How the Indonesia Investment Authority Built Its Portfolio in 2023

The Indonesia Investment Authority (known as the INA) is Indonesia’s state-run investment fund and has been around for about three years now. When the INA was first proposed, it was not really clear what it was going to do or how it would be structured. But with a few years of operations under its belt, the fund’s role in the Indonesian economy is snapping into sharper focus.

In 2021, the INA was seeded with $5 billion in state capital. This included about $1.7 billion in cash, most of which went into interest-earning bank deposits and government bonds. It also included $3.3 billion worth of shares in two state-owned banks, Bank Mandiri and Bank Rakyat Indonesia. In 2023, the fund’s total assets had grown to around $7.3 billion and it booked a net profit of $269 million.

The INA’s main source of income and operating cash flow right now is not from its investment portfolio, but rather interest income it earns on bonds and bank deposits, as well as the dividends paid out by Bank Mandiri and Bank Rakyat Indonesia. Indonesia’s banking sector is seeing strong growth, and the value of the shares the INA holds in these banks has increased from $3.3 to $4.8 billion over the last two years.

This was actually a pretty clever way to structure the fund because it minimizes the direct cash outlay required by the government. As long as the banking sector continues doing well, the INA’s shares in Bank Mandiri and Bank Rakyat Indonesia will generate cash flow while the fund continues to build its portfolio.

And that brings us to the next big question: what exactly is in that portfolio? The INA’s mandate is to invest in priority sectors such as transportation, logistics, healthcare, green energy, and the digital economy. In previous years the INA created sub-holding companies that invested in telecom tower operator Mitratel and state-owned pharmaceutical company Kimia Farma. They continue to hold these investments.

But most of the INA’s significant activity so far has been in the toll road sector. Through sub-holding companies, the fund has acquired ownership stakes in several toll roads in Java and Sumatra and what it’s doing is very interesting. Let’s look at the Pejagan–Pemalang toll road as an example. This is a stretch of highway in Java operated by the state-owned construction company Waskita Karya. Waskita is struggling financially at the moment in large part because it incurred lots of short-term debt building these toll roads.

The INA came in and acquired 100 percent of the Pejagan–Pemalang toll road from Waskita, which will help relieve some of the financial pressure on the state-owned construction firm. I think we are likely to see more of this, as Indonesia’s toll roads have significant long-term economic value and operators like Waskita can use injections of fresh capital. In the case of Pejagan–Pemalang, the INA then turned around and sold 53 percent of the toll road to a pair of foreign investors from the UAE and the Netherlands.

These kinds of co-investment partnerships are starting to develop in other areas as well. In 2023, the INA created a sub-holding company called PT INA DP World in which it owns a 51 percent stake. The other 49 percent is held by DP World, a massive logistics firm based in Dubai. Right now this co-venture is small in terms of its book value, but they are clearly setting it up to be a major conduit for Middle Eastern investment into Indonesia’s port infrastructure. A similar co-investment deal is in the works with China’s GDS to develop data centers, and there are big plans for green energy in the near future.

And this, it is becoming clear, is what the INA’s main function is likely to be. It isn’t funded nor does it really operate like a traditional sovereign wealth fund, such as Singapore’s Temasek. Temasek mainly reinvests accumulated reserves by buying and selling assets, often overseas, to maximize returns to the state. Instead, the INA is more of a co-investment fund designed to attract foreign capital into key parts of the Indonesian economy.

Historically, a big barrier to foreign investment in Indonesia has been investor uncertainty. Regulatory hurdles can be significant, and breaking into a market that is heavily dominated by state-owned companies can be daunting. Throughout 2023 it has become clear that one of the INA’s main functions is to help allay those concerns by partnering with foreign investors in priority sectors and we should expect to see a lot more of this activity in toll roads, logistics, green energy, and the digital economy moving forward.

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