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What INA, Indonesia’s SWF needs to do?

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James Bladen
James Bladen joined Alpha Southeast Asia in 2015. He has written on a wide range of issues covering capital markets, Islamic finance and M&A. He worked as a consultant in Indonesia (2013-2017) and moved to New York in 2020 where he continues to cover Southeast Asia.

Launching a sovereign wealth fund (SWF) is not for the faint hearted. Indonesia threw its hat in the ring in January 2021. There are however a myriad range of issues to be raised, agreed upon, keep private let alone make public.

Key considerations include how much of the investment portfolio is to remain in Indonesia for infrastructure projects and how much of it will be anchored overseas and how best to split the percentage of the underlying assets by region? Most notably, how far out will the red carpet be flung open or will investments from Indonesia be restricted or shunned?

China and India are widely seen as key drivers of global economic growth, and climate change and fintech as investment opportunities. Meanwhile, many SWFs have generally found infrastructure opportunities along China’s Belt and Road to be attractive. Will Indonesia Investment Authority (INA) invests overseas or limit itself purely to Indonesia?

Sector wise, will INA only focus on infrastructure or invest in fintech services that benefit from the acceleration in digitisation of financial services? Alternatively, will investment in technology, telecommunications and life sciences that focuses on artificial intelligence, blockchain and cybersecurity get some much needed attention? Most importantly, what sort of climate risk analysis and sustainability benchmarks will be used to guide new investments?

In his best-selling memoir, From Third World to First, Lee Kuan Yew, former President of Singapore and chairman of GIC wrote, “My cardinal objective was not to maximise returns but to protect the value of our savings and get a fair return on capital.”

To that end, the Government of Indonesia and market regulators will need to take heed from the key lessons learnt from the losses that incurred at China Investment Corporation(CIC), the Chinese SWF established in 2007, regarding unspecified overseas investment losses in 2008-2013 and the ‘dereliction of duty’ levelled by the country’s top auditor, in a rare public rebuke in July 2014.


Like China, Indonesia may also want to invest in agriculture in both, Indonesia and overseas as well as across the entire value chain although these are fiercely protected areas and will likely face headwinds overseas, despite its potential for local job creation and economic growth.

In fact, in an interview with CNBC on the side lines of the Asian Financial Forum  in January 2018, Tu Guangshao, vice chairman and president of CIC said, [China] is also “facing more difficulties and challenges” related to “protectionism” overseas.

Similarly, lest it be forgotten Temasek had trouble making inroads into Indonesia with the July 2013 aborted acquisition of Bank Danamon. Although there were multi-faceted reasons at the time for spurning Singapore, the Indonesian government cannot proclaim support for economic openness on the global stage, while have rules in place to limit foreign investment within Indonesia.

Similarly, having a senior international adviser to a sovereign wealth fund  resign as an indirect result of false allegations levelled against a helpless worker, rebutting claims the president of a given SWF receives a S$100 million salary or the former CEO of  Norway’s sovereign wealth fund facing a probe after accepting a trip on a private jet that may have strayed from the fund’s compliance rules, among other distracting media reports will not help Indonesia on the global stage, either. Needless to say, Indonesia can circumvent such issues by setting out the rules from the outset, maintain an active line of communication with the international press and go one step further by publicly disclose the salaries of its senior executives in its annual report, unlike some other SWFs.

In a September 2020 article for Pensions & Investments, Mr. Peng Chun, Chairman of CIC encouraged the setting up of an “Information Superhighway’ mechanism to step up communication with and information flows from international institutions.” to “lower our total portfolio risk target”, summing the need for a high-calibre communications department.

The appointment of a trusted auditing firm is also of paramount importance. In 2018, Temasek found itself in the media spotlight for using KMPG, which was severely criticised by UK watchdog, the Financial Reporting Council. In the United Kingdom, “50% of KPMG’s FTSE 350 audits required more than just limited improvements, compared to 35% in the previous year” while closer to home in Malaysia, KMPG retracted its audit reports on Malaysia’s 1MDB for three financial years from 2009-2012 after an investigation was launched on financial irregularities. Temasek however quickly expressed confidence in its auditor and said “KPMG has expressed “unmodified opinions on the audited statutory consolidated financial statements” of Temasek Holdings and its subsidiaries for the financial year ended 31 Mar 2009 to 2018 but no one disputes the merit of not having to deal with such PR distractions.

Last but not least, the INA will also need to find a way to reconcile United Nation’s Principles for Responsible Investing (PRI) with investment opportunities available in Indonesia in oil & gas, coal, palm oil, and other forestry related industries, some that operate within the Sustainable Development Goals (SDGs) framework while others skirt at the outer rim. In particular, it will need to clarify its own environmental, social governance (ESG) stance.

Given how soy production and cattle farming are two of the leading drivers of deforestation, it is good for the influential Norway’s Government Pension Fund (GPF) to put pressure on companies involved but is the same brush used on a minority of companies that have not quite measured up being used to tar large key companies in Indonesia that have spent the last decade investing in sustainability? After all, GPF was built from profits earned by exploiting Norway’s oil reserves and hydrocarbons.

In fact, GPF’s decision to dump oil and gas companies from its benchmark index in April 2019 had more to do with economics than the environment. The exclusion affected companies that explore and produce oil but did not impact world’s oil supermajors such as BP and Shell, a move widely seen as hypocritical. In the end however, this was done to protect Norway from the impact of seesawing oil prices, if not anything else.

With stakes in over 9,000 companies globally, Norway’s GPF is among the world’s most influential investors and periodically expresses its “views” in a bid to influence investment behaviour, ironically and despite its deep links to the fossil fuel industry itself.

Meanwhile, given the large number of oil & gas, coal mining and palm oil companies in Indonesia, the INA will need to work extra hard to clarify its stance on environmental, social and governance (ESG). Only then can the fund enjoy untrammelled access to markets and investment opportunities around the world.

These ethical guidelines will need to be supervised by qualified staff and overseen by an independent board. The fund will also need to incorporate sustainability into its investment decision-making in order to identify systemic risks and make investments accordingly. Climate risk analysis, including an internal carbon price, will also need to guide decisions on new investments in the decade ahead.

By building methods to reduce climate change through investment planning and encouraging local Indonesian companies to report on greenhouse gas emissions, the INA can influence other funds to follow suit and this could be the start of the tipping point in favour of Indonesia.

In the end, the goal for the INA should be to promote a resilient portfolio of investment opportunities in Indonesia that are focused on investing in negative emissions technologies and nature-based solutions, a broad diversification and long-term investments which are sustainable in economic, environmental and social terms.

To achieve this, the public face at the Indonesian Investment Authority will need to have the combination of investment experience, trust of those in positions of power and the ability to assume a large public presence in international circles.

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