A larger than life rupiah coin at Bank Indonesia. Image: Facebook

JAKARTA – US President-elect Joe Biden’s nail-biting election victory has injected new uncertainty into Indonesia’s ambitious plan to ignore the economic fallout from the Covid-19 pandemic and launch its first-ever US$5 billion sovereign wealth fund early next year. 

Government sources say Coordinating Minister for Maritime Affairs and Investment Luhut Panjaitan is reconsidering next week’s scheduled visit to Washington, where he is expected to meet Jared Kushner, President Donald Trump’s son-in-law and senior adviser, and Adam Boehler, head of the US International Development Finance Corp (IDFC), a government finance arm.

Boehler proposed contributing $5 billion to the fund when he met with President Joko Widodo last January, but he said projects to develop quality transportation, energy and digital infrastructure had to be financially viable, adhere to high social and environmental standards and promote inclusive economic growth.

It is understood Foreign Minister Retno Marsudi advised Panjaitan to call off his November 15 trip until the path to the transition becomes clearer. “We don’t know whether he (Panjaitan) will proceed or not,” said one official. “Boehler is a political appointee and it is unclear whether he will still be there beyond January.”

Created with the 2018 merger of the Overseas Private Investment Corp (OPIC) and USAID’s Development Credit Authority under the so-called BUILD Act, the IDFC only began operations last December with an investment cap of $60 billion. 

Kushner is believed to have been responsible for Boehler’s appointment, but sources in Washington say the 41-year-old businessman earned a reputation for professionalism in his previous role as director of the Center for Medicare and Medicaid Innovation. 

“Biden is a decent man and I don’t think it is likely that he will go on a witch hunt (of Trump appointees),” says one Washington-based financier pondering Boehler’s future in his current job. “People seem to think that he isn’t like that and will take his time.”

Joko Widodo and Adam Boehler in batik shirts in Jakarta. Image: Facebook

To optimize asset value and support sustainable development, Indonesia is counting mostly on the IDFC, Japan’s SoftBank and the United Arab Emirates (UAE) to attract a targeted $15 billion in overseas investments, a tough call given current uncertainties caused by the pandemic.

Known as the Indonesia Investment Authority (LPI), the venture is different from most sovereign wealth funds in the way it will act as an asset management holding company for the state-owned enterprises (SOEs) to be brought under its umbrella.

Conventional sovereign wealth funds such as Singapore’s Temasek Holdings and Norway’s Government Pension Fund invest overseas, relying on state assets such as foreign exchange reserves, accumulated trade surpluses and natural resource exports.  

Panjaitan has been under mounting pressure to produce results. At a recent Cabinet meeting, Widodo admonished him and Investment Coordinating Board (BKPM) head Bahlil Lahadalia over a 5% contraction in third-quarter investment, saying he expected an improvement in the fourth quarter.

Encouraging for Panjaitan, however, has been US Trade Commissioner Robert Lighthizer’s decision to extend Indonesia’s Generalized System of Preferences (GSP) privileges without any loss of benefits, even if he did warn that the US wanted greater access to the Indonesian market.

Lighthizer said in an October 30 letter to Panjaitan that failure to make good on commitments that include removing barriers to reinsurance, cross-border data flows and horticultural import licensing may prompt the US Trade Representative to open a new GSP review.

Little is known about the LPI management structure because the implementing regulations can only follow the enactment of the Job Creation Omnibus Law, which Widodo finally signed on November 2 amid continuing demonstrations by the country’s labor unions. 

Finance Minister Sri Mulyani Indrawati has said $2 billion of LPI’s seed money will come in the form of cash from the state budget and the remaining $3 billion from the sale of shares in SOEs and other state assets.

Indonesian Finance Minister Sri Mulyani Indrawati in Hong Kong on November 1, 2017. Photo: Asia Times / Lin Wanxia

The Finance Ministry is responsible for the management of state assets, but Indrawati’s input on the LPI appears to have been limited because she is not a member of Widodo’s inner circle, where Panjaitan is the dominant voice on many key issues.

Panjaitan said earlier this year that the funds gathered in the LPI fund will be utilized mostly for infrastructure projects, including Indonesia’s planned new capital in Kalimantan, which now looks less likely than ever to get off the ground.

Earlier this year, Widodo reportedly secured an undertaking from UAE Crown Prince Mohammad bin Zayed Al Nahyan to invest in the fund, but Middle East oil states have been notorious in the past for offering a lot and delivering little.

The LPI’s eventual success may come down to how the international market views Indonesia’s heavy debt burden and widening fiscal deficit brought about by a huge stimulus package to deal with the economic fallout from the Covid-19 pandemic.

Another major problem, shown by delays to China’s Jakarta-Bandung fast-rail venture and the Japanese-funded 2,000MW Batang power station, is the long time it often takes to prepare projects for investors because of land ownership and other “clean and clear” obstacles.

Critics also point to Indonesia’s reputation for corruption as a potential deterrent. They say much depends on who heads the LPI’s board of directors, which will be appointed by a five-man supervisory board made up of the finance and state enterprise ministers and three private sector executives.

Financial experts favor tough-minded former central bank governor and finance minister Agus Martowardojo, the current president commissioner of Bank Negara Indonesia (BNI), or Glenn Yusuf, the former vice-president commissioner of Bank Cimb-Niaga who headed the Indonesian Bank Restructuring Agency (IBRA) in the wake of the 1997-98 financial crash.

A worker removes bundles of rupiah banknotes at the headquarter of the state-owned Bank Negara Indonesia (BNI) headquarters, in Jakarta. Photo: Reuters / Supri

The new omnibus law stipulates that Finance Ministry officials and LPI staff members can’t be held legally responsible for future losses to the state, which under Indonesian law is deemed to be corruption even if the losses are the result of a well-meaning business decision. 

There are conditions, however. Suspects must show the losses were not caused by mistakes, negligence or conflicts of interest, that they performed their duties with “good intentions and prudence” and that they did not obtain personal benefits.

The poor standard of governance at most Indonesian SOEs is another major concern when sovereign funds must be managed according to the 2008 Generally Accepted Principles and Practices of SWFs, issued by an international working group at the initiative of the International Monetary Fund (IMFR).

Indonesia’s SOEs last year generated revenues of $170 billion, but many of the larger companies, such as electricity utility Perusahaan Listrik Negara (PLN) and oil company Pertamina, are heavily indebted.

The State Enterprise Ministry has now consolidated the firms into 12 clusters in an attempt to improve their standard of governance and prepare them for public listing, which investors will probably demand as a benchmark if they are to be included in the LPI.