Breaking Down House Bill 6398
How We Learned to Stop Worrying and Love the Fund
On 28 November, 2022, House Representatives Ferdinand Romualdez, Manuel Dalipe, and others introduced House Bill 6398 to the Nineteenth Congress. This bill seeks to found a sovereign wealth fund (SWF), provide guidelines for its management, and appropriate its funds. The proposal has since seen outrage and rejection, no less from the Makati Business Club1, UP Economists, the Management Association of the Philippines, and others23. Wrong statements have also spread, including the Foundation for Economic Freedom’s claim that the Bangko Sentral must “contribute 50% of its cash dividends” to the national government4.
Summarizing the Bill
The Fund and its Management
Article 2 of the bill gives provisions on the fund’s establishment. Legal ownership belongs to government financial institutions, the National Government, and other mandated fund contributors. The fund’s objective involves generating consistent and stable investment returns given risk. Article 3, which provides for the investment corporation’s establishment, expounds on the fund’s management. The fund will have a diverse portfolio of investments both locally and abroad. The fund is mandated to follow the Santiago Principles5, internationally accepted principles for managing SWFs. As of filing, the fund itself will have an initial investment from the following government institutions subject to voluntary increases:
GSIS: Php 125 billion;
SSS: Php 50 billion;
Landbank: Php 50 Billion; and
Development Bank of the Philippines: 25 Billion.
As of writing, Representative Stella Quimbo has said that the bill will drop the GSIS and SSS requirements, but no official writing has been done yet. The National Government will also allot Php 25 Billion additional investment. The following government institutes will also contribute the following annually:
Bangko Sentral: 10% of remittances from OFWs, and 10% of BPO proceeds;
PAGCOR: 10% of gaming proceeds;
National Budget: to be discussed in General or Supplemental Appropriations; and
Other sources, like public borrowings.
Only a maximum of 10% of the past year’s gross revenue is allowed for administrative and operating expenses. Additionally, 10% of the initial investment is allowed to be used for the first year of operation.
Investments and Governance
Article 4 starts with a list of allowed investments. While the list is expansive, there is a provision that investments in real estate, infrastructure and other development projects are subject to the National Economic Development Authority’s approval. The rest of the Article gives general guidelines which the Board of Directors is expected to fill in later on.
As Article 5 lays out, the board itself will consist of a Chairpserson, a CEO, six regular members, and two independent members. Unlike what popular outrage suggests, nowhere does it say that the President of the Republic of the Philippines will chair the board. Instead, the board is required to submit periodical reports to the Office of the President, and to the Advisory Board (the government financial institutes’ presidents and additional members). The rest of the Article mandates what bylaws the Board will come up with. [Editor’s note: there is an update regarding this piece of information]
Article 6 gives interesting details on rewards and incentives. The Board of Directors will determine performance-based incentives to all members of the corporation - including the board themselves. Separation and termination will not impact these incentives for the period they applied in.
The rest of the bill deals in small and particular details that will lengthen this piece if dealt with. We now proceed to discussing what effects they may have.
The effects
We must reject once and for all the left-libertarian view that all government-operated resources must be cesspools. We must try, short of ultimate privatization, to operate government facilities in a manner most conducive to a business, or to neighborhood control.
Murray Rothbard, Right-wing populism
Other than standard gripes against government management of public funds, there is nothing in this bill that should give cause for grave alarm. No new taxes will be raised, no mandatory contributions from citizens will be levied, and no explicit objectives are pursued beyond returns on investment. Other than the initial contribution, all funding will come from the Bangko Sentral, PAGCOR, and the National Budget. The greatest cause for concern should be public borrowings being placed into the fund. Risky investments ought to be avoided in this case, but otherwise there is little problem here. There will be bureaucratic bloat, but at the very least their salaries will come from the fund’s profits instead of our taxes.
Can a Sovereign Wealth Fund succeed here?
Historically successful Sovereign Wealth Funds (SWFs) rely on proceeds either from natural resources dumped in foreign markets, or from trade balances. These provide enough disposable proceeds than can be used for whatever purpose. In the MIF’s case, the only funds available are those from government pension funds (for the initial contribution), from foreign currency inflows, or from amusement incomes, other contributions notwithstanding. Many will hue and cry about the lack of budget surplus, but we need to put things into perspective. Foreign states with SWFs - Norway, Denmark, China, among others - all have public debt. Public debt is a reality in this day and age when all governments focus on maximizing quantitative metrics like GDP. In fact, all mentioned countries have historically operated on debt-to-GDP ratios of above 40% anytime in the last 50 years678. Putting things into perspective is a deed that barely any Filipino on the professional-managerial class does these days. While it’s unfortunate that we don’t have Scandinavia’s oil deposits or China’s trade surplus, one should get used to treating all government income as sunk costs. We pay taxes because the government will shoot us if we don’t. Rationalizations like “the common good” serve only to comfort us of our lost income. We here would rather that our taxes actually multiply through transparent investments than go to some sleazy bureaucrat. In fact, taxes will only be a minority in funding sources. PAGCOR and the Bangko Sentral will contribute most of the annual contribution, barring whether lawmakers decide otherwise in budget appropriations.
The Maharlika Investments Corporation
The MIC acts as a consortium of government financial institutes. While they may allot some staff to work here, it is probable that new managers and bureaucrats will be hired. The MIC itself will have bylaws that deserve more scrutiny than House Bill 6398 ever will. These bylaws will govern how the corporation operates daily. If ever the bill gets passed and no buzz comes from the media, private interest groups, or the founding government financial institutes on the MIC’s bylaws, then the public should beware - something real meaty will have happened behind the scenes.
The corporation itself is expected to be run like all funds are: injecting investments where most profitable. The main difference is that these investments are subject to public scrutiny. Having a fund’s investments be available to the public will let the public know what the executive actually prioritizes, rather than have it buried under legislative horsetrading. Those managing the fund are expected to know their Finance: technical indicators, options, futures, derivatives, security analysis, and other big words. Experience with government hiring lets us know that they will get Masters degree holders, though the fund might follow the Western pattern for financial funds and prioritize PhD holders in Mathematics, Physics, Statistics, or Computer Science. Contrary to popular belief, hedge funds, mutual funds, and the like do work, and one can predict turns in the economy - the key is not to believe anything they say in Economics or Finance programs.
Macroeconomic Concerns
The first big concern on everyone’s mind is the use of pension funds for the initial investment. Representative Quimbo has said that this will be removed, but for the sake of argument, let us say that it will push through. One little known fact about pension funds is that present payers pay present benefitees. Pension funds are a pyramid scheme that survive from getting more and more members. To wit, part of concerns on decreasing fertility are the lack of new social security payers. If the government hurts from having to recoup the lost social security payments, then we wouldn’t care. No pyramid scheme deserves to continue, and its makers ought to hurt from making false promises. Retirees can sue the government for its assets when they realize how scammed they were.
Larger concerns exist anyhow. The Bangko Sentral investing 10% of OFW remittances and likewise for BPOs implies lower foreign reserves. This will be great for exporters, who will receive more cash when the peso is weak. On the other hand, imports will be more expensive. The RCEP’s looming ratification in fact makes this arrangement attractive. No one but the rich will bother to buy foreign goods, while local businesses can dump their wares abroad. Ideally, small and micro businesses would benefit just as medium and big businesses will. A weaker peso in face of RCEP ratification is beneficial either way: the lucky or brave few among the former will definitely benefit. As for PAGCOR’s contribution, we have no cares for where gamblers’ money goes to, and we have no cares for whether casinos get more expensive. Money wasted is money wasted, no matter the endpoint. The public getting some benefit out of it is better than lining some amusement bureaucrat’s or casino owner’s pocket.
Half a loaf, or no loaf?
Despite people’s concerns on the government’s budget, the Maharlika Investment Fund is no different and should be treated as no different from the government’s other adventures. If anything, this enterprise will teach people about how government revenues are the public’s sunk cost: whatever the legal details, once our money goes to the government, it stays with the government for it to do as it pleases. This is the cold reality of power: the mighty gets what it wants, and makes what it wants reality. If we get any good out of it, even better. We might get only half a loaf with the Maharlika Investment Fund, but better that than none.
Either way, spending that goes to the fund at least provides tangible returns on investment on its own instead of going through bureaucratic or legal procedures. Far from a Keynesian government correction in markets, this enterprise will make sure that decision makers aware of risk enter the civil service. While most of the government’s budget jumps through hurdles made of red tape, the fund’s assets can be used for whatever purpose with little oversight as long as everyone can see results. The bill itself includes allowable investments, so oversight can be small as long as the fund managers stay within these bounds. If the fund managers screw up, at the very least we have concrete results as basis to say that they screwed up. Whether civil servants or government officials screwed up remains a subjective exercise with many variables, so this already shows improvement. Any returns from the enterprise will be used for any purpose as the government sees fit. Plenty of politicking will ensue from how to allocate them, but then again this is no different from politicking over taxes. It might even be spicier, as the fund managers will have a say in how their hard work pays off9.
https://www.philstar.com/pilipino-star-ngayon/bansa/2022/12/07/2229109/maharlika-wealth-fund-tablado-sa-makati-business-club-
https://mb.com.ph/2022/12/05/business-think-tanks-reject-planned-maharlika-wealth-fund/
https://tinyurl.com/MaharlikaSWF
https://www.ifswf.org/santiago-principles-landing/santiago-principles
https://tradingeconomics.com/china/government-debt-to-gdp
https://tradingeconomics.com/denmark/government-debt-to-gdp
https://tradingeconomics.com/norway/government-debt-to-gdp
“You don’t want to fund this woke trash I love? Guess I’ll do a bad job this quarter.”