Indonesia’s First Sovereign Wealth Fund (INA): Opportunities and Challenges

On 19 April 2021, Indonesia’s State-Owned Enterprise (SOE) Minister, Erik Thohir, announced regulations that would determine the criteria and process for the sale of SOE assets to the country’s newly established sovereign wealth fund (SWF), the Indonesia Investment Authority (INA). Such asset sales effectively pave the way for SOEs to alleviate their debt burdens. Large state-owned construction companies are expected to sell some of their toll road projects to INA and its co-investors. The latter include Hutama Karya (Trans-Sumatera project), Jasa Marga (North Sumatera, Java, East Kalimantan, North Sulawesi and Bali projects) and Waskita Karya (West, Central and East Java projects). The announcement also brought some clarity to the future operations of INA.

This essay seeks to explain the origins, goals, organisation and operational challenges of INA. It traces the events leading up to its establishment and follows that up with a discussion of INA’s objectives, organisation, and governance structure. The final section will examine some challenges involved in the implementation of the Omnibus Law as well as INA’s ability to attract much-needed investments amid an evolving Covid-19 pandemic.

INDONESIA’S MUCH-DELAYED SWF PLAN

The idea to set up a sovereign wealth fund in Indonesia is not new. An early initiative was undertaken during the last years of the Suharto government when, on 16 March 1998, a new SOE Ministry was established with Tanri Abeng as its first minister. That ministry was given oversight over all SOEs. Tanri, who had been a senior executive for Union Carbide’s Indonesian operations and was later CEO of the Bakrie Group, was one of the first professionals from the private sector appointed to a cabinet minister position. The plan was to classify SOEs into groupings, each with its own holding company. A super holding company would then be formed to oversee all these holding companies. However, the plans never materialised in the aftermath of the 1997/98 Asian Financial Crisis or after the Reformation Era.

With subsequent governments, from the Habibie to Yudhoyono administrations, the SOE structure remained largely the same, except for the formation of a few sectoral holding companies and the privatisation of several commercially-oriented SOEs through Indonesia’s stock market. This relative absence of SOE reforms could have been due to strong opposition from various stakeholders. SOE workers have been worried about layoffs due to such reforms. SOE management and supervisory bodies are concerned about their positions in a potential rationalising and merger exercise. Suppliers and distributors who are part of the SOE ecosystem also do not want reforms that affect their role in the SOE supply chain. Bureaucrats are also protective of their turf, especially the technical ministries that oversee each of their related SOEs. Finally, elected politicians are also concerned that SOE reforms will reduce the benefits enjoyed by their constituencies under the current arrangement.

Despite the opposition to SOE reforms, Rini Soemarno – the SOE Minister during President Joko Widodo’s (Jokowi) first term (2014-2019), began to revisit the earlier idea of an SOE super-holding company and began forming more sectoral holding companies. By the end of Jokowi’s first term, six sectoral holding companies had been formed, and there were plans for seven more.

The rising trend in SOE debts, which began in Jokowi’s first term, has clearly become a major concern in the second term, with the SOEs’ debt-to-equity ratios having reached potentially unsustainable levels.

However, the plan to form a super holding company was subsequently abandoned by Erik Thohir, who replaced Rini Soemarno as the SOE Minister in Jokowi’s second term. Instead, the minister decided to focus on completing the formation of sectoral holding companies.

An important factor influencing the trajectory of SOE reforms is infrastructure investment. During Jokowi’s first term, the government spent heavily on building infrastructure by recapitalising the construction SOEs and having them raise funds for infrastructure construction. The President realised he needed to improve the country’s much-neglected infrastructure by attracting private investments. For example, Anton Gunawan (2021) showed that although the nominal value of the capital stock increased over time, infrastructure stock as a percentage of GDP has been declining since 1999 (Figure 1). He also argued that much of the spending on infrastructure was primarily undertaken by the SOEs (Figure 2) and funded primarily through debt. Furthermore, the debt-to-equity position of many of these companies has risen significantly between 2014 and 2019 (Table 1).

Figure 1: Infrastructure Capital Stock in Indonesia

Figure 2: Infrastructure Investment Flow by Source

Table 1: Debt-to-Equity Positions of SOEs

The rising trend in SOE debts, which began in Jokowi’s first term, has clearly become a major concern in the second term, with the SOEs’ debt-to-equity ratios having reached potentially unsustainable levels. More recently, this problem was further exacerbated by the impact of the Covid-19 pandemic on the Indonesian government’s fiscal space. The government has reoriented fiscal expenditures to deal with the pandemic. It will also need to reduce its budget deficit going forward. Under these circumstances, and with SOEs involved in infrastructure projects having reached their debt limits, there is an urgent need to attract private investments (both local and foreign) to fund the country’s neglected infrastructure in the future.

In this regard, Indonesia had before the pandemic already implemented some reforms to increase private investment. Reza Siregar (2021) notes that during Jokowi’s first term, the government launched 16 policy reform packages to attract private sector investment. Even though this was done piecemeal, Indonesia was able to climb up the World Bank’s “Ease of Doing Business” rankings by 30 positions to 73rd position last year. The packages were followed by a landmark fuel subsidy reform in 2015. Overall, these reforms were designed to streamline regulations, support private investment, and make wage-setting more flexible.

During Jokowi’s second term, the government began to realise that the piecemeal approach adopted in the past to attract private investment was inadequate. Thus, it embarked on designing and issuing a major bill that would consolidate, harmonise and simplify the country’s unwieldy, often conflicting and overlapping, investment laws. This bill, with an all-encompassing coverage, was called the Omnibus Law, which was passed by parliament on 8 October 2020. The new legislation consists of 79 laws and 1,245 articles. It focuses on four essential areas: (i) ease of doing business, (ii) simplification of investment requirements, (iii) strengthening the labour market’s competitiveness, and (iv) boosting micro, small and medium enterprises. These four areas are further divided into 11 clusters. One of the clusters – the Investment and Government Project cluster – includes the plan to set up the Indonesia Investment Authority.

INVESTOR-FRIENDLY AND FLEXIBLE

The main goal of the Indonesia Investment Authority (INA) is to attract private investment into the country. In the early phase, INA’s priority is to attract private investments into the government’s infrastructure projects. In a sense, the role envisaged for INA is more limited compared to the earlier idea of establishing a super-holding company for SOEs in the country.

Dr Darwin Cyril Noerhadi (2021), a member of INA’s Board of Supervisor, explained that INA is modelled more closely to India’s National Investment and Infrastructure Fund (NIIF). This makes it different from SWFs from countries such as Singapore and Norway (Table 2).

In general, SWFs invest their country’s surplus funds or reserves overseas to diversify and grow their assets. INA, in contrast, is more inward-looking and builds on the government co-investing with private investors (local and foreign) in Indonesia-based projects or entities.

Funding for SWFs, in general, comes from internal surpluses or the country’s reserves, while INA’s funds, as with NIIF, may come from government surpluses and foreign co-investments into local companies and projects.

Table 2: Comparisons of Sovereign Wealth Funds in Norway, Singapore and India

The investment objectives of SWFs are similar when it comes to financial or commercial returns. However, the focus can be different across SWFs. For the usual SWF, the emphasis is on wealth creation done through investing in a diversified portfolio of assets, both domestic and overseas. In contrast, INA and NIIF focus on attracting external funds for domestic infrastructure projects.

As a result, INA’s features are designed to be investor-friendly and flexible, with a focus on commercial returns. Like private companies in Indonesia, INA has a two-tier board governance structure, comprising the Board of Directors (Management), which the Board of Supervisors oversees. This Board of Supervisors reports directly to the President. The five-person Supervisory Board consists of the Minister of Finance and the Minister of State-Owned Enterprise (SOE), and three professionals from the private sector. The current Board of Directors consists of five independent professionals selected and vetted by the Supervisory Board to run the SWF.

INA’s ability to attract investments into toll roads, seaports and airports will indeed be tested in the second half of this year. Only after INA has delivered on what it set out to do in this area will consideration be given to broadening its role to a holding company of strategic SOEs. Some will consider it a pity if this does not materialise…

Under the 2020 state budget, a total of IDR15 trillion has been allocated as INA’s capital. Another IDR 15 trillion will come from the 2021 state budget. The plan is to boost INA’s total capital to IDR 75 trillion by 2021 year-end. This is expected to come from various sources, ranging from cash funds, state property to government shares in SOEs.

Noerhadi (2021) has noted that the initial co-investment activity will focus on infrastructure projects such as toll roads, airports, and seaports. One possible investment participation structure involves the creation of an INA-managed master fund that is further split into designated thematic funds for co-investment with interested participating investors (Figure 3). Investors wanting control over their investments would take a majority share, with INA taking a minority stake. To ensure flexibility, the location and jurisdiction of these co-invested funds could reside in Indonesia or abroad, depending on the investors’ preference.

Figure 3: An Example of INA’s Co-Investment Fund Structure

CHALLENGES AHEAD

The Omnibus Law has thus far attracted more street protests than investments, however: Labour unions have opposed this new bill, especially on the reduction of severance pay terms; environmental groups are not happy with the less stringent environmental protection, and provincial governments are questioning the shift of authority on investment licenses to the central government. The implementation of the law will remain a challenge since it is opposed by the above three important constituents.

INA’s ability to attract investments into toll roads, seaports and airports will indeed be tested in the second half of this year. Only after INA has delivered on what it set out to do in this area will consideration be given to broadening its role to a holding company of strategic SOEs. Some will consider it a pity if this does not materialise, given the country’s long and arduous 20-year journey to set up the SWF.

However, INA can become unwieldy and costly if it becomes a super holding company of all SOEs (through their sectoral holding companies). It might be preferable for INA to be a more focused holding company for selected strategic SOEs, especially those that would benefit from heightened transparency and accountability, similar to the existing 28 publicly-listed SOEs.

A public listing would improve transparency and accountability, allowing managers to better focus on operating efficiency and performance with less political interference. The government’s perennial concern over control could be addressed by the maintaining of majority ownership and through special voting-right shares.

In a recent interview, Tanri Abeng opined that a holding company is essential to protect the SOE from political influence. The current SOE Deputy Minister, Pahala Mansury, has mentioned that, in addition to the toll roads being sold by the state-owned construction companies, several SOE subsidiaries are being planned for sale to INA before or during an IPO public listing. These include PT Pertamina Geothermal Energy (a subsidiary of PT Pertamina) and a sub-holding company covering marine logistics. It would be interesting if INA can also help bring about the public listing of PT Pertamina (Persero).

---

This is an adapted version of ISEAS Perspective 2021/63 published on 5 May 2021. The paper and its footnotes can be accessed at this link.