Plans to move Indonesia's capital to East Kalimantan

 

The relocation of the capital from Jakarta to East Kalimantan on Borneo looks set to create major investment opportunities if approved by Parliament. In August 2019 President Joko Widodo, better known as President Jokowi, stated that 20% of the estimated $33bn required for the development would be supplied by the state, leaving 80% open to state-owned enterprises (SOEs), public-private partnerships and private investors.

Key Players

SOEs will play a major role in the construction of the new capital city’s hard infrastructure. Those with experience and an existing presence in Kalimantan are in a strong position to secure tenders for the move’s constituent developments. State-owned construction firm Wijara Karya, for example, has considerable experience in the East Kalimantan region and is set to be heavily involved in building the new capital.

Consortia formed between foreign and Indonesian players will also likely be called on to tackle some of the larger projects. In January 2020 President Jokowi reportedly received an offer from Japan’s SoftBank of up to $40bn in funding, exceeding the initial estimated requirement. However, SoftBank later clarified that specific sums had not been formally offered, but reiterated its interest in being a key partner. Meanwhile, US asset management firm BlackRock expressed interest in joining any fund established by SoftBank for investment in the new capital. Other major investors from the Middle East, the UK, the US and Germany have also shown interest, according to local media.

Prime Opportunities

Real estate will be highly attractive to foreign and domestic developers. Indeed, government intervention was required to curb land speculation in East Kalimantan soon after the project was announced, although these measures only apply to the intended site of the city, not its surrounding towns and cities. Investment in hospitality, retail and service industries also offers significant potential for future growth. “The development of the new capital will open up the market for growth in the hotel industry,” Prem Harjani, president director of Vivaces Prabu Investments, told OBG. “There will be a great need for conference venues, restaurants and upscale hotels, particularly if the government and related agencies are going to be dependent on them,” he added.

Smart Investment

The new capital is to be powered by smart technologies and low-carbon, sustainable energy sources. This will not only help to address concerns regarding the environmental impact of ongoing construction and increasing urbanisation, but also enable cost-effective monitoring and maintenance solutions. Smart tech and renewable energy sources can further help Indonesia achieve its sustainability targets, minimise the congestion issues that the current capital faces, and afford a better quality of life to those living and working in the city. Additionally, the installation of smart tech will boost demand for digital infrastructure, thereby opening up an array of opportunities for technology companies and better positioning Indonesia within the global digital economy.

Next Steps

Looking ahead, while the government owns 90% of the plot earmarked for the development, the remaining 10% has yet to be reclaimed from local communities. This is a sensitive issue that will require careful handling by stakeholders, and the compensation packages offered must enable families to successfully relocate. Furthermore, the government will also need to work to turn investor interest into commitment. “Attracting a significant amount of foreign finance means that policy and regulations will need to be more investor friendly,” Herianto Pribadi, president director of Skha Consulting, told OBG. This situation may prove more challenging during the global economic downturn caused by the Covid-19 virus. In April 24, 2020 the Ministry of Public Works and Public Housing announced that it would be redirecting funds originally designated for new capital infrastructure projects to help support the pandemic outbreak response. At that time, it remained unclear if funds would be available in the 2021 budget.

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The Report: Indonesia 2020

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