The time seems right for Indonesia’s new Sovereign Wealth Fund 

This article is produced by CMS Holborn Asia, a Formal Law Alliance between CMS Singapore and Holborn Law LLC.

Introduction

In an effort to propel substantial foreign investment into Indonesia, the Indonesian government has recently established a new sovereign wealth fund management institution, the Nusantara Investment Authority (Lembaga Pengelola Investasi – “LPI”). The LPI is due to commence operations in the second half of 2021 where it should set about re-accelerating the economy as Indonesia seeks to tackle the economic fallout of the Covid-19 pandemic.

The establishment of the LPI is seen as a historic move by the Indonesian government to create more job opportunities and to attract investment (consistent with the rationale behind the recently enacted Omnibus Law), with an overarching aim of supporting overall economic growth. It is anticipated that the LPI will function as a strategic partner for foreign and domestic investors by providing them with the flexibility to invest in various projects previously delegated to many state-owned enterprises (some of which have patchy track records with investment partners). This is arguably the most promising aspect of the LPI – the potential emergence of a strategic and commercially focused partner.

The LPI also plans to enable flexible participation by public and private investors in various projects spanning infrastructure, energy, healthcare, tourism and technology, and represents the first serious test of a package of sweeping reforms passed by Indonesia’s government in October 2020 that are designed to attract more foreign investments.

Where will the funding and investors come from?

With Indonesia continuing to run twin deficits (current account and state budget) over the past few decades, it will not be able to self-fund the LPI’s investments through foreign exchange reserves or government budget surpluses (unlike Singapore’s model of funding its sovereign wealth fund). The Indonesian government is therefore seeking to raise funds from both global (including other sovereign wealth funds and governments) and local investors, with increased interest likely being driven by the current low interest rate environment globally.

The fund has reportedly secured a first (unofficial) tranche of US $15.5 billion in funding as of 29 December 2020 – with the Indonesian government seeding up to US $6 billion, comprising of slightly over US $2 billion in cash and the remaining in state assets, assets and shares in state-owned enterprises, and state receivables; the Japan Bank for International Cooperation and the US International Development Finance Corporation being slated to invest US $4 billion and US $2 billion into the fund respectively; and, according to the Indonesian Minister of Maritime Affairs and Investment, potential additional investments totalling US $3.5 billion from Caisse de Dépôt et Placement du Québec, a Canadian public pension fund, and APG, the biggest pension fund in the Netherlands.

More recently, on 13 January 2021, it was reported that the United Arab Emirates had pledged a US $22.8 billion investment into the fund. The Indonesian government is also apparently in talks with the Abu Dhabi Investment Authority which has been involved in setting up the LPI. US private equity firms, including Blackstone and Carlyle, and fund managers, including BlackRock, EIG Partners and JP Morgan Asset Management, have reportedly also been approached, lending some sizeable bench strength to the investor group if the investments play out.

Governance and Potential Challenges

The reputational damage caused by neighbouring Malaysia’s 1MDB scandal, Indonesia’s own high-profile corruption cases in recent times and the resulting heightened scrutiny on emerging market wealth funds means that the Indonesian government faces an uphill task in assuring potential investors that the LPI will be managed independently, transparently and professionally. To this end, it is envisaged that the LPI will be managed by professionals and have a supervisory board comprised of ministers, including the Minister of Finance and the Minister of State-Owned Enterprises. The fund’s governance framework will also adopt safeguards such as having professionals run its board of directors, having an advisory team comprising representatives of major investors and being subject to stringent audit and reporting obligations.

Whether the governance structures put in place will adequately assuage investor concerns remains to be seen. Despite the implementation of various safeguards, concerns arise from the fact that the LPI will not be subject to probes by Indonesia’s Supreme Audit Board. Furthermore, questions surrounding the LPI’s independence from the political process may be raised. The LPI is a 100% government-owned entity that is directly accountable to the President, and there are concerns that the supervisory board, constituted of senior government officials, has the potential to exert political influence over investments and LPI business decisions, given that its oversight includes the powers to appoint and dismiss members of the board of directors and advisory board.

Implications and Concluding Remarks

It is hoped that the LPI will attain its aims of creating more opportunities and attracting investments to its fund(s) in order to bolster economic growth in Indonesia. Given that effective implementation of the governing laws and regulations for the fund is uncertain, potential investors and partners should keep abreast of developments as well as the ways in which the LPI may facilitate their prospective investments or partnerships, however, we would expect that the construction and infrastructure industries will be major benefactors of partnership and funding structures. Market confidence in the LPI will ultimately depend on Indonesia’s political and economic climate and stability, confidence in its public sector governance as well as transparency and accountability of the fund and its management.