New authority created, major investor walks . . .
Less than one month after the ratification of Indonesia’s new law to move government functions from the current capital of Jakarta to a newly-built capital city, the authority overseeing the mega-move faces a major financial hurdle. Indonesian President Joko Widodo recently appointed Bambang Susantono, a former vice-president at the Asian Development Bank, and Dhony Rahajoe, a senior real estate development executive, to lead the Nusantara Capital City Authority. The authority is responsible for planning, securing funding, and constructing the new capital. But immediately after their appointment, Japan’s SoftBank Group said it was no longer interested in providing the billions of dollars in investment it had committed to the relocation project.
Concern over project’s viability for private investors . . .
Developing the new capital of Nusantara will cost approximately US$32.6 billion, of which only 19 per cent will come from state coffers. The rest is expected to come from private investment and public-private partnerships. SoftBank’s withdrawal is a serious setback for the endeavour and raises concerns over the project’s viability and attractiveness to private investors. The project’s economic feasibility may be the main issue here, with SoftBank expressing concern after the government said it does not have the power to require private businesses to relocate away from Jakarta. Current plans are for only 1.5 million people working for government agencies, foreign missions, and international organizations to be relocated to the new capital. It is expected that most commercial activities will remain centred in Jakarta, which is under threat of flooding due to climate change.
Closing the funding gap . . .
Indonesia’s reliance on private sector investment for its ‘capital project’ is due in part to budget pressures caused by the pandemic. However, analysts say the government should increase the budget allocation for this project, in particular by obtaining low-interest loans from multilateral organizations it can leverage as an attractant for risk-averse private investors. The government may also want to issue long-term rupiah-denominated bonds to raise funds from domestic investors, something it has so far avoided. With a sufficient rate of return, securitized and guaranteed by the government, this bond could be a good asset class for investors – and being rupiah-denominated, it would come with less exposure to foreign exchange risk for the government.
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