A 20 Billion Dollar Ambition in a Traumatic Market

Tempo ()

THE government is hanging their hopes high on the Indonesian Investment Authority (LPI). This new agency will be Indonesia’s trump card to attract investment from abroad. President Joko Widodo has set a truly ambitious target for it: US$20 billion in two months.

To convince investors around the globe that this authority is a serious business, the government has put in a seed money amounting US$5 billion. The LPI will manage this initial capital along with investor’s fund. Its main target is infrastructure projects across the country. That is the plan.

Attracting US$20 billion in foreign investment is not a small task. There are several issues that can get in the way. One of them is bad timing. The LPI is launched just as Covid-19 is intensifying. Expectations for a quick economic recovery died swiftly as the pandemic continued to worsen around the globe.

Naturally, investors tend to become more cautious about where to put their money. Investing in infrastructure projects in these dark times is clearly not attractive. In general, infrastructure project is a long-term investment. Its yields will not be interesting enough in the short term.

In terms of national economic management, building infrastructure does not seem like a good fit. When there is a public health emergency, the government ought to focus all its efforts on mitigating that emergency. Infrastructure needs to be built, yes, but it can wait, at least until there are signs that the pandemic will be over. Besides, the effects of infrastructure projects on the economic recovery effort will not be immediate. An economy in a downturn needs a more direct stimulus.

The other issue that is no less complicated is the LPI’s business model as a sovereign wealth fund (SWF). As its name suggests, SWF is an institution that managed national wealth to generate higher return. Temasek Holdings Singapore, for instance, manages the savings of the Singapore residents by investing in various corporations around the world. Norway is another example. One Norwegian SWF, the Oil Fund, has optimized state income from oil. True to their name, an SWF does not exist to attract investment capital from abroad.

But lately, different SWF business models have appeared. Some were established to attract foreign capital, and not just to manage national wealth.  The Indonesian government uses this model in establishing the LPI.

The problem is that the market is still extremely cautious of this type SWF business model. They have been burnt in a scandal involving a neighboring country’s SWF, 1Malaysia Development Berhad. Initially, this institution succeeded in attracting foreign investment. But it ended up being a massive corruption racket. According to an estimate from the United States Department of Justice, US$4.5 billion had been stolen from this institution. Until this day, former Prime Minister Najib Razak still faces charges for dozens of bribery accusations in 1MDB.

Not only did it implicate a highest ranked politician in Malaysia, the scandal also hit the global financial market. One of the oldest and most prestigious investment banks in Wall Street, Goldman Sachs, had to pay a spectacular fine of US$2.9 billion to the US government because of its involvement in this scandal. This trauma is still fresh in the market’s mind, as that fine was imposed just last October.

So when the Indonesian government is bristling to establish the LPI and attract foreign capital through a SWF business model that is similar to 1MDB’s, the financial market might still feel the pain. So far, there has been no statement of definite commitment from big Wall Street investment banks to participate in the LPI. The only statement comes from the Indonesian government, promising that US$20 billion will come soon.

Of course, this is not impossible. But the professionals that will be appointed to lead the LPI and realize that US$20 billion ambition have a very heavy task on their shoulders.