04/07/23

INVESTMENT: Indonesia’s new capital winks to foreign investors

As published on: fdiintelligence.com, Tuesday 4 June, 2023. 

The FDI angle:  

• The new capital city of Nusantara is budgeted at Rp466tn ($29.2bn).
• The state will cover only 20% of that, with the remainder expected to  come from private investors. 
• “We are opening up our arms to foreign investors,” says the head of the Nusantara Capital Authority (OIKN). 
• After a challenging start, OIKN says it's receiving growing interest from international investors. 
• The current aim is to make the city both liveable and carbon-neutral by 2045.

Indonesia’s ambitious plan to move its capital to the brand-new city of Nusantara relies heavily on international investors’ help to build the Rp466tn ($29.2bn) mega project. With the state committing to funding just 20% of the cost of its development, the rise or fall of this new city depends entirely on attracting foreign direct investment (FDI).

“The government has always rightly focused on bringing in foreign investment to help them develop the country,” says Julian Smith, lead for environmental, social and governance (ESG), and government and infrastructure at PwC Indonesia. “It wouldn’t make sense to try to develop Nusantara without foreign investment because then it will be sucking investment away from other sectors of the economy.”

Works underway

The city’s construction started on the jungly island of Borneo, across the Java Sea, at the end of 2022. The current aim is to make the city both liveable and carbon-neutral by 2045.

Bambang Susantono, head of the Nusantara Capital Authority (OIKN) tells fDi that the presidential palace, several ministerial buildings and the plaza — which will be used for the city’s independence ceremony in 2024 — have already been built. A hydroelectric dam that will provide the raw water source for the city is expected to be completed in August.

However, the project has struggled to secure foreign funding since its initial announcement in 2019, with major investors such as Softbank withdrawing in March 2022 citing an unfavourable investment model.

After Softbank walked away, president Joko Widodo led efforts to stir up private investor interest — something that has been picking up in recent months, Mr Susantono confirms. 

“We are opening up our arms to foreign investors,” says Mr Susantono. “I always tell investors, if you are going to be a first mover, you will be at a premier position.” 

Growing confidence

According to data provided by the Nusantara Capital City Authority, there have been 182 letters of intent from investors expressing their interest in the project since October 2022, around 50% of whom are foreigners. Mr Susantono also tells fDi that he is currently assessing nine potential investor proposals for a hospital and three applications for a golf course.

“We are putting more weight on proposals with an international brand name,” says Mr Susantono. “That will allow us to attract confidence to the market and have others follow.” 

Government representatives have been travelling the world scouring for interested parties and investors. 

“We want to create a city that follows a global standard and for that we need global investors,” says Agung Wicaksono, deputy for financing and investment at the Nusantara State Capital Authority, following an official visit to the German city of Hanover. “One of the approaches we have used to attract private investment involves the strong role of the government via the schemes of public-private partnerships.”

The government has introduced availability payment schemes, where it guarantees the future cash flows of major private infrastructure being developed in Nusantara. “These new government schemes, which are basically providing an almost risk-free guarantee for the investors, shows that the government will put some skin in the game,” Mr Wicaksono tells fDi.

To further build on the increasing investor interest, new regulations were announced on March 9 that include provisions to facilitate business licensing, tax breaks and longer periods of land rights for investors in Nusantara. Under the new rules, land rights can be extended to up to 190 years — double that of other major cities in Indonesia.

“There has been a lot of expression of interests from foreign investors, but a lot of them are also holding out to see how the 2024 general elections will influence the continuation of the project,” says Dimas Wisnu Adrianto, lecturer in the Department of Urban and Regional Planning at the University of Brawijaya, Indonesia.

In February 2022 the government passed a law that formalised its intent to relocate the capital from Jakarta to Nusantara, which may help reduce some uncertainty that a different presidential candidate would alter development plans. 

The government-owned Korean Land and Housing Corporation and the China Construction First Building Group have committed to building the housing infrastructure for civil servants in the new city, and are in the midst of a feasibility study, according to Mr Wicaksono. Companies based in Singapore, the US, India, Japan and Germany have also expressed interest in other infrastructure projects in Nusantara.

Plans to relocate the capital emerged after the government woke up to the reality of Jakarta’s subsidence, caused by overexploitation of its underground aquifer, which is seeing some parts of the city sink by up to 30cm per year. This poses an existential threat for the city. According to the Earth Observatory, 40% of the city sits below sea level as of 2019, which makes it susceptible to major damage from floods during the yearly monsoon season.

The plans also coincide with efforts to redistribute economic growth away from Jakarta amid criticisms that the city is the cause of a brain drain from other parts of Indonesia.

Reviving Borneo’s biodiversity

The Indonesian government has been vocal in its plans to make Nusantara a sustainable city, including reserving 60% of the new capital as green areas, according to Mr Susantono. However, conservationists have questioned the country’s ability to follow through on its green ambitions, given its track record of environmental degradation.

Collaboration on zero-waste, smart transport and renewable energy projects are some of the key initiatives the government is turning to foreign investors for. “You can’t escape the ESG norm,” says Mr Susantono. 

“If you are not getting on board with ESG being the future, you will get left behind.” 

The city is also finalising the development of a tree nursery where the seeds will be used for reforestation, in efforts to bring biodiversity back to Borneo, which has long been considered ground-zero for palm oil devastation. According to the UN, the world’s third-largest island has lost 75% of its forests since the 1980s as a result of illegal logging, palm oil and pulpwood plantations. 

“We are trying to reverse the bad conditions on the ground,” explains Mr Susantono. “Borneo has lost its [rich biodiversity], so we are dedicating two-thirds of Nusantara to restoring tropical forests. We are putting the environment high on our agenda.”

Mr Susantono revealed that the government is in the middle of discussions to sign a memorandum of understanding with the World Wildlife Fund, “to put more weight on our ESG goals and increase its credibility for better ease of access to potential financial sources around the world.” 

Tags

Foreign Investment Indonesia