Will China invest in Indonesia's new capital Nusantara?

The Indonesian government is pushing ahead with its plan to build a new capital city on Borneo island. The new capital, which is named "Nusantara" (meaning archipelago), will be located on 256,000 hectares of land in the North Penajam Paser and Kutai Kartanegara regencies in East Kalimantan province, which are about 2,000 km from Jakarta.

The project will cost 466 trillion rupiah (S$44 billion), of which the state can cover only about one-fifth of the investment cost. Around 80 per cent of the total investment value needs to be sought from public-private partnerships and investments.

As Indonesian President Joko "Jokowi" Widodo sees Nusantara as a legacy project, he is keen to ensure it will materialise before he steps down in 2024. In a recent telephone conversation, he conveyed his hope to President Xi Jinping that China will continue supporting the development of various infrastructure projects in Indonesia, including in the new capital.

The question is, will Nusantara attract more Chinese investment?

The immediate answer is no, given that no concrete plans have been offered to investors so far. To be sure, the project can open up opportunities for Chinese investment in basic infrastructure projects, such as roads, dams, electricity, clean water, public transport, housing and commercial real estate. However much will depend on whether the interests of both parties coincide. If China and Indonesia each have something that the other wants, they can agree on investment deals in Nusantara.

In recent years, Chinese investment in Indonesia has grown significantly, rising from US$297 million in 2013 to US$4.84 billion (S$6.6 billion) in 2020, based on Indonesian Investment Coordinating Board data. These investments are mainly concentrated in the base metal industry, transportation, warehouse and electricity sectors. The largest investment locations are in Central Sulawesi, South-east Sulawesi, and North Maluku for the mineral processing industry, mostly of nickel, bauxite and copper.

Given this trend, some critics worry that inviting China to the Nusantara project will lead to Indonesia becoming even more dependent on China. Indonesia has indeed become more dependent on China economically and vice versa. It is a natural consequence of globalisation and openness. This can be good and bad depending on the nature of the economic dependency.

Currently, the economic benefits are tilted towards China (due to its growing trade surplus with Indonesia). One can argue that Indonesia also receives Chinese capital. But we need to look at the value-add of the investment. Suppose the Chinese capital comes with Chinese labour, machinery and suppliers, and limits access for local workers and industries to participate, there will be little benefit for the Indonesian side. Moreover, growing dependency means that changes in China's economy will have a bigger effect on Indonesia's economy.

However, it is unlikely that China's investors will invest in the new capital if they deem the risks too great. With a small population size (less than 200,000), a lack of basic infrastructure such as roads and electricity, and no clear plans to develop the region, the new capital's attributes may not be very appealing to overseas investors, including those from China.

Japan's SoftBank group pulling out of Indonesia's new capital project is evidence of investors' concern about the project's economic viability. Previously, Alibaba Cloud also planned to invest, but it later changed its mind. The Covid-19-related economic disruptions have forced investors, including the Chinese, to be more careful as to where their money goes. They will not fund risky and unprofitable projects.

Unfortunately, Nusantara's current master plan, prepared by the Ministry of National Development Planning, still lacks concrete projects that, in turn, would need to be rigorously assessed. For example, as noted in an East Asia Forum article, a new international airport has been mentioned as one of the strategic projects, despite Balikpapan, located about two hours away, already having one.

President Jokowi appointed Mr Bambang Susantono, an infrastructure and transportation planning expert, as the head of the National Capital Authority on March 10. In an interview, Mr Bambang said the president has given him full authority to seek suitable investors and grant licences to private investors. While a practical and necessary move, the new state institution has drawn criticism for its lack of parliamentary oversight and potential for rent-seeking.

The government remains optimistic about investor interest in Nusantara. The Coordinating Minister for Maritime Affairs and Investment Minister Luhut Pandjaitan has reported that several countries, including Saudi Arabia, the United Arab Emirates and China, have shown interest in investing in infrastructure projects in Nusantara either individually or through consortiums.

Planning Minister Suharso Monoarfa has dismissed the idea that the Nusantara project will be reserved exclusively for Chinese contractors. The government has been cautious about mentioning China's investment, given the political sensitivity of the subject in Indonesia. Anti-China or anti-Chinese sentiment (with implications for Chinese Indonesians) are deep-rooted in society.

Perceptions about mainland Chinese taking away jobs from locals have previously fuelled several anti-Chinese demonstrations. While the number of mainland Chinese workers is below 40,000, there remains about nine to 10 million unemployed Indonesians.

In addition, most of the Chinese investment in Kalimantan thus far is in the plantation, wood and furniture, mining, mineral processing, and electricity sectors. While they have contributed to local economic growth, they have also generated environmental and social concerns.

The Indonesian government is aware of these concerns and is expected to be more cautious about granting permits to foreign contractors or workers. However, partnerships that involve Chinese firms cannot be avoided if the government wants to see progress. The onus is therefore on the authorities to carefully manage the impact of foreign investments in the building of the new capital and to ensure that the projects will benefit the community and protect the environment.