IKN Project Begins, But Can It Attract Investors?

Issue

The government has ensured that the capital city relocation from Jakarta to East Kalimantan will start in 2024. Therefore, the Nusantara Capital City (IKN) construction must begin immediately. This week, Public Works and Housing (PUPR) Minister Basuki Hadimuljono plans to do the groundbreaking for the new State Palace and start the project's construction.

President Joko "Jokowi" Widodo was initially scheduled to lead the groundbreaking ceremony. However, Presidential Secretariat head Heru Budi Hartono said that the lack of preparation prevented it from happening. Basuki also added that the president would likely visit the site next month once the construction begins.

The project will start immediately after signing several construction contracts, taking place on Monday (29/8). "Because the DIPA [budget implementation list] is ready, the next thing to do is to sign the contracts," Basuki said last week. He explained that the initial work would focus on land development, plotting the land based on the government core area (KIPP), toll roads, national roads, and water supply and sewage systems.

KIPP will be equipped with various facilities, from education and health to tourism centers. Moreover, Nusantara's core area is expected to be livable in 2024. The government must fund the project's initial development stage to show the world that Nusantara Capital City is a serious project, even though it relies heavily on investors.

 

Background

The idea of ​​relocating Indonesia's state capital has existed since President Soekarno's era. His successors keep bringing it up, but none of them set the plan in motion except President Jokowi. He decided to relocate the nation's capital city out of Java in a limited meeting at the Presidential Office on April 29, 2019. Since then, the government has conducted many intensive discussions and studies to finalize the plan. Four months later, Jokowi finally determined that the new capital would be built in Penajam Paser Utara, East Kalimantan.

At the end of 2019, the government accelerated the National Capital City Bill (RUU IKN) drafting so that it could be included in the 2020 national legislation program (Prolegnas). However, the legislative process with the House of Representatives had to be delayed due to the COVID-19 pandemic, which is hitting the country as of March 2020. Besides, the state budget was also focused on handling the pandemic. The discussion on the Capital City Bill was resumed once the pandemic subsided, specifically after the House of Representatives received the President's Letter (Surpres) on the capital city bill (RUU IKN) on September 29, 2021. The House of Representatives started to process the bill on December 7, 2021 and finally passed it into law through a plenary session on January 18. It took only 43 days to establish the legal basis for such a massive project.

Five secondary legislations were out within three months after the DPR passed the law. Jokowi appointed former Deputy Transportation Minister Bambang Susantono as the IKN Authority head on March 10. He also gathered all governors to camp on the project's ground zero. Furthermore, at the end of July, President Jokowi held a limited meeting with the IKN Authority and demanded the first phase of the capital relocation be carried out in 2024. Therefore, basic infrastructure development must start as soon as possible.

Jokowi expects the construction work to start immediately this month. In the initial phase, the government plans to build the new State Palace, President's Office, Vice President's Office, DPR/MPR Office, Supreme Court Office, and Coordinating Ministry Offices. To carry out the preliminary development, the Public Works and Housing Ministry was granted an additional budget of Rp 5.1 trillion this year.

 

Statement of Stakeholders

Joko Widodo, President of the Republic of Indonesia.

[IKN] does not only contain government offices but is also a new driving force for the economy. It's not an ordinary city but a jungle city with a world-class education and health services. The state will fund the Government Core Area, but the rest 80 percent of the funds are from private investments."

Sidik Pramono, IKN Transition Team's Information and Communication Coordinator.

IKN's investment opportunities are open to all parties, regardless of the business scales, as long as they comply with existing regulations. This is also in line with IKN's development concept until 2045, which will optimize financing from non-state budget sources."

Bahlil Lahaladia, Investment Minister.

People [investors] want to invest in IKN. Inadvertently, in the IKN transition team, the investment coordinator is the Investment Ministry. Therefore, in my opinion, there is no turning back. IKN is non-negotiable and must continue."

Dhony Rahajoe, Nusantara Capital Authority deputy head.

Even though the time available is very limited for the first phase in 2024, we must believe in ourselves that we can do it."

 

Insights

In line with the president's demand to start the construction work as soon as possible, Public Works and Housing Minister Basuki Hadimuljono plans to begin signing several IKN-related contracts this month. There are 20 construction work packages and around 30 software work packages worth Rp 5.4 trillion. Contracts for five construction and several software works will be signed on Monday (8/29), while the contract signing for other works will take place on September 5. Contractors will at least handle two toll road projects, one land development project, one national axis area management project, one logistics road project, one drainage project, and the construction of flats for workers.

The government has already allocated an extra Rp 5.10 trillion for the PUPR Ministry to work on the first stage of the IKN project. The ministry plans to disburse Rp 110 billion for the Directorate General of Water Resources to manage the flood in the Sanggai watershed, the Sepaku Semoi Dam, the KIPP Embankment, the Sepaku River Intake, the raw water supply, and the Mentawir Nursery. Meanwhile, about Rp 2.11 trillion will go to the Directorate General of Highways to build and preserve logistics roads, core areas, and toll roads.

The Directorate General of Creation and Work also received Rp 2.36 trillion for the construction of the new Presidential Palace, the new Vice President's Palace, four blocks of Coordinating Ministry offices, the new State Secretariat office, ministry/institution office buildings, the PUPR Ministry office, state mosques, and others. Meanwhile, the Directorate General of Housing gets Rp 48 billion for official and construction workers' housing.

The total budget allocation for the IKN project until 2024 will expectedly reach about Rp 43.73 trillion. The government has already allocated Rp 5.4 trillion for this year's works and planned to disburse Rp 23.6 trillion next year, Rp 20.8 trillion of which will go to the PUPR Ministry. The fund will be used to build new palaces, basic facilities, infrastructure like roads and sanitation systems, and office complexes.

Luring Investors to Fund IKN  Project

Many have questioned the financing scheme for the IKN development and relocation due to the project's magnitude. Besides, its value is fantastic, around Rp 466 trillion – Rp 486 trillion. However, Jokowi ensured that the state budget would only cover 20 percent of the cost, or about Rp 89.4 trillion. The remaining 80 percent of the financing, or Rp 254.3 trillion, will be obtained from the government-to-business scheme, private investments, and crowdfunding of around Rp. 123.2 trillion. The government seems optimistic about the project. Jokowi even aspires to hold the country's independence day ceremony in 2024, or his final year as president, at Nusantara.

The Indonesian government always claims that many investors are interested in building and funding projects in Nusantara. Development Planning Minister/Head of the National Development Planning Agency (Bappenas) Suharso Monoarfa even boasted that hundreds of local entrepreneurs would be interested in funding the Nusantara project. Investment Minister Bahlil Lahadalia also revealed that investors from the United Arab Emirates pumped US$20 billion through the Indonesia Investment Authority (INA). Investors from China, South Korea, and European countries have also expressed interest. However, none are involved in the first stage or the development of the core area.

To complete the first phase in 2024, the government must be willing to do more, such as disbursing the budget allocation in advance. Besides, only contractors closely related to the Public Works and Housing Ministry and the Transportation Ministry have submitted bids. Meanwhile, large investors such as Softbank have pulled out of the project since it does not seem to promise any promising return on investment due to the lack of the city's projected population. In the early stage, the Administrative and Bureaucratic Reform Ministry suggested that 60,000 civil servants, TNI and police officers would live in the area. Bappenas even projected that Nusantara would only be inhabited by around 1.9 million people, not big enough to attract investors.

Nevertheless, Jokowi will also provide special incentives to facilitate investments in the new capital. The schemes and types of incentives will be regulated in a Presidential Regulation (Perpres), expectedly out in September. The duration of the land management rights will be longer than the current figure. For example, the right-to-build (HGB) permit will be valid for 30 years. The licensing process will be quicker and more straightforward, while the tax holiday will last for 20 years. Business players also welcomed this offer. The Indonesian Chamber of Commerce and Industry (Kadin) and the IKN Authority invited 64 entrepreneurs and explained the benefit of investing in the Nusantara project on Monday (8/22).

Based on the documents obtained by D-Insights, some companies invited were construction companies, such as Adhi Karya Tbk, Astra Infra, and PT Waskita Karya Tbk. Companies were also engaged in ten other fields, such as real estate, education, health, retail, energy, transportation, automotive, finance, manufacturing, and communications. Many large companies were listed, including Hyundai, AWS, Google, LG, Samsung, and Inpex, as well as local groups such as Lippo, Kalla, and Sinarmas.