Indonesia selects McKinsey to assess capital city relocation project

16 October 2019 3 min. read

Indonesia has tapped McKinsey & Company to conduct a feasibility study into the relocation of the country’s capital from Jakarta – with the question of financing still in the air.

Global management consulting kings McKinsey & Company have been selected by the Indonesian government to conduct a feasibility study on the proposed relocation of the nation’s capital city to Borneo, according to planning ministry official in a report from Reuters. McKinsey beat out rivals Roland Berger and Boston Consulting Group for the three-month project – which was tendered at $1.77 million – as well as 100 other candidates.

In a move which has been priced at $33 billion, the Indonesian government is seeking to ease congestion in the current capital of Jakarta by relocating its governmental and administrative centre – with a 3,000-hectare parcel of land in East Kalimantan province on the island of Borneo the designated site for the first stage of development. The estimated cost covers the construction of government buildings and residencies for approximately 1.5 million civil servants.

Notably, in addition to conducting a social, cultural, environmental and economic impact study, McKinsey has been tasked with examining the required funding, with a participant in the bidding process quoted by Reuters as saying that “understanding the financial reality … the investment mechanisms to start funding a project like this, whether public or private” was among the selection criteria for the tender. Previously, the finance ministry was ordered to come up with a scheme to allow private investment.

Indonesia selects McKinsey to assess capital city relocation project

According to Rudy Soeprihadi Prawiradinata, deputy for regional development at Indonesia’s Planning Ministry, the relocation plans for East Kalimantan are already reasonable advanced, despite the site only being officially announced in August. “They will not start from zero as we have done many studies,” he told Reuters in reference to McKinsey’s assignment. “They will determine the strategy going forward; that’s why we are looking for world class consultants.”

Earlier, Indonesia’s minister for national development planning, Bambang Brodjonegoro, stated that one of the main points of the prior studies was to determine the business models to develop the new capital. “We want to diversify. We want to create new sources of growth,” he said following a meeting in June with the House of Representatives’ Finance Commission, adding that; “The motto of the city will be Smart, Green and Beautiful.”

In a McKinsey Global Institute report on smart cities in the ASEAN region released last year, the firm’s think-tank suggested a $26 billion opportunity awaited private-sector players in the smart built environment market across Southeast Asia annually, noting that; “While good management is a critical element in a smart city, governments are not the only actors. Smart cities are not just top-down initiatives; they actively engage corporations and residents.”

Despite the introduction of tax incentives, and reasonably robust local economic activity, Indonesia has been failing to attract significant foreign direct investment, described as the only ‘loser’ in the China-US trade war to date, with companies choosing to instead shift operational functions to regional neighbours such as Thailand and Vietnam. According to reports, President Widodo has demanded that the ministries involved in facilitating FDI promptly address the situation.