Indonesia set to establish $6.8b sovereign wealth fund to support economy

The establishment of the sovereign fund is included in the Job Creation Law.
The establishment of the sovereign fund is included in the Job Creation Law.PHOTO: REUTERS

JAKARTA (THE JAKARTA POST/ASIA NEWS NETWORK) - The Indonesian government is preparing 75 trillion rupiah (S$6.8 billion) in capital to set up a sovereign wealth fund to attract investments and support the economy.

Global heavyweights from the United States to the United Arab Emirates have expressed interest to join in.

The establishment of the sovereign fund, which will be called the Indonesia Investment Authority, is included in the Job Creation Law.

Finance Minister Sri Mulyani Indrawati said 30 trillion rupiah of the capital would be in cash, while the remaining would be in the form of shares of state-owned enterprises (SOEs) and other state assets.

The fund is aimed at attracting 225 trillion rupiah in investment, with foreign funds from the UAE, Japanese conglomerate Softbank and the US International Development Finance Corporation (IFDC) already lining up to invest, officials have said previously.

It remains unclear where the wealth fund will be invested. Dr Sri Mulyani mentioned a combination of a development fund and a stabilisation fund.

Officials have previously mentioned projects in sectors including infrastructure, healthcare, energy and resources, tourism and technology.

Other sovereign wealth funds elsewhere invest in financial markets as well.

"We are currently formulating the government regulation, as the President has asked to prioritise this," Dr Sri Mulyani told reporters on Wednesday (Oct 7). "We are hoping to get strategic and reputable partners so that we can develop the fund to better attract investment."

The Job Creation Law has met with widespread protests and criticism from labour unions and civil groups over the potentially negative impact it could have on labour rights and the environment

The government, on the other hand, sees the law as a means to attract investments, boost economic growth and create jobs.

The wealth fund will have a supervisory council led by the finance minister, with members including the SOEs minister and three more professionals, according to the law.

The board of directors will include five professionals to oversee the fund's operation, including to formulate the fund's policy and work plan, among other things.

The government can inject more money into the fund should its capital decline significantly, the law states.

Indonesia would follow the model of the Russian sovereign wealth fund, as it would raise the required funds from private investors instead of the country's reserve funds, Deputy SOEs Minister Kartika "Tiko" Wirjoatmodjo said earlier this year.

The Russia Direct Investment Fund (RDIF) has invested and committed 1.9 trillion rubles (S$33.1 billion), of which 1.7 trillion rubles came from co-investors, partners and banks.

It has also attracted over US$40 billion (S$54 billion) in foreign capital into the Russian economy through long-term strategic partnerships since its establishment in 2011.

Although the fund could act as alternative financing sources to boost economic growth, the government must ensure that the fund should be transparent and independent, said Permata Bank economist Josua Pardede.

"Both the supervisory council and board of directors must be independent, transparent and far from political interest to mitigate the risk of corruption," he told The Jakarta Post. "As the fund will manage a significant amount of assets, prudent management is the key to avoid potential state losses."

Political interests should be avoided to prevent the fund from becoming like state fund Malaysia's 1Malaysia Development Berhad (1MDB), said Institute for Development of Economics and Finance (Indef) senior economist Aviliani.

The 1MDB fund came under the spotlight following alleged money laundering and financial fraud in which Malaysian and US investigators believe about US$4.5 billion was misappropriated.

Ms Aviliani said that if managed properly, the sovereign wealth fund could allow cash-strapped Indonesia to invest more in infrastructure as it would allow foreign investors to partner with or invest in the fund.

"The fund may be able to increase foreign investors' trust in Indonesia, which has been hindered by regulatory uncertainty, but it should be implemented and supervised carefully to avoid any special interests," she said.