Emma Connors, Singapore/Jakarta – Indonesia's sovereign wealth fund is finally open for business and the government of President Joko "Jokowi" Widodo has made some important concessions in a bid to attract foreign capital.
Since legislation establishing the fund, known as the Indonesian Investment Authority (INA) was passed late last year, enabling regulations have been finalised. The fund's managers are seeking foreign investors, making their pitch to secure what the government hopes will be $US100 billion ($127 billion) in capital within two years.
Much is riding on the fund's success. In addition to finding ways to build infrastructure and improve asset management, the government needs to create jobs urgently. At least 6 million were lost in the pandemic-induced recession last year and only 2 million have been recovered.
The INA estimates that every 1 per cent increase in investment will lift economic growth by 0.3 per cent and create 33,000 jobs.
The recognition that foreign investment and unemployment are linked, and the determination of Jokowi to stare down the country's often-strident economic nationalists, could be an important turning point for the nation, some long-term observers believe.
"Jokowi could become one of Indonesia's most consequential presidents," says Manu Bhaskaran, chief executive of the Singapore-based Centennial Asia Advisors.
The Australian government is among those to have expressed interest in the fund before it was legislated. More recently, Japan, Canada and the United States have all suggested they could commit by redirecting aid or via government investment vehicles such as Japan's Bank for International Cooperation. So far, the only firm commitment has come from the United Arab Emirates, which in March confirmed a $US10 billion contribution.
In Indonesia, the definition of corruption includes causing a loss to the state. Managers of state-owned enterprises routinely ascribe their risk-aversion to this.
The government doesn't want that to be a feature of this fund, so is protecting board members from personal liability for commercial losses. Jakarta has also acknowledged that foreign investors might be more comfortable with an indirect allocation through the INA rather than a direct one that could leave them exposed to regulatory and legal challenges.
A different kind of sovereign wealth fund
Most sovereign wealth funds invest the proceeds from the sale of national resources or other excess revenue in the interests of future generations. Australia's $168 billion Future Fund is one such example. The INA is different. It plans to co-invest a relatively small amount of government funds alongside external contributions.
The similarity to Malaysia's 1MDB investment fund, which exploded in a multibillion scandal that may yet land former prime minister Najib Razak in prison and cost Goldman Sachs $US3.9 billion in legal claims, has made INA a tough sell.
Balanced against this is the opportunity to invest in south-east Asia's largest economy in a vehicle especially created to remove obstacles to doing business in Indonesia.
Anwita Basu, head of Asia country risk at Fitch Solutions in Singapore, is not optimistic about INA's chances of success. She notes that 80 per cent of the government's seed capital is expected to come in the form of shares in state-owned enterprises. So even though the INA structure differs from SOEs, it will be yoked to them – and their debts.
"Given the likely dire financial position that these companies are in and the potential corruption risks that they bring along, foreign investors may find them to be unsavoury business partners, especially over the longer term," Basu says.
Rushed announcements concerning funding commitments have also created some confusion. The government has been in a hurry to reach its first milestone of $US20 billion and so announced that Japan, Canada and the United States are all likely to be involved. Some of these announcements preceded the formation of the INA.
In January 2020, Jokowi said the US International Development Finance Corporation (DFC) was ready to help fund infrastructure work in Indonesia. In November, Jokowi's right-hand man, co-ordinating minister Luhut Pandjaitan, flew to Washington and met president Donald Trump.
A week later the Indonesian government announced on its own that the DFC would invest $US2 billion. In December the DFC announced it would invest $US54 million in India's National Investment and Infrastructure Fund, but it has been silent on the Indonesian fund.
In March, the United Arab Emirates emerged as the single largest investor after announcing it would put $US10 billion into the INA. The deal was clinched in a phone call between Jokowi and UAE Crown Prince Mohammed bin Zayed al-Nahyan.
The Crown Prince is also leading a committee overseeing the construction of Indonesia's new capital. Work on the ambitious plan to shift the nation's parliament and administrative centre from Jakarta to East Kalimantan, on the island of Borneo, stalled during the pandemic but the government is adamant the $US34 billion project is going ahead.
"In my opinion, INA funds will be included in the new capital city," says Andry Satrio Nugroho, a researcher from Jakarta-based Institute for Development of Economics and Finance.
Others believe Indonesia has more urgent infrastructure needs, and are concerned the INA will over-commit to the new capital too soon.
Bill Sullivan, senior foreign counsel at Christian Teo & Partners in Jakarta, believes there's a risk the INA could crowd out existing private investment, particularly as it seems the new fund may look beyond infrastructure to healthcare, tourism and other sectors. Given its likely size and government ownership, it is unrealistic to expect the private sector will be able to outbid the INA, he says.
Sullivan also has reservations about politicians being able to keep their hands off the money. The INA regulations stop members of political parties from involvement in the fund's operation, but there will be ways around this, Sullivan notes.
Whether the fund is a positive development for Indonesia and its international reputation will depend very much on how well it is managed and the extent to which, if at all, it reduces the space for private sector investors in the Indonesian economy, Sullivan says.
"This is certainly a bold "experiment" for Indonesia but one with a very uncertain outcome."
Still, there is much about the INA Sullivan likes. "The government has ticked all the boxes in terms of presenting this in a way that looks very positive. It remains to be seen just how convinced potential investors will be."
– with Natalia Santi