GOCC law

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
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







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




*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.

The National Development Project, part 3: Renovating the Bureaucracy

This is the third of a three-part series on the Philippine Development Plan 2011-2016.

We have looked at the PNoy government’s development strategy in Part 1 in which infrastructure was seen as the problem to unlock investment and that better governance of projects would work a treat. In Part 2, Re-defining Good Governance, we scanned three possible models for good governance. We concluded that the best approach, the East Asian model, was difficult to emulate but not insurmountable.

In this third part, we investigate specific ways of renovating the bureaucracy along East Asian lines. In part 2, the work of Peter Evans* on the lessons of political institutions and development illuminated much of the discussion. It will also help inform this one.

The task at hand

Finding a recipe for good governance is something that every nation has to figure out on its own as the East Asian experience has demonstrated. There is no ‘one size fits all’ policy. While Evans attests to the importance of establishing minimum levels of probity, he also does not recommend that we attempt this renovation with the bureaucracy universally.

The main focus of capacity building in East Asia has been the economic bureaucracy. The role and scope of this project covers tax and subsidy policy, industry, trade and investment policy, planning and development as well as regulatory policy. In the Philippines, we have to include some enforcement mechanisms as well.

When he announced his presidential bid, PNoy talked about his recipe for countering the calculus of corruption. The two basic ingredients include both carrot and stick. The president has yet to outline basic reforms to put that in action. It is towards informing that agenda, that the following policy recommendations are submitted.

Policy Recommendations

1. Corporatization of Revenue Agencies.

So far the government has been emphasizing the ‘stick’ component of the recipe through schemes aimed at enforcing the law against tax cheats, smugglers and the colluding elements within the bureaus of internal revenue and customs.

Though it has produced some modest returns, it is time to put the next element, namely the ‘carrot’ in place to address long-term improvements in the professionalism of our revenue agencies. This implies tweaking the career and compensation systems working within them.

Corporatization is the way by which the government has been able to pay its agents salaries commensurate to, if not exceeding that of, their private counterparts. Singapore achieved this for its entire bureaucracy, but it is the sole Confucian state to do so. The others achieved it through a combination of salaries, allowances and benefits.

The newly minted GOCC law now provides greater safeguards against abuse done by non-performing companies. It will govern the corporatization of the BIR and BoC. In exchange for the higher compensation, transition into the new agencies must be based on merit and not guaranteed for old bureau officials.

The boards of the new revenue agencies should be allowed to appoint people from among the ‘best and brightest’. Tougher qualifying exams, educational attainments, and past performance should all be part of the selection process. Where posts cannot be filled with existing staff, recruiting externally should be the resort.

2. Economic bureaucracy renovation.

To complement the corporatization of revenue agencies, key elements of the economic bureaucracy have to be beefed up. The Department of Finance, parts of the Department of Trade and Industry, those relating to industry and trade policy and the National Economic Development Agency need to be covered.

The idea is to strengthen and coordinate its policy making capacity. I will have more to say on this below under number 6, but what I would like to pay attention to here is again the recruitment, compensation and performance package.

For the independence of our economic bureaucracy to be secured, requirements for hiring have to be made more stringent. Salaries for managers and executives which might be 2/3 that of their private sector equivalent need to be augmented with benefits and allowances that could cover a more attractive retirement and health package, housing, transport, childcare and education, and communications.

What will they be expected to do that would merit such an upgrade in their compensation and why just target these agencies? Well, under the good governance model of East Asia, the economic bureaucracy is responsible for increasing the flow of investments into and from within the country.

To do that, they need to be adept at wielding both the carrot and the stick to investors. They will also need to be coherent in pursuing a development agenda and in orchestrating it using taxes and subsidies. To make them immune to outside influence whilst engaging with the business community, their rewards including both monetary and non-monetary have to be upgraded.

3. Limitations to presidential appointments.

When the controversy surrounding LTO Chief Virginia Torres a presidential appointee and shooting range pal first showed up, I took the opportunity to advocate for more serious limits to the president’s appointive powers.

I was met with skepticism at first by a fellow contributor to this space, but in the end some kind of consensus was formed. The issue then was cleansing the roster of the past president’s appointees.

Now that the GOCC law has in effect dealt with that, it is now high time to revisit the larger issue. From several thousands, I believe the presidential appointments need to be scaled down to several hundreds. That might be hard given the number of boards and government authorities that abound.

I believe the GOCC Commission needs to act like the Civil Service Commission in screening appointments to government boards and heads of GOCCs, just as I believe the CSC should do the same for the line agencies and the NAPOLCOM for the police. Either by convention or by law the president’s appointments should be restricted to his Cabinet and a few cabinet subalterns.

4. Outsourcing much of the Commission on Audit’s role.

Another thing I have been advocating here since the scams involving corruption in the military was uncovered was for the COA to outsource much of its functions to private auditing firms.

This has been the practice in Australia already where the Attorney General’s department merely sets policy and standards with regards to government audits. The actual audits must be done not by ‘in-house’ government auditors who are very susceptible to influence, but by external firms who must be rotated in accordance with the Code of Good Governance adopted by the SEC.

In fact the scope of audits should not be restricted to financial management alone, but to management of risk and occupational health and safety. Private auditing firms already have the capacity for performing this function. They are already subject to professional standards of excellence which if broken lead to the cancellation of their professional licenses.

5. Incentives for Prosecutors of Big Cases.

Catching and prosecuting the ‘big fish’ has been made a priority by this government. Yet, no real sets of incentives have been put on the table for addressing the task at hand.

When hundreds of millions, if not billions, of pesos are involved, the government needs to ensure that its prosecution team have a stake in winning the case. In the private sector that involves sharing in a portion of the damages.

The settlement by the previous Ombudsman in the case of Carlos Garcia demonstrates how difficult it would be to provide a similar incentive structure for the public sector.

If a reward based on a percentage of recovered ill-gotten wealth is instituted, that would have meant rewards to the past Ombudsman for settling the case. Perhaps the reward ought only to apply when cases are prosecuted and not settled out of court.

The Ombudsman and the Office of the Solicitor General (essential generals in the fight) which are given the task of prosecuting graft cases before the Sandiganbayan and Supreme Court respectively need to have more than a kind of altruistic motivation for performing their duties. The need to have protection and financial security.

Paying them higher salaries alone might not be enough to motivate them to exert maximum effort even in very winnable cases. Some sort of sharing in the spoils which would go both to their office and to chief prosecutors and their staff needs to be put on the table.

I know that some will argue that this is the people’s money and that any recovered ill-gotten or plundered wealth needs to be returned 100% to the coffers to fund social programs. This assumes that we are working with incorruptible Confucian super bureaucrats. That is not the case here. We need to live in the real world, not in some ideal fantasy land.

6. Creation of a Productivity Commission.

The importance of having a lead agency within the economic bureaucracy is one lesson learnt from the East Asian experience. This lead agency role was performed by MITI in Japan, the Economic Planning Board of Korea, the Industry Development Boards of Taiwan, the Economic Development Board of Singapore, and the Productivity Commission of Australia.

In the Philippines, I am proposing the creation of a Productivity Commission similar to Australia’s to be under the Department of Finance with direct access to the President. Elements of DoF, the government think tank PIDS, Tariff Commission, National Income Tax Research Center, and DTI need to be brought into this agency or at least made accessible to it.

Its role will be to advice the president on matters relating to government red-tape, taxes and subsidies (including to agriculture), telco, port and aviation policy and industry policy more broadly. A secondary focus could be in housing or economic development and climate change policy.

The commission in navigating the post-WTO environment should do so without engaging in what Evans calls ‘anticipatory acquiescence’ on the one hand by pushing the envelope a la China on protectionist policies when it suits our development goals, but use our external commitments as a shield against regressive private interests on the other hand (for example on sin taxes).

As part of the economic bureaucracy, it should have the same high recruitment and compensation standards as the rest of the economic bureaucracy. This will enable its agents to be immune from lobbying and rent-seeking by private agents.

7. Limitations to the scope of rent-seeking.

As highlighted by Evans, rent-seeking did continue to a surprisingly large extent in East Asia even as their economic bureaucracies forged ahead with many productivity enhancing measures.

Traditionally the agriculture or construction departments were used by reformist governments to engage in clientelism with their constituents usually ex-military men, party mates or in the case of Taiwan, former residents of the mainland.

This makes the task of emulating them within reach for countries like the Philippines where the practice of paternalism is embedded in our culture. This means that while the areas of rent-seeking are limited on the one hand, it will continue nonetheless and will be an essential part of governing.

The purists will argue against pork barreling and the dispensing of largesse through the PCSO, PAGCOR, DPWH, DOA and so on, but we must remember that a certain amount of populist clientelism is necessary. We have to take a balanced view of things. If it helps the executive push for more substantial reforms, then the area of rent-seeking will gradually diminish.


The long road to economic development has many twists and turns. Perhaps what PNoy’s government has to acknowledge is that sometimes the shortest distance between two points is not a straight line. An understanding of the lessons of good governance in East Asia is essential for appreciating this fact.

Without the ability to withstand rent-seeking on the part of private agents in the sphere of economic policy, the national development project never advances very far. The need for a solid economic bureaucracy is the first step in emulating the ‘fast-paced growth’ these nations experienced.

The ‘carrot and stick’ approach articulated by PNoy at his presidential bid announcement needs to be further developed into meaningful policies. So far the Philippine Development Plan only covers very generic non-targeted approaches. Zeroing in on the economic bureaucracy and some key enforcement agencies is needed.

The road ahead is fraught with risk. Our country did not start off with the auspicious initial conditions of an egalitarian society that our East Asian brothers had. Regardless, a path is laid out before us that makes it attainable despite initial infirmities. If we have faith and confidence in our abilities and not succumb to fatalism, we may at least further the project of nation-building along the way in the years ahead.

* Evans, Peter (1998). Transferrable Lessons? Re-examining Institutional Pre-requisites of East Asian Economic Policies, Journal of Development Studies 34 (6), p.21.