The government’s plan to establish its own sovereign wealth fund has raised questions regarding the source of funding, as well as how the fund is managed to ensure it does not suffer the same fate as Malaysia’s 1Malaysia Development Berhad (1MDB).

The fund’s establishment will be regulated in the anticipated omnibus bill on job creation, which is currently being drafted by the government.

A presentation shared by the Office of the Coordinating Economic Minister on the omnibus bill revealed that the fund’s establishment was aimed at managing and allocating a sum of funding and/or state assets. The fund’s assets will be in the form of state capital injection, assets/business development returns, state-owned enterprise assets, grants and other defined sources.

The sovereign wealth fund will be owned by the government and will be able to engage in direct or indirect investments and work with other parties.

“Losses in the sovereign wealth fund, however, will not be counted as state losses,” said Office of the Coordinating Economic Minister expert staff member Elen Setiadi on Friday.

The government expects to submit the omnibus bill on job creation to the House of Representatives this week for deliberation. If passed into law, it will amend around 1,200 articles in more than 80 prevailing laws that have been blamed for hampering investment in the country.

“The sovereign wealth fund will need good governance based on international values as investors will demand such a thing to prevent corruption and financial fraud,” said Centre for Strategic and International Studies (CSIS) economic department head Yose Rizal Damuri over the phone on Friday.

According to global company Sovereign Wealth Fund Institute, some sovereign wealth funds tend not to be as transparent as others.

“For example, one sovereign wealth fund may disclose their investment holdings on a periodic basis, while another fund keeps them private,” the institute stated on its website.

Malaysia’s sovereign wealth fund 1MDB, for instance, has been in the spotlight following alleged money laundering and fraud in which Malaysian and United States investigators believe about US$4.5 billion was misappropriated. The case has implicated Wall Street investment bank Goldman Sachs officials and former Malaysian prime minister Najib Razak.

“The government must be able to supervise the fund management in a bid to avoid embezzlement such as in Jiwasraya or the 1MDB case,” Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah said.

He added that the government also had to look for other sources of funding for the fund.

“Other countries’ sovereign wealth funds came from their own highly liquid assets, whereas the government seeks foreign investment as its source of funding. We will only rely on foreign debt if we do not look for new sources,” he stressed.

Coordinating Maritime Affairs and Investment Minister Luhut Pandjaitan said the government was still in discussions to invite foreign investment into the proposed sovereign wealth fund.

“This will have a multiplier effect,” said the minister during a press briefing in Jakarta on Friday. “If we have $15 billion [in a sovereign wealth fund] we have to look for projects that could generate up to $60 billion.”

In a statement on Jan. 13 he said the United Arab Emirates (UAE), Japanese company SoftBank and the US’ International Development Finance Corporation (IDFC) were among the investors in the sovereign wealth fund with the possibility still open that other potential parties would join.

The UAE government has prepared $6.8 billion to invest in Indonesia’s development projects through a sovereign wealth fund together with the IDFC, which has pledged to invest $5.5 billion in Indonesia, and Softbank, which has offered up to $40 billion to invest in the development of the new capital city.

President Joko “Jokowi” Widodo said previously that the planned sovereign wealth fund was expected to attract at least $20 billion of foreign inflows to finance the country’s infrastructure projects.

A sovereign wealth fund is typically funded from a nation’s resources, such as oil revenues, and budgetary or balance of payment surpluses like Singapore’s Government of Singapore Investment Corporation and the UAE’s Mubadala Investment Company.

“The sovereign wealth plan is vague because a sovereign wealth fund is established by a country because it has excess money from a balance of payments surplus, like in the UAE,” Yose said.

What the government planned, he went on to say, was that domestic funding and foreign investment would be collected under a sovereign wealth fund to be used in Indonesia.

“However, a sovereign wealth fund doesn’t work like that,” he added. “[The government’s plan] is probably to collect funding from other countries’ sovereign wealth funds.”

THE JAKARTA POST/ASIA NEWS NETWORK