On Sunday, the Indonesian government announced that it had secured a USD 4bn pledge from the Japan Bank for International Cooperation for its soon-to-be-formed sovereign wealth fund, the Nusantara Investment Authority (NIA). The amount is on top of a possible USD 2bn from the United States’ International Development Finance Corp. Indonesian officials will travel to Saudi Arabia and Abu Dhabi this weekend to secure more funds toward their target of USD 16bn ahead of the NIA’s planned opening in the first half of next year. The Indonesian government is expected to contribute an additional USD 5bn. State Enterprises Minister Erick Thohir said that the rules governing the fund would be ready by the second half of December. The fundraising is also being led by one of Widodo’s most trusted cabinet ministers, Coordinating Minister for Maritime Affairs and Investment, Luhut Pandjaitan, which assures its internal visibility and that it will remain a political priority.
The recently approved Omnibus Law on Job Creation mandated its creation. Still, the NIA is not a conventional sovereign wealth fund because Indonesia does not generate sufficient fiscal and foreign exchange surpluses. The fund’s purpose is to become an investment vehicle for mainly external participants, and the government has been wooing both governments and private participants.
The fund’s money will most likely be targeted towards the government’s infrastructure program, possibly including the planned relocation of the political capital. The Widodo administration has made state enterprises a development linchpin, but many are constrained by debt limits. A finance ministry official explained that state firms are key to infrastructure development, but many have maxed out their ability to carry more debt.
One solution would have been to encourage more public-private partnerships, as Indonesia did during its power sector build up in the last decade. However, foreign ownership or control of infrastructure assets appears to have become a political issue, reportedly because of Chinese assertiveness on the issue. Noticeably, the announced funding efforts have not included China, yet. The creation of an infrastructure investment fund is a compromise solution — foreign capital can participate, but ownership and control will remain with the Indonesian government and its state enterprises. The money will be divided up into different industry-specific funds, all to be managed under the NIA.
The rules for the fund will therefore be critical for Indonesia to turn these investment promises into actual cash. Even with this new structure, Indonesia will have to adopt many of the existing governance and operating practices already in use by multilateral and governmental agencies for their funding activities in Indonesia. These reflect their established institutional knowledge on how to mitigate the risks of investing in the country. Otherwise, should Jakarta insist on new rules, investors may require additional safeguards, delaying their willingness to release funds and slowing the rollout of projects.
Nonetheless, should the government meet its target for external commitments, these recent developments will be a political victory for Widodo as 2021 begins, even if the actual investments are months or even years away and likely very much still depend on the actual mechanics of the fund.