MWF: An idea whose time has come
Funds are more successful when matched with good governance and strong political institutions.
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Funds are more successful when matched with good governance and strong political institutions.
In the news now is the proposed creation of the Maharlika Wealth Fund now pending In Congress as House Bill 6608 and Senate Bill 1764. The proposal has taken a beating in social media and the press lately. Most of the negative comments against the bill may be based on unfounded fears and a lack of understanding about the concept of a sovereign wealth fund.
The International Monetary Fund defines SWFs as government investment funds established for various macroeconomic purposes. The concept of a state-owned investment fund is not really new. The Permanent School Fund of 1854, followed by the Permanent University Fund of 1876, established by the State of Texas, USA was the first SWF in history that was designed to use excess oil revenues to fund educational institutions in an attempt to promote human capital formation.
Closer to the Philippines, the Indonesian government established its first sovereign wealth fund in 2021, the Indonesia Investment Authority. The INA is now regarded as a successful model of a sovereign wealth fund that was used to fund the country's big-ticket infrastructure projects even amidst the Covid-19 pandemic.
The size and number of SWFs have increased dramatically in recent times. According to the SWF Institute, there are 89 SWFs with accumulated assets of nearly 8.2 trillion dollars in 2020. The establishment of an SWF is a tried and tested investment vehicle that has been used by governments in both first-world and developing countries to achieve their economic objectives.
Each SWF has its own individual reason for being created; additionally, all funds have their own goal, which is mutually complementary and can change over time according to the specific needs of the given economy and the situation in the financial markets. In the case of the Maharlika Wealth Fund, our economic managers stated that the MWF is a sovereign wealth fund that will be used by the government to invest in a wide range of outlets such as foreign currencies, fixed-income instruments, domestic and foreign corporate bonds, commercial real estate, and infrastructure projects, among others.
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There is a lot of criticism levied against the proposed MWF because of concerns about the use of pension funds from GSIS and SSS (essentially trust funds of its members) – which have now been addressed by Congress when it deleted them from the possible sources of the MWF. The political opposition also fears that undue political influence may adversely affect investments in unworthy companies and the lack of transparency and accountability. But the solution to these fears and apprehensions is not to scrap the idea of a sovereign wealth fund altogether. Sovereign wealth funds are governed by the national regulations that each country decides to use for its SWFs. Thus, the solution is to include safety mechanisms in the law to ensure transparency and accountability.
The verifiable facts are available online from the success stories of other countries with their own SWFs. The lesson learned is that establishing an SWF can be useful in many contexts over the long run, and with the best empirical estimates we find that these funds have proven to be helpful. It is a truism that management quality and institutions truly matter for SWF's success.
Funds are more successful when matched with good governance and strong political institutions. Thus, the Maharlika Wealth Fund bill should be certified as urgent by the President because this is an idea whose time has come.
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For more of Dean Nilo Divina's legal tidbits, please visit www.divinalaw.com. For comments and questions, please send an email to cabdo@divinalaw.com.
