Despite the government’s confidence, it is not clear what kind of SWF the government will establish, which SWF model it will follow and how it will build market confidence in the LPI.

We can analyze the SWF from two aspects: the source of the fund and the objective of the fund. First is the source of money. The majority of SWFs around the world were established to invest surplus money. The three most popular benchmarks based on the type of surplus are: 1) natural resources, such as in Norway, Abu Dhabi and Kuwait; 2) foreign exchange reserves (China, South Korea and Singapore); and 3) pension reserves funded by fiscal surplus (Australia and New Zealand).

For sure, Indonesia does not have any of these surpluses. The government hinted that the money would come from a mix the government's seed funding and assets, as well as foreign investors. This idea refers strongly to the fourth type of SWF, which Russia established in 2011 and India in 2015, in which the money does not come from a surplus. This type of SWF is established to attract private investors, mainly foreign. The Russian Direct Investment Fund (RDIF) has attracted around US$40 billion, of which about 90 percent derived from private and foreign investors. Meanwhile, India’s National Investment and Infrastructure Fund (NIIF) currently manages about $4 billion in assets.

For Indonesia, the idea of the LPI surfaced after President Joko Widodo met in early 2020 the UAE crown prince, who pledged to invest $22.8 billion in Indonesia. However, that was right before the coronavirus pandemic and the resulting economic crisis. The King of Saudi Arabia made a similar commitment back in 2017, although for a smaller amount.

Second is the objective. For most surplus-based SWFs, the objective is to maximize returns on assets. The funds typically invest in both local and global markets. Some funds, like Norway's, allocate about 71 percent of the pool in equity.

Meanwhile, regarding the LPI, Finance Minister Sri Mulyani Indrawati said that the fund would be a mix of development and stabilization funds, indicating that the money will be invested in Indonesia. The first objective, development, is relatively straightforward. The fund plans to attract foreign investors to invest in Indonesia’s infrastructure projects.

However, the second objective of stabilization may face a serious obstacle. For SWFs that derive entirely from a single government or source, an investor can easily withdraw their money when needed because they have full control over the fund. However, if the money also comes from private or foreign sources, the fund will involve the commitments of many stakeholders. Thus, it will not be easy to liquidate the investment whenever the Indonesian government needs it.

Russia divided its fund into two separate SWFs: 1) the National Wealth Fund (NWF), with the money coming from natural resource or commodity surpluses and which serves the stabilization function; and 2) the Russian Direct Investment Fund (RDIF), with the money coming mainly from private and foreign investors and which serves the development function. If Indonesia insists on creating an SWF to serve both functions, then Russia's strategy is worth following.

An SWF is a long-term investor, and as in the typical workings of the investment business, it relies on trust. The Indonesian government undoubtedly has to work hard to gain trust. In terms of its macroeconomics, Indonesia is a net oil importer, has substantial domestic public and foreign debt burdens, and has deficits in both the state budget and balance of payments. Moreover, Indonesia’s public sector governance is still internationally perceived as notorious. What can the government do to increase market trust and attract blue-chip, long-term investors to the LPI?

Edwin Truman (2008) outlines the governance factors that are key to SWF best practices. It involves four aspects: 1) investment strategy; 2) investment reporting; 3) periodical reports; and 4) audits. The aspect of investment strategy focuses on defining the investment category and playing field. The LPI needs to state clearly whether the fund will invest in physical projects, equity, government instruments, or other asset classes. Also, it must be clear whether it has specific benchmarks and limitations for investing only in highly rated projects or instruments. Please note that many development projects are not economically viable.

The second aspect is investment reporting. The LPI needs to regularly report its investment performance and activities, such as the size of the fund, any returns, and portfolio diversification. Ideally, the LPI should make this information publicly accessible. The third and fourth aspects are reports and audits. The LPI must publish regular reports (quarterly and annually), as well as independent and regular audits. 

Long story short, communication is the key to gain trust, not only from investors but also the public.

In conclusion, transparency and accountability are key to gaining market trust and in this context, communication is crucial.

 ***

The writer is a PhD candidate in economics at the Australian National University and is research director at the Overseas Indonesian Students' Association Alliance (PPI Dunia).

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