On June 22, President Ferdinand Marcos Jr. led the inauguration of the new headquarters of the Securities and Exchange Commission, which is tasked among other things, to ensure the “protection of the investing public” against investment scams.
When asked about what the government can do against the proliferation of online and text scams, Marcos said: “My advice to the public is that when you get a message, and there is a deal being presented, and it sounds too good to be true, it is.”
All well and good. But he might as well be talking about his pet project, the Maharlika Investment Fund, which seems to be a forgone conclusion already: in the same event, the President said he will sign “as soon as [he gets] it.”
(The enrolled or final bill is now en route from Washington, D.C., where it was signed by Senate President Juan Miguel Zubiri, who said the bill’s infirmities and conflicting provisions were corrected using the Viber group of the Senate’s majority bloc. Is that even legal and constitutional?)
Now, why does Maharlika sound like a scam? Because it offers a deal that sounds too good to be true – just like what the President had described.
If you listen to the President, his economic team, and proponents in Congress, they are pitching Maharlika as a veritable panacea to all the country’s economic woes.
In a joint statement released on June 13, the economic team said Maharlika is “not only beneficial but necessary at this point in time,” “an ideal vehicle and well-positioned to bring in investments as the Philippine economic outlook remains robust amid the global economic slowdown.” Funny, since Maharlika was not even mentioned in the Marcos administration’s Philippine Development Plan nor the Medium-Term Fiscal Framework.
Meanwhile, Senator Mark Villar – who proposed Maharlika in the Senate – said the fund can generate as much as 350,000 new jobs. Is it a job-generating measure now?
Most notably, the economic team and lawmakers keep claiming that the returns from Maharlika’s investments will be about 8.6%.
Where did this magical figure come from? Apparently, it came from a three-page (yes, three) “business proposal” submitted by the Bureau of the Treasury to the Senate. So much for a fund that has a seed capital of at least P125 billion, and an authorized capital of as much as P500 billion.
Let’s parse the three-page business proposal.
As explained by Senator Villar himself, using the business proposal submitted by the Treasury: “In order to achieve the goals of the MIF, they must diversify the investments. So in line with the objectives, the MIC is envisioned to maintain two major sub-funds; Capital Market Investment Sub-fund and Sectoral Investment Sub-fund.”
Simply, Maharlika will invest in two major categories of investments.
First would be capital market investments like your usual stocks and bonds.
But, quite telling, in the business proposal, listed under this category is “Real estate: Stock price of a reputable real estate organization listed in the [Philippine Stock Exchange or PSE].”
Why was this singled out? (Incidentally, the Villar group has real estate companies listed on the PSE, like Vista Reit Inc., Vista Land & Lifescapes, and Vistamalls Inc.)
Also included under this first category are “Private equity infrastructure: Global infrastructure investment fund,” “Natural resources” (publicly-traded corporations in agribusiness, energy, and commodities processing), and “Money market” instruments.
The second type would be investments in companies in four selected sectors:
- Power (companies investing in power generation, wind power projects, solar farms, geothermal power plants, hydropower plants, other renewable energy facilities)
- Real estate (companies developing mixed-use and commercial properties)
- Infrastructure (companies invested in expressways, airports, rail, and road projects)
- Logistics (companies involved in port development and expansion and investments in port equipment, cold storage, and other facilities)
How will Maharlika’s funds be allocated? In the Treasury’s business proposal, investments in this sectoral sub-fund will be equally distributed: that is, 25% in each of the four sectors, “to reflect the equal importance of each sector to the development needs of the Philippine economy.”
But it’s not at all true that all these sectors contribute equally to growth. (For instance, in 2022, real estate contributed just 9.1% to total service output, compared to professional and business activities [10%], financial services [16%], and trade [30%].)
More importantly, how exactly were these sectors selected? Is it prudent and wise to use Maharlika’s funds – seeded by public funds – to support companies in, say, “mixed-use and commercial properties”? As one economist friend remarked, is this investment strategy aligned with the goals of the Philippine Development Plan? How?
Sure, the government must promote the private sector’s growth. But ideally, if government subsidies must be handed out at all, such funds must go into firms and sectors that spur innovations and technological growth, as well as those with distinct “positive externalities” or benefits redounding to society at large – not just the companies themselves and their client base.
By failing to give any solid justification for the choice of sectors where investments will be made, Maharlika can very well be used to “pick winners”: that is, subsidize or reward certain companies and business interests, possibly those owned by politicians and their friends and family. This will be reminiscent of the crony capitalism that was entrenched during Martial Law.
Garbage in, garbage out
Now, said the Treasury, “Following the methodology described above (is it even a methodology?), the MIC may generate a return on equity of around 6.51% to 10.78%, depending on the blend of placements between the Capital Market Investment Sub-Fund and Sectoral Sub-Fund.”
That is, if Maharlika’s investment were put exclusively in stocks and bonds (category 1), and none in companies in select sectors, the 10-year average of “simulated returns” would turn out to be 6.51%. If it’s the reverse – 100% of investments in sectors, 0% in stocks and bonds – the returns will be even higher at 10.78%.
So apparently, the much-cited 8.6% return from Maharlika is the simple average of the two numbers above.
There are several issues here.
First, how were they able to compute the 6.51% returns on stocks and bonds? Exactly what stocks and bonds and companies did they choose to do the simulations? It’s not at all elaborated in the business proposal.
Second, why is the return on “aggressive” sectoral investments higher than “conservative” capital market investments? And how did they get the 10.78% return on “aggressive” sectoral investments?
Is this from individual projects of companies in the four sectors? If so, what projects? Or, is this derived from the stock prices of companies selected from the four sectors? If so, this is a major deviation from the idea of a strategic investment fund or SIF (note that Maharlika is not a sovereign wealth fund or SWF in the traditional sense).
In SIFs, funds are placed in economic projects (not companies) that could bring about growth and development. The thing is, returns from economic projects are almost always lower than returns from financial investments. Moreover, returns from economic projects are nearly impossible to measure, and not at all comparable with returns from financial investments. For example, how do you measure the returns from a road or bridge? It’s totally different from the return from a stock or bond.
Those who crafted this business proposal don’t seem to understand the nature of strategic investment funds in the first place.
Third, what is the proper mix of capital market investments and sectoral investments? This goes back to the fact that the Maharlika bill contains no provision or guidance specifying how exactly Maharlika’s investments ought to be allocated.
This deviates from global practice: the laws establishing other SIFs indicate exactly what percentage of investments will be placed in stocks and bonds on the one hand, and economic projects on the other.
In the case of the Nigeria Infrastructure Fund, for example, only up to 10% of capital available for investment can be invested every year in “social infrastructure projects.”
Too bad to be true
According to the business proposal, using the “conservative” 6.51% expected return from equity investments, “the proposed seed fund of Php100 billion may grow to around Php187.9 billion by 2033.”
Meanwhile, using the magical 10.78% return, the P100 billion “will grow…to around Php278.3 billion by 2023.”
First, why assume just P100 billion as seed fund? Note that in the Senate version, the seed fund will be at least P125 billion (P50 billion from the Land Bank of the Philippines, P25 billion from the Development Bank of the Philippines, and P50 billion from the national government).
Second and much more importantly, these figures are garbage since the assumptions used in the computations are also garbage. What’s that computer science term again? GIGO: garbage in, garbage out.
The business proposal settles for the simple average of 8.64% return, “Bearing in mind the standard industry practice of diversification, as well as the long gestation periods associated with projects under sectoral investments.” With this, P100 billion will supposedly grow to P229 billion by 2033. (That will be lower if you compute for the present value of that amount.)
If you think of it, P229 billion isn’t really much at all. For instance, the total unpaid estate taxes of the Marcos family is already P203 billion, just 11% lower than the expected size of Maharlika in 10 years (assuming all of the fund’s earnings are retained and not withdrawn for one reason or another).
This goes back to the idea of “additionality” or value-added of Maharlika: if scarce public funds can be invested directly on projects – without having to gamble them away in a risky fund – then, by all means, let’s just do that. No need for Maharlika in the first place. Until now, all proponents have failed to prove the additionality of Maharlika.
Moreover, as analyzed by UPSE Professor Emeritus Emmanuel de Dios, using the concept called social rate of time preference, the returns from Maharlika ought to be at least 10% (based on back-on-the-envelope calculations): “Bottomline, if funding the Maharlika fund is to be justified as coming from current revenues, the alternative use should yield a rate of return of at least 10% to 11%.”
So by that benchmark, even the much cited 8.6% doesn’t cut it.
In the end, the potential benefits of Maharlika are fantastical and exaggerated. But at the same time, its potential costs are plentiful and deleterious.
Among other things, Maharlika will endanger the financial strength of state-owned banks and pension funds, delay the capital-raising of the Bangko Sentral, promote risky investments (moral hazard), waste taxpayers’ money, and pave the way for abuse and corruption because of its poor governance structure.
So Maharlika isn’t just too good to be true, but also too bad to be true. – Rappler.com
JC Punongbayan, PhD is an assistant professor at the UP School of Economics and the author of False Nostalgia: The Marcos “Golden Age” Myths and How to Debunk Them. JC’s views are independent of his affiliations. Follow him on Twitter (@jcpunongbayan) and Usapang Econ Podcast.