Maharlika’s political risk

Desperate to get credible support for putting up the Maharlika Fund, the administration’s economic managers tapped the Milken Institute to bless it. They got it, sort of.

The report that came out concluded that well-structured funds work very well, but the purpose must be clear because that determines how it is to be funded and most importantly, politics must be kept out of it.

That’s not what our economic managers and brown-nosing legislators wanted to hear.

Budget Secretary Amenah Pangandaman, said in a Kapihan sa Manila Bay forum hosted by PhilStar’s Ichu Villanueva:

“We tapped them (Milken Institute) to help us when we were working on the type of sovereign wealth fund.”

Milken Institute’s Financial Innovation Lab observed that “many nations create sovereign wealth funds (SWFs) to invest surplus assets in a diversified portfolio approach to achieve national policy goals, hedge against economic risk, and benefit successive generations.”

But… and it is a big but for us… our government must keep politics out of its funding and management. Good governance is important for the credibility of Maharlika, specially in attracting private investors.

On top of Milken’s observations is the need for our government to ensure that the SWF is independent and efficient. The financial think tank warned of political risks arising from the use of existing government funds for Maharlika.

“The Philippines could use its SWF to attract foreign direct investment, reducing the state’s burden to finance infrastructure through taxes and debt,” the Milken Institute said in its report. It cited Indonesia’s SWF that raised over $20 billion.

“Political risks accompany the use of existing government revenue funds, especially from national savings programs and pension funds. These funding options are helpful, but are also much more vulnerable to political interference and potential conflict of interest,” Milken warned.

Milken also observed that using funds from the pension funds to start a SWF provides no new money since these already count as existing funding.

Less politically dangerous is Milken’s suggestion to use proceeds from the privatization of GOCCs, similar to the approach used by Singapore’s Temasek Holdings in 1974.

“In the Philippines’ case, of 108 GOCCs, from insurance and financing to charity work and gaming, the top 31 GOCCs hold assets worth $323 billion, representing half of gross domestic product,” the Milken Institute said.

Former Sen. Frank Drilon had the same idea, more specifically, privatizing the gambling operations of PAGCOR and PCSO, but that will not be popular with politicians who depend on those agencies for hand-outs.

“The problem of funding can be solved by privatizing our gaming industry. It will generate up to P300 billion that the government can use to fund its ambitious Maharlika Investment Fund,” said Drilon in an interview with ‘The Chiefs,’ a television program.

“PAGCOR should do away with operating casinos and PCSO, we have no business running the lotto and small-town lotteries. Government should limit itself to being a regulatory body that protects the interests of the betting public.

“We are shooting two birds in one stone by privatizing the gaming industry: to generate funds and eliminate the source of corruption. And the President has the authority to privatize the two gaming agencies under the GOCC Governance Act,” Drilon said.

Funding for most of the existing sovereign wealth funds generally came from either sale of commodities and non-commodities, or from a budget surplus. None is funded out of borrowings.

“With the Philippines’s ballooning budget deficit, pegged at P1.2 trillion for the period January to November 2022 alone, the sovereign wealth fund could not be funded by a budget surplus,” the former senator observed.

The Milken Institute urged innovative thinking in funding Maharlika. Among others, Milken suggested using resource exploration rights (from mining or Malampaya royalties) and use of assets in telecommunications.

That’s a thought. Our government has been giving the right to use spectrum/frequencies for free. Other countries auction this right for the private use of this resource in the public domain.

Perhaps, since we have already given away the rights, we can look at the possibility of charging rent. Even a small percentage from the profits from broadcasters and telcos among other users of spectrum/frequencies should produce  new income streams for the government that can be harnessed in a SWF.

“The government could also innovate by allowing the fund to accept foreign private investment and boost infrastructure development. The fund could be an investment vehicle to attract private investment that is  often chasing deals in real assets, like infrastructure.

“Thus, an SWF could bring in new capital, but also meet the economic and development goals through public-private partnerships in road, energy, and digital infrastructure, with transparent and competitive processes.”

So, that’s the thing. The most important ingredient for a successful SWF, the Milken Institute emphasized, is good governance.

“Governance is key to ensuring the success of the Philippines’ first SWF, which is why disclosure, transparency, and clarity of ownership and oversight are important.”

Management of foreign capital, Milken said in its report, also requires significant oversight and disclosures.

Big deal! The first version of the Maharlika bill exempts it from the Freedom of Information Act.

The Milken Institute continued: “Any government fund is at risk of political interference, as well as the temptation to withdraw from the fund in tougher economic times – both of which jeopardize the health and longevity of the SWF,” it said.

The Milken Institute noted that the Maharlika must design its operations and management systems to minimize risks of mishandling and lessen political influence.

Milken is saying in so many words Maharlika must be privately controlled and possibly listed in the stock market where levels of transparency is required.

If that is the case, our political leaders will say, what’s the use of putting up this SWF if we have no say in how it is managed?

Maybe a SWF can be a game changer if it is reasonably isolated from politics. It can help finance needed infrastructure and now, modernizing agriculture.

The question is, knowing what we know from experience over the last few decades, is it possible for our government to have good governance, the type that no-nonsense investors look for?

We can dream, can’t we?

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco