MAP Insights

1. The Maharlika Investment Fund has been the subject of much controversy after its swift passage in the House of Representatives. House Bill (HB) No. 6608 seeks to establish an independent fund which the government can use to make strategic investments, or what is more commonly called a “sovereign wealth fund.”

    

   While it is easy to look at the successful sovereign wealth funds, such as Norway’s Government Pension Fund and China’s China Investment Corporation (which have trillions in assets, according to the Sovereign Wealth Fund Institute) or even Singapore’s Temasek, there are also some other funds that should serve as a warning – specifically, the 1MDB.

    

   Problems of Transparency

    

   One of the most prominent scandals in the financial world was the 1MDB scandal. 1Malaysia Development Berhad, or 1MDB, was Malaysia’s sovereign wealth fund, and was the subject of embezzlement and money laundering. An estimated amount of US$4.5 Billion (B) was alleged to have been stolen from the 1MDB and it further incurred outstanding debts amounting to US$7.8B.

    

   Certainly, one might say that the 1MDB is just one sovereign wealth fund and that there are more successful wealth funds out there. However, one of the oft-repeated criticisms against sovereign wealth funds is their lack of transparency and accountability.

    

   If the Philippine government were less corrupt, then maybe they could be trusted with a fund like this. As of 2021, the Philippines ranked 117 (out of 180 countries) in the Corruption Perception Index published by Transparency International. It scored a total of 33 out of 100.

    

   Still, even if we assume that public officials (and/or the people who would be handling the fund) are incorruptible saints, there are still several other red flags to look out for.

    

   Lack of Surplus Revenues

    

   One of the major problems is the source of funds. Sovereign wealth funds generally arise out of a country’s surplus revenues – whether from surpluses due to natural resources, trade surpluses, or any other similar sources.

    

   BSP Governor Felipe M. Medalla claims that the balance sheet is strong enough for the Maharlika Investment Fund, and Finance Secretary Benjamin E. Diokno even went so far as to claim that the BSP has “too much” gross international reserves.

    

   However, the figures appear to disagree. In fact, as of September 2022, the National Government recorded a PhP179.8B budget deficit. Though this is lower than last year’s PhP180.9B deficit, it is nevertheless still a deficit.

    

   So, given this deficit, where exactly does the government expect to draw its funds from?

    

   The initial capitalization of PhP75B would be sourced from Land Bank and the Development Bank of the Philippines. For subsequent funding, the Maharlika Fund would also come from the BSP’s declared dividends, PAGCOR’s gaming revenue streams, and other sources, such as royalties and/or special assessments based on natural resources, proceeds from privatization of government assets and borrowings by the MIF.

    

   Clearly, these sources of funds are not sourced from any surplus revenue.

    

   Previously, initial versions of the bill also included SSS and GSIS as the sources of funds, which means the government would be passing the burden onto its citizens. Thankfully, this idea appears to have been scrapped in the later versions.

    

   Safeguards

    

   Another problem is the issue of safeguards. The 1MDB scandal noted above is a result of inadequate safeguards. So, it merits asking: does the Maharlika Investment Fund have sufficient safeguards?

    

   Proponents of the fund are quick to assure the public that there are enough safeguards – such as the adherence to the arm’s length principle and the prudent person rule.

    

   The Fund would also comply with the Santiago Principles, which are the generally accepted principles and practices (GAPP) voluntarily endorsed by the members of the International Forum of Sovereign Wealth Funds. These principles essentially embody the “best practices” for the operations of sovereign wealth funds. The bill also states that the fund would adhere to “internationally-accepted standards of transparency and accountability” as well as with other laws, such as the Securities Regulation Code, and ethical standards.

    

   Of course, what the law states and how it is implemented would not necessarily be the same.

    

   Assume, then, for the sake of argument, that a violation of these safeguards occurs. What then would be the penalty against the offender? The law provides that, for the auditor, the fine is P80,000 to P500,000. In case the auditor’s failure is attended by fraud or injury to the general public, then the auditor or responsible officer may be fined P100,000 to P600,000.

    

   What about for graft and corrupt practices? A corporation who appoints an intermediary who then engages in graft and corrupt practices would be punished with a fine of P100,000 to P1,000,000. Any director or officer who tolerates such graft and corrupt practices would be penalized P500,000 to P1,000,000 as well.

    

   In looking at these penalties, remember that the Maharlika Investment Fund would be handling billions of taxpayer money.

    

   Other Provisions

    

   Under HB 6808, (1) all funds, assets, and properties, (2) all revenues, income, or investment earnings, as well as accruals thereto; and (3) purchase of supplies, equipment, papers, or documents are exempt from tax.

    

   Importation of supplies and equipment for the fund would also be exempt from customs duties.

    

   Instead, in lieu of the taxes and the customs duties, the Maharlika Investment Corporation is obliged to remit at least 25 percent of its net profits as poverty and subsistence subsidies to Filipinos living below the poverty threshold. The remainder of the fund’s net profits would be remitted to the national government, to be earmarked for social welfare programs.

    

   Aside from the tax exemptions, there are also other provisions on exemptions and privileges. The Maharlika Investment Corporation is also exempt from the GOCC Governance Act of 2011, from the Government Procurement Reform Act, and the Salary Standardization Act.

    

   The Fund’s exemption from the Government Procurement Reform Act is another possible red flag. Of course, the exemption is limited only to “the procurement or engagement of the professional or technical services needed in the selection of investments,” it is still a provision that possibly warrants looking into.

    

   The Philippine Government is, after all, not a stranger to paying for overpriced procurements. Just over a year ago, the Pharmally scandal resulted in billions of taxpayer money being used in the payment of allegedly overpriced facemasks and other COVID-19 supplies.

    

   Prioritizing Measures Other Than the Maharlika Fund

    

   Another important question that warrants asking is on the timing. Is now the time to establish the fund? While it is possible for the fund to be profitable in the future, it certainly does not address the present economic problems faced by the country. As of December 2022, the Philippines has a national debt of PhP13 Trillion. As of December 2022, the country’s inflation rate stands at 8.1 percent. These are not problems that could be solved by a sovereign wealth fund.

    

   Instead, the government should focus on addressing the present economic issues that the country is facing.  It should address inflation by either implementing fiscal restraint, developing new sources of revenues, or even possibly both. As we have been proposing, it should also look into improving tax collections by modernizing the BIR and lifting bank secrecy laws.

    

   More importantly, if the government is to be trusted with managing a sovereign wealth fund, it should first take steps to improve transparency and accountability, and to eradicate graft and corruption.

    

   Overall, sovereign wealth funds do indeed appear to have some benefits, but there are plenty of red flags that make them prone to corruption by unscrupulous politicians.

    

   Given the scope and the potential implications of such a fund, it certainly deserves more than the 17 days that the lower house accorded it. The bill would still have to pass through the Senate before it can be signed into law. Hopefully, the upper house would accord it the skepticism it deserves and carefully scrutinize the bill in question.

    

   (This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.  The author is a MPA/Mason Fellow at Harvard Kennedy School. He is a member of MAP Tax Committee and MAP Ease of Doing Business Committee, Co-chair of Paying Taxes on Ease of Doing Business Task Force, and Chief Tax Advisor of Asian Consulting Group. Feedback at <map@map.org.ph> and <mon@acg.ph>.)

   Between now and 2027, Xi Jinping has set and articulated the following goals:

    

   • Intensify troop training and enhance combat preparedness across the board, strengthen all-around military governance, and consolidate and enhance integrated national strategies and strategic capabilities.

    

   • Innovate the guidance of military strategy, develop strategies and tactics of people’s war, build a strong system of strategic deterrent forces, raise the presence of combat forces in new domains and of new qualities, and deeply promote combat-oriented military training.

    

   Whether one likes him or not, he’s transformed the PLA into a modern strategic combat force. Security analysts believe that he’ll forcibly take Taiwan on or before the centennial of the PLA’s founding in 2027. Should that happen, it could simultaneously wrest strategic control of the countries comprising the First Island Chain. With what China has accomplished under Xi’s watch so far, the CCP-PLA clearly possess the mindset, aptitude and skill sets to ensure China’s defense and security. But so do the U.S., Japan, South Korea, India, Indonesia, Singapore, Vietnam and Australia to help protect the Indo-Pacific.

    

   The latest U.S. security review sees the People’s Republic of China as harboring the intent and, increasingly, the capacity to reshape the international order and tilt the global playing field to its benefit. The U.S., on its end, affirms its commitment to “responsibly manage its long-term competition with China” while reaching out to nations who share its core belief that the rules-based order must be the basis for global peace and prosperity. Sadly, while mouthing peace, their war preparations are actually drawing them farther away from it.

    

   Even if, for argument’s sake, both sides don’t want war, they’re actually on a collision course pushing countries around us to accelerate their defense build-up. They have one thing in common: they have the right mindset, aptitude and skill sets to act in their national interest. In our case, for far too long, that has been our Achilles heel. There are too many disablers within our corridors of power that sacrifice national security in favor of their selfish interests. Our dismal state of unpreparedness keeps us vulnerable and exposed to the clear and present danger that surrounds us. We’ve squandered so much time already.

    

   In 2013, the China News Service, China’s second largest state-run media outlet, published an article entitled “Six wars China is sure to fight in the next 50 years.” It alluded to China’s pride, shredded after centuries of defeat and embarrassment. China has long been preparing itself for war, preferably without firing a shot. However, its offensive firepower isn’t there for display. At some point, it will be used when necessary to wage:

    

   1. The war to unify Taiwan (2020–2025)
   2. The war to recover the various islands of the South China Sea (2025–2030)
   3. The war to recover southern Tibet (2035–2040)
   4. The war to recover Diaoyutai and the Ryukyus (2040–2045)
   5. The war to unify Outer Mongolia (2045–2050)
   6. The war to recover the territory seized by Russia (2055–2060)

    

   China’s a cunning master of timing, sophisticated cost-benefit analysis and risk assessment. It strives to win by applying “unrestricted warfare” through superior advantage in diplomatic warfare, proxy warfare, cyberwarfare, currency warfare, trade warfare, psychological warfare, electronic warfare, computer network operations warfare, espionage, etc. It may bide its time or stage swift blows at an adversary’s strategic points of weakness to kill its will to resist. That’s what we need to address to ably defend ourselves and be a reliable allied partner.

    

   There’s so much to do in so short a time. We need to switch to good governance; develop our own A2AD strategies; restructure the armed services to fight a hybrid war; find new ways of funding modernization and sustainment; adopt enabling laws, rules and regulations that facilitate emergency procurement of essential assets; establish a technology-based defense industry; invest in strategic stockpiles. Time will tell if our entire national leadership finally scrambles to make up for lost time.

    

   The last thing we need is to shamefully get caught, once again, with our pants down.

    

   (This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.  The author is former Governor of the MAP. He is Chair of Philippine Council for Foreign Relations, Vice Chair of Pepsi-Cola Products Philippines, Inc. and sits on the boards of other companies as Independent Director. Feedback at <map@map.org.ph> and <rmalunan@gmail.com>.)

   oyees, but healthier food as well. After all, the ones who decide are the management, Human Resources and Finance. You may be surprised that healthier food served in cafeterias may mean less sick days for your personnel and less absences, too.

    

   Using technology to save money

    

   If you have not yet invested in inverter appliances, think again. These energy-efficient appliances, lights and other equipment save the company a lot of money in lower electrical consumption while saving the planet. Yes, it may be expensive at the start but savings as well as a lesser carbon footprint come as a reward for the planet and your bottom line.

    

   Bike, don’t drive

    

   Many factories now encourage employees to live near their place of work and avoid long commutes. They provide bicycles, motorcycle loans and other provisions for employees to avoid long travel times. This also contributes to efficiency of workers who sleep longer than those who have to wake up early, get less sleep and are less efficient in their jobs.

    

   Vegetable gardens in the office or workplace

    

   Companies can encourage employees to plant in a designated area and grow their own vegetables. This action helps employees save on market trips and makes them more conscious about growing their own food. Even the lowly malunggay or moringa tree can give employees a lot of healthy meals at home or in the cafeteria. There are urban gardens, like plant towers, that can be started even in high-rise offices with decks or open rooftops.

    

   Rather than just tree planting activities in the Human Resources calendar, you can start allocating space for company gardens where employees can buy fresh vegetables or harvest what they plant.

    

   Work outside and take in some fresh air

    

   Make a field day or a day outside a regular occasion for your townhall meetings rather than another gathering inside air-conditioned offices or hotels. Get some sun, some fresh air and let employees work (or meet) outside the office for a change. Go to a park or a farm, for a change. You may be surprised with better results when your team gets to commune with Nature. Take your employees hiking, going on a picnic or just breathing some fresh air on a regular basis.

    

   Give rewards for green and safe ideas

    

   The best ideas come from the people who feel the heat of brownouts, high electricity costs and the high price of onions and rice. Listen to ideas from the smallest member or the one who had the simplest education. Green is the new black. Maybe they have ideas that can help your bottomline while you help Mother Nature. Reward suggestions on how to make your company greener, healthier or safer.

    

   Ready to start to turn a new leaf? Start with yourself, then your family and then your company. If everyone just did something different to make the world a better place, we will all be able to take 2023 by the horns and hope for a better, healthier year. But we have to start with ourselves.

    

   What habit can you change this New Year?

    

   (This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.  The author is member of MAP Diversity & Inclusion Committee, and MAP Agribusiness Committee. She is Chair of the Philippine Coffee Board, and Councilor of Slow Food for Southeast Asia. Feedback at <map@map.org.ph> and <pujuan29@gmail.com>.  

    

   sending someone to the bank physically. It has been a breeze depositing a check virtually.

2. Download Spotify to listen to music of your era or to listen to podcasts of speeches, or other interesting topics discussed by experts. You have no need for Compact Discs (CDs) or USB sticks to put in your laptop.
3. Learn how everything works through Bluetooth. Get Bluetooth speakers which are so portable you can take them literally everywhere and just connect to your mobile phone (with wifi of course)
4. Play games on your mobile phone. You can pass the time and keep your brain active by doing puzzles, word games and even solitaire on your phone. They say it’s good for the brain to work different parts of it, not just the analytical side.

It is never too late to start. You may ask a very patient middle-aged person to teach you as the young seem to be impatient in teaching the old. They do not know why we do not get it right away. They forget we are digital immigrants while they are digital natives, being able to intuit everything without an operating manual.

 

But, do start. It is a liberating experience to know how to manage our affairs even without virtual or real assistants. You can start with making lists of what you ask others to do for you. Then start crossing them out as you learn to do it yourself. Even the act of crossing out an item in your “things to do” is liberating.

 

Before you lose your memory, train your brain. Train it to think not only on problem-solving but on routine tasks as well. Paying bills, checking bank accounts, transferring money—these will become routine once you get the hang of it.

 

Challenge yourself to do the unthinkable—like letting go of your assistant. They have been half our brains and we are held hostage because we become too dependent on others.

 

Challenge yourself while helping your brain stay healthy. It may be the best gift you can give yourself this Christmas.

 

 

(This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.  The author is member of MAP Diversity & Inclusion Committee, and MAP Agribusiness Committee. She is Chair of the Philippine Coffee Board, and Councilor of Slow Food for Southeast Asia. Feedback at <map@map.org.ph> and <pujuan29@gmail.com>.  

 

be causing the ‘cost-push’ inflation and that contractionary monetary policy may not be enough to temper it – notwithstanding the responsive policy rate adjustments made by BSP, inflation has continued to rise.

 

In view of this, the following fiscal policy tools are recommended to the Philippine government through the Department of Finance with the aim of easing the hardship brought by high inflation especially to the poor and low-income earners: (1) increasing excise taxes on non-essential goods, (2) imposing corporate income tax to non-resident foreign tech giants, (3) improving tax collections through digitalization, (4) cutting government spending, and (5) other government interventions.

 

Increasing taxes

 

While increasing taxes may be politically challenging, Congress can enact a law to increase taxes on non-essential goods, like luxury cars, alcoholic drinks, cigarettes including vapes which are not considered basic commodities. Revisiting the Tax Reform for Acceleration and Inclusion (TRAIN) Law to further increase excise tax on luxury cars from 60 to 200 percent will generate more revenues from the top 10 percent of households in terms of income as this is a highly progressive tax. There may be an initial slowdown in the sales of cars, alcohol and cigarettes but it will quickly recover as it did in the past once the inflation is brought back down to healthy levels.

 

Imposing corporate income tax

 

Congress is presently considering the imposition of the 12 percent value added tax (VAT) on digital services, expecting that it will generate an estimate of P19 billion in revenues or less than 0.1 percent of GDP. Instead of doing that, however, imposing income tax or digital service tax to non-resident foreign tech giants and digital transactions including cryptocurrency may yield higher revenues without burdening the low-income earners. How it will be collected may still be a question but it’s worth pursuing rather than simply imposing a 12 percent value added tax on digital services which will burden local consumers.

 

Improving tax collections

 

Revenue collections from audit and investigation contribute less than 2 percent to the total tax collections. The government must instead prioritize the full digitalization of the Bureau of Internal Revenue (BIR) so that they can catch up with the fast-paced development in the e-commerce and digital economy. This will require at least an additional 10 percent of their P11.12 billion FY 2022 budget and reallocation of Personnel Services which comprised 72 percent of its total budget. This can be used to fund full digitalization and hiring of software engineers, developers and data analysts to support its new IT infrastructure.

 

Implementing a general tax amnesty and lifting the Bank Secrecy Law will also generate more revenues without relying on regular audit and investigation. This will allow the BIR to run after big-time tax evaders since they would no longer be able to hide behind the Bank Secrecy Law.

 

However, both legislations will require more political will from the President to make it a priority bill of his Administration.

 

A risk-based audit will also generate more tax collections than the random audit. Using data analytics and industry benchmarking, the BIR can allocate their resources in auditing high-risk industries and taxpayers, especially large corporations which contribute more than 60% of the total tax collections.

 

Cut government spending

 

While checks and balances are in place, the government must cut spending, address loopholes in budget allocation, and deal with procurement issues that led to an average of P1 Trillion (T) unused and misused/abused annual budget from 2010-2020. Transparency and accountability must be upheld, especially given the proposed P5.268T budget for 2023 and the increasing debt at P13.5T as of November 2022.

 

Targeted subsidy and financial support to farmers and fisher folks must also be prioritized to increase domestic productivity which will reduce prices and importation of agricultural products.

 

Other government interventions

 

While subsidies are helpful, it is high time to revisit the Oil Deregulation Law in order to give the government the power to intervene when there is a prolonged increase of oil prices.

 

RECOMMENDATIONS

 

Addressing high inflation requires a whole-of-government approach. It requires fiscal consolidation through budget rationalization and more tax revenues. While the BSP uses monetary policy to temper inflation with the least possible job loss, the government must exercise fiscal restraint to lower inflationary pressures.

 

First, government deficits and debts must be lowered. Rationalizing the government budget will not only cut unnecessary spending but also reduce the budget deficit. PPP may also be helpful in funding infrastructure projects to avoid incurring more foreign debts.

 

Moreover, revenue efforts must be increased through tax policy and administration reforms. Increasing the excise tax on non-essential goods will serve as both a revenue and health measure, and imposing corporate income tax or digital service tax on non-resident foreign tech giants will generate more collections from the digital economy.

 

Fiscal consolidation aimed at taxes and spending that help the rich can help reduce inflation. There could be trade-offs in terms of jobs to a slower economy but inflation is already hurting the poor and vulnerable. Thus, keeping targeted subsidy will help ease their hardships while the government continue to address high inflation.

 

(This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.  The author is a MPA/Mason Fellow at the Harvard Kennedy School. He is a member of the MAP Tax Committee and the MAP Ease of Doing Business Committee, Co-chair of Paying Taxes on Ease of Doing Business Task Force, and Chief Tax Advisor of the Asian Consulting Group. Feedback at <map@map.org.ph> and <mon@acg.ph>.)