• The Relocation of Indonesia’s Capital City
Investors & Developers

The Relocation of Indonesia’s Capital City

The first presidential term of Joko Widodo ended with a historical milestone for the Republic of Indonesia: the government’s decision to relocate the capital of Indonesia from Jakarta to East Kalimantan.

This is actually not an original idea. In the late 1950’s, Indonesia’s first president, Ir. Soekarno, had the idea of relocating the capital to Palangkaraya in Central Kalimantan and during Soeharto’s era, rumour of relocating the capital to Jonggol in West Java, not too far from Jakarta, also surfaced. There was even a presidential decree about the management of Jonggol area. But once the Soeharto regime tumbled, gone also was the idea of Jonggol becoming the new capital city.

What We Know

So far there are three main headlines that we know for sure:

  1. President Joko Widodo has decided that the area of the new capital will be in the area of North Penajam Paser Regency and Kutai Kertanegara Regency;
  2. In that area, the Indonesian government has 180,000 hectares of land; 40,000 hectares of which will be used for the main area of the new capital;
  3. The location sites between the two major cities of Balikpapan and Samarinda, each having an international airport.

The Motivation Behind the Move

There are several drivers behind why President Joko Widodo finally decided that the Indonesian capital city should be relocated from Jakarta.

Firstly, Jakarta and Java island is over-populated. More than 10 million people are now living in Jakarta and if we add the surrounding areas of Bogor, Depok, Tangerang, Bekasi, Puncak, and Cianjur, that number swells to more than 32 million. This represents 12% of Indonesia’s total population living in a relatively small area.

Secondly, Indonesia is very Jakarta-centric. During the Soeharto era, everything became centralized in Jakarta, including all central government functions, the headquarters of major businesses (both private and state owned), and even arts and cultural centres and all the supporting infrastructure. This led to areas outside Jakarta having very limited chance to grow economically, with the government citing ease of control as the justification for this approach.

Finally, Jakarta is very environmentally challenged. Traffic congestion has become unbearable and is one of the major contributors to the city’s significant air pollution. Around 40% of the population of Jakarta uses ground water as the main source of clean water, with this clean water supply ever decreasing in quantity.

To add to this, the land area of the city is sinking, with rising sea levels due to global warming rendering the northern part of Jakarta under constant threat of flood. Between 2007-2017, the land area sank some 35-50 centimetres, with some parts of Jakarta now 94 cm below sea level. And all this is in addition to the natural risks Jakarta faces from earthquakes and proximity to areas of volcanic activity.

To address these challenges, the government has finally taken the decision to relocate the capital to somewhere outside the island of Java, where the government owns a significant parcel of land and in a location with a lower risk of natural disasters. For all those reasons, East Kalimantan was chosen as the new seat of government.

What Comes Next?

The government has stated that it will commence ground-breaking for the new capital in 2021. This will be followed by the development of core infrastructure for the area from 2022-2024, with the first batch of relocations expected in 2024.

The Indonesian government has already prepared some schemes to finance this relocation. From the total of IDR 466 trillion (USD 32.9 billion) required for the project, 19.2% will come from the state budget, 54.4% from Public Private Partnership (PPP), and the remaining 26.4% from the participation of private and state-owned companies.

Existing government-owned properties in Jakarta (generally located in prime areas) will also be used as a financing source, offering short-term leases (up to 5 years), Build Operate Transfer (BOT) schemes, and utilisation cooperation opportunities for real estate occupiers and other property players in the market.

What is now clear, is that the confirmation of the capital’s relocation present significant business opportunities, especially for the real estate sector. The construction of a new capital, as well as re-purposing and managing vacated assets in Jakarta, cannot be achieved by the government alone. Participation by other institutions including state-owned enterprises and the private sector is obviously needed, and the entire real estate industry will need to be ready to play a sizeable role in supporting this vast endeavour.

 

For more information about the relocation, check out our Market Watch report.

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