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January 28, 2022

Indonesia continues to push forward with its capital migration

By GlobalData Thematic Research

Indonesia passed a law this week moving its capital from Jakarta to East Kalimantan on the island of Borneo, where there are essential habitats for rainforests, rivers, and other species such as orangutans. Construction will start this year, and the capital will be completed in just two years (by 2024). Built on swampy areas and below sea level, Jakarta has a population of 10 million and is sinking rapidly.

Reasons for the decision

There are two significant reasons for this decision. Firstly, severe urban problems in Jakarta are leading to overcrowding, traffic congestion, and flooding. It is believed that the move to East Kalimantan will partially lighten Jakarta’s heavy burden. The new capital represents a more favorable environment, as it is a bright, modern, forest-like green city that will be a hub for future technological innovations.

Secondly, the move to East Kalimantan will realize the national vision of economic equality and an advanced Indonesia, and this new capital city will represent the country’s development. Therefore, this move reflects the national shift from being Java-centered (the island upon which Jakarta is located) to Indonesian-centered.

Concerns about the move

Any city, especially a capital, is strongly driven by three elements: politics, culture, and the economy. However, the repercussions of the shift away from the political center in Jakarta are being ignored. What happens to the paperwork required to start and keep a business running when a political amputation occurs? It is still unclear whether the government will maintain offices in Jakarta to support enterprises or whether each document and requirement will entail a trip to Kalimantan. In either case, the result would be increased government operating and private business costs, at the expense of taxpayers and consumers.

The cost of the trade-off will only become visible in the future. The amputation of Jakarta’s political sphere may lead to a deterioration in the supply chain networks that represent the current capital. At the same time, transaction costs for companies will increase. On top of this, there are discussions and controversies around the biodiversity and environmental degradation that will occur as a result of developing a city in a sensitive region.

Emerging opportunities due to capital migration

However, there are many brighter aspects to the decision as well. Indonesia’s capital relocation plan offers excellent opportunities for foreign investors in areas that have historically been under-invested. A project like this will provide opportunities for soft and physical infrastructure companies, such as urban development, utilities, manufacturing of paid services, environmental consulting, and companies involved in smart city design.

There were few infrastructure developments in Kalimantan before President Joko Widodo’s arrival. However, the move will present several opportunities, including the development of ports for maritime infrastructure. The opening of new sea routes could be beneficial for the export of commodities such as coal and gold, which are heavily mined in the Kalimantan region. With development, the government may aim to increase tourism, presenting an excellent opportunity for hotel chains and high-end luxury resorts to invest in the region.