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Building Indonesia’s new capital

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Indonesian President Joko Widodo gestures as Governor of East Kalimantan Isran Noor stands during their visit to an area, planned to be the location of Indonesia's new capital, at Sepaku district in North Penajam Paser regency, East Kalimantan province, Indonesia, 17 December 2019 (Photo: Reuters/ Antara Foto/Akbar Nugroho Gumay).

In Brief

Indonesian President Joko ‘Jokowi’ Widodo’s announcement last August that a new capital would be built in East Kalimantan has been widely met with scepticism. While this scepticism is warranted, some of the project’s potential upsides are being overlooked by both outsiders and the government.

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Given the threat climate change poses to keeping Jakarta’s head above water, the case for building a new Indonesian capital is pretty strong. According to the United Nations’ population estimates, the Indonesian government faces the challenge of building a healthy, sustainable urban environment for another 92 million people over the next 30 years.

One advantage of building new cities, rather than expanding old ones, is that they can be located at elevations above the projected sea-level rise. A new city also provides opportunities to create better policies and administrative institutions, which may be more difficult with existing government arrangements.

Early descriptions of Jokowi’s project have raised concerns, particularly regarding people, land-value capture, and governance. In each of these areas, measures can be taken to reduce costs and create an attractive urban environment for residents. But implementation may exceed the Indonesian government’s ability to challenge deeply entrenched vested interests.

Official government statements about the new capital city project have emphasised the infrastructure and the buildings. Not much has been said about people — neither those who will be displaced in the process of building the new capital, nor those who will become its residents. A fair compensation policy for people displaced by development should include cash compensation for moving to new housing, guaranteed employment, and some form of equity in the project so that they can benefit financially if it succeeds.

A people-centred approach to building the new capital could be the key to its success. Civil servants, who are expected to experience the bulk of disruption, will develop positive attitudes toward the project if they are consulted and see steps taken to address their concerns. Construction workers and other government service providers will also do their jobs more effectively if they are treated as partners.

Jokowi’s announcement put the cost of building the new capital at US$33 billion. This figure was quickly criticised as an underestimate. But if the project is designed well, it will be a money-maker, not a black hole. The government can use ‘land value capture tools’ to ensure that rich and powerful ‘speculators’ don’t pocket the profits as land value goes up.

Historically, this rise in value has been linked to infrastructure construction, urbanisation and gentrification. Typically, elites buy land at a low price before construction and then sell again at a high price when construction is complete. To prevent this, the government can retain land ownership in the new capital. This would allow the government to lease parcels of land to occupants and gradually increase rents as infrastructure improves and the land becomes more valuable. The growing rent income can then be used to finance further improvements.

Alternatively, Indonesia could implement a Land Value Tax (LVT). Unlike a property tax, an LVT is imposed on the underlying value of land on a parcel. It does not tax the value of improvements made upon the land, such as buildings. The LVT rate can up to 100 per cent without any harm to the economy, it is relatively easy to administer and it aligns the government’s financial incentives with good governance.

Whether by retaining ownership of land or establishing an LVT, land value capture is how Indonesia’s new capital can be built without being a budget buster — especially if the capital is designed to encourage and facilitate private investment.

But perhaps the biggest threat to the new capital is obstruction from political parties. Allowing the new capital to become a political football will kill the project by creating uncertainty that discourages private investment and encourages inefficient, partisan distribution of budget resources.

One way to take party politics out of the process is to vest governance in a board of non-political technocrats administering a legally-constituted ‘sustainable development zone’. This management entity is granted temporary, limited authority for those aspects of governance necessary to sustain a dynamic and healthy city. It contracts for basic infrastructure construction, licenses and regulates businesses, adopts a building code, administers tax collection and carries out other public service functions.

Revenue is derived from land value capture and a portion of the income tax collected from residents, giving the management entity an incentive to support sustainable economic growth. The national government receives far more revenue than it otherwise would from businesses and residents in the zone through the greatly increased incomes being taxed and the higher land value being taxed. The zone’s management is accountable to residents through laws, inspectors general, ‘watchdog’ organisations, residents’ councils, impartial dispute-resolution and claims procedures that protect the rights of vulnerable groups.

Critics of Indonesia’s new capital raise legitimate concerns. It is normally unwise to adopt a ‘build it and they will come strategy’ because businesses need to be located where market forces naturally draw them. But in Indonesia’s case, there is great demand for new, well-governed, resilient urban space. If the new city in East Kalimantan has institutions that incubate good governance, it could exceed expectations.

Putting people at the heart of the process, capturing the increase in land value, and creating a trustworthy governance structure can make Indonesia’s new capital city a model for urban development elsewhere in Indonesia.

The COVID-19 pandemic seems likely to delay, if not kill, Jokowi’s plan for a new capital.  When the time comes to re-examine the plan, one option could be to recast it as simply building a new model city and only making it Indonesia’s capital after it has demonstrated the ability to grow sustainably.

Lex Rieffel is a non-resident Fellow at The Stimson Center, Washington DC. 

Michael Castle-Miller is CEO of Politas Consulting, Los Angeles.

A longer version of this article appears in the most recent edition of East Asia Forum Quarterly, ‘Middle Power Game’, Vol. 12 No. 1.

4 responses to “Building Indonesia’s new capital”

  1. One advantage of building new cities, rather than expanding old ones, is that they can be located at elevations above the projected sea-level rise. A new city also provides opportunities to create better policies and administrative institutions, which may be more difficult with existing government arrangements.

    I think this paragraph says it all!

    Build a new city to avoid the ravages of anthropogenic climate change that is a direct product of the greed-and-growth agenda that the construction of this new city will represent! How perverse!

    I notice reference to sustainable development. If this is occurring amidst an ever growing human population, then you are really only writing of sustainable growth … and there is nothing sustainable about growth!

    If we do not cease living this lie, we have no future at all … and certainly not the Indonesians!

    Whatever Indonesia chooses to do over the next fifty years or so, it must include efforts to reduce population growth. Do not imagine that the development process itself — as some no doubt claim it will — can drag sufficient people from poverty to encourage smaller families. So much ‘development value’ will be syphoned off by the corrupt, that the advantages offered to the common people will be minimalised and they will continue to be what they are: breeders of unsustainable numbers. Much greater pro-activity — in the most benign but positive way possible — needs to be given to family planning and fertility! For the sake of the Indonesian people, the Indonesia environment, and the planet!

    Indonesia is in a downward environmental spiral and will remain so until and unless it reduces population growth … moreover, if the world is what it ought to be, it will be denied the opportunity to expand into Papua and West Papua. That would be a shake-up!

    • I couldn’t agree with you more, Dr. Clews, about the importance of family planning in Indonesia, with a view to stabilizing if not reduce its population. But that argument struck me as a distraction from the thrust of our essay. And maybe I was concerned to pointing it out would turn off some policymakers. It’s a touchy subject as you undoubtedly know. It’s an argument that can be made much more forcibly and credibly by Indonesians than by an “orang bule” like me.

  2. “Revenue is derived from land value capture..”
    Seeing most of the Kalimantan residents (those not transported there to ‘Indonesianise’ the island) are traditional landowners and have no title deeds, the capture of land value will be by Jokowi’s opportunist mates.

  3. The concept of introducing a land value tax would follow the business of allocation sites to speculators in its value. The alternative is more ethically sound although it will initially require much borrowing for national purchase of the land at the beginning of its use. here is a comparison about it based on my poem relating to this better alternative.

    A MORE STEALTHY GEORGIST CAT
     
    The Georgist cat is small and lean
    And often doesn’t get to be seen.
    It hides in the branches of an economic’s-tree
    So it takes a long while for you or for me,
    To appreciate its cute and original form
    That the landlords are so ready to scorn.
     
    The economic’s-tree has many fine branches
    (On which we contend, there are no free-lunches).
    Whilst the land-owning rich in the city all claim
    As bloated capitalists, that they’re not to blame
    For the gap that lays ‘twixt the poor and the wealthy,
    But oppose any tax to make our nation healthy.
     
    Have you heard the tale of a committee, that
    Thought to bell and get warning of a fat cat?
    But could not find a soul to apply this device,
    Because typically all were a council of mice!
    Our Georgist cat has a bell ready-fitted,
    (Which makes this analogy more to be pitted).
     
    This warning sound makes our ideals unwanted,
    For a new tax is how politicians get doubted.
    So the Georgist cat fails to catch any mice
    That pose as landlords, along with their vice.
    But how shall we silence the bell’s warning sound
    And quieten the news that our pussy’s around?
     
    Our Georgist feline is in serious error,
    ‘Cause its bell draws attention not only to whether
    Valuable sites can be ethically shared,
    But also the rent from a site is declared
    As the means to replace other kinds of taxation,
    Which obviously causes the landlords vexation.
     
    In the economic’s tree many other beasts lurk
    But are missed, after learning of Henry G’s quirk
    Through the cat-finder’s recently brilliant discovery.
    This writer seeks a new means for recovery
    From our politi-unacceptable claim,
    And stealthily project LVT once again.
     
    If we would but examine some more of the tree
    Alternatives are waiting there for us to see.
    Among them is hiding a far better way
    For an equivalent LVT effect, to stay
    In essence, without causing such evil offences
    To the landlords and their partitioning fences.
     
    When a property-owner decides to sell–quick
    The gov’ment buys its land, and not the public!
    Its occupant then leases it for a similar fee
    To the One-Tax of Henry George’s decree.
     
    Any buildings on-site should be sold as previously
    But without the land, on which the price grievously
    Had risen, with huge speculation in its advance
    That stopped entrepreneurs from having a chance.
     
    The cost of this land must be raised through new bonds
    Which the government sells and the public responds,
    ‘Though their interest-rate’s a bit lower than rent,
    Their returns are more stable than the average tenant!
     
    This process will take many years to complete–
    So its financial support is no great money feat.
    After the lease-fees begin to collect,
    Gov’ments can tax less, and firmly expect
    To pursue this policy without change, until
    All the lease-fees are site-rents in the Gov’ment’s till.
     
    With the land properly shared, the government sees
    That site development stays with the current leasees.
    Other taxes that cause so much trouble and hate
    Are scrapped, with great pleasure to all in the state,
    Except for some bankers and the tax collectors
    Whose actions no longer apply in these sectors.
     
    Land-rights will be shared through this simple device,
    By a fast-growing country that takes our advice.

     

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