Construction activity of Indonesia’s new capital in East Kalimantan on Borneo Island started, with the construction of the presidential palace after delays due to the outbreak of the COVID-19 pandemic in 2020. The new smart and green city will replace Jakarta, Indonesia’s current capital, which is prone to natural disasters, due to rising water levels.
The development of the new capital is estimated to cost USD 33 billion and create over 1.3 m jobs. Many countries have expressed interest in investing in this project, such as China, which wants to design urban landscapes and participate in water management. The US has sought a role in helping build infrastructures, such as roads and bridges. Japan has also expressed interest in building the capital’s transportation and energy systems.
The state budget will fund 19% of the total cost, while public-private partnerships and the private sector are expected to contribute the remaining. Projects in the new capital include basic service infrastructure, construction of the National Palace, buildings for the police and army, housing, green open space, military bases, transportation systems, telecommunications, and renewable energy projects. They offer ample opportunities for increasing private sector investments in the capital’s sustainable city infrastructure.
The development of infrastructure projects is expected to boost E. Kalimantan’s economic output as well as demand for and investments in infrastructure-related products and services, most notably concrete and cement. East Kalimantan currently accounts for 1% of Indonesia’s GDP, which is expected to increase several folds. Private investments would pick up as it plays a central role in administration and governance. Similarly, East Kalimantan accounts for 6% of Indonesia’s cement demand, which is expected to increase significantly on several planned infrastructure projects as well as low cement consumption per capita, which offers growth opportunities.
The capital is likely to be developed in three stages: 2021-2024 (first stage), 2025-2029 (second stage), and 2030-2045 (last stage), covering an area of 2,000 hectares, 40,000 hectares, and 200,000 hectares, respectively. Apart from building governance and administration facilities, several commercial projects, such as airports, shopping malls, office buildings, convention centres and hospitals, are included in the plan, which is expected to spur economic growth and investments in the region. This will also likely increase the demand for infrastructure products and services.
Apart from infrastructure development, the ambitious new capital development plan is expected to drive several ancillary industries. Demand for maritime infrastructures, such as port and shipping lanes, renewable power sources and power storage, and tourism, are expected to drive investments in the region as the population of the region grows. Almost all these ancillary investments are expected to be made by the private sector and provide lucrative opportunities against a backdrop of ambitious infrastructure projects.
The projects are planned for 15 years and, hence, are expected to impact GDP and investments in a staggered manner instead of a sudden step-up. Investment flow into East Kalimantan is inevitable and returns on these investments are expected to be higher for early movers. This is expected to make East Kalimantan a central hub for development, with several local companies, are evaluating expansion into East Kalimantan and foreign companies with no Indonesia presence assessing directly setting up shop in East Kalimantan.
Cement and infrastructure players, at the centre of this development, that already has a presence in this region will have an upper hand in comparison to new entrants, as they can seize growth opportunities and rising demand quickly because of the already established supply chain in the region. It is not surprising that these players are negotiating mergers and acquisitions to solidify their position in the region.
