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1MDB scandal casts pall over Indonesia wealth fund ambitions

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The republic has to convince investors that Nusantara Investment Authority will not fall prey to corruption.

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Free Malaysia Today
Indonesia’s new wealth fund, Nusantara Investment Authority, starts operations in the second half of next year.

JAKARTA:
Indonesia will need to step out of the shadows of neighbouring Malaysia’s 1MDB scandal to convince investors that its new wealth fund will not fall prey to corruption.

Nusantara Investment Authority will take lessons from other sovereign wealth funds and adopt a framework based on independence, transparency and accountability, said Isa Rachmatarwata, the finance ministry’s director-general of state assets.

It needs to assure potential investors that governance protocols are airtight when it starts operations in the second half of 2021, as the fallout from the 1MDB scandal has heightened scrutiny on emerging-market wealth funds.

“The region has had a bad name after 1MDB and people will think of that – how a similarly well-intended fund can go so wrong,” said Bank of America Securities economist Mohamed Faiz Nagutha.

While Indonesia’s fund has attracted US$6 billion of pledges from the Japan Bank for International Cooperation and the US International Development Finance Corp, it could be a tougher pitch for private investors, he added.

Malaysia is still working to recover the US$4.5 billion missing from its state fund, with investigations that have led to a massive settlement with Goldman Sachs Group Inc and a 12-year prison sentence for former prime minister Najib Razak in the SRC International corruption trial, linked to 1MDB.

Built-in safeguards

Indonesia seeks to raise 225 trillion rupiah (US$16 billion) by offering global and local investors the chance to put their money in Nusantara Investment Authority’s sub-funds spanning infrastructure, healthcare, tourism, technology and the development of the new capital city.

The pandemic’s impact has sapped state revenue in Southeast Asia’s largest economy, and President Joko Widodo is betting on big-ticket projects to help drive a turnaround for 2021.

“While this is a positive step as it provides investors the flexibility to invest in various projects previously delegated to many state-owned enterprises, its success will depend on investors’ confidence on governance,” said Chua Hak Bin, senior economist at Maybank Kim Eng Research Pte.

Safeguards are built into the fund’s framework. It will be run by professionals on its board of directors, have an advisory team consisting of representatives from major investors, and be subject to audit by an internationally reputable accounting firm, said Isa Rachmatarwata.

The management team can only be dismissed based on specific grounds, as a way to shield them from outside pressure in making investment decisions, he said.

Improving record

Indonesia has made significant strides in putting its house in order, with its Corruption Eradication Commission setting a track record of going after high-profile cases.

Transparency International boosted 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 pushed a state insurer to the brink of financial collapse, said Danang Widoyoko, Transparency International Indonesia’s secretary-general.

The wealth fund’s framework is worrying as it would further relax investment rules around state-owned enterprises and it would not be subject to probes by the nation’s Supreme Audit Board, he said.

A professionally run board is not enough assurance that the fund will not be politicised, as business and government officials typically move from one sphere to another in Indonesia, Widoyoko said.

“Business and politics are just different sides of the same coin,” he said.

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