Nusantara, the bet of the new capital city

The government has pledged to finance 20 percent of the costs from the state budget, and for the rest it relies on private capital, including foreign. But the new capital is slow to attract investors, both domestic and foreign

By Annalisa Manzo 

In 2019, President Joko Widodo "Jokowi" announced the location of Indonesia's new capital in East Kalimantan province, the Indonesian part of the island of Borneo. It will be built on 180,000 hectares of land already owned by the government, thus minimizing acquisition costs, straddling two districts, Penajam Paser Utara and Kutai Kartanegara, near Balikpapan and Samarinda, the province's two largest cities. Balikpapan is home to oil refineries and a port, making it a major economic center. Samarinda is the capital of East Kalimantan Province. Compared to other areas of Kalimantan previously considered, much of the necessary infrastructure is already in place. Both cities have an international airport and could be connected to the rest of the island via highways and railways. Kalimantan is geographically located in the center of the country and is less exposed to volcanic eruptions, earthquakes and floods. "We cannot let Jakarta and the island of Java continue to bear the increasing burden of population density, subsidence, traffic, and air and water pollution," Jokowi said in a speech broadcast live on television. "The economic gap between Java and other islands in the archipelago has continued to widen despite the regional autonomy policy launched in 2001," he added. 54 percent of Indonesia's more than 260 million people reside on Java and 58 percent of the country's GDP is produced on the island, despite it being the smallest of Indonesia's five main islands.

The $32 billion megaproject aims to create a new capital from scratch. Its name is Nusantara - Indonesian for 'archipelago' - precisely to reflect the geography of the world's largest archipelago-state. Its construction has been planned in five phases until 2045, the 100th anniversary year of Indonesian independence. Work on the first phase began in 2022 and is expected to be completed by this year.

The primary stated goal in the Ibu Kota Negara Nusantara project-in short, IKN-as it is officially known, is to create a new, more geographically central hub for Indonesia and drive the nation's economic transformation, without centralizing Indonesia around Java anymore. The government estimates that the city's population will reach 60,000 in 2024, rising to 2 million by 2040.

The capital relocation is currently in the infrastructure development phase. The Ministry of Public Works and Construction has assured that the IKN project is proceeding according to plan. Work is focusing on the development of basic infrastructure and government buildings. The development of the central government area (KIPP, Kawasan Inti Pusat Pemerintahan), especially the Presidential Palace, which will be the largest complex in KIPP, is key to building public confidence and attracting investors. The palace will cover twice the area occupied in Gicarta and will be able to accommodate up to eight thousand people for ceremonial activities on August 17. Public infrastructure will also be built, such as places of worship, health facilities, parks, sports, educational and commercial areas, and housing for officials. This area will also be surrounded by green belts in line with the goal of making the capital a "smart forest city," with 65 percent of the land covered by urban forests, which will help achieve the goal of zero net emissions by 2045 through the use of renewable energy. Starting in August, many government ministries and agencies will open offices there, and the government plans to relocate 3,000 civil servants from July to November. In contrast, embassies and headquarters of foreign companies located in Jakarta have been reluctant to discuss relocation.

Regarding investment, the government has pledged to finance 20 percent of the costs from the state budget, and for the rest it relies on private capital, including foreign capital. But Nusantara has been slow to attract investors, both domestic and foreign. SoftBank has withdrawn plans citing concerns about economic sustainability. The government is claiming the interests of nearly 300 companies worldwide, but negotiations have yet to conclude. Few investors are willing to commit funds until Jokowi's successor--and his views on the new capital--are clear. Foreign investors also need to make sure that Nusantara's plans move forward after the elections.

Jokowi has made every effort to ensure that his successor continues the project, going so far as to pass a law on the new capital in early 2022, supported by 93 percent of the parties in the House of Representatives. Another guarantee became clear last October when Prabowo Subianto, the 72-year-old defense minister and former army general now leading the preliminary outcome of the Feb. 14 presidential election, announced that his running mate in the next election would be Jokowi's 36-year-old son Gibran Rakabuming, who intends to carry on his father's legacy.

The skepticism of foreign investors also reflects the observation that historically there have been few successful transfers. Many fear that Nusantara may share the fate of similar projects pursued by its neighbors in Southeast Asia who transferred their capital in the postcolonial era. In 1999, for example, Malaysia began relocating federal ministries and government agencies to its new administrative capital, Putrajaya, 25 kilometers south of Kuala Lumpur, which remains the country's financial and commercial capital to this day. Similarly, Myanmar in 2005 moved its administrative capital from Yangon to Naypyidaw, but most major embassies remained in Yangon.

There are many who doubt that Nusantara will be able to quickly replace Jakarta as a financial center. Kalimantan has industries that could support development, including forestry, agriculture, and mining, but Java has an industrial and service-based economy. It is uncertain whether it will be able to sustain the role of a true capital city: connectivity with other global cities, knowledge creation, administrative services. 

Despite doubts and strong criticism, Nusantara Capital Authority said the metropolis follows the models of Shenzhen and Dubai, two economic centers built from the ground up, as well as the other benchmarks of Canberra, Putrajaya or Washington D.C. to become a center of the world economy as well as a pivot of government and economic growth.

If the plans go ahead, Jokowi and his successor will succeed where previous Indonesian leaders have failed. However, massive deforestation, risks to biodiversity and wildlife, and overexploitation of the area's mineral resources remain major concerns, as well as the danger of corruption and excessive debt. As stated by I. M. Sukma, "a mega infrastructure project presents two distinct possibilities: the potential for a waste of funds if it is completely abandoned, with the project already underway, or the risk of a failed city, especially given the government's continuing challenges to attract the investment needed to make the center of the 'new Indonesia' a reality." We shall see. The future of Nusantara and the incoming government is yet to be written.