Indonesia creates a new capital bonanza

As one of the least liveable cities in the world – prone to flooding, traffic gridlock, pollution – the Indonesian capital, Jakarta, leaves much to be desired.

Overpopulated Greater Jakarta is home to about 30 million people, living and working in an earthquake zone, on ground that sinks by an average of four centimetres a year. At long last the president, Joko Widodo, whose term as governor of Jakarta provided the platform for his tilt at the presidency in 2014, has found a possible solution to the problem: move Indonesia’s bureaucracy.

Jokowi, as he is popularly known, has decreed that Indonesia will get a brand-new capital smack in the middle of the pristine Kalimantan jungle: it is intended to be his legacy when he leaves office in 2024.

The $33 billion-plus project is meant to take much of the burden off Jakarta, shifting the headquarters of the various government ministries and institutions, as well as diplomatic missions, to this new and as yet unnamed city.

Jefferies global head of equity strategy Christopher Wood says the new capital project “cannot do (Indonesia) any harm.”

“The most positive thing Jokowi has done for Indonesia is building infrastructure,” Wood says. “Jokowi seems very committed to the project to unify the country and reduce dependence on Jakarta.”

Not only will the new city be home for as many as six million people, but it will bring infrastructure projects and a much-needed economic stimulus to one of Indonesia’s more neglected regions. 

The world is set to hear a lot more about Kalimantan Timur, often abbreviated to KalTim, as East Kalimantan is known in the local vernacular, with the construction of the new capital – a project currently dubbed Ibu Kota Negara Baru – over the next five years.

If you can’t quite place the location, it is on Borneo, the world’s third-largest island and the largest in Asia, a land mass that is shared by three countries: Brunei; Malaysia’s eastern states of Sarawak and Sabah; and the largest chunk, which forms part of Indonesia.

This relatively remote and sparsely populated district lies at the geographical centre of Indonesia’s sprawling archipelago. Its eastern section is known for its ancient rainforests, indigenous Dayak culture and population of orangutans, while its vast coal deposits, palm oil plantations, offshore oil and gas fields and logging industries are valuable resources.

But in many ways it has lagged economically. Java, the most populous island and home to Jakarta, accounts for nearly 60% of the Indonesian economy, according to the Indonesian central statistics agency BPS. The island of Sumatra is next, with 21%. These two islands attract the lion’s share of investment.

KalTim only contributes about 8% of the country’s GDP; Indonesia hopes this region will be a lure for big infrastructure projects and investment in future.

Before the coronavirus outbreak, ground was expected to be broken in early 2021, and the purpose-built city was due to be ready for its first residents around the time that Widodo’s presidential term ends in 2024; it will be hewn from 200,000 hectares of jungle to replace chaotic Jakarta as Indonesia’s administrative capital.

Jakarta, which has been the capital since independence in 1947, is expected to remain Indonesia’s primary financial and commercial centre, while the replacement new capital will eventually become Indonesia’s second-biggest metropolis.

KalTim’s current population of three million people – one third of whom come from the ethnic Javanese who were forced from their overpopulated home island in the 1970s under then-dictator Suharto’s internal transmigration plan – is expected to almost triple in size with the influx of civil servants, their families and the businesses that follow.

Whether the new capital will be a functional success, such as Canberra, Brasilia or Islamabad, or a white elephant such as Putrajaya in Malaysia or Egypt’s new administrative capital project, will depend on many factors, not least savvy urban planning.

But one thing seems certain: the bankers, financiers and investors eager to get involved in the project will be working with an unusual cast of characters, people like KalTim’s quirky governor, Isran Noor.

As the mover and shaker of KalTim’s new capital, Noor is slated to be a member of the national authority convened by the president to administer the building of the city, serving as Jakarta’s local point man on the ground.

And, as he explains to Asiamoney in an interview (before the country locked down in the face of the coronavirus pandemic) in his gubernatorial office in Samarinda, the capital of KalTim, he’s a big fan of British prime minister Boris Johnson, and would love to see him visit.

“He (Johnson) is a real politician,” Noor says, admiringly. “He is persistent, and his struggle for Brexit is good. He is very good to fight, although his hair is always messy.”

Noor has become Indonesia’s go-to man in Kalimantan for deal-hunting foreign bankers and businesspeople scouting out the new capital project. A career civil servant who hails from an indigenous KalTim village, he has been governor since 2018.

With the influx of the media onto his patch, he has also become something of a national figure since the capital was announced.

Now 60 years old, he seems to be trying to get as much political mileage from the project as he can. Governors and other regional posts are elected in Indonesia and can provide a route to national power: Widodo himself was a successful and popular mayor in Solo (also known as Surakarta); then was elected governor of Jakarta before running for president.

Noor admits to Asiamoney that he hopes the raised profile might land him Indonesia’s presidency.

That would make him only the second non-Javanese leader (the first was BJ Habibie, who came from South Sulawesi and who was Suharto’s vice-president; he took office by default when the dictator was toppled during the 1997/98 financial crisis and economic collapse).

With the capital, Noor’s profile has certainly been boosted, as has his schedule of travelling the world, inspecting model cities elsewhere.

“I have been to Canberra, Islamabad, Putrajaya,” he beams. “I’ve never been to Brazil but will go there hopefully. I have never been to Kazakhstan. I heard it is good. The president said he will ask me to come along when he’s visiting there.”

Noor is certainly a man in demand. Called for a 3pm appointment, Asiamoney’s correspondent is one of 60 people waiting outside his office, all of us seemingly summoned around the same time. As Noor cheerily works the room, his aide explains that every day is like this.

Isran Noor, East Kalimantan governor 

“In one day it could be more than 100 people coming here,” says Noor. “No problem. They are my people, no problem. They will be happy to see their leader.”

Populist charisma is not the only trait Noor shares with Johnson. Asked about how he will balance development with KalTim’s fragile environment, he laughs. He vows to protect the province’s unique wildlife; the orangutans, the honey bears and “the monkeys with long noses” that he says look like his Asiamoney interviewer.

We ask him what economic and political philosophies and models he follows.

“All of them combined,” he beams, without elaborating.

With a projected development spend some estimate to be at least $33 billion, KalTim’s new mother city will become southeast Asia’s largest infrastructural project.

Indonesia’s national development agency, Bappenas, says construction will boost KalTim’s GDP by 7.6% and the wider Indonesian economy by 0.6%, amounting to a potential sovereign-backed bonanza for banks and financiers.

“Our goal is to build a capital city that will demonstrate Indonesia’s shift to a smart economy,” Widodo said in a statement.

Luhut Binsar Pandjaitan, coordinating minister for maritime affairs and development and a former general who has become Widodo’s chief aide on new capital matters, tells Asiamoney: “All public services from Jakarta, like the central bank, the financial services authority, government officials, armed forces and police headquarters are going to move to the new capital.”

Who will be paying for all this?

“Many investors have agreed to finance it, from South Korea, China, United Arab Emirates, Saudi Arabia and Germany,” governor Noor says confidently, adding that the Indonesian state will bear just 10% to 20% of the total cost of the new capital, while the private sector will foot the bill for the remaining 80% to 90%.

That mix leads him to describe Indonesia’s finance minister, Sri Mulyani Indrawati, as a “cashier,” implying that she will be counting the anticipated inward investment from abroad.

“There are many parties interested in investing there, including state-owned companies and many private companies,” Noor says.

As if to underline his emerging role as something of a judge in Indonesia’s capital-as-beauty-contest, Noor describes his recent encounter with a prospective Japanese investor.

“I told him we are only interested in a long-term investment, not short-term, so it won’t burden the state. If we plan to build a road, it should be a paid road, so investors would be able to directly benefit from it.”

Minister Luhut says he doesn’t see a financing problem “because we have engaged with SoftBank.”

Masayoshi Son, chief executive and founder of the Japanese tech conglomerate, has expressed an interest in investing in the new capital.

“But we are also open to other sources,” Luhut says. “So far, we don’t have problem in the financing because this is also a very attractive project, an attractive number of population and Indonesia is a rich country. I think we are going to have also integrated industry [here].”

How much debt will the project require?

“We’d like to make it as minimum as possible,” says Luhut. “That’s why I said we make it B2B [business to business]. Most of the project has to be B2B.”

Luhut says everything is open to foreign investment: hospitals, education, research, infrastructure, entertainment: “They are all open.”

Little wonder then that before the Covid-19 outbreak, flights from Singapore were carrying more suits than the usual oilmen.

Balikpapan’s mayor, former journalist Rizal Effendi, says that he noticed more and more bankers in town, scouting branch sites and business.

“They see big opportunity here,” he says. “Imagine! The development of the new capital will require financing of up to Rp466 trillion ($29 billion).

“People think it is like new sugar up for grabs,” Effendi says, noting that thousands of Indonesians have re-located to KalTim from elsewhere in the archipelago, judging by the new residency applications received at his office.

“I think it is very good idea, the fourth blessing God has given East Kalimantan,” Effendi says. He hopes this one will prove even more lucrative than the three earlier ‘blessings’: oil and gas, forestry and coal.

“Many people suddenly become rich here, many nouveau rich,” he says, “but these didn’t prosper East Kalimantan people.

“In 2015/16, economic growth in East Kalimantan was negative 2%, and we were the only province in the entire nation with negative economic growth, simply because we leaned too much on natural resources when the markets declined.”

The momentum to move from Jakarta comes as the city has seen some big improvements in its infrastructure.

The capital, nicknamed the ‘Big Durian’ after the stinky tropical fruit, upgraded its flood defences and has built a new subway, easing the chronic macet, or traffic gridlock, which contributes to the three- to four-hour daily commutes for office workers.

This work has helped convince the people who live and work in Greater Jakarta that their government doesn’t intend to abandon the city altogether when the new capital opens for business, that their city’s future remains as Indonesia’s New York, its throbbing economic hub.

“Jakarta is full and sinking,” says a foreign infrastructure specialist who did not want to be identified by name. “And now is the time to move, but it will take more than moving the administrative, judicial, executive functions of government away from Jakarta to diminish its importance.

“Moving the capital to KalTim will be a boon to economic growth and development in not only that province, but also likely Indonesia’s other under-developed eastern provinces,” he predicts.

Enticing investment into the less-populated and developed parts of eastern Indonesia has proved difficult for successive governments, but the specialist says moving the capital to KalTim might serve as the catalyst to unlock growth in these regions.

He sees opportunities for foreign involvement in education and health facilities, power generation and transmission, roads and other transportation infrastructure, water treatment and distribution and waste-management facilities.

Inevitably, however, it wouldn’t be a mega-project without controversial claims swirling around it.

In December, a coalition of environmental groups released a study that detailed landholdings and land usage rights connected to senior Indonesian officials, including Luhut, as well as the veteran politician and failed presidential candidate Prabowo Subianto, who is the former son-in-law of Indonesia’s late dictator Suharto and who currently serves as defence minister.

According to the study, Prabowo’s younger brother, businessman Hashim Djojohadikusumo, owns a company, PT ITCI, which has usage rights to a vast stretch of land in KalTim’s Penajam Paser North regency, one of the districts to be embraced by the new capital project.

“Famous names in the Indonesian political landscape lie behind the ownership of the company’s concessions,” the environmental lobby group says in its report. They include Prabowo’s nephew Thomas Djiwandono, who is treasurer of Prabowo’s political party, Gerindra, which forms part of the ruling coalition supporting Widodo.

All three were approached by Asiamoney for comment, but didn’t reply before the magazine went to press.

A coal mining company with a concession in the capital zone is controlled by minister Luhut, the lobby says.

Asked by Asiamoney if any minister or senior government official has any personal financial interest in KalTim, such as property ownership, Luhut says: “I don’t see that. So far, I don’t see any.”

Luhut has claimed that he no longer has any control over a mining concessionaire he founded in 2004, PT Toba Sejahtra, since he became a public official.

Noor, the governor, admits corruption could happen because Indonesia’s anti-graft systems are weak, but he doesn’t appear concerned.

“There are many ways to prevent it,” he says. “We could fight against corruption by setting up a good system that would prevent people from corruption. If we don’t have good system, people would continue making mistakes.”

Noor denies there is land seizure and speculation in the capital zone.

“Speculation occurs outside the location as in some supporting cities like Samarinda and Balikpapan,” he says.

Noor claims there is no opposition to the project: “Everyone likes it, including indigenous people. There is no resistance. The military like it even more.”

But in the village of Sepaku, three hours’ drive north of Balikpapan and the closest population centre to the new capital site, the district’s head administrator Risman Abdul sees things a little differently.

Part of his job is to host VIPs who come to town. Before the coronavirus lockdown, he saw government officials from Bappenas, the finance and the public works ministry, including its ministers, as well as Widodo nearly every day since the latter’s government officially announced the location of the new capital in his area.

He also noticed land prices soaring. He says that a hectare of land, which previously would have cost Rp100 million ($6,600), is now selling at Rp1 billion to Rp1.5 billion.

Alarmed by the speculation, Abdul says his local authority, or regency, issued a law to try to stem it.

“The law stated that it is prohibited for anyone to sell land, especially state land, on a large scale,” he says. “Of course there will be an excess, but we are optimistic we could deal with it.

“Bank transactions are definitely increasing as many local people already started selling their land lots. They have divided big land into smaller pieces, one hectare divided into several lots and [then they] sell it.”

Luhut said before the lockdown that the new city would be ready for its first residents in the first quarter of 2024, with construction starting in early 2021.

“I think the first five years is going to be around 1.6 million (people), but by 2034 or maybe 2029 we are expecting five million,” Luhut says.

Effendi, the Balikpapan mayor, admits there are concerns that the region “will become like Jakarta with its problems, flooding and traffic.”

But he says he has been personally assured by Widodo that the new capital will be built on modern green principles.

“I think there will be more positive impact than negative because the city will be developed differently from other cities in the world,” he says. “I am very happy. In my dreams I could not think this could happen.”

The project has already attracted interest from prominent parties. McKinsey’s Indonesian unit and Larry Fink’s investment house BlackRock have been cited as keen to be involved as consultants and investors, with scope for support from multilaterals such as the Asian Development Bank and the World Bank.

Officials in Jakarta say China is angling to build infrastructure as part of its never-ending Belt and Road Initiative. SoftBank’s Son, former British prime minister Tony Blair and Abu Dhabi’s ruler Crown Prince Sheikh Mohammed bin Zayed al Nahyan have been appointed to Widodo’s steering committee for the project.

But beyond KalTim, some infrastructure experts don’t share the Indonesian enthusiasm.

“The plan is certainly ambitious, but still lacking in a lot of detail,” cautions one infrastructure investment specialist. “The master plan development phase is critical. For the Indonesian government to attract the requisite interest in the public-private partnership projects from foreign and domestic investors, it will have to successfully coordinate the formulation of a financially sound and executable master plan.

“The problems that have negatively impacted PPPs in Indonesia in the past have been the quality of tendering documents and processes, land acquisition issues and the dearth of bankable projects,” he adds. “Transparent and competitive tendering processes will be important to attracting foreign investor interest.

“The problem is that Indonesia’s state-owned enterprises have historically been given priority access to the most attractive infrastructure investment opportunities in Indonesia. The active involvement of reputable foreign partners in the development of the master plan will go a long way to allaying any concerns investors may have about the viability of the project.”