Nusantara funding: State budget's burden swelling

This article has been translated by PwC Indonesia as part of our Indonesia Infrastructure News Service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.

Bisnis Indonesia - Pendanaan IKN Nusantara: Beban APBN bengkak

17 March 2022

By: Tegar Arief

 

Bisnis, Jakarta – The contribution of the state budget (APBN) in funding the new capital, Nusantara, is swelling from Rp89 trillion to Rp93.2 trillion. It shows how fragile the megaproject’s funding source is.

The Finance Ministry logged that the construction of Nusantara located in Kalimantan required Rp466 trillion in total.

Rp253.4 trillion will be provided from public-private partnership (PPP), Rp123.2 trillion from the private sector, and Rp89 trillion from APBN.

However, based on the information obtained by Bisnis, APBN will contribute to 20% of the total budget or Rp93.2 trillion, which is higher by 4.71% compared to the allocation in the initial planning.

In response, Bisnis has contacted Budget Director General of the Finance Ministry Isa Rachmatarwata. However, Isa does not want to provide a response regarding the allocated budget for the construction of the new capital from APBN.

Funding for Nusantara construction this year is quite urgent. Until now, the government and the House of Representatives (DPR) have yet to find a suitable solution to meet the requirement of the new capital in the early stage.

The APBN cannot freely make fiscal interventions. This is because Law No. 3/2022 on State Capital City is passed after executives and legislatives issued the law regarding the 2022 APBN.

Moreover, in the Update of Government Work Plan (RKP) Year 2022 legalised in Presidential Regulation No. 115/2021 and issued on 30 December 2021, the initial requirement of Nusantara construction from the government’s budget reaches Rp965.45 billion.

Furthermore, most of the budget, reaching Rp798.6 billion, comes from State-owned Enterprises (SOEs), while the remaining Rp166.85 billion comes from ministerial and institutional expenditures, PPP, and special allocation funds (DAK).

DPR Commission XI member, Hendrawan Supratikno, during the work committee meeting with legislators, explained that the government had stated that they have prepared several funding schemes to construct Nusantara.

“The government is preparing mixed funding schemes,” Hendrawan said on Wednesday (16/3).

According to him, despite having prepared solid funding schemes, the government still needs to be aware of the various risks that can hinder the megaproject construction. The risks that need to be anticipated include the geopolitical dynamic of Russia-Ukraine and the potential of investors in Nusantara pulling out.

Softbank Group, one of the strategic investors, has stated that they were pulling out from investing in Nusantara. This is forcing the government to look for alternative funding sources to drive the relocation of the central of government.

Besides that, the government is facing fiscal consolidation missions where one of them requires the budget deficit to be reduced to be less than 3% of the gross domestic product (GDP) next year, in accordance with Law No.2/2020.

If APBN’s portion in the new capital construction swells, the government’s fiscal consolidation risks increase. Hendrawan mentioned that the most ideal option that could be taken by the government without increasing their debt is by using the surplus budget balance (SAL) or by refocusing the budget of activities that are not priorities.

On the other hand, the government is allocating 5% reserved funds for every ministry and institution for urgent matters.

“Amid a condition such as this one, shrinkage, conservation, or budget cutting can have negative effects,” he stated.

IndiGo Network Economy Observer, Ajib Hamdani, said that, for financing that involves APBN, the government must be careful in managing their debt so that the fiscal consolidation missions will still progress appropriately.

“The state budget cannot be burdened by policies that are increasing the burden,” he said.

Ajib added that the impact of social costs from the new capital development to the macroeconomy must be considered. By relocating citizens and the government to a new location, inflation will increase due to abnormal economic activities.

Moreover, Centre of Reform on Economics (Core) Indonesia Director Mohammad Faisal suggested the government to hunt for investors to fund the megaproject to lighten the burden of APBN and SOEs.

 

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