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JAKARTA: Indonesia will have to emerge from the shadows of neighboring Malaysia’s 1MDB scandal to convince investors that its new endowment fund will not be the victim of corruption.
The Nusantara Investment Authority will take lessons from other sovereign wealth funds and adopt a framework based on independence, transparency and accountability, said Isa Rachmatarwata, general director of state assets at the Ministry of Finance.
It should reassure prospective investors that governance protocols are airtight when it starts trading in the second half of 2021, as the fallout from the 1MDB scandal has heightened scrutiny of emerging market wealth funds.
“The region has gotten a bad name after 1MDB and people will think about that: how a fund with good intentions can go so wrong,” said Bank of America Securities economist Mohamed Faiz Nagutha.
While the Indonesian fund has attracted $ 6 billion in pledges from the Bank of Japan for International Cooperation and the United States’ International Development Finance Corporation, it could be more difficult terrain for private investors, he added.
Malaysia is still working to recover the missing $ 4.5 billion from its state fund, with investigations leading to a massive settlement with Goldman Sachs Group Inc and a 12-year prison sentence for former Prime Minister Najib Razak at trial. for corruption of SRC International. linked to 1MDB.
Integrated safeguards
Indonesia is seeking to raise Rs 225 trillion (US $ 16 billion) by offering global and local investors the opportunity to put their money into Nusantara Investment Authority sub-funds that span infrastructure, healthcare, tourism, technology and the development of new capital.
The impact of the pandemic has sapped state revenues in Southeast Asia’s largest economy, and President Joko Widodo is betting on major projects to help drive sea change by 2021.
“While this is a positive step, as it gives investors the flexibility to invest in various projects previously delegated to many state-owned companies, its success will depend on investors’ confidence in governance,” said Chua Hak Bin, Senior Economist of Maybank Kim Eng. Research Pte.
Safeguards are built into the framework of the fund. It will be managed by professionals on its board of directors, will have an advisory team made up of representatives from major investors, and will be audited by an internationally reputable accounting firm, Isa Rachmatarwata said.
The management team can only be fired for specific reasons, as a way to protect them from outside pressure when making investment decisions, he said.
Improving the registry
Indonesia has made significant progress in tidying up its house, with its Corruption Eradication Commission establishing a track record of pursuing high-profile cases.
Transparency International raised the country’s ranking to 85th out of 180 countries in its 2019 Corruption Perceptions Index, from 111th a decade ago.
Still, concerns resurfaced in the wake of investment irregularities uncovered in January that brought a state insurer to the brink of financial collapse, said Danang Widoyoko, secretary general of Transparency International Indonesia.
The endowment fund framework is worrying as it would further relax investment rules in state-owned companies and would not be subject to investigations by the nation’s Supreme Audit Board, he said.
A professionally managed board is not a sufficient guarantee that the fund will not become politicized, as companies and government officials generally move from one sphere to another in Indonesia, Widoyoko said.
“Business and politics are just different sides of the same coin,” he said.
