Sovereign Wealth Fund as Critical to Development

The infrastructure gap in the Philippines will keep growing unless we put a funding vehicle in place to bridge the divide.

Many of our citizens are perhaps perplexed over the slow progress of infrastructure development in the country. But we can learn a lesson or two from our Asian neighbors, which have found a way to push big infrastructure projects.

The creation of the Philippines’ own version of a sovereign wealth fund, or the Maharlika Investment Fund, hopefully will put us at par with our neighbors in the race to infrastructure investments. I am pleased that the divisive but healthy debates in both houses of Congress over the passage of Maharlika Investment Fund Bill are over. President Ferdinand Marcos Jr. signed the bill into law, to be known as Republic Act 11954, just days before  delivering his second State of the Nation Address (SONA). It is a landmark law and, as President Marcos puts it, a “bold step towards our country’s meaningful economic transformation.” The government can use the funds generated by the MIF to develop agriculture, infrastructure and the digitalization of the country.

My son, Senator Mark Villar, the principal author and sponsor of the MIF bill, sees the law as generating more jobs for the Filipino people and providing appropriate funding in sectors left behind, such as agriculture, energy, health, information technology and infrastructure.

I agree with Mark. The MIF can be used to boost investments in undercapitalized industries like infrastructure and agriculture. This will allow the construction of more roads, airports, power plants and cold storages, which in return will spur economic growth.

Major developing nations, including China, India, Brazil and Russia, have tapped into their sovereign funds to finance critical infrastructure projects. Our immediate neighbor Indonesia created a sovereign wealth fund in 2021 to assist in infrastructure investment. Indonesia started with a seed funding of $5.4 billion, which jumped to $24.5 billion after just one year following investments from foreign institutions.

One of our friends in the Lower House, House Ways and Means Chair Joey Sarte Salceda, is probably the best spokesman for the MIF. For Mr. Salceda, the fund is the bridge between “trillions” in investible funds and investable development projects. The Philippine banking system has close to P19 trillion in investible funds that need to go somewhere productive in order to contribute to the economy. Banks, including state-owned Land Bank of the Philippines and Development Bank of the Philippines, can pour part of those funds to the Maharlika Investment Fund to bankroll infrastructure projects.

I will not argue with Mr. Salceda. The private and the government sectors combined have trillions of investible funds that are passively locked up in foreign bonds, stocks and other forms of investible securities that earn dividends. Our big conglomerates with gross savings of P5.7 trillion are another source of funds for the MIF.

Investing in the MIF may turn out to be rewarding for our banks and conglomerates in terms of the dividends they will earn. It is a patriotic act since their investments in the fund will also help the government cut down on its local and foreign borrowings. With the MIF undertaking and financing those infrastructure projects, the private sector will also avoid red-tape issues tied to building toll roads, airports, dams and bridges, and make their investment less risky.

The Philippines, per the research report of Mr. Salceda, has an infrastructure financing gap of around P2 trillion annually until 2030. The MIF will exactly fill in the role of funding this requirement and enable the government to reduce its reliance on foreign and domestic loans to fund its annual budgetary requirements.

In sum, the MIF will ease the government’s fiscal restraints and move it closer to self-sustainability in terms of obtaining its financial requirements.

Will the MIF lure investors and notable foreign funding institutions? I am optimistic it will. Sovereign wealth funds are designed to make one’s investible money earn a return. The funds are invested in a variety of viable assets. The Norway Government Pension Fund Global, the largest in the world with assets of over US$1 trillion, invests in equities, fixed income and real estate. It reported a return of 19.9 percent in 2019, with equity investments leading with earnings of 26 percent.

Our economic managers assured us that the MIF will enable government financial institutions like the DBP and LandBank to obtain medium- to long-term returns that are higher than their 10-year average return. LandBank’s 10-year average return on investment is 4.23 percent, while that of the DBP is 3.59 percent. 

The expected return of Maharlika, in comparison, is estimated to be around 8.6 percent on the average, or much higher than the cost of capital and the return in the current investments of the two state-owned banks. I trust our economic managers, who are upbeat on the MIF’s prospects. Foreign investors, this early, including the Japan Bank for International Corp. and several US investors, have already expressed interest in investing in the MIF.

I won’t be surprised if more investors join the bandwagon once the MIF is officially launched. The MIF is our first sovereign wealth fund that needs the support of every Filipino.