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Business trends

Indonesian developers rush to join capital relocation project

Government's announced farewell to Jakarta expected to create 500,000 jobs

Indonesian President Joko Widodo announces the relocation of the country's capital, a move that is expected to boost the nation's economy by 2%.   © Reuters

JAKARTA -- A day after President Joko Widodo announced his plan to move Indonesia's capital to East Kalimantan Province, property developer Agung Podomoro Land placed a full-page ad in a national newspaper offering investment opportunities in a new apartment and commercial complex in the province's largest city.

"Borneo Bay City, world-class resort ... best investment in the new capital in East Kalimantan," reads the ad, published in Kompas on Tuesday. It adds that the "superblock" will consist of luxury apartment towers, a five-star hotel, shopping malls and other facilities. Further, it will be "strategically located," a 20-minute drive from the future capital.

Agung Podomoro Land's share price gained 8% the same day.

Some business executives have been euphoric since Widodo on Monday ended months of speculation and announced that the new capital will sit on 1,800 sq. km of land in the Penajam Paser Utara and Kutai Kartanegara districts in East Kalimantan Province, on Borneo Island.

The current capital, Jakarta, is on the island of Java and some 1,400 km southwest of where its successor is to rise.

The prospective move will give a direct advantage to property developers and construction companies already operating in East Kalimantan as well as to players with the potential to take part in its development.

The shares of PP Properti, the property development arm of state-owned construction company Pembangunan Perumahan, jumped nearly 18% on Tuesday. One day earlier, President Taufik Hidayat said his company has a hotel and shopping mall in Balikpapan, East Kalimantan's largest city.

"We've started [planning] to develop more properties across 500 hectares of land," Hidayat told reporters shortly after Widodo's announcement. "Since four months ago, we've been studying potential opportunities from the relocation plan ... to focus on [what] measures to take."

The shares of Bumi Serpong Damai, another major property developer and part of the Sinar Mas Group, are also on the rise. The company is known to have more than 5 sq. km of land in East Kalimantan, divided between Balikpapan and Samarinda, the provincial capital. Both cities are close to the site of the future capital.

State-owned construction company Wijaya Karya, or Wika, is also excited about the relocation plan.

"Wika has been preparing since early on to develop the new capital -- on the construction side and the financial side," Wika president Tumiyana told reporters on Wednesday. "Wika is very much ready to be at the forefront ... of this big mission."

Tumiyana said Wika is involved in building a 99 km toll road that will open in October, connecting Balikpapan and Samarinda. The company has also built the Balikpapan airport and a power plant in another part of East Kalimantan.

With its experience in the province, Wika expects to be involved in building basic infrastructure -- from roads to a power grid to water works -- for the yet-to-be-named capital.

Tumiyana said Wika will look for foreign partners to jointly finance and develop basic infrastructure in the new city. He added that land acquisition likely will not be an issue as most of the land allotted for the new capital is already owned by the government.

Development costs for the new capital are estimated at 466 trillion rupiah ($32.7 billion). Most of that money, an estimated 265 trillion rupiah, is projected to go toward the construction of housing, schools, hospitals and commercial districts. Basic infrastructure costs are estimated at 156 trillion rupiah. And about 33 trillion rupiah is slated for the construction of government offices, including a new presidential palace, a House of Representatives building and new national police and military headquarters.

The relocation adds to Widodo's ambitious infrastructure spree, which following his reelection in April, has lifted stock prices for infrastructure and property companies at large. The Indonesia Stock Exchange's infrastructure, utilities and transportation index has jumped 15% so far this year, while the property, real estate and building construction index is up nearly 12%. The Jakarta Composite Index has gained 1.35% during the same period.

The state budget will cover about 19% of the capital's relocation costs, with the government planning to involve the private sector as much as possible, especially through public-private partnerships.

The move is to begin in 2024. Although it is being left behind, Jakarta will remain the nation's commercial and financial hub.

Despite all the applause for the capital relocation, some business circles have expressed concern, including Kowantara, a community for wartegs, or privately owned small streetside restaurants, a staple of everyday life in Jakarta.

It released a statement saying that it "reject[s] the plan to move the capital." Although Kowantara cites macroeconomic headwinds, like small businesses struggling as consumers' purchasing power recedes, it likely fears a loss of customers as government officials and others relocate to another island.

While small-time restaurateurs fear this fate, large corporations are preparing for their own.

Executives at state-owned Bank Mandiri said as soon as a regulatory framework is completed, Mandiri will build a large office in East Kalimantan from where it will help finance the capital relocation. The government seeks to complete the framework by the end of this year.

"Mandiri will proactively approach construction contractors" from the private and public sectors, Mandiri Director Alexandra Askandar told reporters on Wednesday. With state budget "allocations to start in 2020, we believe there will be requests for funding related to [the capital relocation] soon."

David Sumual, chief economist at Indonesia's largest private lender, Bank Central Asia, said sectors such as construction and trading, finance, heavy equipment, and food and beverage will benefit the most from "first-round effects" from 2020 to 2025. There are forecasts that up to 500,000 jobs will be created during this period.

From 2024 to 2027, logistics services between Java and Kalimantan will be big profit-earners. Later, private investment in the new capital's supporting sectors -- retail, education, health and hospitality -- will increase.

The relocation will create multiplier effects that will positively impact Indonesia's economy, Sumual said.

"At the national level, the capital relocation will add 2% to the baseline growth projection between 2020 and 2030," he said. "Kalimantan, especially, will enjoy an added 8.5% growth from the baseline projection, and Java 1.5%."

Nikkei staff writer Shotaro Tani and Ismi Damayanti contributed to this story.

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