Benigno S. Aquino III

Establishing and Managing a Philippine Sovereign Wealth Fund

This is the second part of a series on this topic. In the first part, I discussed why we need a sovereign wealth fund or SWF in the first place. My main contention was that the Philippines is currently suffering from “Dutch disease” or the adverse effects of a sudden rise of income from its export of labour and from a rise of confidence in its domestic economy. In this second part, I will discuss how we could govern and operate our own SWF.

The Santiago Principles established by 26 countries with SWFs known as the International Working Group or IWG  in 2008 lays out a number of generally accepted principles and practices or GAPP to ensure that “the SWF arrangements are properly set up and investments are made on an economic and financial basis”. One of the main reasons for this is that as government-owned  entities, as SWFs continue to grow in importance to global capital markets and perform a bigger role in corporate governance, they need to demonstrate that their investment decisions are not politically motivated.

Traditionally, SWFs took the surplus foreign reserves accumulated within a resource exporting nation and invested them in long-term projects overseas. This allowed recipient countries that were often capital constrained and developing to benefit from such investment flows. The size and relative lack of transparency of some SWFs however caused many actors in the international community to cast a suspicious eye at these funds.

In the Philippine context, as discussed in the first part of this series, I propose that our SWF be confined to funding projects within the country given our chronic underinvestment in infrastructure and need to resuscitate our industrial sector. Given however our historically poor track record at ensuring that government owned and controlled companies manage their assets in a prudent manner, the main concern in establishing a SWF would be to ring-fence it from the influence of politics.

The Santiago Principles help to define a set of best practices for us in establishing our own SWF in the Philippines. The Carnegie Endowment for International Peace talked about what the effect of signing up to these principles is by saying that

(b)y voluntarily submitting to the Santiago Principles, IWG members ceded their autonomy to establish governance arrangements in line with their individual needs and preferences. In a way, they made a conscious decision to limit the reach of their “sovereignty.”

You might be tempted after reading that to draw an analogy between the IWG to the World Trading Organisation or WTO which implements the General Agreement on Trade and Tariffs or GATT. Unlike that body, the IWG and its successor the International Forum of Sovereign Wealth Funds or IFSWF is purely voluntary and has no powers to sanction its members. The Carnegie Endowment does draw this distinction. What our Philippine authorities should do in drawing up the framework for its SWF would be to hard code “the Principles” in its charter.

As shown in the table below, the Principles may be divided into three distinct parts. These cover the legal and macroeconomic policy framework of the fund, its institutional and governance arrangements and structures, and finally its methods for managing investment decisions and handling risk. I am adapting the Carnegie Endowment’s description of these parts here.

Table 1: Santiago Principles*

Section What “the Principles” state there should be GAPP #
Legal framework, objectives, and coordination withmacroeconomic policies
  • disclosure of legal framework
  • definition and disclosure of policy purpose
  • public disclosure of funding and withdrawal arrangements
GAPP 1
GAPP 2
GAPP 4
Institutional framework and governance structures
  • clearly defined roles and responsibilities of the principal/owner (the government) and the agent (SWF’s governing body, officers and executives)
  • a limited role for the principal which is to set the broad  objectives, appointment of governing body or board, and oversight of operations
  • a clear mandate to the fund’s governing body to set strategy for achieving its objectives along with being accountable for its performance
  • delegated authority for independently implementing strategies and handling operations for officers and executives under clearly defined roles and responsibilities
GAPP 6 

 

GAPP 7

 

GAPP 8

 

GAPP 9

Investment and risk management frameworks
  • disclosure of investment policies
  • information about investment themes, investment objectives and horizons, and strategic asset allocation, including:
    1. disclosure of investments that are subject to non-economic and non-financial considerations
    2. whether they execute ownership rights to protect the financial value of investments
  • a framework that identifies, assesses, and manages the risks of its operations and measures to track investment performance employing relative and/or absolute benchmarks
GAPP 18 

 

 

GAPP 19.1

GAPP 21

 

GAPP 22

*adapted from Sven Behrendt (2010). Sovereign Wealth Funds and Santiago Principles: Where do they stand? Carnegie Papers No. 22, Carnegie Endowment for International Peace.

The policy aims of setting a SWF in the Philippines are clear: to channel excess foreign reserves in a productive way and to cope with the developmental needs of the country. As I stated in the first part of this series, existing legislation tasks the Bangko Sentral with ensuring an adequate supply of currency to meet our international obligations. It does not contemplate our current predicament where the annual flows of remittances and portfolio investments have made our gross international reserves (GIR) rise rapidly.

This has caused the appreciation of the peso which has put a strain on our exporters. Even our burgeoning business process outsourcing industry is beginning to feel the pinch of the currency’s upward trajectory. As I previously stated, the GIR is now sufficient to cover twelve months of imports and to meet all our external obligations with a comfortable buffer left over.

And it will keep rising especially if our government earns an investment grade credit rating as is expected next year. Our GIR should only be allowed to rise in proportion to our external commitments. As our economy becomes less dependent on foreign borrowing these external debts won’t rise as rapidly as they have in the past.

Once a targeted level has been reached, the Bangko Sentral should be authorised to declare any additional funds in excess of its requirements. The existing Central Bank Act should be amended to explicitly state this. The monetary board should be given the task of setting the appropriate benchmarks for making such declarations and for transferring excess funds into a SWF.

The nature of such a transfer, as I have suggested, should be in the form of a sovereign loan issued to the national government, which will own the SWF. This would help ensure that the projects which the SWF invests in will have a sufficient return to cover its borrowings and operating costs. It would also ensure that the value of the Bangko Sentral’s assets is preserved.

As to the appointment of its board and officers, the SWF would be subject to the same rules covering government owned and controlled corporations or GOCCs. The reforms carried out by the new GOCC law which created a commission that regulates the appointments, compensation and accountabilities of such officers would apply as well. This would include the need to provide audited financial statements and management reports.

In terms of the type of projects it would fund, I have suggested four potential areas or themes. This includes public infrastructure (such as the ones eyed for Public-Private Partnerships) aimed at both social and economic development, joint minerals exploration in consortium with private mining firms, industry cluster development projects, and clean, renewable energy projects.

The allocation of resources across these themes could be based on national priorities. Let’s be clear: the main purpose of this SWF would be to support the development priorities of the nation, and that should be stated unapologetically. But for specific projects, a set of solid business cases needs to be presented. When entering into joint ventures or consortia with private players, the SWF should also be allowed to exercise ownership rights over the project to protect its investments.

Just as with government financial institutions or GFIs, the SWF should be guided by proper prudential management principles that would monitor its risk exposure. Unlike the conservative treasury management practices of government banks and pension funds, the risk-return equation is different for an equity investor like the SWF. The risk tolerance would be higher while its returns need not necessarily be as big given its lower cost of borrowing. Its risk adjusted return on capital would thus be lower compared to commercial banks.

Some PPP bidders have expressed concern over political interference in the Philippines affecting their ability to set fees independently of the government. This has limited the appetite for actually managing the operations of the utilities and transport oriented projects. They have therefore chosen to participate only in building contracts. Takashi Ishagami of Marubeni Corporation has been quoted as saying that “the Filipino PPP is far away from our standard”. It has partnered with a local firm to jointly bid for a $1 billion railway project in which it would be merely supplying equipment.

That’s fine. If the SWF were to finance such partnerships, our excess foreign reserves would leak out of the country (as intended) through the purchase of foreign equipment. This will help temper the peso’s rise since these projects will no longer be financed through overseas assistance or equity from abroad. What could leak in, however, is foreign technology and know-how because as an equity investor, with a long time frame, the SWF would also have greater leverage to request that suppliers provide technology transfer to local partners. This should unapologetically be part of its investment prioritisation framework.

An Alternative to Charter Change

Rather than relaxing the maximum capital requirements on foreign participation in certain industries contained in our constitution, the government should instead be looking to accelerate the flow of funds into productive activity with the SWF as one of its prime vehicles. Where private players are too small to generate sufficient scale to participate in large projects, the government should encourage them to form a cluster and fund them to be able to compete with multinationals.

This incidentally was the vision of the late-Senator Benigno “Ninoy” Aquino for the Philippine economy which he explained in a speech delivered in Los Angeles back in 1981 while he was in exile. He sought to counter the Marcos regime’s formula of encouraging multinational firms to engage in extractive activities and to commercially fund projects like the Bataan Nuclear Power Plant. Juxtaposed to Marcos’ “crony capitalism”, Ninoy termed his philosophy “Christian socialism”.

Don’t be turned off by the name. As his remarks suggest, what he really meant was essentially a form of capitalism more akin to Northern Europe’s brand than to the English version as espoused by Adam Smith. The last time I checked, the German and Scandinavian economies seemed to be weathering the present crisis well, while maintaining one of the highest levels of income and social well-being compared to their Anglo-American counterparts.

Under President Benigno “Noynoy”Aquino’s rubric of good governance, the stage is now set to pursue that economic philosophy and vision for the country.  As the Carnegie Endowment for International Peace found, sound democratic institutions best explains a nation’s compliance with the Santiago Principles.

With the government now facing the prospect of receiving investment grade status in the coming year, it must prepare for any unintended adverse consequences this might have as more short-term investors flock to our shores, boosting the peso’s value and putting more of an already unbearable strain on our exporters of goods and services.

For good governance to yield economic benefits to the people, it needs to be used to address the developmental challenges facing the nation. If we act soon, we won’t have to face these same challenges in the future. The country is already in a gradual demographic transition that will lead us from an excess supply to an excess demand for labour over the next decade.

While we still send our surplus workers overseas, we need to channel the wealth they are creating for our nation into projects that would increase economic opportunities for our people back home. This presents our policy makers with a once in a generation opportunity to get things right. Given the discussion covered in this series, it would seem apparent that a SWF would be the way to go.

Explanation required, Mr. President

My position regarding what has become Republic Act No. 10175, the Cybercrime Prevention Act of 2012, has not changed since I first went over the Senate version (Senate Bill No. 2796) several months ago: I maintain that it is a deeply flawed law that will not be able to properly address the problems it was ostensibly designed for, including, but not limited to, libel, cyber-bullying, and cyber-prostitution. Of course, back in February, I was content merely to air my anxiety, because I was fairly optimistic that the ill-conceived bill would not prosper, such optimism—or maybe I should say, with the benefit of hindsight, naïveté—being largely rooted in my reluctance to entertain the notion that the denizens of officialdom would act, to use a time-honored phrase, like a bunch of drooling incompetents.

It seems opportune to raise yet again the important question of whether our leaders understand what goes on in cyberspace, even as they attempt to engage the wired middle and upper classes—certainly not the general public, in view of extant data on the level of Internet penetration, not to mention access to electricity, in the country—by establishing and using all sorts of online properties, such as web sites, blogs, and social media accounts.

The massive outcry against the anti-cybercrime law, which, as of this writing, includes four separate petitions filed with the Supreme Court by various groups, has found the apparatchiks of this administration scrambling to defend the decision of President Benigno S. Aquino III to sign it into law. For instance, at a press briefing yesterday, September 27, Presidential Spokesman Edwin Lacierda, urging critics to wait for the pertinent Implementing Rules and Regulations (IRR), said that “freedom of expression is not absolute”, and that the law “[attaches] responsibilities in cyberspace”—pronouncements that are not without merit and would be difficult to disagree with, but tend to come across as incongruous at the very least, considering that Lacierda, along with other Palace functionaries, has been known to happily heckle political opponents—transport strike organizers and participants, say, or former Chief Justice Renato Corona—using his Twitter account, and could more convincingly serve as an exemplar of irresponsible online behavior than the opposite, especially because, by virtue of his position, he is supposed to speak with the voice of the Chief Executive.

Similarly irresponsible, as well as disingenuous, are the arguments advanced by Presidential Communications Development and Strategic Planning Office (PCDSPO) Undersecretary Manuel L. Quezon III, who, in response to blogger Jon Limjap’s tweet that the law, presumably on account of its provisions on libel, could be used “to silence political critics online“, replied that Limjap’s “sweeping” statement “ignores the [C]onstitution and its guarantees“, adding that the Act contained nothing that “any columnist hasn’t had to live with since time immemorial“. I would have thought that the following patently obvious things need not be said: first, the Constitution will not prevent—and in fact allows—the litigious from threatening to file or actually filing lawsuits, as Quezon himself knows from experience, whatever the courts eventually decide; second, the majority of people online are not columnists and have had no journalistic training, though pretenders do proliferate; and third, just because a particular state of affairs has persisted “since time immemorial” is not a reason to maintain said state.

None of the foregoing is to advocate that a kind of exceptionalism be observed with reference to cyberspace and the various activities that go on it it, as The Philippine Star columnist Federico J. Pascual seems to believe, rather strangely, of those against the anti-cybercrime law. I do think that there is much that deserves to be regulated online, although that requires a separate discussion. The process of law-making, however, ought to be undertaken with intelligence, sensitivity, and no small amount of caution. Given the disturbing implications of the Act in its current form, a severe shortage of precisely the aforementioned qualities may well be afflicting Congress and Malacañang, and now time, energy, and taxpayer money must be spent, if not squandered, in the fight against a law that, as Cocoy Dayao has pointed out, could have been crafted “far, far better“, and would therefore have been a more efficient use of national resources.

It is interesting to note that, according to a recent report, Aquino did not exercise his veto power over the Act because the office of Executive Secretary Paquito Ochoa, Jr. prepared a legal memorandum recommending the law for signing. Perhaps Ochoa or Aquino might be prevailed upon to release the contents of this memorandum to the public,  in order that the rationale behind the approval of the Act by a President who has repeatedly asserted his commitment to freedom and transparency might be understood by the people it will affect—the so-called bosses in whose interests he claims to work, and to whom he now owes a clear explanation.

SC rules Truth Commission unconstitutional

According to a report from ABS-CBN News, the Supreme Court has dealt “another blow to to President Benigno ‘Noynoy’ Aquino III’s administration” by striking down the Truth Commission, a body intended to investigate anomalies that took place during the term of former President Gloria Macapagal-Arroyo:

Voting 10-5, the Supreme Court ruling effectively bars the prosecution of former President Gloria Macapagal Arroyo and other officials and parties involved in alleged scandals under the previous administration.

The 5 who dissented were: Associate Justices Antonio Nachura, Antonio Carpio, Conchita Carpio Morales, Maria Lourdes Sereno, and Roberto Abad dissented.

The high court apparently gave credence to the petition of minority lawmakers led by Rep. Edcel Lagman, who sought to have the executive fiat that created the Truth Commission quashed.

The commission, tasked to investigate the anomalies during the 9-year term of Mrs. Arroyo, was created with too much power that it has already stepped on the rights of constitutionally-created bodies, they had said.

UPDATE (1220H): Updates via the ABS-CBN News Channel (ANC) Twitter account cite Presidential Spokesperson Edwin Lacierda describing the SC ruling as “unfortunate” during a Malacañang press conference. Lacierda added, however, that it was a “temporary setback” that would not stop the efforts of the Aquino administration toward reform and accountability. He said he was certain that the Office of the Solicitor General (OSG) would file a motion for consideration, and that meanwhile other options would be explored. Lacierda personally informed President Aquino of the development through a text message.



Photo credit: infographic by ABSCBNnews

Aquino scraps 'Pilipinas kay Ganda'

Aquino scraps ‘Pilipinas kay Ganda’
By Aurea Calica
The Philippine Star

MANILA, Philippines –  As criticism against “Pilipinas kay Ganda” turned nastier, President Aquino finally decided to drop the newly conceived tourism slogan and hinted at reviving the old “Wow Philippines.”

The President said he arrived at the decision after meeting with various stakeholders and with Tourism Secretary Alberto Lim.

“The stakeholders appear unsatisfied. Perhaps it’s automatic that it no longer needs fine-tuning, but a replacement that will be more appropriate,” Aquino told reporters in Malacañang yesterday after receiving world boxing champion Manny Pacquiao.

Aquino acknowledged that “Wow Philippines” appears more acceptable to most Filipinos. “Wow Philippines” was the country’s tourism battle cry during the previous administration.

The President said he had also asked Lim to submit a blueprint for developing the country’s tourism industry.

“I want to review all the details,” Aquino said.

On Friday night, the President said he and Lim discussed a number of things, including the details of the overall tourism master plan.

Clef two-factor authentication