Indonesia to Resume New Capital Project after COVID-19 Delay

by | Mar 16, 2021 | Study Insight | 0 comments

The stalled of the new capital building project on Borneo Island.

Indonesian President Joko Widodo announced the continuation of the plan to relocate the capital to East Kalimantan after it gets delayed because of a coronavirus outbreak in 2019 and the Indonesian government must shift some of the budgets to support the pandemic relief efforts. The new capital building project on Borneo Island is to replace Jakarta as a capital city and move ahead with the construction of a presidential palace beginning after the coronavirus outbreak in 2020 stalled the ambitious project. It will be built in a regency in East Kalimantan, which is in Penajam Paser Utara. 

However, what is the exact COVID-19 Impact on the process? How does Indonesia continue the project? And also, what are the opportunities for investors during this project? Keep reading to find out more.

New Capital Project: The Heavy Burden of Java Island

Jakarta, the current capital city of Indonesia is having an environmental mess with some of the worst air pollution and traffic congestion in the world. As in Augustus 2019, AirVisual recorded Jakarta’s air quality as the worst in the world with an estimated 70% of the city’s air pollution coming from vehicles. According to an index created by a motor oil company, Castrol, Jakarta was named the world city with the worst traffic which found the average driver starting and stopping more than 33,000 times in a year. 

Moreover, each year parts of the metropolis are sinking more than 7 inches because of the depletion of underground water wells. This happened because the city is located below sea level and the government is racing to build walls to hold back the ocean. 

The Population Density

The Inter-Census Population Survey (SUPAS) in 2015 stated that 56% of Indonesians were concentrated on the island of Java. Meanwhile, in other islands, the percentage is less than 10%, except for the island of Sumatra. Jakarta’s population is nearly 270 million making it home to more than 10% of the population in Indonesia. 

In the location of the construction of the new capital, the government will have 180 thousand hectares of land. This will make it easier for the government to build without having land acquisition as the issue

Pushing Indonesia GDP

Based on the Central Statistics Agency (BPS) 2018, the economic contribution to GDP in Java is 58.49%. Meanwhile, in Sumatra, the economic contribution was 21.66%, Kalimantan the economic contribution was 8.2%, and in Sulawesi, the contribution was only 6.11%. In Bali and Nusa Tenggara, the contribution was 3.11%, in Maluku and Papua, it contributed 2.43%.

Java’s economic contribution to Indonesia’s economic growth, or Gross Domestic Product (GDP), dominates. Meanwhile, other islands are far behind. This happened to be one of the reasons the government moved the capital city outside Java island.

Strategic Area

The construction of the new capital will start from scratch that will make the development easier. The new location chosen by the government is close to Balikpapan and Samarinda, an area with large vacant land, the facilities in the new location will be quite capable. Starting from toll roads to close to international airports.

Moreover, East Kalimantan is considered strategic because it is located in the middle of Indonesia. The government believes that this area in Kalimantan has less risk of disaster. Starting from floods, earthquakes, tsunamis, forest and land fires, volcanic eruptions, and landslides, it is considered that they occur less frequently there. 

Delay concerns on the Indonesia new capital project

Indonesia’s multi-billion-dollar decision to develop a replacement capital city on the island of Borneo is formally placed on hold due to the economic impact of COVID-19. However, the coronavirus pandemic disease has severely affected economies worldwide and made most into austerity mode to avoid a recession. Public spending has been shaved, and high-cost infrastructure projects are shelved as a result, with more likely to return. There are also other concerns why the new capital project should be delayed and rethink the way to solve it.

Impact on the region’s environment

Kalimantan is home to 37 million hectares (91 million acres) of tropical forest, about 7 million hectares (17 million acres) designated as protected areas, consistent with the national statistics agency. Before its separation from North Kalimantan, East Kalimantan had the most crucial span of protected forest in Indonesian Borneo, covering quite 2.8 million hectares (6.9 million acres). The province is already the location of industrial-scale forest clearing for mining, logging, and oil palm cultivation. Large-scale road-building projects, ongoing and planned, Large-scale road-building projects threaten to fragment the region’s tropical rainforests, even more isolating the forest corridors vital for wildlife movement (Mongabay, 2020).

Indigenous communities

Experts also are worried the move, with the attendant influx of many thousands of civil servants and other workers, will exacerbate social problems in Indonesian Borneo, which features a long history of deadly conflicts between the indigenous population and migrants from parts of Indonesia (Mongabay, 2020). Indigenous rights activists warn there might be a surge in land grabs as speculators look to take advantage of the demand for land for the new capital.

Threatened wildlife

The new capital project building would increase the speed of habitat loss and destruction of natural resources, which can successively raise the danger of transmission of zoonotic diseases, very similar to COVID-19. The massive amounts of timber, concrete, and steel needed to create the new city would spell disaster not just for East Kalimantan forests but also other regions within the country from where those materials will need to be sourced. If the project resumes, the government should include an epidemiological analysis in its environmental impact assessment (Mongabay, 2020).

The COVID-19 pandemic relief

From all other concerns, the shifting budgets to support the pandemic relief are the main reason it got delayed. Since the effect of the pandemic outbreak is a vital concern that affected many aspects. Also, The Indonesian government official revealed that the project to maneuver the Indonesian capital from Jakarta to North Penajam Paser in East Kalimantan, which was expected to be completed in 2024, get delayed by the coronavirus pandemic because the Indonesia government must shift some of the new capital budgets to support the pandemic relief efforts (Jakarta Globe, 2020). As of 15 April 2020, the central government has recorded 5,136 infections from the coronavirus and 469 deaths; local authorities and health experts agree the crucial numbers are likely repeatedly higher (Mongabay, 2020).

The planning ministry allocated 85 billion rupiahs (USD 5.4 million) to return up with the plan for the new capital has become the pandemic response and allotted about 405 trillion rupiahs (USD 26 billion) (Mongabay, 2019) Also, Activists have called on the government to specialize in combating the outbreak, including reallocating funding for more testing, treatment, personal protective equipment for medical experts, and support for marginalized communities. 

How does Indonesia continue the Project? 

Indonesia’s New National Capital Region (IKN) is set to be built on 180,000 hectares of land in East Kalimantan Province. The construction that is expected to begin in 2021 is now back on track after having been temporarily held up by the COVID-19 pandemic. The state budget would cover 19.2% of the cost according to Indonesia’s Finance Ministry, while the 54.4% would be financed through government cooperation with businesses. 

The preparations for the new capital were “still on track”, which prompted widespread criticism of the government’s priorities, by the revelation that the planning ministry allocated IDR 85 billion just to come up with the master plan for the new capital. According to Indonesia’s Finance Minister Sri Mulyani Indrawati, the government has shifted its budget to upgrade hospitals, including expenses related to the new capital city. The original timeline for the project is for the government to seek parliamentary approval this year and begin basic construction and civil servants are expected to pack up and start moving by 2024. 

The Opportunities of Indonesia New Capital Project 

Indonesia’s plan to maneuver its capital presents many ample opportunities for foreign investors during a region that has historically lacked investment. This new nature project will present opportunities for global companies engaging in both soft and hard infrastructure, like urban development, environmental consulting, utilities, toll manufacturing, and those within the business of designing smart cities.

New economic hubs and shipping lanes

Investments, as an example, in maritime infrastructures, like developing ports, in East Kalimantan could encourage industrial productivity in Indonesia’s eastern regions, which covers 64% of the country’s total expanse. Given the country’s location in one among the world’s busiest waterways, the government initiated the sea toll program in 2015, which aimed to develop 41 new ports throughout the country, including Maluku and Papua, which are both within the eastern regions, to potentially create new economic hubs and new shipping lanes within the country’s east (Asean Briefing, 2019).

New export market

This would even be advantageous for East Kalimantan province, which is renowned for its abundance in commodities from coal to gold to oil. The opening of the latest trade routes through eastern Indonesia could see the province explore new markets for exports, particularly for its mining commodities like coal and gold – with this account already 80%of the province’s export (Asean Briefing, 2019).

Potential of renewable energy investment

While electricity production in East Kalimantan remains overwhelmingly reliant on fossil fuel-fired power plants, the president wants the new capital to utilize renewable energy for its electricity needs. This presents enormous potential for foreign investors in solar power, hydroelectric dams, wind farms, and biomass generators development. The large-scale electricity storage system prospect could channel power from neighboring North Kalimantan province, where the Indonesian government is currently in the process of building a hydroelectric dam there (Asean Briefing, 2019).

New tourism sector investment

With the Indonesian government targeting over 20 million tourists in 2019, Indonesia seeks to diversify its destinations on an offer outside Bali and Lombok. Currently, Bali accounted for around 5 to 14 million visitors in 2018. However, developing better infrastructure for East Kalimantan will help boost the East Kalimantan tourism industry and also will reduce its dependence on commodities. 

The province has already developed quite 500 tourist sites, with more nature reserves and tropical forests being reserved and guarded. The area also has presented international hotel chains and high-end luxury resort opportunities. Furthermore, there is also enormous potential to create quite 40 million domestic travelers, a market that will still increase in-line with Indonesia’s middle-class expansion (Asean Briefing, 2019).

BRIGHT Indonesia for Brighter Future

Indonesia’s new capital city project opens a new opportunity for increasing private sector investment into sustainable city infrastructure. However, the emergence of COVID-19 introduces an altogether new set of challenges.

BRIGHT Indonesia provides several services to help set aside the challenges such as Business Partnership Engagement, Management and Strategy Consulting, Business Registration and Establishment, and Foreign Direct Investment Promotion (FDI). To help the growth of your company we can provide services such as providing a list of potentially suitable partners, developing corporate or business strategies, and linking your company both from the private sectors in global FDI.

With exceptional local market expertise and networks in Southeast Asia, BRIGHT Indonesia will offer excellent services designed specifically to achieve your company’s goal. For more information, email info@brightindonesia.net

This article is co-written with Alifia Berizky

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