The Maharlika Investment Fund has been the subject of much controversy after its swift passage in the House of Representatives. House Bill (HB) No. 6608 seeks to establish an independent fund which the government can use to make strategic investments, or what is more commonly called a “sovereign wealth fund.”
While it is easy to look at the successful sovereign wealth funds, such as Norway’s Government Pension Fund and China’s China Investment Corp. (which have trillions in assets, according to the Sovereign Wealth Fund Institute) or even Singapore’s Temasek, there are also some other funds out there that should serve as a warning — specifically, 1MDB.
PROBLEMS OF TRANSPARENCYOne of the most prominent scandals in the financial world was that involving 1MDB. 1Malaysia Development Berhad, or 1MDB, was Malaysia’s sovereign wealth fund, and was the subject of embezzlement and money laundering. An estimated $4.5 billion was alleged to have been stolen from the 1MDB and it further incurred outstanding debts amounting to $7.8 billion.
Certainly, one might say that the 1MDB is just one sovereign wealth fund and that there are more successful wealth funds out there. However, one of the oft-repeated criticisms against sovereign wealth funds is their lack of transparency and accountability.
If the Philippine government were less corrupt, then maybe they could be trusted with a fund like this. As of 2021, the Philippines ranked 117 (out of 180 countries) in the Corruption Perception Index published by Transparency International. It scored a total of 33 out of 100.
Still, even if we assume that public officials (and/or the people who would be handling the fund) are incorruptible saints, there are still several other red flags to look out for.
LACK OF SURPLUS REVENUESOne of the major problems is the source of funds. Sovereign wealth funds generally arise out of a country’s surplus revenues — whether from surpluses due to natural resources, trade surpluses, or any other similar sources.
Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla claims that the balance sheet is strong enough for the Maharlika Investment Fund, and Finance Secretary Benjamin E. Diokno even went so far as to claim that the BSP has “too much” gross international reserves.
However, the figures appear to disagree. In fact, as of September 2022, the National Government recorded a P179.8-billion budget deficit. Though this is lower than last year’s P180.9 billion deficit, it is, nevertheless, still a deficit.
So, given this deficit, where exactly does the government expect to draw its funds from?
The initial capitalization of P75 billion would be sourced from the Land Bank and the Development Bank of the Philippines. For subsequent funding, it will tap the BSP’s declared dividends, PAGCOR’s gaming revenue streams, and other sources, such as royalties and/or special assessments based on natural resources, proceeds from privatization of government assets, and borrowings by the Maharlika Investment Fund (MIF).
Clearly, these are not sourced from any surplus revenue.
The initial versions of the bill also included the Social Security System and Government Service Insurance System (SSS and GSIS) as sources of funds, which means the government would be passing the burden onto its citizens. Thankfully, this idea appears to have been scrapped in the later versions.
SAFEGUARDSAnother problem is the issue of safeguards. The 1MDB scandal noted above was a result of inadequate safeguards. So, it merits asking: Does the Maharlika Investment Fund have sufficient safeguards?
Proponents of the fund are quick to assure the public that there are enough safeguards — such as the adherence to the arm’s length principle and the prudent person rule.
The Fund would also comply with the Santiago Principles, which are the generally accepted principles and practices (GAPP) voluntarily endorsed by the members of the International Forum of Sovereign Wealth Funds. These principles essentially embody the “best practices” for the operations of sovereign wealth funds. The bill also states that the fund would adhere to “internationally accepted standards of transparency and accountability” as well as with other laws, such as the Securities Regulation Code, and ethical standards.
Of course, what the law states and how it is implemented would not necessarily be the same.
Assume, then, for the sake of argument, that a violation of these safeguards occurs. What then would be the penalty against the offender? The law provides that, for the auditor, the fine is P80,000 to P500,000. In case the auditor’s failure is attended by fraud or injury to the general public, then the auditor or responsible officer may be fined P100,000 to P600,000.
What about for graft and corrupt practices? A corporation who appoints an intermediary who then engages in graft and corrupt practices would be punished with a fine of P100,000 to P1,000,000. Any director or officer who tolerates such graft and corrupt practices would be penalized P500,000 to P1,000,000 as well.
In looking at these penalties, remember that the Maharlika Investment Fund would be handling billions in taxpayer money.
OTHER PROVISIONSUnder HB 6808, 1.) all funds, assets, and properties, 2.) all revenues, income, or investment earnings, as well as accruals thereto; and, 3.) purchase of supplies, equipment, papers, or documents are exempt from tax.
Importation of supplies and equipment for the fund would also be exempt from customs duties.
Instead, in lieu of the taxes and the customs duties, the Maharlika Investment Corp. is obliged to remit at least 25% of its net profits as poverty and subsistence subsidies to Filipinos living below the poverty threshold. The remainder of the fund’s net profits would be remitted to the National Government, to be earmarked for social welfare programs.
Aside from the tax exemptions, there are also other provisions on exemptions and privileges. The Maharlika Investment Corp. is also exempt from the GOCC Governance Act of 2011, from the Government Procurement Reform Act, and the Salary Standardization Act.
The Fund’s exemption from the Government Procurement Reform Act is another possible red flag. Of course, the exemption is limited only to “the procurement or engagement of the professional or technical services needed in the selection of investments,” it is still a provision that possibly warrants looking into.
The Philippine Government is, after all, not a stranger to paying for overpriced procurements. Just over a year ago, the Pharmally scandal resulted in billions in taxpayer money being used in the payment of allegedly overpriced face shields and other COVID-19 supplies.
PRIORITIZING MEASURES OTHER THAN THE MAHARLIKA FUNDAnother important question that warrants asking is on the timing. Is now the time to establish the fund? While it is possible for the fund to be profitable in the future, it certainly does not address the present economic problems faced by the country. As of December 2022, the Philippines has a national debt of P13 trillion. As of December 2022, the country’s inflation rate stands at 8.1%. These are not problems that could be solved by a sovereign wealth fund.
Instead, the government should focus on addressing the present economic issues that the country is facing. It should address inflation by either implementing fiscal restraint, developing new sources of revenues, or even possibly both. As we have been proposing, it should also look into improving tax collections by modernizing the Bureau of Internal Revenue and lifting bank secrecy laws.
More importantly, if the government is to be trusted with managing a sovereign wealth fund, it should first take steps to improve transparency and accountability, and to eradicate graft and corruption.
Overall, sovereign wealth funds do indeed appear to have some benefits, but there are plenty of red flags that make them prone to corruption by unscrupulous politicians.
Given the scope and the potential implications of such a fund, it certainly deserves more than the 17 days that the lower house accorded it. The bill would still have to pass through the Senate before it can be signed into law. Hopefully, the upper house would accord it the skepticism it deserves and carefully scrutinize the bill in question.
This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.
Raymond “Mon” A. Abrea is an MPA/mason fellow at Harvard Kennedy School. He is a member of the MAP Tax Committee and the MAP Ease of Doing Business Committee, co-chair of Paying Taxes on the Ease of Doing Business Task Force, and chief tax advisor of the Asian Consulting Group.