I sat through the YouTube replay of the third public hearing of the Senate version of the MIF recently and, from the looks of it, the public phase is apparently now over.

What takes place next is the Technical Working Group phase which will be held behind closed doors and will probably not be televised. So kibitzers such as yours truly and the general public will be in the dark until a final version is produced by a Bicameral Conference Committee composed of a select group of House and Senate legislators to reconcile any differences in their respective versions.

I might add that this last phase is the “Hora de Peligro” where last-minute horse-trading and insertions from the left field not at all covered by the public committee hearings and floor debates are known to happen. Presumably, however, or I should say, hopefully, the various position papers and public comments raised by the private sector representatives during the hearings will be earnestly considered by our esteemed legislators. With control of the Senate and the House with the administration, the odds obviously favor the eventual passage of the MIF. Given this reality, what’s the best-case scenario going forward?

The gist of some key issues that were ventilated during the last Senate hearing gives us a clue as to how the MIF structure might evolve.

After initially heralding it as a Sovereign Wealth Fund, which traditionally is a strategy for countries with surplus funds to diversify their risk assets as a hedge for future cyclical market dips, it is now crystal clear that our government intends to generate incremental funding for the priority areas. Not debt, however, but equity from investors and prospectively from the revenue that will be generated by the MIF. The economic team’s hope is two-fold. Creating a government-sponsored investment vehicle with certain privileges, focused on developmental priority projects, will attract passive financial foreign and domestic investors who are prepared to sit it out for the long haul.

The other aspiration is that with a team of astute fund managers, the fund will be able to invest a certain percentage of the investible funds in a diversified array of capital market securities whether here or abroad that will generate a return better than the yields of a market index or specialty funds that are widely offered by local and international wealth fund managers. The combined returns of these twin strategies will hopefully provide the MIF investors with an attractive return. The simulations of the economic management team, which apparently involved several iterations, indicate an average return of slightly above 8 percent over 10 years. If it comes to fruition, the rate is not a home run but it’s not bad either. It definitely beats inflation and I am assuming the simulations considered FX rate movements as well.

The nagging question raised by the Senators however is: Do we really need to set up a new entity or can a fully beefed-up NDC serve the same purpose? On this point, I must admit that a newly created fund actively promoted by a brand new administration that mimics other sovereign funds will likely have better prospects of attracting institutional investors instead of a recycled NDC with not exactly the right track record to speak of. Furthermore, the layering of control measures involving both government and private external auditors coupled with punitive consequences for any board or management misdeeds can be sufficient risk management safeguards.

But where is the capital for the MIF going to come from given our strapped fiscal situation? I thought a persuasive case by the private sector industry associations to stay away from the coffers of the anointed GFIs and BSP has gained ground since the economic team seems to be softening its stand on this one. The idea of infusing as capital selected government assets due for privatization such as choice real estate properties and lucrative GOCCs like Pagcor will likely be the route.

The problem though is the MIF will need some liquidity to jumpstart its activities. Perhaps the solution could be a hybrid of bringing in the private sector from the get-go and allowing the GFIs to voluntarily infuse capital within their comfort zones and not a mandated amount that would necessitate regulatory relief. This could also pave the way for the removal of the contentious issue of a government guarantee being asked for by the GFIs.

Until next week… OBF!

***

For comments, email [email protected]