JAKARTA – The Indonesian government is scrambling to find alternative sources of funding after Japanese conglomerate SoftBank Group Corporation withdrew from the US$32.5 billion new administrative capital in East Kalimantan, citing timely return-on-investment issues.
Maritime Affairs and Investment Coordinating Minister Luhut Panjaitan said in early 2020 that the Tokyo-based venture-capital company had offered to invest between $30-40 billion in the project, known as Nusantara, but SoftBank itself has never publicly mentioned a figure.
Asked about the size of the investment, SoftBank chairman and CEO Masayoshi Son said at the time: “We won’t discuss the specific number yet, but a new smart city, the newest technology, a clean city and a lot of artificial intelligence — that’s what I’m interested in supporting.”
Baffling for many financiers is to what extent funding for the new capital can be seen as an investment when it doesn’t appear to have the potential to generate cash flows. That basic point explains SoftBank’s doubts about a guaranteed return on investment.
Media reports suggest SoftBank’s withdrawal stems from financial setbacks. Last May, its market value fell $55 billion after the company refused to pledge a continuation of buybacks to prop up its stock price – despite reporting a record profit in the previous quarter.
But banking analysts now question whether the Korean-Japanese tycoon was serious about the venture from the start, describing him as a “notoriously phlegmatic investor” who may have been looking to find favor with influential figures in the Widodo administration.
In 2018, for example, SoftBank and Saudi Arabia signed a memorandum of understanding (MOU) for a $200 billion solar power development, then the world’s largest renewable initiative of its kind. But nothing has come of the venture.
SoftBank said the withdrawal would not affect its interest in funding future start-ups in Indonesia, which is making rapid strides in building a digital economy. The bank already has shares in Internet giant GoTo, a merger between ride-hailing start-up Gojek and e-commerce firm Tokopedia.
According to news portal Katadata, Son prepared the ground for SoftBank’s exit from the new capital project by making “unreasonable demands,” including his insistence that the government plan for a population of 50 million if Nusantara was to meet the economies of scale needed to make it “investible.”
He also reportedly urged the government to consider relocating all industries from Greater Jakarta to East Kalimantan, leading the National Development Planning Agency (Bappenas) to remove Softbank from its list of potential investors as early as last year.
“It seemed to be a polite way to say ‘No’ to the president,” says one former government official familiar with a presentation Son made to a group of prominent Indonesians. “Everyone in the room was against the idea (of shifting the capital).”
Jakarta has been doubly embarrassed by the fact that Son sits on the steering committee overseeing the capital city’s construction, along with Abu Dhabi Crown Prince Mohammad bin Zayed Al Nahyan and former British prime minister Tony Blair.
Blair met with President Joko Widodo in late February to hear about progress on the venture, but insiders say the president was also anxious to discuss the G20, scheduled for Bali in late October, and what impact the Russian invasion of Ukraine would have on the meeting.
Tersely declaring “There’s no more Masayoshi, he’s out,” Panjaitan is now looking to the United Arab Emirates (UAE) and Saudi Arabia – a major investor in SoftBank – to fill the funding gap. He has also mentioned China, saying Abu Dhabi has many partners around the world, including the Chinese.
However, analysts doubt China’s potential involvement, seeing it as a last resort given public perceptions that Indonesia is already deep in Beijing’s pocket. Profit-minded Chinese firms are unlikely to be interested in the project for the same reason as SoftBank, certainly at a time of rising economic uncertainty at home.
Widodo has developed a close personal relationship with Sheikh Zayed, who is building a grand mosque in the president’s Central Java hometown of Solo, a replica of a similar domed structure in Abu Dhabi that will hold up to 10,000 worshippers.
Government sources say Panjaitan was informed SoftBank was pulling out of the new capital project when he met with Saudi Arabia Crown Prince Mohammed bin Salman Al Saud on a working visit to Riyadh on March 1-2.
The president’s right-hand man has since dispatched a team of officials to Riyadh to explore Saudi Arabia’s reported interest in helping with the financing, but the Saudis do not have a reliable investment record with fellow Muslim countries.
Indeed, Indonesians recall a pioneering visit by King Salman bin Abdulaziz Al Saud in 2017, in which his delegation lavished more on hotel rooms in Bali than the kingdom spent in direct investment to the world’s largest Muslim country for all of that year.
That was a far cry from the $25 billion in deals officials expected to be finalized, including a $6 billion joint venture between state-owned companies Saudi Aramco and Pertamina to expand Java’s Cilacap oil refinery. Pertamina is now going ahead on its own after a four-year wait.
Funding for Nusantara has always been controversial. Initially, the government indicated that only 19.2% of the money would be channeled from the state budget, with the rest covered by international and domestic investors and state-owned enterprises.
Then-national development planning minister Bambang Brodjonegoro told Asia Times in August 2019, shortly after the project was announced, that some of the funds would come from “asset management” – the sale or rent of existing government offices in choice locations in central Jakarta where land prices are as high as $5,000 a square meter.
Other funding is expected to be sourced from the newly-created Indonesia Investment Authority (INA), whose Sovereign Wealth Fund is different from most other models in the way it proposes to use mainly foreign instead of domestically-raised capital.
The UAE announced in March 2021 it would contribute $10 billion to the fund, the largest commitment so far. But little is known about $9.5 billion in pledges from financial organizations in the US, Canada and Japan and the Netherlands.
When the New Capital Law passed in January laying the legal foundations for the new capital, observers were surprised to see the state’s participation had increased sharply to 53.5%. But Finance Minister Sri Mulyani Indrawati quickly denied it would be that high.
The minister said officials were still working out who would pay what, noting that allocations would be based on the project’s five phases and intimating that in the short term at least budget spending would focus on the pandemic and economic recovery.
Still, the government has already committed to provide $5 billion of state funds for basic infrastructure and for many of the key government buildings, including a new presidential palace and Parliament, which will lie at the heart of the planned clean-and-green city.
Only last week, the Asia Development Bank (ADB) pledged to help develop Nusantara as a “carbon neutral and inclusive city” in a statement that came days after Widodo chose former ADB vice-president Bambang Susantono to head the new capital authority (IKN).
“ADB looks forward to helping plan for the historic relocation of Indonesia’s capital from Jakarta to Nusantara,” said Ahmed Saeed, ADB vice-president for East Asia and Southeast Asia. “Developing a brand-new city provides a unique opportunity to incorporate the latest thinking on what makes a city pleasant and efficient (in which) to live, work and play.”
It was the first international financial institution to openly endorse Widodo’s vision of a new capital that he says will re-balance Indonesia’s political and economic development, though with his presidency coming to an end in 2024 much will depend on his successor agreeing to carry it forward.
It is no secret that most of the country’s central government bureaucrats oppose the move, including elements of the Indonesian Armed Forces (TDI), which now must draw up a plan to provide protection for a capital located much closer to the contested South China Sea.