‘Maharlika to have 6 to 11% yield in 10 years’

The Senate committee on banks and financial institutions wrapped up yesterday its hearings on the proposal to put up a Maharlika Investment Fund (MIF) that economic managers said can have an average yield of anywhere between six percent and 11 percent in 10 years.

Committee chairman Sen. Mark Villar said the panel will convene its technical working group to consolidate all inputs received in the three hearings even as senators indicated the Senate version of the MIF bill will have marked differences from the counterpart measure passed by the House of Representatives last December.

Upon questioning by senators, National Treasurer Rosalia de Leon gave initial estimates on the possible returns from the MIF, which is proposed to secure its seed fund from the Land Bank of the Philippines at P50 billion, P25 billion from the Development Bank of the Philippines (DBP), P17 billion from the Bangko Sentral ng Pilipinas and still undetermined contributions from the Philippine Amusement and Gaming Corp., royalties and special assessments on natural resources and privatization.

She said the MIF may be placed in private equity infrastructure or in the capital markets or both. If the fund – estimated to be initially at P150 billion to P200 billion – were invested in the capital market, it would have a 10year average return of 6.51 percent.

“So that is of course higher than the important target inflation of two to four percent and even higher than our 10year average GS (government securities) yield of 4.7 percent, indicating that it is a better return than the traditional conservative investment option,” De Leon said.

If placed in other sectors like power, real estate, infrastructure and logistics, the 10-year average return would be a 10.78 percent, she said.

“Of course, we’d like to diversify the portfolio… this would be a more realistic allocation strategy and on a 50-50 allocation between the major sub funds, 8.64 percent per year on average, which is also double the four percent upper bound of the long-term inflation target and more than two percent above the most recent yield,” she said.

Not unique

Senate Deputy Majority Leader Joseph Victor Ejercito said investments allowed under MIF are the same as those allowed for government financial institutions.

Such investments are in cash, foreign currencies, metals and other favorable commodities, fixed income instruments issued by a sovereign, quasi-sovereign and supernational and in joint venture or co-investments.

“What makes it (MIF) unique, because these are also being done by the GFIs?” Ejercito said.

Undersecretary Zeno Ronald Abenoja, chief economic counselor of the Department of Finance, said the purpose of the MIF is to focus government investments on strategic destinations, but with commercial rate or even higher than market returns.

Villar sought the opinion of the National Development Co. on how the creation of the MIF would affect their operations. Some senators earlier said the NDC could be the one handling the MIF instead of the MIC.

“I just want to get a comment from the NDC and clarify what is your stand on the Maharlika Fund and the creation of Maharlika Investment Corporation,” Villar asked.

NDC general manager Antonilo Mauricio said the NDC does not have a position on the creation of the MIF since the agency has not been involved from the start in the conceptualization of the proposed sovereign wealth fund.

Mauricio, however, suggested to senators “to give emphasis on NDC as an investment arm.”

Asked by Sen. Nancy Binay whether the MIC would be a competitor to the NDC, Mauricio replied the corporation is focused on smaller deals and investment gaps that national government agencies might have overlooked.

Rogelio Quevedo, of the Office of the Government Corporate Counsel, explained that while the NDC would be focusing its investments on local development projects, the MIC would invest in treasury bonds, equities and government securities.

Cap on foreign funds

National Treasurer De Leon also said there should be a limit to the resources foreign entities may pour into MIF to ensure their participation in decision-making is restricted.

She said both the Senate and House versions of the MIF bill don’t provide for such restriction.

“We are thinking of putting a cap in terms of the limit on how much offshore investments can participate in the corporation,” De Leon said.

“There should be a cap on how much you can invest. We can put it in the IRR (implementing rules and regulations) or put it in the law already, if needed,” she said.

The rationale behind such a proposal, according to De Leon, is to keep foreign investors from becoming part of the board of directors of the MIC. This means they will have no seat or voting rights in the MIC.

In the proposed measure’s current form, the corporation is represented by the founding members including the secretary of the Department of Finance, heads of the Landbank and DBP, as well as an advisory board.

There will also be independent directors whose seats are reserved for nominees of the Landbank and DBP, given the size of their capital contribution.

“Since the sizable amount will be from Landbank and DBP, it would be pro rata to their contribution,” De Leon said.

Even as the private sector will be encouraged to invest in the fund, she stressed the MIC would have no private sector representatives – at least in the board of directors.

But Binay and Sen. Sherwin Gatchalian questioned such restriction, saying it would make the MIF less appealing.

“Foreign investors are very particular on representation, primarily to protect their investment,” Gatchalian said.

De Leon explained that putting a cap on foreign investments would ensure the government remains the majority holder of the institution.

“For you to be on the board, then you would have to have more than 25 percent shares of the corporation,” she said. “But then the limits will prevent them from getting that much. Majority will still be the government.”

De Leon clarified that the only time that a foreign entity can sit in the board is when the MIC enters into a deal with another company and forms a joint venture.

Binay suggested that the law should make it clear that no foreign entity can be part of the board regardless of the size of its investments.