4 days ago
The hard road to a clean and profitable Danantara
The recent inauguration of Danantara, Indonesia's new sovereign wealth fund, marks a remarkable development in the Southeast Asian nation's economic strategy.
Established through amendment to the State-Owned Enterprises Law (Law No. 1), Danantara's creation has sparked significant discussion, often drawing comparisons with regional giants such as Singapore's Temasek Holdings and Malaysia's Khazanah Nasional.
Yet, a critical aspect often overlooked is the profound disparity in legal frameworks that govern these entities and the implications for Indonesian state-owned enterprises (SOEs).
Indonesia's legal framework for managing SOEs has traditionally been rigid and risk-averse. Under the former SOE Law, boards of directors were perpetually at dual risks: navigating business losses and evading potential corruption charges.
This ambiguity often stemmed from the blurred legal lines that failed to distinguish between genuine business losses and misappropriation of public funds.
Consequently, SOEs were involved in a stringent compliance framework that stifled innovation, promoted bureaucratic conservatism and hindered the development of a dynamic and competitive economy.
The reformed SOE Law attempts to mitigate these challenges by reclassifying business losses as corporate losses instead of losses to state finances, significantly reducing the criminal liability under Indonesia's principal anti-corruption law (UU Tipikor).
However, a more detailed review of UU Tipikor—particularly Articles 2 and 3—suggests that corruption may still be conducted based on two criteria: losses to state finances ( keuangan negara ) and harm to the state economy ( perekonomian negara ).
While the new SOE Law narrows the risk associated with state financial losses, the interpretation of 'harm to the state economy' remains nebulous and broad.
Unlike financial losses, which are measurable and direct, harm to the state economy is a much broader notion. It could be interpreted to include impacts on the country's investment climate, economic system stability or other material adverse effects.
Governance and oversight weaknesses pose the most immediate risk to Danantara's mission. Unlike well-established funds such as Temasek or Khazanah, which are overseen by independent boards with rigorous checks, Danantara is ultimately controlled by the Executive Office of the President.
Its enabling law (Law No. 1 of 2025) places the fund under the president, delegated via the SOE Ministry. This centralized control has raised alarms that Danantara could become a vehicle for political patronage rather than objective investment management.
Worryingly, Indonesia's national audit body (BPK) currently lacks a clear mandate to scrutinize SOEs' books at this stage, removing a critical layer of independent oversight.
The exclusion of the state audit agency from the fund's oversight framework means billions in public assets could be managed with limited external accountability, a structural flaw that undermines transparency and investor trust. If the foundation of this institution is built on insufficient checks, the door opens to mismanagement or worse.
Closely intertwined is the risk of political interference. By design, Danantara's management answers to political authorities, which heightens the possibility of government directives influencing investment decisions.
Past governance issues in Indonesian SOEs often stemmed from political interest superseding commercial logic, and Danantara's current setup may not fully solve this.
Analysts note that the fund remains 'inherently tied to the government and political influence' under the present structure. That has manifested in market fears, despite presidential assurances of open audits ; there are persistent concerns that the fund could be misused for short-term political goals or the benefit of cronies .
Such interference would erode not only Danantara's profitability but also its reputation. The first week of trading after Danantara's launch vividly illustrated this: mere speculation about heavy state control was enough to send Indonesian stocks tumbling and investors fleeing.
Legal and structural uncertainties add another layer of risk. Danantara represents a radical reorganization of state assets, and not all roles and responsibilities have been clearly delineated.
Tension could emerge between Danantara and existing institutions like the Finance Ministry or the SOE Ministry over who ultimately calls the shots on strategy and budgets. Some experts warn of a potential conflict of authority that could create bureaucratic bottlenecks and confusion in managing the fund's portfolio.
Unless comprehensive legal alignment is achieved, Indonesia risks undermining the very goal of creating a more dynamic, innovative and business-friendly SOE sector. To secure Danantara's success and allay early concerns, Indonesia should swiftly implement a set of governance and integrity reforms.
First, establish independent oversight by creating a truly independent supervisory board or council for Danantara composed of reputable professionals (including international experts and domestic technocrats) who are not beholden to the current administration. This body should have the authority to oversee the fund's strategy and audit its finances as well as provide checks and balances.
Second, strengthen corporate governance and integrity to ensure Danantara and its portfolio SOEs adopt the highest standards of corporate governance, clear performance benchmarks, risk management frameworks, and zero-tolerance policies on corruption. The executives running the fund and the companies under it must be selected based on merit and insulated from political pressure.
A code of conduct should bar political office-holders from interfering in day-to-day decisions. Over time, consider partial listings or independent trustees for some holdings to introduce market discipline. These steps will professionalize operations and guard against the fund becoming a 'vehicle for political patronage.'
Finally, legally guarantee non-interference by enshrining in law the operational autonomy of Danantara's management. The government should explicitly limit its role to a shareholders-like function, setting broad objectives and risk appetite but not micromanaging investments.
Fixed terms for the fund's CEO and directors, removable only for cause, could help shield them from political turnover.
Clarify the legal framework to resolve any overlaps; for instance, formalize how the Finance Ministry supports the funds or handles any needed capital injections, to remove uncertainty. Clear, stable regulations will provide the legal certainty global investors need to partner with Danantara.
We hope that the government will uphold public trust by strengthening oversight, depoliticizing management, tightening compliance and committing to transparency. If governed with integrity, Danantara can indeed be a powerful engine of growth and a legacy-building institution for Indonesia.
But if mismanaged, it risks becoming a US$900 billion liability. We should remain optimistic yet vigilant, ensuring that the government actively mitigates all risks and takes necessary precautions.
Ahmad Novindri Aji Sukma is a PhD researcher at the University of Cambridge, specializing in criminology. Arfian Setiaji is a senior legal officer and a University of Washington alumnus specializing in corporate and tech law.
