Indonesia launches SOE holding fund
Indonesia is preparing to launch a second sovereign wealth fund to attract investment, reform state-owned enterprises and extract higher dividends.
However, as details about the new fund surface, analysts are warning of execution risks and the potential for political interference, especially in light of the huge spending required for President Prabowo Subianto's ambitious social welfare programmes.
Prabowo said on Thursday the new sovereign wealth fund, Daya Anagata Nusantara, or Danantara, will be launched on February 24 with assets under management exceeding US$900bn.
He first announced the initiative in October last year soon after taking office, with officials saying at the time the fund was meant to operate like Singapore’s Temasek Holdings.
While the exact format is not yet clear, Danantara may sit between the government and SOEs, or the government could transfer a minority stake in SOEs to the fund so that it could have a more independent voice in decisions.
The new wealth fund is expected to consolidate seven SOEs – Bank Mandiri, Bank Rakyat Indonesia, Bank Negara Indonesia, state-owned power company Perusahaan Listrik Negara, energy firm Pertamina, telecom company Telekom Indonesia, and Mining Industry Indonesia.
Danantara will be established with capital of at least Rp1,000trn (US$61bn), will oversee dividends from SOEs and have the authority to approve capital increases and to restructure companies.
The new fund will have a broader scope compared to the existing Indonesia Investment Authority (INA), which was formed in 2021. It will invest in sustainable high impact projects across sectors such as renewable energy, advanced manufacturing, downstream industries and food production, Prabowo said.
INA, which received initial capital of US$5bn from the government and shares worth Rp45trn in Bank Mandiri and Bank Rakyat, was set up to attract investments into the country's infrastructure, logistics, digital infrastructure, healthcare and green energy sectors.
“Danantara is a super holding company which is repackaging assets that already exist,” said Kevin O'Rourke, a principal consultant at Reformasi Information Services, an independent political risk consulting firm based in Jakarta. “It is more just about creating another level of management above the SOEs.”
“The INA was designed primarily to attract capital from long-term, bilateral, institutional development investors such as pension funds, etc,” said O'Rourke.
INA’s assets under management have more than doubled to US$10.5bn as per the latest data. Dividends can be distributed to the government when retained earnings reach 50% of capital and are capped at 30% of profits. If INA's capital drops by more than half of the initial amount, the government can provide additional equity following approval from the president and parliament.
Earlier this month, the government amended a 2003 law that oversees SOEs, paving the way for Danantara to manage and consolidate the companies in its portfolio more efficiently.
"We think that several key features of INA could be replicated in Danantara," said CreditSights in a note on January 24. Analysts say the government may eventually merge the two funds.
More dividends
Danantara will generate significantly more from dividends than INA given the number of SOEs it will manage.
“Dividends from SOEs were more than Rp85trn in 2024. On the other hand, INA received around Rp3trn–Rp4trn of annual dividends in 2023–2024 from its minority shares in Bank Mandiri and Bank Rakyat Indonesia,” said Olly Prayudi, director at Fitch in Indonesia.
While CreditSights sees the creation of Danantara's holding company as a modest credit positive for the SOEs involved, analysts point out that taking over the government's stake in these companies might not be straightforward.
"Shareholder changes may require regulatory approval or consent from lenders or bondholders," said Felita, head of Indonesia corporates at Fitch, who like many Indonesians goes by one name. "We believe a significant change in the key SOEs’ public service obligations and role is unlikely and the new government will remain selective in providing support to SOEs.”
Analysts and market watchers are circumspect about Danantara’s central goal to consolidate and restructure SOEs, especially as the new government seeks to spur growth and manage spending. Indonesia's fiscal deficit is expected to rise to 2.5% of GDP in 2025 from 2.3% last year and 1.6% in 2023.
The government in recent weeks has been on an austerity drive that includes steps to save electricity at government agencies and cutting spending on the maintenance of roads and bridges, underscoring the extent of the fiscal constraints Prabowo's government faces to fund his flagship policy of free school meals at an estimated cost of US$28bn.
Prabowo in last week's address said that more than US$20bn in budget savings generated through efficiency measures will be redirected "towards financing strategic national projects ... which includes investments in nickel, bauxite, copper and other critical minerals and downstream industries", as he aims to supercharge growth to 8% from about 5% while also rolling out social welfare schemes.
Economists feel that Indonesia will need a combination of social infrastructure and physical infrastructure development to propel growth to 8%. "The country will require an all of government and all of private sector effort, because investments have to increase, not just through the public sector, but through the private sector route as well," said Lavanya Venkateswaran, economist at OCBC Bank.
“We believe that the main challenge would be finding investment and capital deployment opportunities that meet the broader government’s agenda,” said Fitch's Prayudi.
The expected strain on spending along with the rising fiscal deficit has caused some to question whether Danantara could be used as a vehicle for the government to extract funds for public programmes.
“There is a lot of speculation on what Danantara will do with the dividend income that it collects from SOEs under its control. Will it pass straight through the government budget, or is Danantara going to embark on its own ventures, and are they going to be commercially viable or politically driven? This is a potential cause of concern,” said O'Rourke, at Reformasi Information Services.
He said the more urgent problem is elevating state revenues through better tax collection. "The dividends might go up, but the dividends depend on profits, so SOEs need to be profitable.”
First appointments
While the fund’s management structure is not clear yet, the government has announced that Muliaman Hadad will head the new sovereign wealth fund. He was most recently Indonesia's ambassador to Switzerland and Liechtenstein, and previously served as chairman of Indonesia’s market regulator and deputy governor of the central bank.
Among other appointments, Pandu Sjahrir, an investor and entrepreneur, is said to be taking on the chief operating officer role. Sjahrir is a director in coal mining company Toba Bara Sejahtera and was also an investor in ride-hailing company Gojek Indonesia. He is also a nephew of Luhut Binsar Pandjaitan, a politician who was chief of staff to former president Joko Widodo.
“I think the governance structure and the team that runs it would be crucial,” Ben Charoenwong, an associate professor of finance at Insead in Singapore, warning that without the right checks and balances "it can become an extractive institution which perhaps officials use as a bargaining chip to gain personal favours and so on".
(Additional reporting by Suzannah Benjamin)