(Part 3)
When the Senators start to deliberate on the Maharlika Investment Fund, they should make it a point to avoid wasting their time raising objections to features of the old version that have already been eliminated precisely in response to the very valid criticisms by some top leading economists, lawyers, bankers, and other experts on the issue of savings and investments. These criticisms were solidly based on evidence-based comments contained in a “Statement on the Maharlika Wealth Fund” dated Dec. 7, 2022, signed by leading former government officials, economics professors, and professional economists.
As originally drafted, the Maharlika Wealth Fund bill assumed that there was excess long-term investment funds in the Philippines as can be found in countries with consistent large budget surpluses, windfall revenues from booming extractive industries, and excess foreign currency reserves from enduring balance of payments surpluses. None of these conditions exist in the Philippines. The Philippine economy today is suffering from a heightened fiscal deficit, ballooning balance of payments deficits, and mediocre levels of foreign currency reserves. Worst still, the Philippines has the lowest Gross Domestic Savings to GDP at 9% compared to the average of East Asian countries of between 25% to 35%. The Philippines has no alternative but to attract foreign savings in the form of Foreign Direct Investments. Our borrowing capacity has been severely limited by the increase in our debt-to-GDP ratio to dangerous levels exceeding 60%.
Proponents of the Maharlika Investment Fund (MIF) must convince the Senators that it will be an efficient vehicle to “create jobs, promote trade and investments, strengthen connectivity, expand infrastructure, achieve energy and food security.” One way of doing so is to relate it to the amended Public Service Act (PSA) that allows as much as 100% foreign ownership of such capital-intensive infrastructure as international airports, railways, subways, telecom facilities, data centers, and green energy facilities. The proposed MIF can own minority shares in these infrastructure investments in order to assure the foreign investors that they will be helped by a National Government agency to overcome the usual red tape and bureaucracy that foreign investors usually encounter when they come to the Philippines.
Contrary to what the Statement on the Maharlika Fund issued by some leading economists and former government officials declared, to continue the Build, Build, Build program started during the Duterte Administration, the government’s goal of promoting infrastructure can no longer be efficiently facilitated through annual appropriations, concessional lending, or public-private partnership (PPP). Infrastructure spending will have to compete with the huge amounts required for improving the quality of basic education (increase the education budget to 6% of GDP) as well as that needed for healthcare, not to mention what will be needed to boost agricultural productivity. In fact, these necessary increases in the budgets of the education and health sectors show why it is unwise for the MIF to use the dividends of the Central Bank as a source of capitalization. Those dividends, if channeled to support the government’s annual budget, can help improve the salaries and benefits of teachers, nurses and health workers.
As regards PPP with domestic investors, we are witnessing a drying up of long-term capital among leading PPP proponents like San Miguel Corp., First Metro, DMCI, and Megawide.
There is no alternative to FDIs, which fortunately, even in 2021 when the pandemic was still raging, reached a level to $12 billion. It is encouraging to note that, as the Financial Times recently reported, a rebound in the global capital markets has led to a flow of $1 billion a day into stocks and bonds of emerging markets. With a very attractive domestic market of 112 million consumers, the Philippines is definitely going to be one of these emerging markets if we get our act together.
Fortunately, in the revised bill passed by the Lower House, the Government Service Insurance System and Social Security System, better known as GSIS and SSS, are no longer going to be required to invest in the MIF. Investments from the Development Bank of the Philippines (DBP) and the LANDBANK can be justified if, in addition to physical infrastructure, the MIF will be a vehicle for partnering with foreign direct investors in large-scale agribusiness investments and in renewable energy projects — which belong anyway to the mandate of both the DBP and the LANDBANK.
In this regard, the Senators should seriously consider the recommendation of former Finance Undersecretary Romeo Bernardo (BusinessWorld, Jan. 30, 2023) to tweak the MIF so that it could attract generous grant and soft loans from donor countries, multilaterals, and private sector investors that will fund green energy projects. In his proposed scheme, funding will primarily come from donor countries, multilaterals, and private institutions that have already pledged or set aside “COP” (the Conference of the Parties summit on the United Nations Framework Convention on Climate Change) funding and would like to support the climate adaptation components of the Philippine economic program.
Also to address climate change, the MIF can be a vehicle to attract FDIs to replicate the success story of Malaysia in utilizing the “nucleus estate” model to invest heavily in large-scale corporate farming in palm oil and rubber. In this case, the nucleus estate approach will be applied to the more than 3.5 million hectares of coconut farms which can be consolidated into 20,000-hectare units as proposed by foreign-owned and operated Lionheart Farms in Palawan, which has successfully adapted the nucleus estate model to 3,500 hectares of coconut farms. Not only will the replication of this model in at least five more coconut regions around the Philippine archipelago result in a significant improvement of the living standards of small coconut farmers (among the poorest of the poor), it will result in the Philippines earning huge amounts of carbon credits since large-scale coconut farming can be readily combined with agro-forestry — as Lionheart Farms has already demonstrated in the municipality of Rizal, Palawan.
Under this “Maharlika Green Investment Fund” concept proposed by Dr. Romeo Bernardo can be subsumed the plans of a good number of foreign investors who are ready to invest in renewable energy projects in the Philippines.
The Ambassador from Denmark already announced in an investment forum in Palawan that a Danish company intends to invest $2 billion in a solar energy project in the Philippines. One of the largest infrastructure companies in Spain, Acciona, is considering investing heavily in solar energy in the country. If and when the decision is made to rehabilitate the Bataan Nuclear Power Plant (BNPP), the MIF can partner with the Korean company that has expressed its interest in investing and operating the BNPP. In fact, the National Economic and Development Authority (NEDA) should go through the 3,600 infrastructure projects worth $372 billion in its list, to find out which of them can attract FDIs that can have the MIF as its local minority shareholder.
Especially for the big-ticket items in this NEDA list, Secretary of Finance Benjamin Diokno has singled out the unique advantage of the Maharlika Investment Fund in reducing the risk of administrative and legal challenges compared with financing through the national budget or through proposals for ODA funding which are usually slowed down by lengthy negotiations, court challenges, and more careful appraisal. The amended Public Service Act in tandem with the MIF as a vehicle for financing will do wonders for the Build, Build, Build program under the Administration of President Marcos Jr.
If we have the best and brightest people in finance and investment banking designated to run the MIF, helped by the four independent directors envisioned in the law, there is no reason why the MIF cannot be insulated from politics, as suggested by a study of the US-based Milken Institute. There will be no politician involved in its operations (since the President is no longer the Chairman). This completely professional team will ensure that the recommendation of the Milken Institute will be followed: that the MIF will be equipped with a long-term investment strategy, along with performance benchmarks that are aligned with short- and long-term goals, minimal currency risk, as well as a range of indicators to measure financial performance, ESG risk, and developmental goals. With this guarantee of professional and competent management, the MIF will be one of the most powerful instruments for the Philippines to attain the goal of increasing its investment to GDP ratio to over 30% (from the present low of 23%). This is the only way we can accelerate our annual GDP growth rate from the 6-7% to the range of 8-10%, which is what we need to reduce poverty to single-digit of 9% or less by the end of the Marcos Jr. administration.
In FDI terms, this would mean reaching the level of annual FDI flows that Vietnam already reached in the last five years: $15 billion to $20 billion. Thanks to the amendment of the Public Service Act, we are now in a position to compete with Vietnam in attracting FDIs, not in manufactured export products, but in infrastructures, green energy projects, and large-scale agribusiness ventures.
Bernardo M. Villegas has a Ph.D. in Economics from Harvard, is professor emeritus at the University of Asia and the Pacific, and a visiting professor at the IESE Business School in Barcelona, Spain. He was a member of the 1986 Constitutional Commission.
