JAKARTA: The Indonesian government is currently designing Danantara, a super holding company for state-owned enterprises (SOEs) that is expected to become a new locomotive in managing national assets.
This model aims to consolidate various state-owned companies to be more efficient, competitive and capable of funding strategic investments without relying entirely on the state budget. However, behind this grand ambition, there is an important lesson to be learned from: the 1Malaysia Development Berhad (1MDB) scandal in Malaysia.
If not managed properly, Danantara could follow the same disastrous path as 1MDB, which turned from a great hope into a national financial catastrophe. 1MDB was established in 2009 as a sovereign wealth fund aimed at attracting foreign investment and funding infrastructure and energy sector projects in Malaysia.
Initially, this model appeared promising. 1MDB had access to loans from global financial institutions and supported the development of major projects such as Tun Razak Exchange and Bandar Malaysia.
However, behind the scenes, poor financial management and corrupt practices turned it into one of the world's biggest financial scandals. One of the strategies used by 1MDB was foreign debt through a business-to-business (B2B) mechanism.
Instead of taking out loans directly under the country’s name, the Malaysian government used 1MDB as a vehicle to borrow through the issuance of international bonds and loans from foreign banks, often facilitated by Goldman Sachs.
This structure allowed Malaysia to obtain off-balance-sheet financing, keeping these debts initially off the official public debt records. However, since many of these loans were implicitly guaranteed by the government, Malaysia ultimately had to assume responsibility when 1MDB failed to meet its obligations.
This model carried significant risks. To secure large loans, 1MDB leveraged land assets it had acquired at below-market rates from the government.
When the company began failing to meet its obligations, the financial burden fell back on the state, and Malaysia was forced to inject billions to cover the debts. Eventually, some strategic assets, such as Edra Global Energy and portions of Bandar Malaysia, had to be sold to foreign investors to manage the crisis.
Danantara is expected to be a catalyst for economic growth by managing strategic SOEs Ministry investments more efficiently. However, if Danantara adopts the 1MDB model in obtaining foreign funds, several risks need to be anticipated.
If Danantara is used as a vehicle for foreign debt through a B2B mechanism, there is a potential for hidden debt that is not recorded in the national budget. This could create a financial time bomb if the loans are not properly managed.
The 1MDB model demonstrated how national assets can be used as collateral to obtain loans with low interest rates. If Danantara follows the same pattern, there is a possibility that some strategic SOEs Ministry assets could be taken over by foreign investors in the event of a default.
One of 1MDB's biggest weaknesses was poor oversight and a lack of transparency in fund management. To avoid the same fate, Danantara must have an independent audit mechanism and publicly accessible financial reports.
1MDB became a breeding ground for corruption because of its lack of accountability. If Danantara does not have a strict oversight system, this scheme could be exploited for the benefit of a select group of political and business elites.
Given the significant potential risks above, several measures must be taken to ensure Danantara does not end up like 1MDB. First, Danantara must have publicly accessible financial reports, be audited regularly by an independent body and be overseen by Parliament and anti-corruption institutions.
Second, the government must limit the issuance of bonds or foreign loans that use SOEs assets as collateral. If such loans must be issued, they should undergo strict risk assessments.
Third, Danantara's Board of Supervisors and Advisory Board must be composed of individuals with clean track records and expertise in investment, law and economics. Fourth, Danantara's business model must be directed toward investments that truly add value to the national economy, rather than simply seeking loans through complex schemes.
Finally, a financial risk early warning system must be implemented to detect any sign of financial imbalance in Danantara, such as excessive debt burdens or over-reliance on leverage.
Danantara is an ambitious initiative that could be a game-changer in managing SOEs and national investments. However, if not managed carefully, this model could lead to a scandal similar to 1MDB in Malaysia.
History has shown that large non-transparent debt, the use of national assets as collateral and weak oversight are a dangerous combination that could trigger a financial crisis. Therefore, Indonesia must learn from the failure of 1MDB.
The management of Danantara must adhere to the principles of transparency, accountability and sustainability, rather than merely chasing rapid growth through unhealthy debt schemes. If not, what begins as a prestigious project could turn into a national disaster that burdens future generations. - The Jakarta Post/ANN
***Kurnia Togar P. Tanjung is a lecturer and researcher at the Faculty of Law, University of Indonesia. The views expressed are personal.
