A Glance at the Indonesian Sovereign Wealth Fund

When the government of Indonesia announced the launching of a sovereign wealth fund (SWF), called the Indonesia Investment Authority (INA) and dubbed as the first-ever in the country, my first thought was, "Whence the money for the SWF to invest. The country barely has surplus cash to spend for such a fund. Oil reserves have been depleted, gain from exports hardly balance imports of consumption and other manufacture products". 

I decided to dig into the theme, wrote a piece on it, and sent it to LSE Southeast Asia Blog. More elaborative writing is under review. The published article can be accessed here.

I raised two main points in this writing. First, the Indonesian SWF is unlike a conventional SWF, to not to say it fits nowhere in the SWF definition commonly referred to by scholars. Why? After browsing some media outlets reporting about INA, I found out that the fund would receive initial funding from the government. There is no problem with this seed funding, although it is unclear whether the money is sourced from surplus or excess cash. What intrigued me is that the fund aims to gather funds from especially overseas investors, which can be other SWFs, pension funds, and private equity firms. At this point, well, I do think the SWF is more like a new agency by the government to attract foreign investments. Something that has been performed by Indonesian state companies or probably the investment coordinating board (BKPM), which is usually in charge of promoting investment potentials in Indonesia. 

Furthermore, I later found out that INA's goal was to disburse the collected investment to development projects in Indonesia. This got me confused. Theoretically speaking, what makes SWF an SWF is because it invests across national borders. That is what scholars agreed. So, it is essentially using surplus money from domestic economic activities to enter other countries markets. IMO, that makes it 'sovereign' because the money should represent the domestic interests and be free from the influence of non-national goals.

Indeed, no SWFs in the world are 100% similar in terms of their structures, functions, or objectives. So, maybe, INA is something that needs beyond-theory observance (?).

The second point I raised in the writing was that INA marked a crucial change in the Indonesian political economy of investment. The country has long been relying on state-owned enterprises to exploit economic potentials, give dividends for the state revenue, and raise funds (e.g. through bond issuances) when the state budget is too limited to finance development projects. With INA's operation, the burden will be eased. INA will raise funds that can be used to finance development projects, especially infrastructure projects that have been the focus of the current government. 

Is there any impact? I do not explore much in the published article. But, a few takeaways should be interesting for a follow-up. INA's operation will likely embody a stronger government's role and influence in the economy. Through INA, the government will be able to direct the flow of capital, probably from overseas and private players, to strategic projects. Second, as an investor in companies, INA will invest and leave upon projects completion or when targeted investment returns are achieved. Thus, it is interesting to see how this investment model affects the corporate governance of the invested firms. Third, it is likely interesting as well to see INA's operation when Indonesia's democracy is both seeing dynamics of public participation and experiencing, as some literature points out, a backslide. The dynamics will likely include issues of corruption and that INA will only benefit politically-wired firms and individuals.

INA has just started operating this early 2021. There are years to come to observe whether INA will be a suitable investment model for Indonesia or will end up defunct just like the previously intended sovereign wealth fund ever exist i.e. Pusat Investasi Pemerintah (PIP).