Tuesday, February 11, 2014

Part 8: Indonesia Investment Agency--Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Funds as Regulator and Participant in Global Markets

(Pix (C) Larry Catá Backer 2014)

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme. For 2014 this site introduces a new theme:  Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Fund as Regulator and Participant in Global Markets.

There have been a number of studies that have sought to provide an overarching structure for understanding SWFs. The easiest way to to this is to find the largest and most influential funds and then extrapolate universal behaviors or characteristics from them.  This is a useful enterprise, it may erase substantial nuance that itself might provide the basis for a deeper understanding of SWFs within globalization and in the context of a state system in which not all states are created equal.  In this sense, while the large SWFs are better known, they do not define the entire field of emerging SWF activity. This study provides a brief critical inventory of the emerging communities of sovereign wealth funds. Each post will consider a different and less well known SWF.  Taken together, these brief studies might suggest the character and nature of the emerging universe of SWFs, and their possible rationalization.

This Post considers the Indonesia Investment Agency.

(Ring Road Bogor Tahun 2008 Monday, August 2nd, 2010)

Like the Vietnamese Fund discussed previously, the Indonesia Investment Agency (Pusat Investasi Pemerintah (PIP)) is a small fund that operates in the shadow of a much larger and more successful fund.  While the Vietnamese look to the Chinese Sovereign Wealth Fund for its Socialist orientation, and then take its investment objectives elsewhere, the PIP looks to Singapore and its operations as a source of imitation.

PIP was established in 2006 as a sovereign wealth fund managed by its Ministry of Finance.  It means to mimic  Singapore's Temasek Holdings and Malaysia's Khazanahk Nasional. (Sovereign Wealth Fund Institute, Indonesia).  The PIP website relates its history in the following terms:

The article 41 Law Number 1 of 2004 concerning State Treasury mandates the government of Indonesia to do long term investment aimed to give economic, social, and other benefits. To fulfill the mandate of that law, government issued Government Regulation Number 8 of 2007 concerning Government Investment.

And as the representation, government established special unit that operates government investment. That unit was a unit called Government Investment Agency under Directorate of Investment Fund Control (now Directorate of Investment Management System), Directorate General of Treasury of Ministry of Finance.

Then, in order to do check and balance, the government separated regulation and operation functions into different institution. The regulation function is under Directorate of Investment Fund Control, Directorate General of Treasury of Ministry of Finance. And to be act as the operator, the government established special unit called Government Investment Unit or GIU under Minister of Finance with technical assistance from Directorate General of Treasury and administrative assistance from Secretariat General of Ministry of Finance.

The establishment of GIU was held by the enactment of The Regulation of Ministry of Finance Number 52/PMK.01/2007 on Organization and Work Order of GIU as legal basis. Based on that regulation, GIU is a public service agency that operates Indonesia government investment.

As the time goes by, in order to give more alternative investment, government determined revising Government Regulation number 8 of 2007. As the result, since 4th February, 2008, Indonesia has Government Regulation Number 1 of 2008 on Government Investment as the revision of the previous regulation.

The fundamental difference between Government Regulation number 1 of 2008 and the previous regulation is in how the new regulation accommodates kinds of investment that continually grow in line with global economic condition. And the new regulation is functioned as legal basis in doing investment cooperation between Indonesia and other countries. So, GIU could become Indonesia Sovereign Wealth Fund (SWF), equal with Temasek in Singapore and Khazanah in Malaysia.

In the future, GIU will continue to make adjustments to the organization along with the increasing of duties and responsibilities to embrace. (PIP history)
PIP was tasked with the following role: "Becoming a catalyst of economic growth, especially in accelerating infrastructure development and investing in any strategic sectors." (PIP Assignment, Function and Role). It is tasked to stimulate national economic growth through investment in strategic sectors. "PIP, which is part of the government also supports programs to reduce the impact of global warming through the establishment of a subsidiary which will engage in a green field investment." (PIP, LinkedIn) To that extent it mimics other development funds, and perhaps Vietnam's SCIC most. 
Previously , PIP has disbursed loans to the Southeast Sulawesi provincial government for the development of Type B Hospital Southeast Sulawesi province of Rp190 billion and the development and improvement of two (2 ) roads and one bridge Rp130 ​​billion . Bahteramas hospitals are built using current PIP loan funds have been operating and serving the community in the province of South East Sulawesi . While the road construction between Lepo - Lepo to Konda and Raha to Hulu Konaweha Lakapera and bridge will be completed in early 2014 .

Sebelumnya, PIP telah menyalurkan pinjaman kepada Pemprov Sulawesi Tenggara untuk pembangunan RSUD Tipe B Provinsi Sultra sebesar Rp190 miliar dan pembangunan dan peningkatan 2 (dua) ruas jalan dan satu jembatan sebesar Rp130 miliar. RSUD Bahteramas yang dibangun dengan menggunakan dana pinjaman PIP saat ini telah beroperasi dan melayani masyarakat di Provinsi Sultra. Sedangkan pembangunan ruas jalan antara Lepo-Lepo ke Konda dan Raha ke Lakapera dan jembatan Konaweha Hulu diharapkan tuntas pada awal tahun 2014. (Ministry of Finance Indonesia Investment Agency, Melanjutkan Pembangunan Jalan di Sulawesi Tenggara, PIP Kembali Beri Pinjaman kepada Pemprov)

Thus much of PIP's investment includes internal loans for infrastructure and alternative energy development. For example, "Government investment agency Pusat Investasi Pemerintah (PIP) has allocated around US$192 million for investment in the geothermal sector for the second semester this year, PIP chief Soritaon Siregar said. . . . . Regarding mini hydro-power projects (PLTMH) PIP meanwhile has allocated around Rp649 billion distributed to 29 applicants for investment loans, he said. "All the applicants for the PLTMH projects are private because the value of the project is too small to be carried out a state-owned enterprise,” he said. He said the PLTMH projects are located in Sumatra, Java and Sulawesi."  (Indonesia's PIP allocates Rp1.8 trillion for geothermal investment, Eco Business, July 14, 2012). See also Wlda Asmarini,  PIP Allocates Rp 450 B for Renewable Energy Power Plant,Finance Today, Sept., 11, 2013.

The PIP tends to leverage its own investment by alliances with other funds (see also Russia and Korea).  For example, it has been reported that PIP has aggregated investment with the Qatar Investment Authority, another SWF, on infrastructure development. (Sovereign Wealth Fund Institute, Indonesia).  It has also been used as an investment vehicle for the funding of specific purpose funds, especially those that touch on the effects of climate change. This builds on a trend in SWF management of creating networks of connected functionally differentiated funds that together constitute the universe of sovereign investment vehicles.
 The Government Investment Unit, the sovereign wealth fund, will contribute $100 million to the Indonesia Green Investment Fund, which it will oversee, Edward Gustely, a senior adviser at the Ministry of Finance in Jakarta, said in an interview. The fund, which will be set up this year, will raise the remaining $900 million from governments that have expressed interest in investing in it and institutional investors, he said. (Netty Ismail,   Indonesia Plans $1 Billion Green Fund to Battle Climate Change, Bloomberg, Jan. 14, 2010
PIP has set out its strategic investment policy as one grounded in leveraging its assets in the shadow of other finds, but especially of working with other development agencies and financial facilities:
Strategic investment :

Making a clarity of investment playing field (market interest rate, risk rate, syndication, etc) between GIU and other state owned entities, such as PT Sarana Multi Infrastructure (PT SMI), PT Indonesia Infrastructure Finance Facility (PT IIFF), and PT Sarana Multigriya Finansial (PT SMF).

Ensuring GIU investment is not crowding out with banking and other financial institutions but still could establish a syndication.

Establishing a subsidiary under GIU to make an anticipation so GIU could make direct investment in other companies. One of GIU's subsidiaries which will be established is Indonesia Green Investment or IGI with one trillion rupiah as its initial capital.

This time, IGI is in harmonization process in Law and Human Right Ministry and is hoping to be inaugurated by the President of Republic of Indonesia in June 2010 and officially operated in July 2010.

Following up domestic investment (such as public private partnership) and also investment cooperation between GIU and Brunei Investment Agency (BIA), Islamic Development Bank (IDB), UK Department For International Development (DFID), and Khazanah. (PIP, Strategic Investment)
It's organizational chart looks like this:

(PIP organization).

Of course, one might ask of this SWF what one might have asked of the Vietnamese SCIC--is this a SWF or is it instead a state owned financing sector enterprise, that is whether PIP is more like a state financing bank than a sovereign wealth fund whose principle object is investment.  Perhaps there is no different in the sense that this fund merely chooses a particular objective for sovereign investing which is inward looking and focused on development rather than outward looking and focused on asset value maximization.
PIP, in reality, is a work unit under the Finance Ministry that manages government investments. Its main duty is providing soft loans to local governments for development of basic infrastructure (e.g. roads, hospitals, airports, etc.). The funds are taken from four sources, namely, State Budget (APBN), internal revenue, trust fund, and other legal sources.

Last year, PIP has allocated equity [capital and] loans of Rp 20 trillion to local governments. The figure was more than twice of the target equity participation and loans in 2011, which was set at Rp 9 trillion. Apparently, PIP will allocate even more funds to local governments this year. (PIP and Local Infrastructure, Republika, ... January, 2013, Page 4, Section: Opini, By Moh Ilham A Hamudy, Researcher in Research and Development Agency (BPP) of Home Affairs Ministry).

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