New Delhi: After building highways, railways, ports, airports and economic corridors across Asian and Latin American countries, China is now aiming to move a step forward — to build an entire national capital city.
As Indonesia embarks on an ambitious project to develop a new capital city in Kalimantan at an expected cost of $33 billion, Beijing has emerged as the frontrunner to build it.
According to Indonesia’s deputy minister of infrastructure, Kennedy Simanjuntak, the government is likely to pick Beijing-based Asian Infrastructure and Investment Bank (AIIB) over more established institutions, like the World Bank and Asian Development Bank (ADB), to help fund the construction of its capital city.
AIIB was launched four years ago by China as a rival institution to the US-led World Bank and Japan-led ADB. At 26.6 per cent, the Chinese government holds the largest voting share in the AIIB, which gives it veto power over key decisions.
Simanjuntak told the Financial Times on 1 December that compared to the World Bank or ADB, AIIB could provide more “flexible options for financing, such as funding public-private partnerships”.
Responding to this, AIIB president and China’s former vice-minister of finance, Jin Liqun has said, “If the government is interested in engaging us, we’d be very happy to provide support.”
There is no clarity on the final date for the decision to award the project.
The latest development, however, comes amid global concerns over China’s wide-ranging developmental activities overseas due to allegations of “debt traps” and opaque governance mechanisms. Countries such as Kenya, Sri Lanka and Zambia have even had to forfeit their assets over failure to pay back the Chinese loans.
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Building a new capital city
In August, the Indonesian government announced its decision to move the country’s capital from Jakarta, on the island of Java, 1,300 km away to Kalimantan, on the island of Borneo. Kalimantan is mostly a jungle at the moment.
The government wants to start construction by 2021 and begin relocation by 2024. Last month, global consulting firm McKinsey was given the contract to conduct a study, determining the “way forward”.
The move comes as Jakarta is experiencing high levels of congestion and is rapidly sinking due to rising sea levels. The shift to a new city, however, is unlikely to ease these problems.
“Only 180,000 civil servants and 141,000 government vehicles of the city’s 10 million inhabitants and 17 million registered private vehicles are set to leave for Kalimantan in 2024,” noted a report in The Interpreter.
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Why Indonesia prefers AIIB
Given the plan to start construction and then begin the relocation within five years, the Indonesian government faces a very stiff deadline.
“If I need it (loan), I will go first to the AIIB,” Simanjuntak told the Financial Times. “If we utilise old-style multilaterals, we cannot achieve our target (of starting relocation by 2024).”
According to the minister, AIIB, launched in 2015, was still a younger multilateral bank as compared to its peers — which makes “it more nimble and more open to innovative funding structures”.
This seems to be the key reason why the Indonesian government might choose AIIB.
The government has proposed that the state budget will fund only 19.2 per cent of the $33 billion project, and rest would be done with the help of public-private partnerships.
According to Indonesian law, the government can’t exceed the 3-per cent fiscal deficit cap. This restricts the government’s ability to take on more foreign loans, making it essential for it to raise money through public-private partnerships.
Simanjuntak said that older multilateral banks lend only to the governments, “leaving political leaders open to criticism over rising sovereign debt”. In contrast, AIIB is more flexible and would be ready to fund public-private partnerships, said the minister.
“It [the AIIB] is more flexible. With old-style banks, I’m worried… They’re very slow,” said Simanjuntak.
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Money with no strings attached
Analysts say the proposal of funding the construction of a new city with the help of foreign financing and private sector money appears to be on shaky ground.
During the first tenure of Indonesian President Jokowi Widodo, despite “tax incentives” and a “robust local economy”, the country struggled to attract substantial foreign investments. Moreover, the government also struggled to lure the private sector from investing in the state’s big developmental projects.
In the absence of foreign or domestic private investments, Widodo’s infrastructure drive over his first term was majorly financed via Indonesia’s state-owned enterprises (SOEs). This, is turn, has left the country’s SOEs with substantial debt.
“Unless something drastic changes in the structure of Indonesia’s political economy in the next few years, state-owned construction companies are likely to do the lion’s share of the work building the new capital,” writes political economy scholar James Guild.
This leaves the Indonesian government with a few options to raise the required money.
US-led institutions such as World Bank and International Monetary Fund have had a history of providing conditional lending — the borrower has to undertake certain domestic reforms in return for the loan.
Such conditional terms often imposes long-bureaucratic delays and requires several rounds of negotiations, something the Indonesian deputy minister of infrastructure referred to.
In contrast, there is a perception that Chinese money does not come with “any strings attached”, making it more attractive.
Given the constraints the Indonesian government is operating in, AIIB is a more attractive option than the World Bank.
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