Indonesia Moves Capital City: An Illusion Or An Era Of New Opportunities?

Legal News & Analysis - Asia Pacific - Indonesia - Energy & Projects Finance

22 November, 2019

 

The fourth most populous country in the world, Indonesia plans to move its capital city from Jakarta to a remote location on the island of Borneo. This article provides an insight into the underlying reasons for the move as well as the current plans and opportunities which may arise from this herculean enterprise. 

 

"A capital city is not just a symbol of national identity, but also a representation of the progress of the nation. This is for the realisation of economic equality and justice. This is the vision of an advanced Indonesia." – President Joko Widodo.

 

The largest economy in Southeast Asia and fourth most populous country in the world, Indonesia plans to move its capital city and seat of central government from Jakarta to a remote and undeveloped area in the province of East Kalimantan on the island of Borneo. The site earmarked for the new capital is said to be in the centre of the vast Indonesian archipelago which stretches from the northern tip of Sumatra to Papua. 

 

This grand plan, floated from time to time since the country gained independence from the Dutch in 1945,1  was formally announced by President Joko Widodo (Jokowi) on 26 August 2019 in a State address at the presidential palace.2 The main arguments for the move are two-fold: (i) to alleviate environmental and infrastructure issues affecting the current capital, Jakarta, which include pollution, congestion and gradual subsidence into the Java sea; and (ii) to reorient investment to other parts of the country and promote a more inclusive society and balanced distribution of wealth. This article provides insights into the underlying reasons for moving Indonesia's capital as well as the current stated plans and opportunities which may arise from this herculean enterprise.

 

Location, location, location – sometimes a difficult choice

 

Choosing an optimum site to develop a city which is to become a national capital is no easy feat. History provides plenty of examples where internal rivalries among ethnic/economic groups, and the need to spread development more evenly, have prompted nations to reassess and change the location of their capital city. Precedents abound, from Brasilia (designated over Rio de Janeiro and São Paulo), Canberra (ending the quarrels between the states of New South Wales (Sydney) and Victoria (Melbourne)), Abuja (due to the overcrowding of Lagos and to serve as a bridge between the largely Christian south and the Muslim north of the country), Astana3  (more recently, to ensure the development of the vast Kazakh interior away from Almaty and its confinement in the south-eastern corner of the country) to Naypyidaw (closer to Indonesia and, allegedly, for astrologic reasons). This is particularly the case for countries where the potential options may be as plentiful as the number of groups and factions cohabitating within the realm of the relevant nation-state. Indonesia is a perfect example of such complexity: the largest archipelago in the world stretching for over 5,000 km from east to west and consisting of more than 17,000 islands, with a population of 270 million,4  a multi-ethnic and multilingual nation where five of the world's main religions are recognised in the Constitution and actively practised.

 

Jakarta's over-dominance

 

With the exception of the three years immediately following independence (1946-1949), Jakarta has been the capital of Indonesia5  from the first days of Dutch colonisation in the early seventeenth century until today. The city is located on the island of Java which is situated towards the west of the Indonesian archipelago. Despite only representing 6.7 per cent of Indonesia's landmass, Java has a population of more than 147 million (or about 56 per cent of the Indonesian population).6  This makes Java by far the most populous island in the world with an average population density close to 1,100 inhabitants per square km.7 The dominance of Java in contemporary Indonesia is also reflected in the fact that this is where almost 60 per cent of Indonesia's GDP is produced. While Jakarta has a population of 10.5 million, the greater metropolitan area commonly referred to as Jabodetabek which includes the adjacent municipalities of Bogor, Depok, Tangerang and Bekasi has a population of approximately 32.5 million. This places Jakarta among the five most populous metropolitan areas in the world behind Tokyo and alongside Shanghai, Delhi and Mumbai.8

 

Environmental and infrastructure constraints

 

This concentration of the nation's population and productive capacity on Java, and especially in the greater Jakarta metropolitan area, comes at a price: the surrounding environment and infrastructure have borne the brunt of the load and are showing signs that they are on the brink of exhaustion. 

Jakarta is regularly struck by floods. In 2007, during one of the worst episodes, 60 per cent of the city was under water resulting in 79 deaths, the displacement of 500,000 people, and damage amounting to in excess of US$ 680 million9. Today's Jakarta has not managed to set flooding issues behind it despite various plans to build a giant sea wall in the Jakarta bay. Based on the national Meteorological, Climatological and Geophysical Agency (BMKG), North Jakarta is sinking by about 7 to 10 cm per year, making Jakarta one of the fastest-sinking large cities in the world10. The causes of Jakarta's subsidence are mainly related to over-extraction of groundwater used by businesses, the growing population and rising sea levels. 

Also of concern is the increasing level of pollution from coal-fired power generation and traffic, placing it for many days of the year atop in the ranks of cities with the highest level of air pollution in the world.11  The same goes for water supply. Due to the lack of treatment facilities and unsupervised industrial waste dumping, the Jakarta metropolitan government is only able to supply 3 per cent of the population's clean water needs. In turn, the lack of access to potable water is one of the indirect causes of Jakarta's subsidence with residents digging groundwater wells thereby accelerating the rate of subsidence.12

 

Endless traffic jams have been plaguing Indonesia's capital, which is competing for the title of the most congested city in the world,13 with the daily commute of dwellers often in excess of four hours. Bappenas (the National Development Planning Agency) estimated in 2017 that traffic congestion in Jakarta caused economic losses of about IDR 67.5 trillion (US$ 4.73 billion). Despite multiple measures to tackle traffic congestion over the past years, including the development of Jakarta's first metro line, express bus lanes and access restrictions on certain key road links, these efforts have so far had a limited impact on traffic due to an increasing population and economic growth. Although clearly positive, these recent improvements are perceived by some to be too little too late.

 

A combination of the factors as sketched out above have prompted the Indonesian Government to reconsider plans to move the national capital to a more auspicious site, which would also be a bridge towards the eastern confines of the archipelago and temper Java's over-dominance. 

 

East Kalimantan – The site of the new capital

 

When considering the potential sites for the new capital, the Government of Indonesia (GoI) has primarily been driven by geographic considerations: What site would be most suitable to become the crossroads of this archipelago of 17,000 islands? Such site would ideally need to be geographically central and allow for easy access by air and sea, which are the two primary means of transportation connecting the Indonesian archipelago. The site for the new capital would also need to be virgin enough to allow for the "greenfield" development of a new city living up to size of the vast country it would service.

Borneo lies at the centre of the Indonesian archipelago and is its second largest island.14  The island is politically divided between Malaysia and Brunei which occupy the northern quarter, and Indonesia occupying the remaining three quarters to the south which is referred to as Kalimantan.

 

Borneo's economy is centred around palm oil production, forestry, mining, and oil and gas, in other words natural resources of which it is one of the largest producers in Southeast Asia. 

Another vital factor considered by the GoI in its process to select the site for the new capital is the exposure to natural disasters. Located on the Pacific Ring of Fire, Indonesia is afflicted by frequent earthquakes and volcanic eruptions. Whereas Java is home to 45 active volcanoes, Kalimantan is considered safer since it is outside the range of the main areas of tectonic plates convergence and has no active volcano.

Based on a study commissioned by President Jokowi and the GoI, an area of 40,000 hectares of government-owned land located in the regencies of North Penajam Paser and Kutai Kertanegara in the province of East Kalimantan has been earmarked. The proposed site lies close to the coast and the cities of Samarinda (the capital and largest city of East Kalimantan) and Balikpapan (the centre of Kalimantan's oil and gas industry with an existing international airport).

 

Bridging economic inequalities

 

Besides the problems afflicting modern Jakarta, President Jokowi wants to ensure a more balanced development of the archipelago; to accelerate the development of the eastern provinces which have historically lagged behind; and to deliver a political message that Indonesia is not all about Java (and the Javanese) and that the nation needs to turn itself towards a more inclusive future.

 

Diagram 1: Economic Contribution of Region to National GDP15

 

REGION GDP CONTRIBUTION
Java 58,48%
Sumatra 21,58%
Kalimantan 8,20%
 Sulawesi 6,22%
 Bali & Nusa Tenggara  3,05%
 Maluku & Papua  2,47%
 

With Java and Sumatra having consistently contributed more than 80 per cent of the GDP for the past 35 years, it is clearly difficult to entice investment to other regions without real intervention and planning. Based on initial studies conducted by Bappenas for the GoI, the move of the capital to East Kalimantan is expected to increase investments in the province by 47.7%, and by 34.5% in Kalimantan generally.16 The GoI also expects that the move will trigger an immediate bump in investments across all other eastern regions (such as Sulawesi, the Maluku, Papua and East Nusa Tenggara) as they will be closer to the national capital and the centre of decision and policy making.

 

What are the plans for the grand move?

 

Based on the current plans prepared by the GoI, the price tag for the development of the new capital is estimated to be around US$ 33 billion, or, in a more modest scenario, about US$ 23 billion.17 Out of these figures, the government is currently only planning to cover 19.2 per cent from the state budget, while the lion's share is slated to be allocated to public-private partnerships (PPPs) (54.4 per cent), and the remainder to pure private investments and state-owned enterprises (26.4 per cent). Other potential sources of funding contemplated by the GoI include the issuance of "municipal bonds" and the commercialisation of government assets (Barang Milik Negara) in Jakarta and East Kalimantan.18

 

Diagram 2: Budget allocation for the capital city move19

 

NO INFRASTRUCTURE NEEDS SCENARIO I (IN US$)  SCENARIOS II (IN US$)
1 Main Functions: Palace, State Institution Offices (executive, legislative, judiciary), Strategic Buildings of Indonesian National Armed Forces (TNI)/Indonesian National Police Department (POLRI) 4.6 billion 2.7 billion
2 Supporting Functions: residence for Civil Servants (ASN)/POLRI/TNI, Education & Health Facilities, Public Residence 17.2 billion 11.5 billion
3 Supporting Functions: Infrastructure facilities, Green open space 10.5 billion 8.1 billion
 4  Lan procurement 564 million 422 million
 TOTAL 32.9 billion 22.8 billion
 

Not including other costs required for the capital move: GoI operational cost during construction; GoI operational cost during transition.

 

Diagram 3: Allocated projects per source of fund20

PPP takes centre stage in the GoI's current planning due to its perceived appeal for delivering projects which are developed and financed by the private sector with the support of (but limited risk exposure for) the government.21 To attract private investors and facilitate financing solutions, the existing PPP regulatory framework includes various incentives which can be deployed by the GoI, such as direct monetary compensation in the forms of viability gap fund and availability payment, and a government guarantee provided through the Indonesia Infrastructure Guarantee Fund (IIGF) which is a state-owned enterprise tasked to provide payment guarantees for private participants to PPP projects.  

So far, Bappenas has been taking the lead on the planning for the move, having conducted four formal market soundings and providing updates to businesses and the general public. The Ministry for Agrarian Affairs and National Land Board (BPN) is meanwhile busy with the land preparation at the new site, which mainly consists of "state-owned land" from repossessed plantation concessions.22 Other ministries and public offices are also contributing to the preparation of initial feasibility studies and planning efforts such as the Ministry of Finance and the Ministry of Environment and Forestry.23

Based on the initial announcement of the move made by President Jokowi on 26 August 2019, Bappenas appears to be targeting the completion of the initial masterplan, urban design, and building design within 2020.24 A bill to promulgate the new site as the future capital is also expected to be submitted to Parliament before the end of 2019, with no meaningful opposition expected considering Jokowi's strong support in the current house of representatives. There are two scenarios currently on the table: either moving the entire existing national civil service workforce (involving the executive, legislative and judiciary as well as the armies and police general staff) in one go; or to re-size the civil service workforce before the move. Based on current estimates, the first scenario would involve the resettlement of approximately 1.1 million people with an initial population of the new capital estimated to be around 1.5 million, while 690,000 would take part in the move in the second scenario with a total city population just shy of 900,000. Based on these projections, the move being contemplated by the GoI appears to be on a much larger scale than similar enterprises undertaken by other countries in the past decades (such as the capital moves to Brasilia, Islamabad, Abuja, Astana and Naypyidaw).

 

What opportunities for this mega project?

 

Based on current plans, the GoI has identified specific types of infrastructure which need to be developed and funded by the private sector (see diagram 4). These include key government buildings, diplomatic quarters, education and healthcare facilities, power generation and transmission, roads and transportation infrastructure, water treatment and distribution, waste treatment facilities, etc.

The table below illustrates the different stages of the move (from planning to operation) and the relevant opportunities available for the private sector.

 

Diagram 4: Business/Investment Opportunities during the Stages of the Capital Move25

 

PLANNING PHASE CONSTRUCTION PHASE OPERATIONAL PHASE
  • Drafting of the Environment Impact Assessment
  • Drafting of the DED (Outline business case, final business case and PPP tender documents)
  • Central Government Building (legislative, executive, judiciary)
  • Official residence for civil service & Armed Forces/Police
  • Diplomatic Compound
  • Education Facilities 
  • Museum
  • Development of road network, power plant and electricity grid, telecommunications network
  • Integrated waste management facilities
  • Drinking water supply and treatment system, solid waste system, drainage system
  • Green open space
  • Public residence Cluster
  • Universities
  • Airport/port development
  • Meetings, Incentives conference, exhibition (MICE)
  • Science-techno park
  • Shopping Mall 
Short Term: Planning and Construction Phase Long Term: Operations of the new capital, Development of Local Economy and Hi-tech and Clean Industries 
 

The plans include the creation of Indonesia's first consumer gas line, as well as the intention that the city will be largely powered by renewable sources of energy. To this effect, the GoI and PLN (the state utility company) are planning the development of a large scale hydro power project in the province of East Kalimantan to provide some of the base load required.

 

Based on Bappenas' plans, it would seem that the GoI is conscious of the need for the relevant investment opportunities earmarked for the private sector to be suitable and offer a reasonable risk allocation and return on investment. In a detailed presentation given in September 2019 by Bappenas to other government stakeholders on the latest status of planning, Bappenas appears to map out the basic risk allocation between the public sector and the private sector as reflected below:

 

Diagram 526 

 

Timeline

 

Bappenas has published a provisional timeline for the capital move by the end of President Jokowi's second term in office in 2024:27  

 

Based on this ambitious timeline, 2020 would be dedicated to detailed planning and to the issuing of the required regulatory framework for the move, while the period between 2021 and 2024 would involve construction at the site in East Kalimantan with the actual move being initiated in 2024.

 

Diagram 6:Timeline for implementing the capital move28

 

 

Looking further into the future, certain sources have also identified additional potential work streams well beyond 2024, which is probably more realistic given the magnitude of the task lying ahead.

 

Diagram 7: Phases of the new capital development

Conclusion

 

The plan is certainly ambitious. But, in contrast to earlier plans to move away from Jakarta over the past decades which were not backed by any form of planning, relevant institutions within the GoI now appear to have engaged with concrete preparations to fast track such move. If the move of the capital does indeed go ahead, this should become one of the largest single infrastructure projects and resettlements ever undertaken. Given the GoI's fairly constrained resources and its stated intention to largely rely on private sources of funding and development, such a mega project should present investors (domestic and foreign) with a myriad of potential opportunities. From master planning to detailed engineering, power generation to water treatment, gas supply to social and transport infrastructure, all of these and more will be needed to turn 40,000 hectares of largely peat swamp forests into a modern and well-functioning metropolis home to a million people or more. One of the keys to the success of this colossal enterprise will be to establish a visionary development plan which provides for a clear and realistic allocation of scope between the public and the private sectors.

 

The viability and bankability of all investments designated for the private sector will also have to be targeted from the outset in order to be able to mobilise these sources which are primarily (and justifiably) driven by a return on investment.

 

If the GoI is indeed serious about this plan, it will have to put in place instruments and processes to ensure the smooth tendering and award of the various pieces of this gigantic puzzle to reputable contractors and services providers which are able to deliver quality infrastructure29 for a city that the Indonesian people will be proud to call their capital. It would seem that such planning exercise could benefit from international ideas and best practices and that the GoI would be well inspired to consider running an international competition to develop the master plan for the new capital city.

 

Only the future will tell whether this grand vision can be fulfilled and the new capital city (yet to be named) will become a blueprint for future urban developments in the vast Indonesian archipelago and, maybe, beyond. A question though remains: is this real and will the move take shape within the term of the second Jokowi administration or is it just another illusion? 

 

ABBREVIATIONS EXPLANATION
ASN National Civil Servants (Aparatur Sipil Negara) 
Bappenas Ministry of National Development Planning/National Development Planning Agency (Kementerian Negara Perencanaan Pembangunan Nasional/Kepala Badan Perencanaan Pembangunan Nasional)
BPN Ministry of Agrarian and Spatial Plan/National Land Agency (Kementerian Agraria dan Tata Ruang/Badan Pertanahan Nasional)
 DED Detailed Engineering Design
 GoI Central Government of the Republic of Indonesia
 IIGF Indonesia Infrastructure Guarantee Fund (PT Penjaminan Infrastruktur Indonesia (Persero))
 POLRI  Indonesian National Police Department (Kepolisian Negara Republik Indonesia)
 TNI  Indonesian National Armed Forces (Tentara Nasional Indonesia)

 

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For further information, please contact:

 

Frédéric Draps, Partner, Ashurst

frederic.draps@oentoengsuria.com

 

1. Soekarno, Indonesia's first president, touted the city of Palangkaraya in Central Kalimantan, while Soeharto and Soesilo Bambang Yudhoyono (Indonesia's second and fifth presidents, respectively) contemplated moving the capital to Jonggol, just 40km outside of Jakarta. .
2. https://nasional.kompas.com/read/2019/08/26/13351161/jokowi-ibu-kota-baru-di-sebagian-penajam-paser-utara-dan-kutai-kartanegara?page=all. Prior to the announcement, Jokowi begged leave of the MPs and senators during an annual session on 16 August 2019, to move the capital to Kalimantan Island (without mentioning the specific regions) to improve economic equality across the archipelago. https://nasional.kompas.com/jeo/naskah-lengkap-pidato-kenegaraan-2019-presiden-jokowi.
3. Astana was renamed Nur-Sultan in early 2019.
4. https://population.un.org/wpp/Download/Standard/Population/
5. Except for the three years (1946-1949) during the struggle to maintain its new independent status when Soekarno was forced to move the capital to Yogyakarta (in Central Java) and Bukittinggi (in West Sumatra).
5. https://sp2010.bps.go.id/index.php/site?id=31&wilayah=DKI-Jakarta; Badan Pusat Statistik (BPS), 2018; 
6. https://databoks.katadata.co.id/datapublish/2019/05/14/berapa-jumlah-penduduk-di-pulau-jawa-2019;
7. Ibid.
8. Depending on the sources and rankings consulted.
9. https://www.bappenas.go.id/files/8913/5441/6576/hasil-penilaian-kerusakan-dan-kerugian-pasca-bencana-banjir-awal-februari-2007-di-wilayah-jabodetabek__20081123211335__1300__0.pdf
10. https://www.bbc.com/news/world-asia-44636934bbc.com/news/world-asia-44636934https://www.suratkabar.id/80596/peristiwa/gawat-najwa-shihab-unggah-video-jakarta-tenggelam-di-tahun-2030-bmkg-itu-nyata; https://www.theguardian.com/cities/2016/nov/22/jakarta-great-garuda-seawall-sinking
11. https://jakartaglobe.id/context/jakarta-air-quality-among-worlds-worst
12. https://www.thejakartapost.com/news/2018/07/23/what-makes-jakartas-rivers-ugly-and-smelly.html
13. According to the Inrix 2017 Traffic Scorecard, Jakarta was ranked second in the ranking of the worst congested cities in the world just below Bangkok. 
14. And third largest in the world.
15. Presentation given by Bappenas on 16 September 2019 in the context of the National Dialog on the Move of the National Capital which is being organised by the GoI (Bappenas Presentation).
16. Bappenas Presentation.
17. Bappenas Presentation.
18. Bappenas Presentation.
19. Bappenas Presentation.
20. Bappenas Presentation.
21. Bappenas Presentation.
22. https://money.kompas.com/read/2019/09/19/155117526/lahan-ibu-kota-baru-disebut-tanah-sukanto-tanoto-ini-penjelasan-bappenas?page=all
23. https://www.bappenas.go.id/files/diskusi-ikn-2/PERSPEKTIF%20LINGKUNGAN%20HIDUP%20DLM%20RENCANA%20PEMINDAHAN%20IKN%20edit4%20share.pdf
24. https://www.voaindonesia.com/a/jokowi-resmi-putuskan-ibu-kota-negara-pindah-ke-kalimantan-timur-/5056949.html
25. Bappenas Presentation.
26. Bappenas Presentation.
27. Bappenas Presentation.
28. Bappenas Presentation.