Shaping of the new Indonesian capital by foreign capital

THE relocation of the Indonesian capital will bring unprecedented changes to Borneo, with enormous risks and opportunities co-existing.

As discussed in previous articles, the population explosion caused by the relocation of the capital will bring various environmental challenges to the third largest island in the world. Among them, the management and satisfaction of the new energy demand will probably be a key issue. With Nusantara sitting right in the coal heartland, the lure of cheap coal power has once again pushed Indonesia to the same crossroads – to deliver on its climate commitments or to (re)embrace dirty energy.

Throughout the 2010s, the world has moved steadily towards cleaner energy, climate change mitigation and sustainable development. However, events such as the Covid pandemic, the US-China confrontation and the Russian-Ukrainian war have put the world in a pessimistic mood, with many countries showing a tendency to embrace protectionism.

Indonesia is no exception. Even though Indonesia has already demonstrated to the world its determination to overcome environmental and climate problems, its current development strategy has demonstrated the opposite. Since his re-election, President Joko Widodo has formulated many inexplicable and contradictory policies, reflecting the country’s constant adjustment on its development paths. While the president has repeatedly underlined Indonesia’s determination to reduce emissions in his speeches, the construction of national coal-fired power plants is still in full swing.

This contradiction can be further exposed in the construction of the new capital. Nusantara’s ambition to be a green city will come up against structural constraints. Besides the relatively high cost of renewable energy, the most fundamental problem is the deep and ongoing political influence of the coal oligarchs. It should be noted that among the various interest groups behind many prominent politicians, the coal industry figures prominently.

The role of foreign capital

In this context, foreign capital can play a key role in determining Nusantara’s development trajectory. The construction cost of the new capital is estimated at 35 billion dollars. Indonesia cannot afford it alone. In addition, the country will also need significant technical support to make this grand plan a reality. Foreign capital and technology will be key.

Along with Indonesia’s long-standing trade and investment partners such as Singapore, Japan, EU and Malaysia, the Chinese have gradually become one of the most important investors over the past decade. In addition, South Korean investment in Indonesia has skyrocketed over the past two years, with a trend to overtake Japan and the EU.

In particular, funds from China, Japan and South Korea greatly influence the energy options of the new Indonesian capital. In the 2010s, public funds from the three countries contributed 95% of global public investment in overseas coal-fired power projects. Although these projects have effectively addressed energy poverty in many developing countries, the three countries have also been blamed for causing climate change. In Indonesia, Japanese and Chinese financiers remain the biggest foreign investors in coal (see photo from GEM).

As the trend away from coal intensifies, China, Japan and South Korea have successively announced that they will phase out government investment in coal-fired power overseas from 2021. China also told the 76th UN General Assembly that its investments would focus on supporting developing countries. deploy sustainable renewable energy.

Indonesia’s rapid growth in the post-Suharto era is the result of massive foreign investment. Undeniably, this foreign capital has cast its eyes on Indonesia’s abundant resources and cheap labor. However, in the face of increasingly evident climate change in recent years, as well as various labor and human rights issues and enormous pressure from scientists, civil society and the general public , the integration of climate commitments and sustainable development into investment strategies has become mainstream. .

In terms of global governance, governments have begun to closely monitor and direct the flow of funds, forcing companies to disclose greenhouse gas emissions, environmental impacts and social implications related to their investment. Malaysia is also trying to catch up. Over the past few years, “Environment, Social and Governance” (ESG) has become a buzzword, appearing frequently on various business and investment platforms.

Rating systems such as various green indices have emerged to assess ESG-related risks. For companies, in addition to dealing with transition risks such as policy changes and evolving operating models brought about by societal and economic changes, they must also consider physical risks brought on by non-compliance. sustainability, such as flooding exacerbated by climate change. and social unrest triggered by environmental destruction and pollution. For investors, mitigating these risks by investing strategically in sustainable development projects has become a major challenge.

Chinese investment abroad

For the great powers, there is still a layer of geopolitical considerations. Probably, Chinese investment flows attract the most attention. Chinese companies are often seen as closely related or controlled by the Chinese government. Chinese money flows and impacts, for better or worse, are inevitably linked to China’s domestic policies.

Chinese investments play a role in the construction of Nusantara. An example is the cement plant with an annual capacity of 10 million tonnes located near the new capital. The total investment of $1 billion came from the Chinese group Zhejiang Hongshi Cement. Ideally, the cement factory can supply the building materials needed for the new capital.

It will also be accompanied by various infrastructure projects supported by China, such as cargo terminals and roads. In addition to financing, the Chinese side also participates as a contractor and provides technology and workers.

It should be noted that cement production is one of the biggest emitters of greenhouse gases, contributing 7 to 8% of global anthropogenic emissions in recent years. Cement factories consume a lot of energy and the main source of energy in the cement industry is coal. This dependence on coal perfectly explains why the large-scale cement plant is located in the coal-mining hinterland of Indonesia.

Careful planning is required

Given the risk of further coal lockdown, the country may need to be more careful in executing its capital relocation plan. First, at the local political level, leaders may need to be more cautious of the influences of coal lobbyists. Meanwhile, the country will need to build foreign investors’ confidence in clean energy by developing appropriate energy policies with strict enforcement and transparency. Alternatives combining renewable energies and local development needs, such as the co-combustion of biomass, can be favored to tap into the resources of the local agricultural and forestry sectors.

The challenge of building a new capital is a microcosm of Jokowi’s second term as president. How to balance the country’s climate commitments, economic development and political stability will continue to test not only the wisdom of those in power, but also the willingness to reject unsustainable energy and the political interests behind it.

Dr. Goh Chun Sheng is a researcher at Sunway University and Harvard University. His research interests lie at the intersection of bioeconomy development and environmental restoration, with a particular focus on Malaysian and Indonesian Borneo.

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