Opportunities and Challenges in Indonesia’s New Capital City Development

Indonesia is currently developing a plan to relocate its capital from Jakarta to a new city in East Kalimantan, Borneo. Part of the reason for the relocation is to ease traffic congestion in Jakarta, which has made the city polluted, and overcrowded. Indonesia’s new capital city would also symbolically centralize the administration, which is perceived to be excessively Java-centric.

The administration handed over the draft law on the new capital to the House of Representatives, along with the presidential letter to confirm it, signaling the start of the parliamentary discussion process on the nation’s new capital city.

The project is expected to cost a lot of money: the government expects state-owned enterprises and the private sector to cover 80% of the expenditures, with the government covering the remainder.

The development will present ample opportunities for foreign investors in a region that has historically lacked investment. In this article, we’ll discuss multifaceted aspects of opportunities and challenges in Indonesia’s new capital city development.

Indonesia’s New Capital City: Opportunities and Challenges for Foreign Investors

Developing Indonesia’s New Capital City – Potential Sectors to Invest

Infrastructure

Companies involved in soft and hard infrastructure, such as urban development, utilities, toll manufacturing, environmental consultancy, and those in the business of creating smart cities, will benefit from such a project.

For instance, investing in Indonesia’s marine infrastructures, such as building ports, in East Kalimantan, may boost industrial productivity in the country’s eastern areas, which account for 64% of the country’s total land area.

Trade

Given the country’s location on one of the world’s busiest waterways, the government launched the sea toll initiative in 2015, intending to develop 41 new ports around the country, including Maluku and Papua in the country’s east, to possibly establish new economic centers and shipping routes.

This would also benefit East Kalimantan province, which is known for its wealth of commodities ranging from coal to gold to oil (which accounts for roughly 80% of its exports) and can assist the province in exploring new export markets.

Energy

While fossil fuel-fired power stations currently account for the majority of electricity generation in East Kalimantan, the president wants the future capital to rely on renewable energy. For international investors interested in solar energy, hydropower dams, wind farms, and biomass generators, this provides a significant opportunity.

There is also the possibility of creating a large-scale electricity storage system that might channel power from the adjacent province of North Kalimantan, where the government is currently building a hydroelectric dam.

Tourism

East Kalimantan’s tourism industry will benefit from improved infrastructure, which will lessen its reliance on mining commodities. More than 500 tourism attractions have already been created in the province, with more natural reserves and tropical forests being safeguarded and preserved. International hotel brands and high-end luxury resorts will leverage great opportunities in the area.

Developing Indonesia’s New Capital City – The Challenges

The government wants to largely depend on public-private partnerships (PPPs), with current estimates indicating that the Indonesian government will only cover 10-20% of the entire cost of the new capital. This means that the rest of the expense, as well as project risks, will be borne by the private sector.

The fact that Indonesia’s bureaucratic environment remains complicated, with a gap between local and national governments, might stymie private investment. However, the government has made some significant moves in 2021 to remove infrastructure investment limitations.

This is evident in Indonesia’s Operational Risk Index score of 53.9 out of 100 for Investment Openness, which is low relative to Jokowi’s administration’s objectives and lags behind regional competitors such as Malaysia, Thailand, and Hong Kong.

Indonesia ranks 12th in East and South East Asia for Legal Risk, behind economies such as Vietnam, Malaysia, and Taiwan, with a score of 47.2 out of 100. As a result, legal concerns and possibly time-consuming anti-corruption and due diligence inspections are likely to prevent the government’s desire to depend on PPPs.

Aside from the pledge to construct new government buildings by 2024, there has been little information regarding the precise details of projects directly related to the development of the new city.

How Can InCorp Help?

While making an investment in Indonesia’s new capital city, InCorp Indonesia (an Ascentium Company) will provide you with a seamless company registration experience. Our consultants can further assist you with the acquisition of business licenses with the least delay.

Moreover, if you want to analyze sectors and know more than what the stats say before investing in Indonesia, InCorp’s market research and due diligence team can assist you to review your possible investments. Furthermore, we provide tax and accounting services and can act as your HR entity to carry out HR and recruitment services to help cut overhead costs of setting up a department.