Investment Insights: Navigating Opportunities in Indonesia's New Capital, Nusantara

06 Dec 2023

IKN

As Indonesia forges ahead with the development of its new capital, foreign investors have a unique opportunity to participate in the growth and transformation of this new capital city. The vision of creating a sustainable, smart and green city aligns with global trends, presenting numerous investment opportunities across various sectors.

Indonesia has set out to create one of Southeast Asia's most promising investment destinations: Nusantara. As investors seek new avenues for growth, understanding the potential opportunities in this transformative mega-project can provide a strategic advantage. This article will delve into the key aspects of investing in Nusantara and aims to provide an in-depth analysis of opportunities to get involved for foreign investors.

Vision and Development Plans

Nusantara, meaning "archipelago" in Indonesian, is a planned city situated on the east coast of the island of Kalimantan (Borneo), that will become the new capital of Indonesia. The project is managed by a corporation known as the Nusantara Capital City Authority (Otoritas Ibu Kota Nusantara), which also markets it abroad, including presenting the vision recently at the Hannover Messe 2023.

The ambitious plan seeks to address the challenges faced by Jakarta, the current capital, such as overpopulation, traffic congestion, and environmental degradation. The building of this new administrative hub envisions creating a sustainable, smart, and green city that serves as a model for future urban planning. The government plans to prioritize environmental preservation, advanced infrastructure, and technology-driven solutions to create a city that is liveable, efficient, and resilient.

The National Development Planning Ministry estimated the relocation cost to be IDR 466 trillion (USD 32,7 billion), whereas the government intends to cover 19% of the cost, the remainder coming mainly from public-private partnerships and direct investment by both state-owned enterprises and the private sector. The government has previously declared its intention to have the capital ready by August 17, 2024 – Indonesia’s Independence Day. The city’s infrastructure is now reportedly 14 percent complete.

Investment Sectors in Nusantara

The development of Nusantara will not only cater to administrative functions but also foster economic growth and diversity. The city aims to attract a range of industries, including technology, finance, tourism and creative sectors, promoting job creation and entrepreneurship. Nusantara presents a wide range of investment opportunities across various sectors:

Real Estate and Construction: The development of Nusantara will require extensive construction and real estate development. European investors with expertise in sustainable infrastructure, green building technologies, and urban planning can find lucrative opportunities in this sector. Residential and commercial projects, as well as industrial and logistics facilities, will be in demand to support the growing population and economic activities in the new capital.
Renewable Energy: Nusantara aims to be a sustainable city powered by renewable energy sources. Investments in solar, wind, and hydroelectric power generation can contribute to Indonesia's renewable energy targets while generating attractive returns for investors. Developing renewable energy infrastructure in and around Nusantara will be crucial to ensure a clean and reliable energy supply for the city and its residents.
Transportation and Logistics: The city is designed for protecting its surrounding Kalimantan forests, targeting 80% of mobility to be supported by public transport, cycling, or walking. A comprehensive public transportation network is planned for the new capital. The city's development focuses on creating dense, walkable areas and will feature a citywide network of cycling paths, two rail lines for a metro system and a bus rapid transit system. A new airport will be located in Penajam.
Technology and Innovation: Smart city solutions, digital infrastructure, and e-governance will play a crucial role in the development of Nusantara. European investors specializing in technology and innovation can collaborate with local partners to drive digital transformation. Areas of focus may include smart grid systems, IoT-enabled urban management, data analytics for urban planning, and e-services for citizens.
Education and Healthcare: As a new capital city, Nusantara will require top-quality educational institutions and healthcare facilities to cater to its growing population. Investing in international schools, universities, medical centers, and hospitals can contribute to the development of a well-rounded and healthy community.

Investment schemes

To attract both local and foreign investors, the Indonesian government has introduced several incentives as outlined in Government Regulation PP 12/2023:

Foreign ownership: The regulation provides an exemption from foreign ownership limitations for businesses in the new city. However, it requires a partnership with Indonesian micro, small or medium enterprises or cooperatives to be eligible for the exemption.
Easy employment of foreigners: Business actors in that employ foreign workers are granted the possibility of obtaining a work permit, formally known as a Foreign Worker Utilization Plan (RPTKA), that is valid for 10 years (as opposed to up to 2 years currently) and is extendable. Also, companies that employ foreign workers for national strategic projects are exempted from the obligation to pay mandatory compensation funds for the utilization of foreign workers (i.e. USD 100.00 per month).
Exemption from import duties: Import duties on capital goods and machinery necessary for the development of Nusantara are exempted, reducing upfront costs for investors.
Reduction of bureaucracy: Business actors doing business in the new capital will be able to invest in without first having to confirm their Indonesian taxpayer status with the relevant authority.

Tax Regulations

In addition, tax exemptions specific to the Nusantara project are in place, applying to investments of at least IDR 10 billion (approx. USD 660,000):

Reduced corporate income tax rates: Investors in Nusantara can enjoy reduced corporate income tax rates, providing a competitive advantage over other regions in Indonesia. There is an additional tax reduction for the establishment or relocation of head offices and regional offices and financial firms setting up in the financial zone.
Tax Holidays: Eligible investors may be granted a tax holiday period between 10 and 30 years, during which they are exempt from paying corporate income tax. The duration of the tax holiday depends on the scale and nature of the investment.
VAT: Value added tax will not be collected, there will be special exemptions for the delivery of taxable goods under the Luxury Goods Tax.

Conclusion

By leveraging the tax incentives and partnering with local players, European investors can capitalize on the potential of Nusantara while contributing to Indonesia's sustainable development goals. Conducting thorough market research, understanding local regulations, and building strong partnerships will be crucial for success in this dynamic investment landscape.

The most recent data showed that 167 investors had sent their letters of intent to invest in the new capital development. It is worth noting that local investors have displayed a strong interest in the Nusantara project. Local investors accounted for a majority of the investment inquiries during the initial phases of the project.

By Philipp Kersting

Registered Foreign Advocate in Indonesia

Luther LLP (in collaboration with Maqdir Ismail & Partners) philipp.kersting@luther-services.com