OF SUBSTANCE AND SPIRIT
It’s bound to happen, and some commentaries are beginning to appear even before the Maharlika Investment Fund (MIF) switches on. And they are no different from the fundamental objections against putting up the MIF out of nothing — not from surplus fund, not from windfall profits. The Philippines has none of these.
United Kingdom-based think tank Pantheon Macroeconomics expressed the fear of many that the new fund could result in lower infrastructure spending over the short term. The reason is quite obvious, something that has been argued before, because the funds to capitalize the MIF would have otherwise been deployed to finance the national budget.
“A diversion of these funds means fewer resources for the government and, with fiscal consolidation a priority, it’s highly likely that the end result will be a smaller public outlay for infrastructure,” declared Pantheon in the report.
One can cite the recent report on the Energy Department’s bid for a higher budget to achieve 100 percent energization of areas still without reliable and round-the-clock power services. Electrification budget is only 10-20 percent of the proposed budget. One way of ensuring broader power services is to institutionalize micro-grid systems that involve the establishment of smaller-scale power grids for decentralized power generation. This would cost additional money.
In short, there are very pressing social demands but with very puny budget allocation. And we are saying we have substantial, unused resources?
It was correct for Pantheon for raising another issue apart from this budget constraint to sustaining infra support. This is the issue of attaining fiscal sustainability. Any diverted funds away from the regular allocations would challenge the Maharlika to work harder. Otherwise, if the National Government (NG) should choose to keep the level of public spending while catering to the Maharlika needs for funds, the easiest way to do both is to borrow from the capital markets. This means the Maharlika returns to investments should be higher than the government’s cost of borrowing.
Pantheon found this to be challenging: “As things stand, the government’s borrowing cost is higher than the annualized return of the Norwegian sovereign wealth fund, though this admittedly is a high benchmark. In any case, this adds to our view that infrastructure spending in the short term likely will drop, if the government’s fiscal consolidation goes as planned.”
Contrary to the Maharlika proponents’ claim, “its short-term impact on activity will be trivial.”
If Pantheon just drilled down a bit deeper, its affirmation against Maharlika would be on firmer ground, more luminous with the emerging reality.
While NG is encouraging foreign investment through MIF, it is also dispensing incentives to those going in through the Build-Operate-Transfer (BOT) schemes. Last Saturday, the broadsheets reported that the President through Executive Order No. 36 mandated the grant of real tax benefits to Independent Power Producers (IPPs) operating under the BOT scheme contracts with government-owned or -controlled corporations (GOCCs). The President’s order reduced and condoned real property taxes (RPTs) assessed by local government units (LGUs) on the power-generating facilities of IPPs within their locality. The argument is that since they have outstanding contracts with a GOCC like the National Power Corporation, it is the government corporation that should shoulder the local tax.
If the LGUs have their way, erring IPPs would be levied and their affected properties sold at auction. However, the Palace equated this with substantial losses to the government, the public resorting to more costly power alternatives, and rotating power outages.
Make no mistake, but the order covers not only RPTs but also special levies accruing to the Special Education Fund on machineries and equipment actually and directly used by the IPPs for power generation. Other BOT schemes are also qualified for this incentive. For power producers, this incentive system is practically retroactive. All their previous payments up to 2023 above the reduced amount of their tax obligations “shall be applied to their RPT liabilities for succeeding years.”
We don’t have enough information to do the math, but we wonder how much tax revenues the LGUs are fore-going against what the executive order claims to be the potential losses of the government plus the cost of alternative power sources plus the cost of rotating power outages? In the first place, are these outcomes unavoidable? This new incentive scheme will definitely boost investor interest in the power industry.
Why then should they go into the power play through the Maharlika when this investment incentive scheme is now available?
The other policy issue is absorptive capacity. At first, we rejoiced when we heard the Treasury report that revenues exceeded the fiscal target for the first six months of 2023. However, it turned out that the government actually underspent and trimmed the deficit. The real score is that underspending of some ₱170 billion dwarfed the over collection of only about ₱50 billion.
Instead of spending as planned, NG could only underspend. Its absorptive capacity is hopelessly low. Un-spent amount should not be considered excess funds. Due to substantial delays in processing payments, procurement activities and submissions of billing statements and documentary requirements by creditors and suppliers, the government built less roads, less hospitals, less school buildings.
We are not surprised that the major Maharlika proponent, the Department of Finance, is now worried the administration is failing its spending target that it had to issue an advisory to all concerned agencies “to come up with their own catch-up plan because the problem there is they are underspending.” The Finance Secretary himself has admitted that “sometimes Congress makes a lot of changes in the budget so there are new projects introduced, and since they are new, they do not yet have feasibility studies or detailed engineering.”
This is one area more worthy of congressional and executive collaboration.
Bottomline is therefore grim: Maharlika diverts funds from producing growth, but whatever funds are left are wasted. Yes, we get double whammy when public policies are rushed and are not in synch.