Jakarta’s shortcomings as a capital are obvious: it has headline-grabbing problems with congestion, pollution, and land subsidence. www.shutterstock.com

Assessing Jokowi’s $33-billion project to move Indonesia’s capital for the country’s economic development

Indonesian President Joko “Jokowi” Widodo, known for various infrastructure projects during his tenure, is embarking on another mega-project yet with his plan to build a brand-new national capital in East Kalimantan province on the island of Borneo.

The estimated cost to relocate the capital 1,400 kilometers away from Jakarta is US$33 billion, or around 18% of Indonesia’s $178 billion state budget.

Jokowi hinted a sense of urgency in his decision, saying that the construction will start next year, as the polluted and sinking Jakarta is under considerable pressure as a capital city. He announced a site and relocation plan on Monday.

But Jakarta’s problems may not be the only reason for Jokowi’s plan to move the capital. We can also see his move as an effort to shift economic activity and address infrastructure gaps in Indonesia’s side of Borneo, sealing his reputation as the country’s ‘infrastructure president

Indonesia’s infrastructure gaps

As an archipelago, Indonesia’s economic activities are spread unevenly across islands – and so are its infrastructure projects.

Java Island, where Jakarta is situated, dominates the country’s economic activities. It is home to almost 60% of Indonesia’s population and contributes about 58% of its gross domestic product (GDP). Sumatra has about 19% of the population and its contribution to GDP hovers around 23%. Meanwhile, Kalimantan accounts for 5.8% of the population and contributes 8.2% of GDP.

Foreign investors, which Jokowi targets to develop the country’s emerging industries, also mostly operate in Java. Japan, a top investor in Indonesia, channels 93% of its investment to Java. Only 1% currently goes to Kalimantan.

Given Java and Sumatra’s economic dominance, it is no surprise they have the highest concentration of infrastructure, dotted with numerous road, highway, and toll road projects to help smooth the movement of millions of people and goods.

According to the country’s National Strategic Projects pipeline, Java and Sumatra have 154 projects planned compared to 79 in the rest of the country

Meanwhile, infrastructure projects in Kalimantan were almost nonexistent until Jokowi’s presidency.

Under Jokowi, East Kalimantan has railways planned and a toll road between the cities of Balikpapan and Samarinda under construction near the proposed site.

Betting on the new capital

To build a new capital, the government must upgrade existing city infrastructures and plan new projects in the region to support businesses. Otherwise, Jokowi won’t be able to achieve his growth targets and connect Indonesia’s new capital with the global economy.

Jokowi seems to be betting on the idea that relocating the bureaucracy of the world’s third-largest democracy would bring a critical mass of supporting institutions, industries, and investment to enrich a province on the outside of the Java-Sumatra core.

The relocation plans include moving the headquarters of powerful ministries and institutions to the new capital starting in 2024.

Diplomatic missions to Indonesia and the ASEAN Secretariat, based in Jakarta, would presumably relocate as well.

Development initiatives in Kalimantan

Indonesian firms, mostly state-owned firms (SOEs) will likely be the first to break ground in East Kalimantan next year.

They are currently building and managing 80% of Indonesia’s infrastructure projects.

Using state companies is a convenient way to expedite new projects because the government often has direct influence over the firm.

It also bypasses slow processes like project proposal designs and competitive tendering. But, relying on state companies to lay the foundations for a new city in a comparatively remote region like East Kalimantan has its drawbacks. Overreliance crowds out much-needed private investment and undermines the benefits of competition among contractors. Indonesia’s business community has echoed these sentiments.

Meanwhile, a big question hangs over how the Indonesian government will involve competing infrastructure and connectivity initiatives such China’s Belt and Road Initiative (BRI) and Japan’s Partnership for Quality Infrastructure (PQI) in the construction of the new capital.

The World Bank and Asian Development Bank have long provided much-needed capital and technical assistance in Indonesia, while the China-led Asian Infrastructure Investment Bank (AIIB) is a newcomer.

Indonesia has invited China’s BRI to invest in projects in adjacent North Kalimantan province, in particular a $17.8 billion hydropower project.

BRI is known for its willingness to pursue projects in challenging regions, but the initiative has suffered from credibility problems in Indonesia. BRI’s flagship project in Indonesia, a high-speed train connecting Jakarta and Bandung, West Java has failed to meet deadlines and officials have begun to view the management of the project as non-transparent.

Bankability challenges

To attract more investment for the development of the new national capital, Indonesia needs to solve its bankability problem in infrastructure projects, where lenders are not satisfied enough with the project’s risk profile to invest in it.

Developing a pipeline of bankable projects is an opportunity to engage with the above-mentioned infrastructure initiatives. Well-designed projects that estimate everything from a project’s profitability to its environmental and social impact will be key.

Moving the capital to East Kalimantan promises to disrupt the present geographic spread of development in Indonesia. Jokowi has created an occasion to turn a peripheral region into a new core of economic activity. The infrastructure demands of building a new capital city afford Jokowi yet another opportunity: to call on the resources of Indonesia’s neighbours in the Indo-Pacific region and put their competing infrastructure initiatives to work.