Could Indonesia’s Sovereign Fund Show India a Better Way?

An important piece of news out of Asia last week seems to have got lost in the hype surrounding the SpaceX IPO launch. Indonesia’s new Sovereign Asset Fund (SAF), Dananatara, saw its debut $1.5 billion bond issue in international markets massively oversubscribed. This was despite the fact that global investor sentiment towards other Indonesian assets has remained tepid, if not downright hostile.

Why bother with Danantara? For one, it is possible to argue that there are some key similarities between India and Indonesia today — a falling currency, weak investor sentiment and the need to fund fiscal expenditures in an economy that is likely to slow down going forward. The Indonesian entity will attempt to ramp up returns from the country’s state-owned assets, a challenge that India has been unable to surmount through its current disinvestment model. If Danantara’s bond issuance success is indeed a measure of investor comfort with its underlying model, it may be worth exploring whether a variant of it could work for India.

Mention of an SAF is likely to bring up the role of the National Investment and India Infrastructure Fund, which functions as a quasi-sovereign wealth fund investing, alongside global and domestic private investors, in infrastructure, energy and “green” projects. However, there is a fundamental difference between the two models. 

Danantara is a huge “super holding” fund that absorbs existing equity from public enterprises, unlike the NIIF, which functions as the manager of a large Alternative Investment Fund whose primary business is raising capital for specific projects with government and private participation. The Indonesian entity is an “active owner” of state-owned enterprises. While it stays away from day-to-day micro-management, it is empowered to take critical decisions on the deployment of dividends, mergers and restructuring, which could involve equity dilution or strategic sales. This is complemented by an investment arm that backs high-growth and potentially risky projects of strategic importance.

The fundamental principle underpinning Danantara is that it does not use its core assets for riskier investments, relying instead on cash reserves and dividends from owned entities. This principle is borrowed from Singapore’s hugely successful SAF, Temasek, which has holdings in domestic giants such as SingTel and Singapore Airlines. This guardrail ensures that the government remains insulated from the downside risks of investments.

One Roof
India’s disinvestment and asset monetisation programme has been disappointing over the past few decades. There was, briefly, a golden period under the Vajpayee government when an independent Ministry of Disinvestment enjoyed a degree of autonomy in deciding when and what to sell. It approximated, albeit imperfectly, the hyper-centralisation through a single entity that has underpinned the success of major Asian SAFs, including Temasek, Malaysia’s Khazanah or Saudi Arabia’s sovereign fund. Danantara hopes to replicate this approach.

To take the argument further, the Asian experience suggests that India’s decentralised approach may have been the biggest hurdle to realising the best returns on state assets. Significant gains could be made if multiple entities, such as the National Land Monetization Corporation and various InvITs, were housed under one roof. Not only would this cut through the bureaucratic maze and reduce interministerial wrangles, it could also be the most effective way to align the management of state assets with national strategic interests.

For example, a unified asset holder could channel funds into companies involved in AI development or greening. It could also hold stakes in global technology leaders to ensure that the economy’s revenue streams are linked to emerging investment trends in international markets.

Does this compromise India’s fiscal dependence on returns from public sector holdings through dividends and stake sales? It is equally possible to argue that by streamlining the asset management process, the government would see a significant increase in revenues from its holdings. Incidentally, Danantara was set up partly to generate additional resources to fund Indonesian President Prabowo’s expanded welfare programmes.

Clearly, moving to this form of hyper-centralisation will not be easy. First, there are the inevitable political economy issues, with individual ministries and public sector managers likely to resist curbs on their autonomy. Second, there is a fine line between ownership and management, embodied in the “Own, Not Manage” philosophy that underpins Asia’s most successful sovereign asset managers. These challenges would need to be addressed.

Finally, there are governance issues. To begin with, who would own such a fund? While portfolio management is best left to professional fund managers, the finance ministry could technically “own” it, leaving critical oversight to an independent body with sufficient political heft to carry decisions through. Temasek’s board is composed entirely of private-sector business leaders, backed by the so-called “double lock” of presidential veto powers over key decisions. Danantara, by contrast, has a fair number of ministers on its board.

There is no need to cut and paste an existing template onto India. Any such organisation can be structured to suit India’s priorities. However, the fundamental principles that underpin these SAFs must hold. India needs to sweat its sovereign assets harder if it is to generate the returns required to fund its growth and development ambitions. It also needs to think seriously about alternate models for doing so and should not ignore Asia’s success stories.