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.

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Diwa Guinigundo, BSP deputy governor until 2019, said that while the mandatory use of the Social Security System (SSS) and Government Service Insurance System (GSIS) funds had been scrapped in House Bill No. 6608, the respective boards of the pension funds may still “voluntarily” invest in the MIF. 

Guinigundo noted that the heads of the SSS and GSIS were appointees of President Marcos Jr., who had certified the bill as urgent and acknowledged that the creation of a sovereign wealth fund was his idea. The first version of the bill was filed in the House on Nov. 28 and was quickly approved on third and final reading, on a vote of 279-6, on Dec. 15.

If the SSS and GSIS boards later decide to invest in the MIF, “then goodbye na tayo,’’ Guinigundo said at an online forum titled “What Now, Maharlika Investment Fund?’’  The forum held on Dec. 17 was sponsored by Seniors on the Move, an internet-based group advocating seniors’ rights.  

The planned mandatory use of SSS and GSIS funds for the MIF was scrapped in the face of strong objections raised by various groups, which claimed that tapping the pension funds privately owned by workers and retirees would be unconstitutional. In the first version of the bill, the GSIS was to invest P125 billion and the SSS P50 billion in the MIF.

Against BSP mandate

Guinigundo said the bill was against the BSP’s constitutional mandate because it would sequester the central bank’s dividends. He explained that, as proposed, 100% of the BSP dividends would go to the MIF in the first two years, and 50% to the BSP and the other 50% to the MIF in the third year and beyond. 

After the BSP’s capitalization to the tune of P250 billion, all its dividends would go to the MIF, he said.

The BSP is mandated not to take part in the ownership or management of private enterprise, according to Guinigundo. But under HB 6608, the BSP would be part of the advisory body of the MIF, which can invest in private companies.

These would amount to restoring the causes of the central bank’s downfall in 1983, he said. 

‘Of the nature of gambling’

Guinigundo also said that under HB 6608, BSP contributions to the MIF would go on and on and that the central bank would co-fund the MIF with a gambling corporation. He was referring to Philippine Amusement and Gaming Corp., which is to invest 10% of its gaming proceeds in the MIF.

The arrangement “partakes of the nature of gambling,” said the former BSP official, who also noted that the MIF could make “highly speculative and very risky investments” in such assets as metals and foreign currencies.

Sequestering BSP dividends to fund the MIF would affect its work of maintaining the stability of the banking system, he warned, adding:  “In times of danger,  the BSP should be able to properly perform its job.” 

Using resources of Land Bank of the Philippines (Landbank) and Development Bank of the Philippines (DBP) could also destabilize these GFIs, from where the salaries of civil servants and cash transfers to the poor are drawn; where part of the government’s cash is deposited; and where taxes can be paid. 

Landbank is to contribute P50 billion and DBP P25 billion to the MIF.

With fewer resources at these GFIs’ disposal, the risk of a “contagion” effect would rise if they are faced with problems, per Guinigundo. 

Instead of the BSP and the GFIs helping to close the budget deficit, and finance social services like health and education, and even infrastructure, their resources would go to the MIF, he said.  Instead of GFI funds being lent to small entrepreneurs and farmers, these would go to the MIF, he added.

HB 6608 allows withdrawal from the MIF only after five years. “But there is no guarantee that the MIF would return the investments of the BSP, Landbank and DBP,” Guinigundo said.

Surrender of power

The MIF would also encroach on Congress’ power of the purse.  “Before, public funds can be spent only upon the go-signal of Congress. Instead, the allocation from the MIF will go straight to poverty and subsistence allowance equivalent to 25% [of its profits.],’’ the former BSP official said.

Adding the 2% as the MIF’s overhead to the 25%, investors would have no control over 27% of the Fund’s profit, he warned. “Congress, by this bill, surrenders its job to do the budget. It’s up to the MIF where to use its money.’’

Its proponents envision the MIF as promoting economic growth and social development in the Philippines. But Guinigundo urged the Congressional Research Office to conduct an independent study and not accept everything that economic managers are saying about the MIF. 

No need for it

Is there a need for such a sovereign wealth fund? 

None, Guinigundo said, because it would not address high inflation and unemployment rates, as well as the swelling national debt. In the first place, the country has no surplus, he said, adding that total debt rose from P7.7 trillion in 2019 to P13.6 trillion as of September 2022, largely due to the Covid-19 pandemic and issues like misgovernance and corruption.

In lieu of the MIF, “we just need to use the national budget, public-private partnerships and concessional loans to finance social services,’’ Guinigundo said. Unlike the MIF, “there is no risk investing in our people though social services like health and education,’’ he said. 

Amendments to HB 6608 are to be introduced in the Senate, which is scheduled to tackle the measure on Jan. 23.

“This is an uphill battle because Congress is dominated by the administration. Let us continue repeating our points and establish networks to amplify our voice,” the former BSP deputy governor said.

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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.  

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

Market failure

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. 

Dangerous illusion   

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.

Moral hazard          

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.

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