Groundbreaking phase 8 of IKN: Challenges in finding foreign investors
This article has been translated by PwC Indonesia as part of our Indonesia Infrastructure News Service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.
Bisnis Indonesia - Groundbreaking tahap 8 IKN: Pening mencari pemodal asing
24 September 2024
By Alifian Asmaaysi and Surya D.A Simanjuntak
The government's effort to attract foreign investment for the Nusantara Capital City (IKN) megaproject has proven to be quite challenging. Until the 8th series of groundbreaking ceremonies, investment in the new government centre has still largely relied on domestic investors and the state budget.
Today, on Tuesday (24/9), the Nusantara Capital City Authority (OIKN) will conduct the eighth series of groundbreaking ceremonies, which will be attended by three foreign investors from China, Russia, and Australia.
Of the three foreign investments, one is a direct foreign investment, while the other two are partnerships with domestic companies.
The direct investment, without any partnership with a local company, will be implemented by Delonix Group, a corporation from China that focuses on the tourism sector.
The other two companies are Australian Independent School and a property company from Russia, Magnum Estate. However, the planned investment value from these companies is relatively small.
Bisnis noted that Delonix’s planned investment would only reach Rp500 billion, while the investment from Australian Independent School is far smaller at Rp150 billion.
Meanwhile, Magnum Estate is committed to investing Rp2 trillion in Indonesia. However, it remains unclear whether the full amount will be invested in Nusantara.
Moreover, Magnum Estate still has numerous property projects and businesses in Bali.
“[The Russian investor] Magnum Investment Development already has many investments in Bali,” OIKN Funding and Investment Deputy Agung Wicaksono told Bisnis on Monday (23/9).
Until now, the government has continuously conducted roadshows in various countries to promote investment opportunities in the new government centre.
Foreign investment is greatly anticipated, as the State Budget (APBN) can only contribute 20% to the megaproject development, which is estimated to require Rp466 trillion.
The remaining funding is expected to come from private sector investments and public-private partnerships. Unfortunately, up to now, the APBN is still being heavily relied upon for the development of Nusantara.
Besides continuously conducting roadshows, policymakers have also tasked Indonesia Investment Authority (INA) with seeking out investors from far and wide.
However, this effort is still suboptimal. This is evident from the continued reliance on two main funding sources, namely the APBN and domestic investors.
Private investors, through the Nusantara Consortium, are committed to investing Rp20 trillion to support the government in developing the area.
Out of that amount, Rp5 trillion will be allocated for the construction of a duty-free mall.
“This is part of the Rp20 trillion commitment announced at the start of the groundbreaking of the Nusantara Hotel,” OIKN Spokesperson Troy Pantouw.
Meanwhile, in terms of the APBN, the government, through the Finance Minister, has allocated Rp18.9 trillion from the 2024 APBN for the development of Nusantara up until August.
Deputy Finance Minister I, Suahasil Nazara, stated that the budget realisation for IKN this year has reached Rp18.9 trillion out of the total budget ceiling of Rp44 trillion, which is 43.1%.
He explained that the budget realisation for the infrastructure cluster reached Rp16.2 trillion. The infrastructure projects include toll roads, bridges, retention basins, ministerial offices, and residential towers for civil servants as well as defence and security officers.
Meanwhile, the non-infrastructure cluster has been allocated Rp2.7 trillion. This cluster includes IKN promotions and disseminations, security support from the Indonesian National Police (Polri), planning, and evaluations.
“We continuously provide supervision as work progresses, including on the development of physical infrastructure,” he stated.
Regarding the search for investors, the government has been quite proactive. One of their steps has been the issuance of Presidential Decree No. 25/2024 on the Task Force for Investment Acceleration in Nusantara Capital City, which was passed on 5th August 2024.
Taskforce
Presidential Decree No. 25/2024 outlines the establishment of a task force to attract investment. The task force is headed by the Investment Minister/Investment Coordinating Board (BKPM) Head, with the Deputy Head being the Agrarian and Spatial Planning Minister/National Land Agency Head and the OIKN Head.
In this context, economists believe the new regulation will depend heavily on the government’s ability to create business incentives and attract investment.
Senior Economist of Indonesia Centre of Reform on Economics (Core), Hendri Saparini, stated that business-oriented investors tend to prioritise market potential, area size, and types of infrastructure, as these factors represent the planning details.
In other words, he added that the government must prepare various references and make investment decisions based on the business considerations of potential investors.
“As long as the government lacks detailed planning, it will be difficult to attract investors. They will ask: What is being offered? What are the long-term conditions? When will they receive a return on investment? Investors need answers to these questions,” he stated.
Hendri added that the development of new independent cities, such as Pantai Indah Kapuk (PIK) and Bumi Serpong Damai (BSD), can serve as examples and alternative strategies. These projects successfully attracted investors by presenting well-developed, mature planning.
According to him, this approach must be implemented in the development of IKN, as it is crucial to attract investors to support the project.
Centre for Strategic and International Studies (CSIS) Executive Director Yose Rizal Damuri predicts that the effect of the regulation on the investment flow from the private sector to IKN can be realised if the project has business attraction.
“If there is a regulation, it is possible. However, without business attraction, investors are not interested. They might come to purchase land, but they will likely hold onto it for now,” Yose stated.
Reflecting on this challenging situation, he suggests that the government should lower their expectations for the IKN project and approach the development process more rationally and without haste.
Bank Permata Head Economist noted that the government is in a dilemma. On one hand, the APBN must attract investors, but on the other hand, their fiscal capacity is very limited.
Therefore, the government needs to ensure that the budget allocated for IKN is spent optimally. He suggests that the budget should be focused on projects that have a larger impact on accelerating development and attracting investor interest, such as transportation and energy infrastructure projects.
Josua added that using the APBN could help maintain fiscal stability. However, there is a risk of compromising development certainty and the attractiveness of investing.
“The government must be careful in making decisions regarding budget allocation for IKN,” he stated.
Josua believes that the reduction in the budget allocation for IKN development in the 2025 State Budget Draft (RAPBN) will provide flexibility for the upcoming government to allocate expenditure to higher priority sectors.
This is because the 2025 APBN still has limited fiscal space, particularly due to the high expenditure required for education, healthcare, energy subsidies, and other priority expenditures.
Therefore, Josua is encouraging the government to aggressively optimise other schemes by enabling larger contributions from the private sector.
“If the budget allocation from the APBN is limited, private investment must be boosted. The government can prioritise the APBN allocation for basic or crucial aspects, while other aspects are financed by the private sector,” he explained.
