Indonesia Preparing Incentives to Woo Investors for New Capital City

November 11, 2022 Posted by ASEAN Briefing Written by Ayman Falak Medina Reading Time: 3 minutes

Indonesia’s government is preparing incentives to attract foreign investors for its ambitious new capital city, Nusantara. The city needs approximately US$35 billion to construct.

Although details of the incentives remain scant, the government has stated investors can receive tax breaks and tax deductions, as well as the easing of imports and exports, among others.

The Indonesian government is finalizing a regulation that offers an array of fiscal and non-fiscal incentives to attract foreign investors into its new capital city, Nusantara.

Indonesia’s new capital, which was first announced in 2019, is estimated to cost over US$35 billion to construct. The government has stated that it would fund around one-fifth of the total cost, with the rest sourced from foreign investors. The new capital will be a low-carbon superhub that will support healthcare and technology sectors as well as promote sustainable growth beyond the island of Java.

President Joko Widodo has assembled a team of political and business heavyweights as part of the new capital’s steering committee. These include President of the United Arab Emirates and ruler of Abu Dhabi, Sheikh Muhammad bin Zayed Al Nahyan, and former British Prime Minister Tony Blair.

What could potentially be on offer?

So far, the government has only stated that it was preparing a 30-year tax break for investments in public services and infrastructure, a 350 percent super tax deduction for research and development in Nusantara, and a 20-year tax break for investments in tourism and meeting, incentives, conferences, and exhibition (MICE) facilities. There are also other more generous tax concessions in the pipeline.

The non-fiscal incentives the government is preparing includes ease for imports and exports, support, facilitating business licenses, and access to affordable land and housing.

What opportunities are there for foreign investors at Nusantara?

Nusantara will sit on a 632,850-acre site, roughly four times larger than Jakarta, and as such, this ambitious project presents opportunities for investors from a wide range of industries.

The sheer scale of the development is hard to imagine. More than 200,000 hectares of inland forest, or roughly three times the size of New York City, will be transformed into Indonesia’s new administrative center.

Identify the Optimal Investment Destination with Cross Country Competitiveness Benchmarking ⟶

Nusantara will require soft and hard infrastructure, such as for the development of urban utilities, toll manufacturing, seaports and airports, and network and communications, among others. This will be achieved gradually, starting from the presidential palace, the central government headquarters, housing districts for government workers, and headquarters for the military and police personnel.

Smart city development

Nusantara aims to be a ‘smart city’, which encompasses information, communication, and technology to improve operational efficiencies and provide a better quality of government services.

The government plans to utilize the internet of things (IoT) to deliver connected solutions to the public from monitoring traffic flows to energy conservation. Some 75 percent of the planned site of the capital city will be green open space, of which 65 percent is protected area and 10 percent is for food production.

Maritime infrastructure

When he first entered office in 2014, President Widodo announced plans to turn Indonesia into the epicenter of Indo-Pacific maritime activity through the Global Maritime Fulcrum (GMF) master plan.

The plan involved investing more than US$6 billion to expand ports in the world’s largest archipelago and reduce logistic costs for investors. The government also hopes this would encourage the establishment of industrial production outside of Java, particularly in the eastern regions of the country where large industrial activity remains low. And yet, Indonesia’s eastern regions cover 64 percent of the country.

The flagship sea toll program

The sea toll program is the government’s flagship project under the GMF with the aim of reducing the price disparity of basic goods between the main islands in Indonesia and the smaller isolated islands, especially those in the east.

Since its inception in 2016, the number of transit ports has increased from 31 to 114 in 2021 and the number of vessels from six to 32. Sea cargo has also increased from less than 100,000 tons to more than 350,000 tons.

Under Indonesia’s positive investment list, airports and seaports are now open to 100 percent foreign ownership, from the previous 49 percent. In addition, airport-related services and seaport facilities are also now open to 100 percent foreign ownership.

Renewable energy

Indonesia needs enormous private capital to achieve its renewable energy mix of 25 percent by 2025; it currently stands at 14.7 percent.

With the new capital being built from scratch, there is plenty of potential to develop new renewable projects. This is despite the provinces of Kalimantan being renowned for their coal, gold, oil, timber, and palm oil exports.

East Kalimantan province does possess huge potential for clean energy with research from the Ministry of Energy and Mineral Resources showing that the combined sources of wind power, biofuels, solar power, hydropower, and other renewable energy sources can reach 20 GW. Solar power comprises 65 percent of this total while hydroelectric power, 26 percent. Another potential renewable energy source in the province is in the form of geothermal energy.