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Indonesia eyes China-backed AIIB to fund new capital city

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Via Financial Times

Indonesia is likely to choose the Beijing-based Asian Infrastructure Investment Bank over more established multilateral institutions to help fund construction of the south-east Asian country’s proposed $31bn new capital city.

The AIIB could offer more flexible options for financing, such as funding public-private partnerships, compared with multilateral lenders including the Washington-headquartered World Bank or the Manila-based Asian Development Bank, said Kennedy Simanjuntak, Indonesia’s deputy minister for infrastructure affairs.

“If I need it, I will go first to the AIIB,” Mr Simanjuntak told the Financial Times. “If we utilise old-style multilaterals, we cannot achieve our target” of starting relocation to the new capital by 2024.

The project to move Indonesia’s capital from Jakarta on the heavily populated island of Java to East Kalimantan province on the island of Borneo is considered one of the most ambitious since independence for south-east Asia’s largest economy. 

Joko Widodo, Indonesia’s president, has made the plan a priority in a bid to relieve overcrowding and congestion in Jakarta and to give an extra boost to an economy that is growing at about 5 per cent a year.

But support from the Beijing-backed AIIB could open Mr Widodo to attacks from the opposition, which in the past has labelled him as an apologist for Beijing.

Beijing is the biggest shareholder in the AIIB, which was launched three years ago. Its 100 members also include India, Russia, the UK and Australia.

“If the government is interested in engaging us, we’d be very happy to provide support,” Jin Liqun, president of the AIIB, told the FT.

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Mr Simanjuntak said the AIIB’s relatively smaller size compared with more established multilateral institutions made it more nimble and more open to innovative funding structures. The older multilateral lenders tended to lend directly to the government, leaving political leaders open to criticism over rising sovereign debt, he said.

To combat this, Indonesia wanted to finance much of the new capital through public-private partnerships with the private sector, he said, not large bank loans.

“It [the AIIB] is more flexible,” said Mr Simanjuntak. “With old-style banks, I’m worried . . . They’re very slow.”

Winfried Wicklein, ADB’s country director for Indonesia, said the institution would consider offering support for the new capital if Jakarta requested it. He said the ADB would be able to offer help mobilising private sector financing, or through providing technical assistance and advisory services for public-private partnerships as well as traditional sovereign loans.

The ADB is “very active in mobilising private sector financing for [Indonesian] infrastructure projects, particularly in the energy sector”, he said. 

The World Bank declined to comment as it had yet to assess the capital city project, a spokesperson said.

External financing is critical to the project given that the state budget will cover just 19.2 per cent of costs at a time when “huge pressure” on government revenues could widen Indonesia’s 2019 fiscal deficit beyond original targets, according to Indonesia’s finance minister.

Mr Jin said the AIIB, which has so far committed $940m to Indonesia, was ready to offer Jakarta “even more resources” of more than $1bn, irrespective of whether the bank was involved in the new capital or not. 

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Indonesia aims to pass a law establishing the plan for the new city in the first half of next year to start construction in 2021 and relocation in 2024.

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