Indonesia’s SWF plans spark governance questions

Experts say the country's debut sovereign wealth fund needs full investing independence to attract international assets, but this appears unlikely according to current plans.
Indonesia’s SWF plans spark governance questions

Indonesia’s plan to establish a new sovereign wealth fund that mostly uses funds from foreign investors will likely depend on how explicitly the government creates strong governance and guarantees its investing independence, say industry experts.

In October 2020, Indonesia’s parliament approved a law to establish a new sovereign wealth fund that attract foreign infrastructure investments in Southeast Asia’s largest economy. The government aims to launch the SWF, which will officially be called the Indonesia Investment Authority (INA), as early as this month.

Joko Widodo: keen for
$100b for SWF

Indonesia’s government intends to seed the fund with $6 billion, and had originally planned a total size of $16 billion. But Indonesian’s president Joko Widodo last year discussed raising the fund’s total target to up to $100 billion,according to The Edge Markets.

To reach such a target it will rely on assets from sovereign investors. Canada's Caisse de dépôt et placement du Québec (CDPQ) and the US's International Development Finance Corporation are reportedly to planning to contribute $2 billion apiece, while the Japan Bank for International Cooperation and APG Asset Management have agreed to invest $4 billion and $1.5 billion, respectively. 

In addition, Abu Dhabi Investment Authority, Saudi Arabia’s Public Investment Fund and Scandinavian and European funds could offer capital for INA, said minister of maritime affairs and investment Luhut Pandjaitan, who is leading the fundraising efforts. He told the Financial Times he had also spoken to fund managers such as BlackRock, EIG Partners and JP Morgan Asset Management.

INA’s ability to secure these assets and more will likely depend on its ability to convince investors it will be free of political priorities in its investing processes, plus it boasting strong governance processes to prevent corruption. The precedent of Malaysia’s 1Malaysia Development Berhad, which was looted of around $4.5 billion of assets between 2009 and 2015 by, among others, then-prime minister Najib Razak, stands as an unfortunate example of can happens to SWFs that lack sufficiently robust processes.

It would be understandable for international investors to be cautious. Indonesia ranks 85 out of 198 in Transparency International’s 2019 corruption perception index and stood last in the Asian Corporate Governance Association (ACGA)'s latest survey of corporate governance quality in 12 Asia Pacific markets.

Corruption scandals have swirled around Indonesian institutions before. In January 2020 two separate state-owned insurance companies, Asuransi Sosial Angkatan Bersenjata Republik Indonesia (Asabri) and Asuransi Jiwasraya, faced charges of investment mismanagement and corruption.


Michael Maduell,
SWF Institute

Michael Maduell, president of the Sovereign Wealth Fund Institute (SWFI) told AsianInvestor that INA should embody three main characteristics to minimise any risk of corruption: independence from the presidency; good corporate governance “including a strong board of directors that declare any conflicts of interest”; and audited financials made available to the public “from a qualified auditor".

According to plans announced by the ministries of finance and state-owned enterprises, which are establishing the fund, INA will likely fall short of Maduell’s preferred standards. HHP Law Firm, the local entity of international law firm Baker McKenzie, said in a report the SWF would be established “as a 100% government-owned legal entity…[and] be responsible directly to [Indonesian] President [Joko Widodo]".

“[The fund] will have a supervisory board that oversees the operational activities, and a board of directors that will run the day-to-day management,” HHP added. “All supervisory board and board of directors members must be Indonesian nationals.”

HHP confirmed to AsianInvestor that it is advising the government but declined to comment further.

The insight further elaborates: “The supervisory board will have five members, with two ex-officio members, namely the Minister of Finance (as the chair of the supervisory board) and the Minister of State-Owned Enterprises, and three professional members. All of these members will be appointed and dismissed by the President.”

In other words, INA looks set to not have any foreign investor participation on the board and its operations will be directly overseen by senior government officials.

In the absence of government independence, Stuart Somer, principal of Complyport, a UK-based compliance and regulatory consultancy advises that INA incorporate an independent oversight body to which the Indonesian president reports with respect to its operations and which, ideally, could override him.

"The same elemental building blocks of good governance procedures and accountability apply to any fund, be it private or sovereign, including precise rules on how investments are made and who can sign off on investments and transfers of cash out of the fund for non-standard payments,” Somer said.

Jamie Allen, ACGA

Jamie Allen, founding secretary general of the ACGA, agrees. “Investors should focus their questions on the fund’s governance structure, for example whether there will be oversight board, how independent it will be from the political process, and whether, as investors, they would have the right to a seat on it,” he told AsianInvestor. “They will also want to clarify whether the fund has a clear investment mandate and how projects will be selected.”

Details on these areas are currently unclear. The government has said INA will broadly be an infrastructure fund, but it has not shared whether the projects will be privately or publicly funded.

“If private, that obviously raises a lot of issues about potential corruption,” Hong Kong-based Allen said. “Another interesting question is how the mandate fits broader climate change imperatives of not investing in coal or fossil fuels: will this fund genuinely be designed to invest in greener infrastructure?”

The need for the SWF’s investment to be at least carbon-emission neutral will likely be a high priority among potential Western state-affiliated investors. That might prove a point of controversy in in a natural resources-abundant country like Indonesia

This story has been updated to correct the name of HHP, the Indonesian law firm that is a member of Baker McKenzie International. 

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