Inside The $34 Billion Bet On Indonesia’s Future

(Bloomberg Opinion) -- Standing in what Indonesians call Point Zero in eastern Borneo, it’s easy to be impressed by the country’s ambition — and daunted by its challenges. Out of the hilly forest, the government is erecting a new $34 billion capital for the world’s fourth-most populous nation, a place long depicted as the next big thing in global economics. Carving an effective seat of power out of this remote spot will be arduous enough. Just as hard will be avoiding the flaws that seem endemic to purpose-built national cities. That’s assuming it’s completed.

Signposts point to the future location of a new presidential palace in Nusantara, the site in East Kalimantan province that President Joko Widodo selected for the project, and to Jakarta, the densely populated and disaster-prone current capital about two hours flight to the southwest. A short walk away, trucks rumble along dirt roads ferrying materials and workers to sites within the perimeter, which is usually closed to foreigners. Maps show sections of the planned city, the first stage of which is scheduled for completion by 2024, the year Jokowi, as the republic’s leader is known, leaves office. Construction is in the early phases. From my vantage point on a recent visit, I couldn’t see a lot of building activity, nor observe land being cleared or foundations laid, though I was assured by officials that work is progressing.

It’s one thing to articulate a vision, quite another to make it happen on the ground. A big question dogged me: Will Nusantara be written into history as a legacy-defining project for Jokowi, one that reshaped the way Indonesia is run and that engineered a redistribution of influence away from crowded main island of Java? Or will it become a well-intentioned boondoggle that never lives up to expectations, further separates the governed from the governing, and becomes a byword for antipathy toward government in the manner of Washington or Canberra? Even the narrow road from Balikpapan, the nearest urban area of any real size, could use work before being ready for prime time. It’s full of hills and windy bends, and traffic regularly slows for resting or broken-down trucks. We pass workers busy building a bridge and small communities comprising a few homes, a school, mosque and mom-and-pop stores.

Give Jokowi credit for forcing the issue. The idea of diluting Javanese clout over the sprawling archipelago nation isn’t a new one; Indonesia's first president, Sukarno, talked about it without doing much. Java, where Jakarta is located, accounts for about 60% of gross domestic product and more than half of the country’s 275 million people. Provincial leaders have often bristled at Java’s footprint. From that perspective, almost anywhere else would be a good start. “The development of the economy in the future is not just about Java,” Rahmad Mas’ud, the mayor of Balikpapan, told me. He describes a dream he had a decade ago that Balikpapan becomes a regional hub for Southeast Asia in the manner of Singapore. That’s a leap, but the attention and focus on his town as a result of Nusantara sure isn’t going to hurt — if he can navigate it correctly. “We aren't going to be like those areas around Jakarta that have just become dumpsters,” he said. 

Java’s sway over the island chain dates back centuries before the arrival of Dutch colonists in the 1600s. All but one of Indonesia’s presidents hailed from Java; the biggest banks and corporations are headquartered there. It would be naive to think that the island and Jakarta fade into the background because the functions of the state pack up and move to a very different place. But Jakarta also has big shortcomings. The city is truly sinking. Traffic is ridiculous and flooding is an almost daily fact of life. Java is also shorthand for earthquakes and volcanic activity, though natural disasters are a problem all over Indonesia. The day before I called on Rahmad, a temblor 60 miles from Jakarta killed more than 300 people. (The picture isn’t unrelievedly bad. Jakarta’s first subway opened to the public in 2019, albeit a generation after the line was conceived. It’s where the jobs are; the city is home to about 11 million people, or around 5% of the country’s inhabitants. Jakarta is a cosmopolitan and dynamic world apart from from provincial Indonesia and has a vibrant night life.) Yet it makes sense to have a backup. Jakarta is building a sea wall that officials hope will mitigate the worst of flooding and protect people from the encroaching waters. Peering above a section of the wall in north Jakarta, I saw a semi-submerged mosque. A few hundred meters away, residents of crowded streets have tried to raise the height of their homes, added exterior staircases, and mix concrete for makeshift barriers at the base of their doors. “Five years ago, during heavy rain, the water would be up to our chest,” explained Mukeni, who runs a small store with her husband and like most Indonesians goes by only one name. “Now, it’s only up to our knees, so maybe that is the sea wall. When we moved here in 1981, we never envisaged these problems.”

It’s good to have a capital that secures the basic functioning of the state, like the presidential office, key ministries and the central bank. Did it have to be so far away? It may be removed from the most-densely populated areas of Indonesia. In an era where there are already concerns about a chipping away of Indonesian democracy, such a distant location risks making leaders and legislators less accessible. Political reforms that followed the financial crisis and sectarian strife of the late 1990s resulted in elections for president, the devolution of some authority to regions, and a legislature that isn’t packed with military brass. The last few years have seen concerns that those hard-won freedoms are being rolled back. Jokowi supporters flirted with seeking a change to the constitution that would allow him to serve beyond his limit of two five-year terms. On Tuesday, parliament passed a law that curtails criticism of the president, along with banning sex outside marriage. Indonesia is the world’s most- populous predominantly Muslim nation and, despite a reputation for moderation, has become more conservative in recent years.   

Despite the ideal of separating political from economic power, new capitals sometimes end up being the worst of all worlds. A tendency toward regulatory capture can mean key agencies respond to the needs and desires of powerful interests regardless of where they are headquartered. Few people say that the US Congress is free of donor interests, or that the Federal Reserve is somehow dismissive of the requirements of the banking system just because the Marriner S. Eccles building is on Constitution Avenue rather than Wall Street. Sitting alongside that can also be a clumsy and often insular bureaucracy and populace that evolves around that system. The term “private enterprise” is used in Australia’s capital, Canberra, in an almost anthropological way, as if someone who works for a corporation rather than the state is an oddity to be studied.

Indonesia wants to relocate around 1.9 million people to the capital by 2045. That would be par for the course:  At least for the first few generations, residents of planned cities are largely shipped in. People live there, but aren’t from there. The social dislocation, and the absence of family networks, can magnify the sense of isolation and apartness. It’s unfair to blame the residents of such cities for every negative development or policy that has unintended consequences, let alone a poor economic performance. Yet vilification of Canberra, where I grew up, and Washington, a place I lived for a decade, never seems to abate. That adds to the sense of barrier. 

Because these urban areas lack deep-rooted animal spirits, a common complaint is that they are sterile. Canberra certainly lacks the buzz of Sydney or Melbourne and has suffered from a sense that commitment to its existence has long had caveats. Parliament met in Melbourne for decades until a building in Canberra was ready; defense from Japanese attack in World War II was plotted in Melbourne. The Reserve Bank of Australia remains headquartered in Sydney. The population has grown since I grew up and Canberrans fancy themselves as more cosmopolitan these days. Forgive my skepticism: On a visit a few years ago, I went to one of the toniest bars and asked for a vodka martini up with a twist, but the bartender had no clue what I was talking about. It’s not just Canberra. A business trip to Brasilia can be a dreary affair after staying in Sao Paulo, notwithstanding the striking modernist architecture of Oscar Niemeyer that characterizes the place. Even in a cramped, two-bedroom apartment, my three years in Brooklyn Heights was a scintillating escape from the sameness of the DC suburbs. Ottawa isn’t exactly pulsating relative to Toronto or Montreal. Much better to stay in Kuala Lumpur and commute the short distance to Malaysia’s government center of Putrajaya than live there. Boosters say Nusantara can avoid these pitfalls, though the global precedent isn’t encouraging.

Is this what Indonesia, forever on the verge of greatness and economic takeoff, wants? A country aspiring to economic and strategic leadership ought to have a functional and secure — if not equally great — capital. Whether Nusantara makes it remains an open question. The hurdles are significant. In an era when it’s easy to say governments lack the ambition to undertake great projects, such as the US highway system in the 1950s or putting a man on the moon, let’s at least applaud Indonesia’s objective. Jokowi is even pitching a Nusantara bid for the 2036 Olympics. However fanciful that might seem, it’s a giant bet on the country’s future.

Indonesia hopes business takes the wager. The initial phase of construction through 2024 will be funded entirely by the national budget. Beyond that, the government wants investors. One question dominates: Who — or what — follows Jokowi? Bambang Susantono, head of the Nusantara National Capital Authority, gets asked that a lot. “It goes beyond one person, this is for the sake of the nation,” he said in an interview. “Don’t forget, it’s the law.”  No serious discussion of Nusantara is complete without the potential for misuse of funds. While Asia has made significant strides in mitigating graft in the past decade, Indonesia still has a lot of room for improvement. The country scored below average in Transparency International’s 2021 Corruption Perception Index, ahead of Pakistan and Bangladesh, but way below Hong Kong and Singapore. “If there is huge financing, there is always the potential for corruption,” observed Kurnia Ramadhana, a researcher at Indonesia Corruption Watch, a non-governmental organization in Jakarta. He’s not aware of any malfeasance, but is on the lookout and concerned that the process surrounding the new capital has been rushed without proper consultation. Underlying his concerns is that the collapse in 1998 of the Suharto regime, which was characterized by autarky and kleptocracy, didn’t remotely cleanse Indonesia of sleaze. “Before, it was centralized, now it’s more dispersed.”

Money hangs over the project in other ways. The government hopes that the bulk of the financing for Nusantara will eventually come from the private sector. It’s relatively early, but the embrace hasn’t been universal. Lippo Group, one of Indonesia’s largest conglomerates, has said it’s exploring opportunities to build hospitals or education centers. State-backed funds from the Middle East have expressed interest. A blow came in March, when a top minister said SoftBank Group Corp. founder Masayoshi Son will no longer be an investor. More than three years after Nusantara was first unveiled, not one foreign party — state-backed or private — has entered into a binding contract to fund the project, Bloomberg News reported, citing people familiar with the matter.Much non-state financing depends in large degree on Indonesia’s political and economic landscape during and after the looming electoral contest in 2024. Politicians are likely to spend the next year focusing on parochial, vote-getting programs; many of the Indonesians I spoke to not directly involved in the project regarded Nusantara as a fairly abstract concept, if they had heard of it at all. A deep global recession — some kind of slump is widely forecast for next year — or an outbreak of a more dangerous Covid strain could upend plans. The central bank could always ride to the rescue: A draft bill circulating in parliament could make direct financing of government spending, such as has occurred during the pandemic, less of an anomaly. When Bank Indonesia bought bonds directly from the state in 2020, a highly unconventional step, it was framed as a one-time event to deal with the demands of the pandemic and a swoon in the economy. But it was renewed for a couple of years, and Jokowi has spoken of his desire to see a permanently closer relationship between monetary and fiscal authorities. Given the president’s personal push for Nusantara and his framing of the issue as one of economic development, don’t be surprised to see rupiah notes featuring the new city’s landmarks or maps of East Kalimantan.

Laws can be amended and who knows what the sausage-making will look like under Jokowi’s successor. One prominent contender, Defense Minister Prabowo Subianto, looks like he is onboard. In a village not far from the entrance to the new city’s perimeter, a giant campaign billboard welcomes drivers to Nusantara. Whether the political class loses interest or the grand design falters, though, it won’t alter Jakarta’s frightening math. Without comprehensive action, central Jakarta will be inundated by 2050, reckons Nirwono Joga, a landscape architect and urban researcher who has written several books on town planning.   One way or another, Indonesia is going to need a bigger boat.More from Bloomberg Opinion:

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics.

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