New SWF Reflects Jakarta’s Infrastructure Ambitions

Experts are questioning the structure and true purpose of Indonesia's new sovereign wealth fund.

Indonesia is seeking to raise billions of dollars in investment after President Joko “Jokowi” Widodo pledged to create a sovereign wealth fund (SWF) to finance the state’s ambitious $400 billion infrastructure program, including construction of a sprawling new capital. Jokowi has moved quickly to secure funding from heavyweight investors: The United Arab Emirates plans to invest $22.8 billion in Indonesia’s SWF, while SoftBank offered to invest $40 billion, according to recent reports.

But Indonesia’s rush to establish the fund has drawn criticism over whether the fund meets the criteria for a SWF, which allow assets to be distributed throughout four investment classes. Veljko Fotak, assistant professor of economics at the State University of New York at Buffalo and a fel-low at the Baffi Carefin Sovereign Investment Lab, says the structure and ownership are unusual for such vehicles. “I am very puzzled by what its true purpose is,” he says. “Infrastructure very rarely generates the types of returns that are attractive to private-sector investors.” The role that SoftBank will play he also finds baffling. “I can see no rationale for their role.”

In an attempt to counter China’s Belt and Road Initiative, the US International Development Finance Corporation has said it will also participate. Meanwhile, Crown Prince Mohammad bin Zayed Al Nahyan of Abu Dhabi will join the steering committee overseeing development of the new Indonesian capital. Other political and business luminaries include former British Prime Minister Tony Blair and SoftBank CEO Masayoshi Son.

Although dubbed a sovereign wealth fund, the new vehicle appears more akin to India’s National Infrastructure Investment Fund. Jokowi’s decision to focus on his country’s voracious appetite for infrastructure investment over the next five years overlooks the fact that pure-play SWFs are often global in reach. As such, Fotak believes the new fund more closely resembles the Manila-based Asian Development Bank.

Fotak notes recent estimates that Indonesia needs around $22 billion, or about 5% of the $400 billion the president is trying to raise, for infrastructure development. “In short, this looks messy,” he adds.