Indonesia’s New Capital: Leap Forward or Ghost-town in the Making?

In 2019, the Indonesian government embarked on a bold journey to relocate its capital from Jakarta to the newly planned city, Ibu Kota Nusantara (IKN). This ambitious project, with an estimated cost of USD 32 billion, is situated in East Kalimantan and broke ground in 2022.

The concept of moving the capital was first proposed in 1957 by Indonesia’s first president, Soekarno. He identified several critical issues plaguing Jakarta, including environmental degradation, frequent flooding, and severe traffic congestion. Soekarno envisioned Kalimantan Island as an ideal location due to its central position within Indonesia, its relative safety from natural disasters, and its rich natural resources. Decades later, this vision has been revived and set into motion by President Joko Widodo (Jokowi).

The Pros and Cons of IKN: A Visionary Move or Risky Gamble?

The decision to relocate Indonesia’s capital to East Kalimantan is a bold move driven by pressing ecological and sociological factors. The primary reason is the highly concentrated population on Java Island, including Jakarta.

Ecological concerns heavily influenced the decision. Groundwater overcapacity has led to ongoing land subsidence in Semarang, Central Java, and Jakarta. Some experts estimate that a third of Jakarta could be submerged by 2050 due to excessive groundwater extraction caused by inadequate piped water infrastructure. As a result, residents and industries have resorted to drilling for water.

Jakarta’s location in the northern coastal area of Java Island, with soil formed from alluvial river deposits, exacerbates compaction and land subsidence, with groundwater levels declining 7.5-10 cm/year. Additionally, sea levels in Jakarta’s coastal area rise 3-5 millimeters yearly. This combination has caused significant floods during the rainy season in recent years. Other ecological issues include heavily polluted water quality and high pollution levels.

The island of Java is highly populated, as 58% of Indonesia’s population resides there. The island also makes the most significant contribution (59%) to the country’s economic growth. Specifically, 12% of the country’s population resides in Jakarta Greater Area, representing 0.3% of the country’s size. Jakarta Greater Area also has a high urbanization rate (250,000 new residents/year), which causes high congestion and unhealthy air quality.

Despite the inevitability of the capital’s relocation, valid criticisms warrant careful consideration. Given Indonesia’s economic capacity, financial concerns, including the project’s fiscal feasibility, feature prominently among these criticisms. The state budget is expected to cover 20% of the budget for developing the Indonesian Capital City (IKN). Although the construction of New Capital City is expected to last 18-20 years (2045 is the target completion year), the investment is targeted to be obtained through a Public-Private Partnership scheme, with private investment covering 80% and the remaining covered by the state budget. However, the basic infrastructure is the initial groundwork that needs to be provided by the government as it will contribute to gauging the interest from the private sector to invest.

Attention is also drawn to the potential social (e.g., land disputes) and environmental impacts stemming from large-scale population displacement and the ecological footprint of the capital city’s development. In the context of land acquisition, several obstacles still exist to its implementation. The concrete one is that the community still inhabits some areas, so these areas cannot be developed presently.

Urbanization poses a significant challenge as industrial centers, company offices, and communities flock to IKN, potentially causing a population explosion. Currently, East Kalimantan’s annual population growth is 3.77%, expected to double in the next 18 years due to the relocation. Environmental concerns include deforestation in the area, known for its plantation forests, including palm oil plantations.

The government is addressing these criticisms and seeking effective measures. Regarding land still inhabited by local communities, the issue stems from various land ownership statuses. The government is considered working with stakeholders to develop solutions that consider social impacts, ensuring land in IKN is “clean and clear” before issuing Right to Use Certificates.

To manage urbanization, the government plans to cap IKN’s population at 2 million to avoid overcapacity. These measures demonstrate the commitment to sustainable principles, ensuring IKN becomes a symbol of national identity.

IKN’s Promise: Transformative Benefits for Indonesia

Regardless of the criticisms, relocating Indonesia’s capital to IKN presents a transformative opportunity, promising economic, social, and environmental benefits. Economically, decentralizing from Jakarta to Nusantara aims to alleviate development pressures on Java and Sumatra, fostering balanced regional growth. Jakarta and Java Island currently dominate the national economy, contributing significantly to Indonesia’s GDP. In 2023, Jakarta contributed 16.77% to the GDP, while Java Island contributed 57.05%. In contrast, other major islands in central and eastern Indonesia collectively contributed only 20.94%: Kalimantan 8.49%, Sulawesi 7.10%, Bali and Nusa Tenggara 2.77%, and Maluku and Papua 2.58%.

As the new economic center, IKN is projected to support Indonesia’s GDP target of USD 180 billion and create 4 million jobs by 2045. It is also expected to boost East Kalimantan’s economic performance, with significant improvements predicted between 2021 and 2030. The province’s economy is expected to grow from 2.38% to 6.3%, the poverty rate to decline from 6.54% to 5.92%, and the unemployment rate to drop from 6.8-7% to 6-6.5%. A positive indicator is already evident, with East Kalimantan’s economic growth expanding by 6.22% in 2023, compared to 4.48% in 2022, largely driven by the construction industry.

Two nearby cities, Samarinda and Balikpapan, can also benefit from the presence, as the government envisioned these two cities to support IKN by leveraging their infrastructure availability. Samarinda, known for its mining, oil, and gas sectors, is expected to transform its focus into new, renewable, low-carbon, and sustainable energy sectors. Balikpapan is projected to expand its role as a logistic hub for exports and imports, strengthening superhubs’ role in inter-regional trade flows.

The presence of IKN is expected to stimulate economic activities in other regions, especially the central and eastern parts of the country, thereby reducing regional disparities and promoting more inclusive development nationwide. Moreover, the new capital city will catalyse infrastructure development, creating jobs and attracting investments to spur local economies and enhance overall economic resilience.

The relocation also presents an opportunity to address Jakarta’s environmental challenges, such as pollution and overcrowding, by implementing sustainable urban planning practices from inception. This proactive approach mitigates environmental degradation and establishes Nusantara as a model for green and resilient urban development in Southeast Asia. Indonesia’s decision to develop Nusantara as its new capital represents a forward-looking strategy to foster balanced growth, enhance regional integration, and ensure sustainable development for future generations.

Latest Developments in IKN Construction

During 2022-2023, the government allocated USD 2.03 billion for the construction of IKN, with an additional USD 2.5 billion budgeted for 2024. This investment represents 16.1% of the planned spending on the project. Local investors have shown significant interest in IKN, with 13 groundbreaking projects, primarily in the property sector, planned last year, totaling USD 1.99 billion in investments. Some of these projects include:

1. Hotel Nusantara as part of an integrated area project developed by the Agung Sedayu Group (ASG) Consortium, which was groundbreaking on September 21, 2023. With an investment value of USD 1.25 billion, the ASG Consortium, consisting of 10 big tycoons, will build an integrated area that includes hotels, malls, apartments, and offices.
2. Hotel Vasanta, a five-star hotel project developed by PT Sirius Surya Sentosa (Vasanta Group).
3. Abdi Waluyo Hospital as the first hospital project in IKN. PT Bhakti Husada initiated this project with an investment value of around USD 125 million.
4. Mayapada Hospital Nusantara, run by the Mayapada conglomerate group, is owned by Dato Sri Tahir, one of the wealthiest people in Indonesia. This project is expected to cost USD 31.25 million. The hospital also collaborates with Apollo Hospital in India.
5. Pakuwon Nusantara is a USD 312.5 million superblock project by Pakuwon Group. The project consists of apartments, hotels, and malls, and the group is collaborating with Marriott International Group for the Four Points by Sheraton Hotel. In a later stage, the superblock project will own a shopping center, Tribute Portfolio by Marriott Hotel, and Westin Hotel.
6. Nusantara Intercultural School is an international school project run by Jakarta Intercultural School (JIS).
7. Hermina Hospital, this USD 40.63 million international-standard hospital, belongs to PT Medikaloka Hermina Tbk. The project will adopt smart hospital concepts and eco green.
8. 50 MW Solar Power Plant Project that will produce green energy of around 93 gigawatt hours/year and is projected to reduce emissions by 104 thousand tons of CO2 per year.

With more incentives for investment in IKN being introduced and the recent construction status of IKN, it is expected that more investments will come to the new capital, which will, in turn, boost foreign investments in the nearby area due to the potential of natural resources possessed in certain areas in the central and eastern part of the country.

Indonesia’s ambitious plan to relocate its capital to IKN represents a strategic leap forward with the potential to reshape the nation’s economic and environmental landscape. While challenges such as ecological impacts, financial feasibility, and social issues exist, the project’s success could herald a new era of balanced regional growth and sustainable development. Whether IKN becomes a thriving new hub or a costly ghost town will depend on careful planning, execution, and the continued commitment of both the government and private sector stakeholders.

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