Massive infrastructure needed before East Kalimantan is ready to host Indonesia's new capital

IN August this year, Indonesian President Joko Widodo announced that his country's capital will be relocated to East Kalimantan, while the centre of business will remain in Jakarta.

The idea for the relocation of the capital is not new, having been conceived since 1957 by former president Sukarno.

In the 60 years or so since, the relocation plan surfaced intermittently, until Mr Widodo finally confirmed it last month.

The main impetus for the relocation is the heavy population burden in Jakarta and island of Java.

Over the years, the population of Jakarta has ballooned to over 10 million residents, while 57 per cent of Indonesia's total population resides in Java.

It is estimated that if no action is taken, the population of the greater Jakarta area will surge to 35 million by 2030.

The population influx has led to a significant decline of the environment. Massive traffic congestion has resulted in chronic air pollution and loss of economic productivity.

The scarcity of clean water in the city brought about a heavy reliance on groundwater that has led to land subsidence over the last few decades.

Some northern parts of the city have sunk by more than four metres since the 1970s and severe floods are a regular occurrence.

At the subsidence rate of up to 25cm a year, 95 per cent of northern Jakarta's surface will be flooded by 2050, according to researchers from the Bandung Institute of Technology.

Based on the government announcement, construction of the new capital will cost US$33 billion.

The relocation is planned to take about 10 to 15 years to complete and the first phase of the relocation will start in 2024.

East Kalimantan

While the government considered several possible locations, part of the North Penajam Paser Regency together with part of Kutai Kartanegara Regency in East Kalimantan emerged as the frontrunner and was confirmed as the new capital due to numerous favourable attributes.

East Kalimantan is located in the geographical centre of Indonesia. The island also has the lowest rate of potential major natural disasters such as floods, earthquakes, volcanic eruptions, and tsunamis.

In contrast to Java, East Kalimantan has low population density with an abundance of clean water resources.

There is also a huge availability of vacant land owned by the government, amounting to 180,000 hectares which can be rapidly developed without the need for the government to acquire private property.

East Kalimantan has major supporting infrastructure which is already available, with two international airports, a seaport, and the Balikpapan-Samarinda toll road which is currently near completion.

However, East Kalimantan still needs massive infrastructure and facility developments before it is ready to support operations as the new capital. This will require intensive capital investment from both the private and public sectors.

Most of the land area for the construction of the capital is not wild rainforest any longer due to deforestation decades ago.

The government has pledged to preserve all protected forests and convert 50 per cent of the allocated land to open green spaces to create a forest city.

Key beneficiaries

The relocation of the capital will bring massive construction and new economic activities to East Kalimantan, which will generate increased demand for land and properties in the area.

In particular, the nearby cities of Balikpapan and Samarinda in the vicinity of the new capital will benefit from the surge of commercial property development which is expected to occur.

The biggest beneficiaries will be the local land owners with vast tracts of undeveloped prime land, who will enjoy huge capital gains with minimal effort on their part.

They already have the option to unlock their gains immediately, as speculators are rushing to snap up the most desirable land plots.

Property developers are another major beneficiary.

Due to the vast scale of development required, there will be ample opportunities for both local and foreign developers.

Supporting business services such as architectural, engineering, and consultancy firms will also benefit from increased demand.

The development of government land will likely be conducted by inviting both state-owned enterprises and private entities under several development cooperation and collaboration schemes, such as BOT (Build, Operate, Transfer), lease and/or asset swap.

Investors in Indonesia and globally will also have new investment market opportunities.

In particular, investors seeking to acquire core assets with stable cash-flows will be very interested in office buildings tenanted by government departments.

Assets in other sectors such as retail and hospitality will also be very much in demand due to their long-term growth potential.

There could also be a boost to bilateral trade between Indonesia and Malaysia.

If highways linking East Kalimantan to the neighbouring Malaysian states of Sabah and Sarawak are constructed in the future, this would lead to increased trade between the new Indonesian capital and the Malaysian states.

Jakarta's urban regeneration

Jakarta will not be neglected, with the government pledging US$40 billion for urban regeneration projects in the city, more than the amount allocated for the construction of the new capital.

The government plans to extend water pipes to cover the entire city to eliminate the population's reliance on groundwater, and to construct a new sewage system.

A large portion of the funds will also go towards upgrading the city's transportation network to alleviate congestion.

Unfortunately, landlords of office, retail, and hotel properties near the existing government institutions in Jakarta will suffer a blow as rents and capital values will fall once the government departments relocate to East Kalimantan due to tenants moving out and the number of international visitors declining.

However, there will still be opportunities in Jakarta, as the vacated government assets, especially those in strategic locations, will be available for re-development.

The real estate community is eagerly awaiting a further announcement of the exact location of new capital area and its detailed masterplan.

This community is also waiting for the establishment of the official body in charge in managing the government's property assets and development in both the new capital and Jakarta.