TEMPO.CO, Jakarta - Without transparency, investment decisions are prone to manipulation. The compliance of businesspeople with the code of ethics is another determining factor.

GOVERNMENT'S initiative to establish a sovereign wealth fund seems rather like paddling upstream. At a time when many investors are lying low as a result of global economic uncertainty, the plan to establish a new body as mandated by the Job Creation Law could become a boomerang.

One factor in the spotlight is the amount of capital that the government will have to provide. As well as injecting Rp15 trillion of state equity participation, the government will in stages have to transfer state assets, including shares and obligations to state-owned enterprises, as starting capital. The total is Rp75 trillion. The technical aspects of this asset transfer must be carried out very carefully.

Without proper calculations, the management of investment partly derived from state assets could result in losses, especially since initially the new agency will still be dependent on state funding that could come from loans. This means that the government will have to recoup the capital costs originating from debts. There is also a risk of moral hazard because the management of the funds will not be audited by the state.

The next problem is how the government will be able to ensure that this new sovereign wealth fund will be able to attract Rp225 trillion of overseas investment or three times its equity -- as has been claimed. In the middle of considerable uncertainty as a result of the Covid-19 pandemic, seeking foreign investors prepared to invest funds to be managed by a new institution will not be easy.

A number of investors, such as the United Arab Emirates Crown Prince Mohammed bin Zayed, have stated their willingness to invest US$22.8 billion via the sovereign wealth fund. But these promises are only commitments and are not yet on paper.

Moreover, the sovereign wealth fund will be more dependent on flows of funds from overseas. Capital like this could easily disappear at any time if investors decide to withdraw their money. This concept is different from the similar bodies in Norway, China, and Singapore that rely on state assets such as foreign exchange reserves, accumulated trade surpluses, and revenues from exports of natural resources. These asset funds are managed commercially to provide optimal returns.

The problem is that the sovereign wealth fund operates commercially to produce returns, and this clearly carries considerable risk. There is an unbreakable law here: the higher the investment returns, the larger the risk. Temasek Holdings Singapore learned this the hard way in 2008. As a result of being too aggressive, Temasek lost US$39.91 billion. There has still been no explanation of how Temasek made these losses or who was responsible, apart from the economic crisis which is always used as a scapegoat.

In the end, everything comes down to the way a regime governs the country. A number of studies have shown that sovereign wealth fund only succeeds if they are run by people of high morals. This success is also supported by the compliance of the business world with a code of ethics and a mechanism of clean government. It is these three elements that it is difficult to find in Indonesia recently.

Without transparency, decisions about investment are prone to corruption. A concrete example is the 1Malaysia Development Berhad (1MDB). From the management of funds over many years, former Malaysian Prime Minister Najib Razak received US$681 million, while 1MDB ended up with debts of US$11 billion.

A study carried out by Bocconi University, New York University, and the London School of Economics showed that the golden age of sovereign wealth fund is over. The Covid-19 pandemic has made matters worse. The bitter experiences of sovereign wealth fund in a number of states should teach us a lesson.

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