Indonesia’s sovereign wealth fund should diversify its investment beyond infrastructure projects to attract foreign capital, while maintaining transparency, according to the Institute for Development of Economics and Finance (Indef). Indef economist Eko Listiyanto said that while infrastructure projects were still profitable, the global trend showed that sovereign wealth funds invested more in private equity than infrastructure, citing International Forum of Sovereign Wealth Fund (IFSWF) data. The organization’s annual review in 2019 showed that the global sovereign wealth fund investment in infrastructure declined to 12.8 percent of the total investment in 2019 from 20.7 percent in 2015, while investment in private equity grew to 61.9 percent form 41.4 percent over the same period.
Sovereign wealth fund investment in hard assets declined from over half of its annual total investment value in 2015 to approximately a third in 2019. Meanwhile, based on the trend in the last three years, investors have been increasingly tapping into the technology and telecommunication sector, including healthcare technology, software and the internet, he said. “As this is a long-term investment, investors think the [investments] that can yield returns and profits are the technology and telco [sectors], while we go toward infrastructure,” he said in a press briefing on Wednesday. “If we want to target foreign funds, we should pay attention to their interest in private equity.” He added that while the sovereign wealth fund could be an alternative funding for the government’s infrastructure projects, the high cost of investment in the sector might also deter investors. The sovereign wealth fund, which will be named the Indonesia Investment Authority (INA), aims to attract foreign funds as co-investors. The government is targeting US$100 billion in investment in the next two years and is planning to use the fund to finance big projects such as infrastructure, tourism and technology, as well as the planned relocation of the country’s capital, in a bid to boost the economy currently ravaged by the coronavirus pandemic.
The National Development Planning Agency (Bappenas) has estimated that the country will need $429.7 billion in infrastructure investment, equal to 6.1 percent of GDP, between 2020 and 2024, of which the government might only be able to cover one third. According to President Joko “Jokowi” Widodo earlier in January, the government is eyeing $20 billion in investment for the sovereign wealth fund in the next few months. The government has reported investment interest of up to $6 billion by the US International Development Finance Corporation and the Japan Bank for International Cooperation, among others, in Indonesia’s sovereign wealth fund. “The establishment of the fund is necessary to finance the country’s massive [development] needs, boost foreign direct investment to the country and lower the debt to GDP [gross domestic product] ratio,” the President said on Jan. 15. The government is planning to allocate Rp 75 trillion ($5.35 billion) in state capital injection this year when the fund is officially established and its board of directors installed. The state capital injection will be in the form of cash, state assets and receivables as well as a portion of state-owned enterprises (SOEs) shares owned by the government, according to Finance Minister Sri Mulyani Indrawati in January.
Indef senior researcher Aviliani also stated that the government should also choose projects with multiplier effects in the economy, fearing that the projects would instead financially burden the country with loans and high-interest rates. “If the [project] development is ongoing but then the multiplier effects take time, we won’t have quick returns and the government will have to keep topping up the [investment],” she said. She suggested that Bappenas take part in determining infrastructure projects eligible to be funded through the sovereign wealth fund. Aviliani also suggested INA go public to boost transparency. Ever since its conception, the country’s sovereign wealth fund has been under scrutiny. Economists have questioned the potential mismanagement mirroring that of Malaysia’s state fund 1Malaysia Development Berhad (1MDB) case. About $4.5 billion was believed to have been misappropriated from the fund. However, Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah said that Indonesia was an exception in the global trend as the country’s infrastructure projects still offered attractive returns to investors. “Other countries’ sovereign wealth funds and infrastructure development have matured whereas our infrastructure is still developing. Investors were reluctant to invest in our infrastructure because it was high risk, but with a sovereign wealth fund, there is risk sharing with the government, which increases investor confidence,” he told The Jakarta Post on Thursday. Piter went on to say that sovereign wealth funds were intended for long-term investments and investors who are interested in shorter term projects can opt for portfolio investment. Similarly, Bank Permata economist Josua Pardede also said that the sovereign wealth fund was established to prioritize funding for the country’s infrastructure projects. “During the sovereign wealth fund’s process of diversifying its investment, it can also invest in international financial markets, with the hope of getting faster returns and without distorting the domestic financial market,” he said in a text message on Thursday.
