The Indonesian government has decided to push ahead with its plan to build a new capital city on Borneo island this year. The new capital, which is named “Nusantara” (meaning archipelago), will be located on 256,000 hectares of land in the North Penajam Paser and Kutai Kartanegara regencies in East Kalimantan province, which are about 2,000 kilometres from Jakarta. The project will cost 466 trillion rupiah (US$32 billion), of which the state can only cover about one-fifth of the investment cost. Around 80% of the total investment value needs to be sought from public-private partnerships and investments.
As Indonesian President Joko “Jokowi” Widodo sees Nusantara as a legacy project, he is keen to ensure that it will materialise before he steps down in 2024. Since being passed into law in January this year, the Nusantara project has become the biggest government agenda in Indonesian history — both for the technocrats and politicians. In a recent telephone conversation, Jokowi conveyed his hope to President Xi Jinping that China will continue supporting the development of various infrastructure projects in Indonesia, including in the new capital.
Nusantara may not be very attractive to Chinese investors
The question is, will Nusantara attract more Chinese investment? The immediate answer is no, given that no concrete plans have been offered to investors so far. Nonetheless, the project can certainly open up new opportunities for Chinese investment in basic infrastructure projects, such as roads, dams, electricity, clean water, public transport, housing, real estate, and office building construction, among others. However, this will not be automatic, but will depend on whether the interests of both parties coincide. If China and Indonesia each have something that the other wants, they can agree on investment deals in the new Nusantara.
In recent years, Chinese investment in Indonesia has grown significantly, rising from US$297 million in 2013 to US$4.84 billion in 2020 based on Indonesian Investment Coordinating Board data. These investments are mainly concentrated in the base metal industry, transportation, warehouse, and electricity sectors, and the largest largest investment locations are in Central Sulawesi, Southeast Sulawesi, and North Maluku for the mineral processing industry, mostly of nickel, bauxite and copper.
...the new capital’s attributes may not be very appealing to overseas investors, including those from China.
Given this trend, some critics argue that inviting China to the Nusantara project will lead to Indonesia becoming more dependent on China. Indonesia has indeed become more dependent on China in economic aspects and vice versa. This is a natural consequence of globalisation and openness. This can be good and bad depending on the nature of the economic dependency.
Currently, the economic benefits are tilted towards China (due to its growing trade surplus with Indonesia). One can argue that Indonesia also receives Chinese capital. But we need to look at the value-add of the investment. Suppose the Chinese capital comes with Chinese labour, machinery, equipment, suppliers, etc, and limits the access for local workers and industries to participate, there will be little benefit for the Indonesian side. Moreover, growing dependency means that changes in China’s economy will have a bigger effect on Indonesia’s economy.
However, it is unlikely that China's investors will invest in the new capital if they deem the risks too great. With a small population size (less than 200,000), a lack of basic infrastructure such as roads, electricity, etc., and no clear plans to develop the region, the new capital’s attributes may not be very appealing to overseas investors, including those from China.
Japan's SoftBank group pulling out of Indonesia's new capital project is evidence of investors' concern about the project's economic viability. Previously, Alibaba Cloud also planned to invest, but it later changed its mind. The ongoing economic disruptions caused by Covid-19 have forced investors to consider their future investments and ensure clear viability and investment returns. The same rationale applies to Chinese investors, who will not put their money into risky and unprofitable projects.
Master plan still needs to be thought through
Unfortunately, the current master plan of the new Nusantara, prepared by the Ministry of National Development Planning, still lacks concrete projects that, in turn, need to be rigorously assessed. The number of projects listed under the master plan also needs to be selected with caution as not all of them are economically viable. For example, as noted in an East Asia Forum article, a new international airport has been mentioned as one of the strategic projects, despite Balikpapan, its proxy city located within two hours, already having an international airport.
President Jokowi appointed Bambang Susantono, an infrastructure and transportation planning expert, as the head of the National Capital Authority (IKN) on 10 March. In an interview, Bambang said the president has given him full authority to seek suitable investors and grant private investors investment licenses. While practical and necessary, critics argue that this new state institution, without local parliament and directly reports to the president, is prone to corruption and rent-seeking opportunities. As noted by the above-mentioned East Asia Forum article, this is especially since the site for Nusantara overlaps with 162 conglomerate-controlled coal mining and pulpwood plantation concessions.
The government has been cautious about mentioning China's investment, given that China or Chinese issues remain politically sensitive in Indonesia.
The government remains optimistic that many investors are interested in investing in Nusantara. Minister Luhut Pandjaitan reported that several countries, including Saudi Arabia, the United Arab Emirates and China, have shown interest in investing in infrastructure projects in Nusantara either individually or through consortiums.
Sensitivity towards anti-Chinese sentiment
Planning Minister Suharso Monoarfa has refuted the idea that the Nusantara project will be exclusively reserved for Chinese contractors. The government has been cautious about mentioning China's investment, given that China or Chinese issues remain politically sensitive in Indonesia. Anti-China or anti-Chinese sentiment (with implications for Chinese Indonesians) are deep-rooted in society. There are continued suspicions against China and the Chinese, for whom some Indonesian communities consider as “alien” and a “threat” to their livelihoods.
During Jokowi's time, the growing number of mainland Chinese workers working on various Chinese projects has fuelled several anti-Chinese demonstrations. There are negative public perceptions that mainland Chinese workers have stolen local jobs. While the number of mainland Chinese workers is still below 40,000, there is still a roughly 9-10 million unemployed workforce.
In addition, most of the Chinese investment in Kalimantan thus far are in the plantation, wood and furniture, mining, mineral processing, and electricity sectors. While they have contributed to local economic growth, they have also generated some environmental and social issues, such as in the case of the Kayan hydropower project in North Kalimantan, as noted in an NGO report.
The new capital project can naturally add more worries about these adverse impacts. The government is aware of this concern and is expected to be more cautious about granting licenses to foreign contractors or workers. However, partnerships that involve Chinese firms cannot be avoided if the government wants to see progress. It is part of the authority's responsibility to ensure the projects given to any investors will benefit the community and protect the environment. They also need to anticipate and respond to social-economic impacts due to the influx of foreign investments into the area.
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