Indonesia to Attract Private Funds to Build New Capital
STORY INLINE POST
On Aug. 16, 2019, President of the Republic of Indonesia Joko Widodo announced the relocation of Indonesia’s capital from Jakarta to a planned city in the island of Borneo called Nusantara. The word Nusantara is an old Javanese word that refers to the archipelago of modern-day Indonesia. The project is currently ongoing, with the first phase of development scheduled to be completed by 2024.
The relocation is a necessary move to relieve some of the burdens borne by Jakarta, whose urban area is the second-most populous in the world (after Tokyo), with 31.2 million people. Jakarta faces problems that are common among overpopulated cities: worsening air quality, traffic jams, water crises, and floods. Not to mention the fact that Jakarta is experiencing land subsidence, rising sea levels, is prone to earthquakes, and is located near active volcanoes.
The move will also help with decentralization and reduce inequality. The current capital sits on the western part of Java, the most populated island on Earth, home to around 57% of the Indonesian population, and contributes 59% of Indonesia’s economy, all despite only occupying 7% of the country’s total land area. Jakarta is also located nearby the southwest corner of the country, making it hard to access from the eastern part of Indonesia.
Nusantara, on the other hand, has all the strategic advantages that Jakarta does not, and it is free from the problems in Jakarta. The location was chosen after the government conducted three years of in-depth studies. Nusantara is located on the eastern coast of Kalimantan/Borneo Island, right in the center of Indonesia, and sits near the strategic Strait of Makassar. The island of Kalimantan is also free of earthquakes and volcanoes, has good air quality, and an abundant water supply. Nusantara has high accessibility since it is located near the cities of Balikpapan and Samarinda with their respective ports, airports, and toll roads.
The new capital is being built in an area of 256,142ha according to the concept of a smart forest city. Nusantara is being constructed from scratch, and the government has created a grand design to serve its purpose as capital for the next 100 years. That is why Nusantara is designed to be a green, sustainable city, and with a very high standard of well-being. Nusantara will not only serve as a capital city, but is also planned as a hub for research and innovation, as well as to host top universities to attract quality talent. By 2045, Nusantara plans to achieve net-zero carbon emissions and become a Top 10 liveable city globally. Recently, President Widodo even announced Indonesia’s bidding to host the 2036 Summer Olympics in Nusantara.
In line with the green concept and targets, the process of developing the new capital targeted a minimum of 75% of the area to be open green space. Eighty percent of the mobility will be through low-emission public transportation, fully developed by clean energy. The development process adheres to sustainable practices, as it started with efforts to revitalize and reforest the area. The construction respects the ecosystem and will be monitored so as not to disturb the biodiversity of Borneo.
Nusantara is estimated to cost over US$35 billion to construct, of which the Indonesian government would fund around 19% of the total cost. The rest of the funding is open to foreign investors, ranging from the basic infrastructure to the industrial complexes. So far, investors from the United Arab Emirates (UAE), China, South Korea, and Taiwan have signed investment commitments, while some European countries have offered to invest in the project.
Since Nusantara is a planned city, there are a lot of investment projects offered, from water treatment facilities, housing, hotels, chemical and green industries, as well as the expansion of existing ports and airports. Several projects will be priorities, such as an international hospital, education facilities, offices and commercial buildings, and housing.
Investment outside of Nusantara is also open for foreign nationals to support the capital city, such as in transportation and renewable energy. The Indonesia government has launched a flagship sea toll program to connect the main islands in Indonesia with its smaller, isolated islands, particularly in the eastern region. The airports and seaports of Indonesia, as well as its related facilities, are now open to 100% foreign ownership. Indonesia also needs private capital to provide clean energy for its new capital. East Kalimantan, the province surrounding the future capital city, has a potential for 20GW of energy from solar power, hydroelectric, wind, biofuel, and geothermal energy.
The Indonesian government also offers an array of incentives for investors. For one, there is a tax holiday scheme of up to 30 years for a minimum investment of IDR10 trillion (US$665 million). Furthermore, there is a super-tax deduction of up to 350% of the investment for several sectors. In addition, investors will have a 0% withholding tax and an additional 0% tax for selected goods and services related to the development of the capital city. The Indonesian government is also offering more incentives regarding employment of foreign nationals, land and building rights, as well as other non-fiscal incentives.
Several infrastructure projects for the first phase of the development are underway. One water reservoir was 75% completed by last November and is expected to finish early this year. An extension to the existing toll road to connect the new capital, as well as the presidential palace and some government buildings, are planned to be completed in the middle of 2024. Previously, the government had built the Pulau Balang bridge over nearby Balikpapan Bay as the main access to the new capital.
Considering Indonesia’s size as the 16th-largest economy in the world and that it continues to become one of the fastest-growing economies of its size, building a new capital is surely attainable. Last year, Indonesia also showed its capabilities by holding the G20 presidency. With various tax and non-fiscal incentives, it surely is a very interesting opportunity to invest in Nusantara, the new capital of Indonesia.