The construction of Indonesia’s new capital city Nusantara goes underway as the government actively seeks foreign funds needed to fulfill the city’s ambition of being a quintessential modern metropolis.

The work is nearly complete for a dam that will supply water to the area, while the presidential palace, administrative buildings for the government, as well as housing for construction workers are just some of the projects that are going to be started at the end of this year, according to President Joko “Jokowi” Widodo. 

Announced back in 2019, not long before the COVID-19 pandemic, the development of Indonesia’s new capital city (IKN) entered the initial phases of infrastructure constructions in the middle of this year. To be funded by the state budget, as many as 22 contracts worth Rp 15.01 trillion – nearly a million US dollars – have been signed by the Ministry of Public Works and Housing (PUPR) for this initial infrastructure development phase. 

These contracts include 4 items under the Directorate General of Water Resources worth Rp 1 trillion that includes the construction of the aforementioned Sepaku Semoi Dam; 12 items under the Bina Marga Road Agency worth Rp 8.71 trillion that includes the development of the IKN toll road; 5 items worth Rp 4.66 trillion that includes the development of the presidential palace area; as well as the construction of 22 towers for the housing of construction workers worth Rp 570 billion. 

Additionally, as quoted from the Minister of Public Works and Housing Basuki Hadjimuljono, as many as 18 contracts for further infrastructure development for the new capital city worth Rp 9.8 trillion are slated to be signed and finalized by the end of this year. These projects possibly include the development of coastal distribution and logistical ports being set up for the transportation of construction materials and equipment. According to data from the Ministry, as many as six distribution ports have been set up and running, while another seven are currently undergoing licensing processes and are scheduled to be completed by January 2023. 

IKN Ongoing Projects 

Source: Ministry of Public Works and Housing, Media Reports 

These latest developments may very well answer the doubts that the general public and foreign investors may have harbored on the feasibility of moving Indonesia’s capital from its current location of Jakarta in the island of Java to the island of Kalimantan (Borneo).  

As have been repeatedly mentioned by President Jokowi himself, only 20% of the estimated $34 billion price tag for the relocation would come from state budget, while the remaining 80% would come from foreign investments. However, details regarding these foreign investments remain sparse. 

Government officials have repeatedly echoed the support it has received from foreign governments and firms regarding the relocation. The United Arab Emirates government has said that it will invest in the new capital through an existing $10 billion commitment to the country’s state wealth fund. Similarly, Mr. Widodo has succeeded in securing $11.9 billion in foreign direct investment during his tour to Japan and South Korea, though it’s unclear how much of the funds would be used for the relocation project. Meanwhile, government officials and company representatives from EU countries have also expressed their intent to cooperate in the relocation plan.  

Nevertheless, Mr. Widodo has yet to announce any projects from these foreign governments or companies for the further development of Nusantara – the legal name of the new capital city. It is little wonder that not an insignificant number of Indonesians have expressed their concern over the fate of Nusantara, especially as Mr. Widodo has only 18 months in his term. 

Full Speed Ahead 

In any case, it is clear that the current administration is unrelenting in its push to realize the relocation of the capital city.  

The drive is understandable. The current capital Jakarta is overcrowded, with more than 30 million people calling the city and its greater areas home. It contributed 16.5% of the country’s GDP in the third quarter of 2022, but the city continues to struggle with worsening traffic and annual floods. By moving the administrative aspect of the capital about 2,000km northeast as early as 2024, Mr. Widodo hopes to relieve Jakarta’s pressure while maintaining its status as the nation’s economic hub. In theory, it could also help equalize the nation’s wealth among its 275 million citizens because, currently, much of its wealth is concentrated in Java. 

Most recently, to further lock in investors’ interest, the government is planning to revise Law No. 3/2022 on the New Capital City of Indonesia. This was supposedly decided in response to feedback from investors who wanted more certainty in the status of the land as to whether the land is for sale or for lease only. The planned revision was received positively by the House of Representatives and would be prioritized for legislation. 

Additionally, the government has introduced fiscal incentives for investors establishing financial centers in Nusantara. These incentives include corporate income tax waivers for banks, insurance and sharia financial services, as well as income tax waivers for non-residents for income generated in these financial centers. 

These efforts seem to have succeeded in raising even more interest from potential investors. On November 28, Head of the New Capital City Authority Bambang Susantono said plots put up for sale at the new capital city had been repeatedly oversubscribed. 

“There was indeed higher interest from among potential investors who contacted us, up to 40 times, more specifically 39 times, from the areas that were made available for investment in this first phase after the market sounding.... Before that, among the plots, areas and zones available in IKN, the oversubscription was 25 times over from what we can supply,” said Mr. Susantono, as quoted by the government’s cabinet secretariat office. 

That is unlikely to mollify the many challenges that still lie ahead by relocating the capital. Ongoing threats to the global economy such as the Russia-Ukraine war and COVID-19 pandemic are just some of the obstacles barring the government from obtaining the foreign investment needed to fund the relocation. And should the government succeed in moving the targeted 1.9 million people and the country’s administrative aspect into Nusantara by 2045, it would still need to provide jobs, education, and healthcare.  

There is no question that something has to be done regarding the overpopulation in the island of Java and the present situation of uneven wealth distribution. The question is thus not so much whether the relocation would occur or not, but rather when and how ambitious it should be. In this regard, the government should remain committed to the project and be as transparent as possible with the business community on its plan, while being open to providing the regulatory adjustments needed to facilitate foreign investments.