Danantara’s governance has raised many concerns throughout its first half-year in existence. While much will need to be ironed out as the fund is in its infancy, the current governance and structure raises many flags that need to be resolved if Indonesia truly and seriously wants its very own Temasek.

As Indonesia launches its new sovereign wealth fund, Danantara, a lot of the details on the fund’s operations and governance have been announced recently. Some of these announcements have preemptively raised concerns about the fund – such as the hiring of major regional political figures in the fund’s board, the appointment of the fund’s COO as its chief regulator, and the fund’s financing techniques. Much of what Danantara is currently doing will need to be polished if it wants to establish itself as a celebrated mainstay in the Indonesian periphery. 

All eyes are on Indonesia’s new sovereign wealth fund, Danantara, as it has finally moved to deploy capital earlier in October. The fund is looking to make close to $10b USD in investments over the first three months, following major preparatory moves, including placing state-owned enterprises in the fund and away from the Ministry of State-Owned Enterprises. The fund has already earmarked early candidates for investment, including a haj pilgrimage village near Mecca, upstream oil investments, and domestic waste-to-power energy programs. 

Danantara was announced as a brand new investment arm of the Indonesian government, to be used as a vessel to consolidate state-owned enterprise operations, as well as an investment tool in both domestic and international projects, primarily aimed to boost and fast-track the archipelago’s growth. As Indonesia’s second Sovereign Wealth Fund, Danantara will look to differentiate itself from the Indonesia Investment Authority, which appears to differ in mandate from Danantara, as it is mainly meant to be used as a co-investment vehicle in order to boost domestic projects.

Despite some optimism, the announcement of Danantara was received with mixed responses. While some opined that long-term value creation is an essential part of growing the national economy and furthering welfare, others worried that investing in the wealth fund overlooks more pressing and relevant issues in the country’s governance. President Prabowo Subianto and the rest of the Indonesian government were under increasingly hostile public scrutiny regarding severe austerity measures, including massive budget cuts to various agencies and ministries. Those who oppose the fund often point to the defunding of public services amid reallocation of government funds into the sovereign wealth fund.

All the while, the fund is slated to eventually hold over $900 USD in assets. An initial $20b has already been reallocated from a discretionary fund in the governmental budget, and a further $30b was taken from state-owned fund dividends. In addition to this, some red flags have been raised regarding the fund’s management, with concerns surrounding management, funding, and how the fund fits into Indonesia’s bigger picture.

Separation of State and… State-Owned Investments

Proverbial heads were turned when the fund’s initial leadership group was announced. Among those announced in the steering committee are controversial former Indonesian presidents, Susilo Bambang Yudhoyono, and Jokowi, the two men who preceded Prabowo as head of state. On the advisory board is Thakshin Sinawatra, a disgraced former Thai prime minister who imposed himself to a self-exile from his home country following a coup d’etat, following a host of allegations and criminal convictions – including abuse of power, corruption, and concealment of wealth. 

Danantara CEO Rosan Roeslani has argued that these appointees will boost market confidence. And that may prove to be true. For one, multipartisan support and wholesale regional political support for the program can be viewed as positive signals for the longevity and continuation of the project, and the wealth of geopolitical connections held by these men are not to be underestimated. However, a heap of arguments to be made to the contrary. Concerns regarding corruption and backdoor dealing, especially given the track record of public perception of some of these men, are common concerns.

While it is not uncommon for the current head of state to oversee the entire operation of a wealth fund – Malaysia’s prime minister chairs Khazanah, and the Crown Prince of Saudi Arabia chairs the PIF – former heads of states sitting on the board of sovereign wealth funds is practically unheard of. Even though these figures might no longer hold personal political ambitions, the increased politicization of investments remains a very real concern. When Jokowi left office, he left with a mixed legacy, with many pointing out increased democratic backsliding and political dynasticism in his last years in office (in fact, the current vice president is Jokowi’s son – despite breaking from his own father’s party lines in order to form an alliance with Prabowo). 

A Conflict of Interest and the SOE Regulatory Paradox

The formation of Danantara has also coincided with the disbandment of the Ministry of State-Owned Enterprises. As all of the duties of the Ministry of SOE have been transferred to the fund, it was officially shut down. Experts have raised concerns regarding the regulatory governance and oversight in lieu of the SOE Ministry, citing issues regarding Danatara’s legal and regulatory immunities, free from the scrutiny that it would normally hold if it had been a member of the state’s governance (i.e., a department or ministry within the executive branch).

More alarm bells have been rung recently. The COO of Danantara, Dony Oskaria, was recently named the head of the newly formed State Owned Enterprises Regulatory Agency. Many critics pointed to a possible conflict of interest in holding both roles, as Oskaria would effectively manage, operate, and regulate the seven state-owned companies under Danantara’s management. Danantara CEO Roeslani and Oskaria himself have brushed off these concerns, citing that the two roles and departments have ‘similar goals’. 

Ronny P. Sasmita, a senior analyst at the Indonesia Strategic and Economic Action Institution has told the Jakarta Post has himself raised the idea that the formation of the regulatory agency was borne more out of ‘political compromise’, created to rehome (so to speak) those who have been left without work due to the disbandment of the Ministry of State Owned Enterprises. However, in practice, the regulatory body will merely add another bureaucratic layer between the Fund and the technical ministries.

Transparency and Mandate

Despite the buzz generated by the fund’s formation, not a lot of information can be found regarding the specifics of the fund’s purpose. A glance at Danantara’ website reveals a few one-liners about its vision and mission, but no word on investments, people, or governance at all. The fund’s LinkedIn page does a better job at displaying companies and investments under the fund’s management, as well as highlighting some of the staff on board and their experiences. However, a $900b USD fund will need more than a handful of LinkedIn posts to announce developments and future plans.

One thing we do know is that the fund is primarily designed as a vessel of value creation – aimed at increasing the state’s income flows to fund further fiscal spending. This in itself is not a bad stated goal, as Indonesia, like many others over the last few years, has been operating at an unsustainable deficit. Budget plans unveiled by the Prabowo administration outlined the use of “creative financing” to boost the role of Danantara over the next few years, potentially looking to expedite income flows coming into the fund. This serves in stark contrast to Indonesia’s other investment fund, the Finance Ministry-led Indonesia Investment Authority, which is mainly used as a co-investment vehicle in order to pursue economic development within the country. However, a lack of a clear mandate makes it quite difficult to understand the scope of each fund and its responsibilities.

The Patriot Bonds

Beyond the aforementioned redirection of the state budget and SOE dividends, Danantara is heavily relying on Patriot Bonds in order to free up some cash flow for its first investments. Patriot Bonds are the informal name of below-market-yield bonds that were issued by the fund. These bonds would carry a 2% coupon – less than half of the central bank’s benchmark interest rate. These bonds, which are not very lucrative to investors, were privately issued to investors (among which is cigarette conglomerate HM Sampoerna) in October. 

These bonds appear to be a bet that investors are willing to tie up their money in significantly low yield bonds as a show of support for the Fund’s creation and operation. While there may be takers for patriot bonds now, this strategy will likely not hold indefinitely. If the fund falters and fails to generate its expected margins, it might be difficult to ask another round of investors to invest their money in low-income generating instruments merely to ‘show support’ to the fund.

Another concern with the Patriot bond issuances is that due to the nature of the low yield and private placements and sales, many of those who would want to get their hands on the bonds may ask for backdoor deals or for something in return. Given the many political ties the fund has, it would not be a surprise if certain firms are willing to make objectively bad investments in exchange for political favouritism when it comes to future trade and industrial policies.

Danantara’s governance has raised many concerns throughout its first half-year in existence. While much will need to be ironed out as the fund is in its infancy, the current governance and structure raises many flags that need to be resolved if Indonesia truly and seriously wants its very own Temasek.

Image credits: CC / Jacobs School of Engineering, UC San Diego

Alexander Rafael Tjipta (Rafa)
Rafa, born and raised in Jakarta, Indonesia, is an undergraduate student at the University of Toronto studying Commerce and Economics. His interests lie in the field of industrial organization — currently writing his undergraduate thesis on this topic, as well as competition policy and antitrust. Rafa loves Chipotle, snowboarding, and the Vancouver Canucks.