus will fail Maharlika Wealth Fund placement criteria.
The People’s Republic of China did not need a sovereign wealth fund to realize that its best bet is in hard and soft infrastructure investment, which anchored its remarkable growth. In other words, the claim that you need a sovereign wealth fund to realize the best return for your investment fund is bogus. The additional claim that you solve your fiscal frailty by putting your already thin resources at greater risk is the gambler’s double down folly! Wiser is the homey counsel outside a bingo hall: “Bet only the money you do not need!” That is the philosophy of a prudent sovereign wealth fund.
But the most important economic objection to the MWF is moral hazard. At its heart is the consolidation under one umbrella of resources that will be wielded with dispatch by a group of people who do not own them. Positive returns for Maharlika placements will mean hefty private returns (bonuses) for this select group; negative returns will be socialized—that is, charged to the nation. You can attach layers and layers of defense but who’s to enforce them?
History tells us that such arrangements lead to irresponsible risk-taking, bankruptcy and financial crises.
Joseph Stiglitz’s “Ersatz Capitalism” (2012), which details the horrors of the system of privatized profits and socialized losses, should loom large in the Maharlika Wealth Fund debate. It does not. Few can match the playful sarcasm of Dante Canlas, former director general of the National Economic and Development Authority: “The MWF is like the guns of Singapore in World War II—very powerful but trained at the wrong targets”.
In a sense, we already had a sovereign wealth fund of sorts in the 1970s-80s, but by a different name. It funded the “behest loans” granted by President Ferdinand Marcos Sr., of which the legal cover was his presidential-decree powers under the 1973 Constitution. It consolidated government funds under one umbrella to be deployed by him through presidential decree. The DBP and PNB became, as it were, the personal ATM of the President and first lady. The massive but legal “privatized profit-socialized losses” orgy bankrupted these banks. And the Philippines fell into a foreign-debt eclipse for a decade.
Wrong in principle
The impression that the opposition to HB 6398 is over one or the other provision which, if dropped, would save it misses the point! Under weak rule of law, the bill enabling the Maharlika Wealth Fund is wrong in principle and is thus beyond repair. If enacted, it will reverse the healthy overall trend of downsizing the government in favor of the market since the 1990s in recognition of weak rule of law.
It goes back to the Marcos pere strategy of state hegemony and direct government action as the solution, though now camouflaged as a sovereign wealth fund.
So if we unsuspend remembrance, the Maharlika Wealth Fund, shorn of modern buzz promises, will circle us back to the old dreaded place.
National Scientist Raul V Fabella is a retired professor at the University of the Philippines School of Economics, a member of the National Academy of Science and Technology, and an honorary professor at the Asian Institute of Management. He gets his dopamine fix from bicycling and tending flowers with his wife Teena. —Ed.