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Indonesia presses on with capital relocation plan despite pandemic

Ostentatious design draws new critics of $32bn project in East Kalimantan

The design of the presidential palace in Indonesia's planned new capital features a massive structure in the shape of a Garuda, an eagle-like mythical bird that is a symbol of the nation. (Screenshot from Joko Widodo's Twitter page) 

JAKARTA -- Indonesia's $32 billion plan to move its capital city from Jakarta to Borneo is triggering fresh debate over issues ranging from the design of a new palace to the chances of attracting global funding amid the pandemic.

The controversy was resparked in late March after Balinese sculptor Nyoman Nuarta announced on Instagram he won a government design contest for the presidential palace in the planned new capital location in East Kalimantan Province. Many people say a massive Garuda-shape structure on top of the planned building ostentatious and unnecessary -- the Garuda, an eagle-like mythical bird, is a symbol of the nation.

A few days later, President Joko Widodo posted a video of what Indonesia's future capital city could look like -- very modern and green -- including a refined version of the Garuda-shaped palace. He invited local architecture and urban planning communities to provide input, floating the relaunch of the project that had been put on the back burner since the beginning of the pandemic.

Local officials recently said construction of the new palace is planned to start soon, with 2024 targeted for completion of the structure and other government offices and public facilities in the new capital. This would be before Widodo's second and final term expires the same year.

Parliament is expected to pass a bill on the new capital city into law this year, giving the project the legal basis to protect it from a potential cancellation by a new administration after the 2024 presidential election.

"The development of the new capital city is designed as among strategies for national economic recovery after the pandemic," the ministry of national development planning said in a news release on April 12. "The preparations... will be adjusted in line with the national vaccination program."

Announced in 2019, Widodo wants Indonesia's administrative capital to be moved to East Kalimantan, citing Jakarta's overcrowding, traffic jams and pollution -- as well as the need for a growth engine in the eastern half of Indonesia. Most government offices will relocate there, as well as parliament, military and police headquarters. Jakarta will remain as the country's financial and commercial hub.

The government estimated that the project would cost 466 trillion rupiah ($32.16 billion). Just a fifth of the cost is intended to come from the state budget, with the rest coming from private funding.

Even before the pandemic, the plan had been met with resistance among Indonesians, with critics calling it a huge waste of money that would only add to the country's growing debt problem. Concerns about the environmental impact in Kalimantan have also been raised.

Critics are becoming more vocal as the pandemic is still rampant in many parts of the world, and Indonesia is still reeling from its first recession in two decades last year.

"Since the beginning I said the government has been rash with infrastructure development. And the peak of the rashness will be the capital city," Faisal Basri, political economist at the University of Indonesia, told a webinar last week, citing Indonesia's declining tax revenues and widening fiscal deficit.

"It is unethical and immoral to build the capital city during this pandemic era... when we should be prioritizing on matters that are most relevant with tackling today's challenges," he added.

But David Sumual, chief economist at Indonesia's largest private lender, Bank Central Asia, thinks despite its rising debt-to-GDP ratio -- 29% pre-pandemic to a projected 41% this year -- Indonesia still has a relatively strong fiscal position compared with other countries.

He also thinks major projects like the new capital city might be what Indonesia needs to stimulate the economy.

"For a nation to reinvigorate the economy back on the right track, I think it's necessary to do spending," Sumual told Nikkei Asia recently. "Right now no private sector will ... increase their capital spending in a big way. That's why I think we need big government projects."

But questions remain as to whether Indonesia will be able to attract enough global funding for the project.

Shortly before the pandemic, the project had attracted the likes of SoftBank CEO Masayoshi Son, former British Prime Minister Tony Blair and Abu Dhabi Crown Prince Mohammed bin Zayed Al Nahyan. But there has been mention of their involvement since.

Sumual is quite upbeat about foreign investor participation, citing the establishment of the Indonesia Investment Authority, or INA, earlier this year, to manage a planned sovereign wealth fund.

Several foreign funds including the United Arab Emirates', the U.S. International Development Finance Corporation, Japan Bank for International Cooperation, and Canadian and Dutch pension funds, have expressed interest in investment partnerships with the INA.

The new capital city project has not been mentioned in the fund's stated objectives. But government officials said priorities will be to support "strategic national" infrastructure projects and help asset recycling among state-owned enterprises involved in those projects.

Sumual thinks it could eventually mean investment in the new capital city, with state construction companies expected to be heavily involved in the development.

Analysts from Fitch Solutions noted that the fund "offers some upside" as it will reduce uncertainties in the legal and financial framework for foreign investors. The government's recent removal of a negative investment list, Fitch added, is also viewed positively.

But Fitch cautions that Indonesia's longtime governance problems, including high levels of corruption and vested interests in many government levels, as well as its track record of a lack of transparency in decision making -- will still deter many investors.

"That said, we are not optimistic about [the fund's] success in the near- to medium- term due to persistent political challenges faced by foreign investors in the archipelago," Daine Loh, power and infrastructure analyst at Fitch, told Nikkei Asia.

"Furthermore, with the bulk of the financing expected to come from foreign investors and with business confidence levels plunging to record low levels in many parts of the world, we believe Indonesia will face additional difficulties to attract the funds required to kick-start the project."

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