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Unclear legal basis of Danantara undermines investor trust

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Jakarta Post - December 27, 2024

Tenggara Strategic, Jakarta – The establishment of Daya Anagata Nusantara (Danantara) as both a superholding agency for Indonesia's state-owned enterprises (SOEs) and an investment management agency has raised questions among investors due to its unclear scope and legal basis.

Specifically, its dual functions involve managing SOEs and their assets while simultaneously acting as an investment management agency that could receive or manage state assets. This duality introduces potential risks of overlapping authority, not only with the State-Owned Enterprises Ministry but also with the Indonesia Investment Authority (INA), potentially undermining coherence in governance.

This overlapping authority further raises the risk of conflicts of interest inherent in Danantara's dual functions. As a superholding agency, Danantara would focus on maximizing the operational efficiency and profitability of SOEs, while as an investment management agency, it would prioritize attracting and deploying capital for long-term projects. These priorities could directly conflict, particularly in cases where foreign investors propose substantial funding for projects managed by subsidiary SOEs. For instance, accepting such investments might require Danantara to exert influence over the subsidiary in ways that compromise the SOE's autonomy or operational interests. Managing these competing demands would pose significant governance and accountability challenges.

To address these concerns, robust safeguards and clear delineation of duties are needed within its governance structure. Danantara should clearly articulate its mandate and clarify its role to prevent overlaps with existing institutions, such as the SOEs Ministry and the INA. A comprehensive road map is also crucial, outlining the steps toward its establishment, supported by a robust legal and operational framework. Such a framework must emphasize strong governance principles, ensure accountability and be coupled with transparent communication to foster trust among stakeholders, including domestic and international investors.

Additionally, even Danantara's mandate is still somewhat unclear as the entity's definition has shifted rapidly over the past few months. Initially, before the name Danantara was coined, the idea of an SOE superholding was floated in September as a method to optimize and possibly reinvest the sizable assets of Indonesia's SOEs, with the implication being that the superholding would assume a significant portion of the SOEs Ministry's current authority. However, by October, the scope had changed, with Danantara described as an investment management agency that would not interfere with the SOEs Ministry's mandates. This evolving narrative continued as Danantara's official launch date of Nov. 7 was postponed due to President Prabowo Subianto's 16-day first overseas trip after his inauguration.

In the meantime, speculation surrounding Danantara has grown because it was introduced before first establishing a transparent road map, leaving prospective investors uncertain. The unclear role and legal framework of Danantara, combined with concerns over governance overlap and inconsistency, has created an air of unpredictability. This perception of risk may deter foreign capital inflows, as investors could be reluctant to commit resources in an environment where the regulatory landscape for key institutions seems unstable or poorly defined.

Without a clear legislative foundation or explicit operational mandate, the legal framework and purpose of Danantara's establishment lacks clarity. This ambiguity raises concerns about the transparency and accountability of its decision-making processes, aspects that are vital for an investment management agency. From the perspective of key investment partners, both domestic and foreign, the sudden introduction of Danantara magnifies doubts about the sanctity of Indonesia's legal framework. Such doubts are especially discouraging for equity investors, who rely on consistent policies and regulations to safeguard the stability of their substantial, long-term commitments.

To sustain trust with existing investment partners, two key questions need to be resolved. First, will Danantara fall under specific provisions of the Job Creation Law on investment management agencies, which provides the legal basis for sovereign wealth funds in Indonesia, including the INA? Second, how will Danantara safeguard its independence from domestic political interference, which is an essential factor in attracting foreign investors, while ensuring compliance with existing governance frameworks? Addressing these two questions is critical to maintaining investor confidence and ensuring coherence in Indonesia's investment ecosystem.

Under the Job Creation Law, investment management agencies are granted two distinct functions: First, they may manage state assets through mechanisms such as delegated management without assuming ownership. Second, they may receive state assets, which then transition into the agency's property and are no longer classified as state assets (Article 157, Paragraph 2). This distinction is critical in understanding the role Danantara would play if it assumes certain responsibilities currently held by SOEs.

To avoid ambiguity and potential legal overlap, it is imperative to clearly define Danantara's mandate, ensuring it aligns with existing regulations and safeguards investor confidence. If Danantara is to take on such significant functions, how can its formation balance legal certainty, operational clarity and Indonesia's need for economic stability? This question leaves stakeholders to wonder whether the agency's role will ultimately resolve inefficiencies or only deepen the confusion.

[This article is published in collaboration with Tenggara Strategic.]

Source: https://www.thejakartapost.com/business/2024/12/27/unclear-legal-basis-of-danantara-undermines-investor-trust.htm

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