Despite the strong controversy surrounding the creation of the Maharlika Wealth Fund, which is designed to assist in funding the requirements of national development investments, the proposed sovereign wealth fund is likely to pass into law.
The President’s economic managers, led by his Secretary of Finance and the heads of NEDA, Budget and the governor of the central bank, together issued a manifestly strong statement in support of the bill to create the Maharlika Fund.
Initially, the idea for the establishment of the fund came from President Marcos.
Revised capitalisation of the Maharlika Fund. Under the proposed House bill, the wealth fund is designed to consolidate the investible funds of the major government financial institutions (for their own account) to achieve scale and to improve fund mobilization for economic development projects.
The Maharlika Investment Corp. is to be established as the institution to invest and manage the funds.
The plan was to create a fund amounting to P250 billion. Four major government financial institutions were initially to contribute the investible funds to be mobilized within one investment institutional vehicle.
The GSIS (Government Service Insurance System) would invest P125 billion of its investible funds and SSS (Social Security System) P50 billion. The Landbank would invest P50 billion and the DBP (Development Bank of the Philippines) P25 billion.
In the ensuing public debate on the House Bill 6398, strong and negative reactions were immediately registered. One of the most contentious issues turned out to be the provision that GSIS and SSS participate sizably in the capital contributions. It hit a high note of concern, especially among members of the two pension systems.
The criticism was that the pension funds were dangerously threatened by participating in the sovereign fund without any track record. Such pensions could be damaged by mismanagement and other catastrophic possibilities.
The loud noise created by this criticism was immediately silenced when the sponsors of the House bill and the economic managers decided to exclude the two pension systems from directly being required to contribute their investible funds in the investment. However, the door remained open if they wished to participate in the fund’s investment program in the future .
The exclusion of the two pension systems considerably shrinks the initial size of the fund from P250 billion to just a little above P100 billion. But starting at this substantially reduced size is is not necessarily a bad start.
For now, therefore, the investible funds will be consolidated from initial contributions of two government banks, the Land Bank and the DBP, which amounts to P75 billion and whatever dividends other major government financial institutions can add.
The Philippine central bank or BSP has in the current period earned profits of close to P70 billion. Such profits constitute dividends that would normally be remitted to the Philippine treasury. Even as such extra money could be used to raise the central bank’s capitalization as required by law, one-half of the amount, around P35 billion could be used as investible resources to add to the sovereign fund. Also, the PAGCOR (Philippine Amusement Gaming Corp.) normally remits its profitable gaming operations to the national government. The House bill mandates that 10 percent of its dividends could be used to contribute to the sovereign fund.
In short, it is possible to start the Maharlika Wealth Fund with more than P100 billion to give it initial size scale.
Potential future investible funds. Ideally, it is true that surplus funds are easier to mobilize together when the country enjoys a fiscal surplus and/ or trade and balance of payments surpluses. So, it is that many countries enjoying large export surpluses often have large fiscal surpluses too.
These are countries that are likely to have large sovereign wealth funds.
However, even a country challenged by difficult economic times can find investible funds that it can harness to improve its financial position. Let me just cite a few examples that are in our midst even today.
The pension funds, provident funds and other investible funds in the care of many government institutions are surplus funds in that they are not used to pay for current obligations.
The SSS, GSIS, Pag-IBIG, and many other funds are always being put in investment instruments to earn income for the institutions concerned. These funds are in fact savings that are tapped to enable them to increase their institutional incomes.
The government can often raise the nation’s saving rates through the effective use of taxation. While tax money always goes to treasury and inevitably gets appropriated for the national budget, some part of tax revenues could be assigned for specific use.
Royalties and contracted revenues that the government receives from those could be assigned for specific uses, like some tax revenues.
In the past, we have many examples of these that are perfect candidates for being harnessed into a sovereign wealth fund.
Let me then suggest some examples: (1) Royalties and taxes from the exploitation of land and natural resources can be justified as part of the sovereign fund to benefit future generations. During its lifetime, the Malampaya fund generated, according to the Commission on Audit, a total of P173 billion.
(2) The National Development Co. (NDC) is a government corporation that dates back to 1916 has been helpful in promoting industry in the course of years. During the 1970s, it was used in major development projects. Its operations could integrate within the sovereign fund concept.
(3) Assets owned or taken over by government financial institutions arising from their lending operations. These include revenues from privatization proceeds.
(4) The management of the country’s foreign exchange reserves by the central bank is by itself an example of a pure sovereign reserve fund. Singapore is an example of a country that extends the management of the country’s reserves through a separate sovereign fund.
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