FIRST PERSON - Alex Magno - The Philippine Star

The implementing rules and regulations for the Maharlika Investment Fund have been reviewed and finalized. The administration tells us that the corporate structure for the Fund is being organized and should be completed before the end of the year.

No one seems sure, however, what higher yielding investment activities the Fund will engage in. Therefore, we do not know if the money put in by “investors” – namely, the P50 billion contributed by Landbank and the P25 billion by DBP – will be worth the cost the government banks have incurred.

The two banks’ “investment” in the Fund will seriously curtail their lending. This has serious repercussions on the whole economy’s performance.

One veteran banker calculates that the P75 billion contributed by the two government banks translates into a reduction of P500- to P600-billion of lending to the economy. That is about 4 to 5 percent of total loans extended by our banking industry.

Because the two government banks target their lending to small enterprises and finance local government projects, the decline in lending capacity translates into an output loss equivalent to 2 percent of GDP. That is major.

This is not a good time to take any more wind out of our economy’s sails. The latest numbers show that both our exports and our imports declined the past month. This could be indications of a slowdown.

It is impressive that the inflation rate in October declined to 4.9 percent from 6.1 percent the month preceding. This could be due to slackening demand in our consumption-driven economy. The PSA reported this week that the unemployment rate ticked up slightly.

The law creating the Maharlika Investment Fund was unduly harsh on the two government banks. It commanded them to turn in their contributions just five days after the measure became law. Being government banks, the two institutions promptly complied with the letter of the law.

It took some time for the IRR to be fashioned. Then the organization of the Fund was delayed a few weeks more to further review the IRR. In the meantime, the large contributions from LBP and DBP were kept at the Treasury and idled.

The two banks will earn nothing while the money is stashed at the Treasury. Meanwhile, both banks are struggling to meet the minimum capital requirements prescribed by the BSP. That means they will have to lend even less. The penalty on our economic growth will be larger.

Even as Maharlika’s IRR has been reviewed twice over, it still missed out on an important detail. The IRR has no provision on how an investor can withdraw contributions from the Fund. The IRR seems to have been blindsided by the assumption that all “investments” in this fund will be commanded rather than invited.

No private investor enters into an investment project without a clear exit provision. None will add to the P75 billion put in by the government banks unless this oversight in the IRR is corrected.

Sometimes, large problems arise out of small details left unattended.

For instance, investment flows into the ASEAN region the last few years studiously avoided the Philippines. The main reason, it turns out, is that the BIR takes forever to refund VAT exemptions. In the case of one patient foreign investor, the refunds due rose to several billions. That is enough to knock out the viability of this business.

Our bureaucracy is notoriously inefficient. It is twice inefficient when it comes to delivering refunds. It is thrice inefficient in the case of the BIR when paying refunds due will affect the agency’s revenue window-dressing.

For all our much-publicized efforts to improve on the ease of doing business, we missed out on this detail about timely payment of refunds. Because of that detail, foreign investors would rather go to Vietnam or even Laos where governments deliver refunds in a timely manner.

For all the publicity about foreign funds expressing “interest” in investing in the Maharlika Fund, not one peso has been added to the money put in under duress by the two government banks. The P75 billion put in by LBP and DBP may be large enough to cut into the minimum capital requirements of the two banks, but in the world of sovereign funds this is really a tiny amount.

The P75 billion in capitalization will not give the Maharlika Fund any comparative advantage in any investment activity. It will not guarantee a return on capital better than what the two banks might have made under current high interest rate conditions. While private banks are enjoying a windfall in this interest rate environment, the two government banks are impaired from growing their loan portfolio.

Again, the costs are being incurred by the whole economy with each passing day.

If the funds for Maharlika are to be taken exclusively from the two government banks, why was a separate corporate entity organized in the first place? The two government financial institutions are both investment banks. They could have made whatever investments Maharlika intends to make without the additional administrative overhead costs arising from the establishment of a separate corporate entity.

What we have in Maharlika is nothing more than a duplication in administrative costs. The two government financial institutions could probably raise more investments on their own simply because, as regular banking institutions, investors will be able to put in money and withdraw them at any time. The two government banks can also absorb investments coming in as Official Development Assistance. They have been doing that all along.

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