Business World
Introspective
Much media space and Congress energies have been devoted to the scandalously high compensation provided by the Arroyo administration to its officials in some GOCCs, especially for those in corporations perceived to have performed poorly like the SONA-mention-worthy MWSS.
While such indignation is not misplaced, such wastes are perhaps in most cases dwarfed by social and economic costs to the country of poor governance due to poorly defined missions, political interventions, corruption, and incompetence.
I would put under that category, NFA, which, even if it has not been an overly generous employer relative to others we read about in the papers, managed to lose P 100 billion in two years while achieving little.
According to a World Bank study, for every P5 of subsidy that the taxpayer pays, only P1 is realized as having social benefit, and the balance, just wasted, or diverted.
Many of us, I think, will be quite happy to pay Singapore-level compensation for GOCCs, if they can perform like Singapore public entities. Thus, I have absolutely no qualms about what some may see as relatively high pay of management of the BSP, an institution which has earned the respect of both international and financial community as being in its own class in this country.
So, the point to underscore beyond the headlines of obscene compensation is performance. In fact, in the case of the BSP, its financial independence and good-pay structure is perhaps part of the story behind good-governance structures, one that allows the recruitment and retention of good people, and the development of a cadre of professionals with a long-term commitment to their organization's well-defined mission under its charter (and who are continuously challenged by financial stresses both local and global).
Clearly though, pay is only part of the story. The other elements of its good-governance story include historical good leadership, a well- defined mandate, having an incentive structure in the organization that is aligned with its mission and insulated from bad politics and conducive to adopting best practices of like institutions globally.
The other government corporations under public klieg lights in terms of pay are GFIs, especially the two pension institutions - SSS and GSIS. In 2006, I had the privilege of being part of a team of international consultants commissioned by the World Bank and the Department of Finance to look at the structural and governance weaknesses of government pension institutions so that they can perform better. (The team included Estelle James, a well-known expert and author of a standard reference on the subject: Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth)
The cost to the economy of their poor performance manifests in the risks they pose to the fiscal sector, since pension benefit liabilities are guaranteed by the national government. We have only to remember the bad investments that GSIS made in the 1970s in many enterprises (like PAL, Manila Hotel, etc.) that ended up being loaded on the Department of Finance auction block and the bankruptcy of RSBS and the resultant reversion of all of the pension-servicing responsibilities of the military back to the national government a few years ago. And who can forget the documented involvement in stock-market manipulation that was part of the charges that led to the impeachment of President Estrada? Eyebrows were raised as well by their participation in high-profile corporate boardroom struggles as well as general concern that these two heavyweights, in playing the stock market, were a cause of major distortions. Most recently we were dismayed by reported huge investments of Home Development Fund/Pag-ibig, in questionable mortgage papers of a development company that they have recently blacklisted, in what seems like a case of shutting the barn door after the horses have bolted.
Our final report, almost 200 pages without annexes, was submitted to the sponsors in March 2007, and may be available upon request.
Allow me to list just a few its key recommendations:
1. Governance institutions need to be strengthened: Members of the SSS Commission, GSIS Board of Trustees should have clear fiduciary responsibility to make decisions solely in the interest of members, and should be chosen through a selection process that ensures professionalism and protection from political interference. (Rural bank directors have to be vetted by the BSP to be fit and proper, but not these pension institutions.) A professional Investment Board should be formed for each institution, to take specific investment decision under the broad investment strategy set by the governing board.
2. Investment processes should be strengthened through the adoption of explicit investment policies that set objectives regarding returns, risk management, types of assets to guide specific investment decisions. Institutions should solicit outside professional investment advice and independent asset managers and custodians should be used.
3. Investment portfolios should be better diversified, including internationally to go beyond the relatively small Philippine capital markets. Domestically, equity investments should be shifted toward pooled instruments such as an allocation matching the Philippine Stock market index, thereby reducing influence on specific share prices and avoiding the need to place members in corporate board of directors.
4. Supervision should be unified and strengthened. A new Insurance and Pension Commission, built on the foundation of the current Insurance Commission, should supervise SSS. GSIS, Pag-ibig, all private pension schemes and any similar instruments.
5. The government should consider the merits of a universal or needs- based pension, paid from general state revenues, to complement existing pension programs, in order to expand coverage and reduce elderly poverty.
6. Pension reform needs to fit into a context of overall financial sector development.
The new leadership in these institutions as well as in the Department of Finance should take a look at how they can address the governance and structural weaknesses in these institutions in a lasting manner.
Mr. Romeo Bernardo is managing director of Lazaro Bernardo Tiu & Associates, Inc. (a consultancy firm), board member of The Institute for Development and Econometric Analysis, Inc, and was undersecretary of Finance during the Aquino 1 and Ramos administrations.
