Pasting this in full before it gets paywalled.

By Stephen CuUnjieng

SIGNED, sealed, delivered — it’s yours. Now what do we have with Maharlika and what will they do with it? I have previously said I am supportive of a national development fund. Preferably one like Indonesia’s, but at least the Senate improved on the House version. Still, would it be the way I would do it? No, but I am not the president or a senator, so what should the managers and board do with what we have?

It is clear as can be seen from the rushed document that there are even sloppy typographical errors that could have been cured with a little proofreading. In the section on the Bangko Sentral ng Pilipinas (BSP), the bill mentions “the monetary board” when it clearly should be “the Monetary Board.” Was that so hard to miss, and correct? What else might be there?

More important, there are contradictions or at least ambiguities, which should have been worked out, unless they were intentional. If the latter, then I would be worried. Sec. 2 on the “Declaration of Policy” seems to imply without being explicit that this is a national development fund from what the aims are. Yet there is no provision delineating this or limiting the breadth of what the Fund can invest in or where. Then in Section 14 on what the Fund can invest in, it reads to me like “Everything, Everywhere, All at Once.” Literally any type of equity, debt, or hybrid debt or equity plus joint ventures anywhere is allowed. That was carried over from the bill passed by the House. This does not seem in line with the “Declaration of Policy” in Sec. 2. If I was charitable, I could argue that this is where to park the money, starting with the initial P75 billion until they make the long-term investments but that is something the board and management may choose to follow, impose or ignore. If the latter, then it is no longer a national development fund but a regular fund with unlimited scope.

Short-term, long-term

Let us even argue that this broader scope of permissible investments is just “short-term” until the long-term investments are made. What if they lose value in the meantime or are so illiquid that they can’t be liquefied to fund the long-term investments? Why do I worry that Sec. 14 was not meant for just short-term investments, i.e. for the money on hand until the long-term investments are made? If it was just short-term, why would that section allow joint ventures and unlisted securities which are not liquid, short-term, or easily sold? If for the long term as well, then why is there no limitation on where and what the Fund can invest in? Again, it seems to be the old provision from the bill passed by the House and just carried over without clarifying what it meant, unless they really plan for it to be open-ended. Unless that was the intent and the Declaration of Policy was just principle that the Fund’s board and managers could comply with in whatever way they want to. So, in reality, full discretion. If so, then it really is the old House bill version with some statements of principle but no implementing or limiting provisions, which is an all-encompassing fund and not a national development fund. If that happens, then I worry and I don’t think that is a very good use of proceeds or worth the trouble and use of funds from the various government sources as Sen. Imee Marcos pointed out. Frankly, the government through existing entities can do that already, so why create something new and use profits of the Bangko Sentral (BSP) which are better used building up its own balance sheet? More on that later, but as Senator Marcos pointed out this is not coming from a windfall. The funds are being allocated away from other potential uses of funds by the DBP, LandBank, BSP and the national government.

Open-ended

On June 3, Sen. Mark Villar, the principal author of the bill which has become law, basically said it is both a general fund that can invest in anything and a national development fund. That means it is open-ended and really can be anything, unless the board and management choose to limit the Fund’s scope voluntarily. The board and management have the discretion to allocate what percent to a general fund and to the development side. Should they decide, that scope can also be changed by subsequent boards and managements.

Then there is the way the Fund is being funded. Most mutual funds that invest in public debt and equity are fully funded from the start and fully invest their funds in a short period of time. Unless they are open-end funds and raise new capital, they sell some of their holdings to buy other stocks or bonds. Most private equity firms that invest in unlisted securities (as at least what should be the national development fund side is targeted to do), usually get commitments but only call the funds when needed. What does that mean? Let us for example say XYZ Fund raises $1 billion in commitments from 100 investors who for simplicity commit $10 million each. At that start, there is no money in the fund, except perhaps an initial call of 5 percent or less for organizational purposes. So, in this case all that is put is $50 million. Then they decide to make a $100 million investment in a company or project, the Fund will receive 10 percent, or $100 billion, from the investors who will each send $1 million, or 10 percent of their commitment. This continues until the Fund is fully invested or the Fund reaches the end of its investment period. That way there is no worry about what to do with the money until the Fund makes the investments.

Here we are starting with zero targeted investments but P75 billion in funds. What will the Fund do with this pending use of proceeds? It also reads that this Fund will continue to be funded until it gets to P500 billion regardless of whether the Fund is making the envisioned long-term investments or not. Or is it profitable or not. Not the normal way it is done. For example, GIC manages the reserves of Singapore. Their private equity fund and investments in global private equity funds don’t send the money ahead except for calls for management fees and the like. They usually send the funds when investments are made. It is different if you are a windfall fund like Norway where revenues from their sale of oil is managed but this is not the case here. While sovereign funds are not limited to those with windfalls it is unusual when there is no windfall or revenue stream to fund ahead of commitments. Even more odd if what is envisioned is a national development fund and not a sovereign wealth fund, then as I put it, why can Maharlika invest in everything, everywhere, all at once? I suppose because it is a two-in-one fund, but those two are at cross-purposes.

Most problematic

Then there is the matter of using the profits of the BSP. Central banks, especially if you are not fortunate to be from a reserve currency like the US or European Community, are never big enough. Most prudent governments want to build the asset base of their central banks as fast and as much as they can to have the wherewithal to act in a financial crisis whether homegrown (like we had in 1983-1985) or regional (1997) or global (2008 and Covid and this year after the Ukraine invasion), which happen with regularity and more so recently. Under the BSP law, 100 percent of the profits of the BSP are returned as additional capital. Well, not anymore. The Senate version adds that “the monetary board (sic) can recommend to the president” that the investment of their profits to Maharlika be deferred if needed. Note, it is the president who decides, not the independent central bank and Monetary Board. Also, the nature of emergencies and crises is they are usually unforeseen, hence the need to prepare for their possibility ahead of time and not post its occurrence. When it happens, the central bank will have to use what resources it has and not be able to recall prior profits given to Maharlika or wait for the forthcoming profits and defer sending that if the president agrees. Frankly, this is the most problematic provision of Maharlika for me.

That analogously, is also the issue with using DBP and LandBank as funders. It lessens what is available to lend and by about 10 times the amount they invest in Maharlika. Why 10 times? Regardless of how they find it, what the LBP and DBP invest in Maharlika is charged to their equity. In their respective cases, initially P50 billion and P25 billion. Now a bank needs about 10 percent Tier 1 capital. So P1 in capital supports about P10 in loans and other debt instruments. As the Maharlika investment is charged to their equity, that means up to P750 billion less lending for both. Can the Bankers Association of the Philippines and BSP confirm if I am correct? I hope I am wrong but if I am right this is something to carefully assess and suggest the administration consider.

Especially given the clashing goal of merging LBP and DBP to make them bigger so they can be more efficient and lend more. How is that accomplished by taking away P750 billion in lending capacity up front, even while Maharlika has yet to find investments, and this will continue if the capital investments continue for these two banks.

Let me put it analogously. If it was too imprudent to let the pension funds like SSS and GSIS invest in Maharlika and are permanently barred, wouldn’t the same logic apply to the BSP given their need to constantly build up their balance sheet and resources to defend the peso and stabilize the economy as needed? Same with DBP and LBP if they are to fund infrastructure, development and agriculture. Why take away equity which will result in 10 times reduction in lending capacity?

Let me leave discussion of management, organizational structure and funding to another column. If we had to have a government-funded investment fund, I wish it was a national development fund, similar to the one Indonesia is trying out. That is not what Maharlika is. It could be implemented as a national development fund, but what is provided by the law is open-ended. It seems to be some hybrid fund whose direction is open to the board and managers but whose funding is set.

In the week since its passage, I have been listening to all the arguments of the government officials on how this will help Philippine infrastructure and so on. I agree if the Fund dedicated its resources to be a national development fund, it could. If that was the intent, then why did they set up a Fund that could invest in everything, everywhere, all at once? And why is that part not being explained?