The recent trip of Indonesia’s Coordinating Minister for Maritime Affairs and Investment to China did not yield good news for Indonesia. The Minister, Luhut Binsar Pandjaitan, was seen to have failed to convince Chinese authorities to decrease loan interest rates from 3.4% to 2% for the cost overrun of Kereta Cepat Jakarta Bandung (Jakarta-Bandung Fast Train − KCJB) megaproject.
The Chinese side believes the pegged loan interest rate given to Indonesia is already cheaper compared to what it offers to countries, which reaches 6%. However, this does little to dampen a debt trap concern that is often associated with China’s investment projects in other parts of the world – such as Sri Lanka’s Hambantota port – whether rightfully or not.
Luhut has stated that KCJB project, which aims to become operational on 18 August 2023, would be Indonesia’s Independence Day gift to its people this year, which falls just a day before.
The planned fast train is monumental to Indonesia as it connects two prominent cities, Jakarta and Bandung, which are situated 151.3 km away from each other, a trip that would usually take two and a half hours to complete. The KCJB would shorten this travel period to a mere 36-45 minutes.
The KCJB will have four stations, including Halim, Karawang, Padalarang, and Tegallurang. Though, for all intents and purposes, the KCJB itself does not reach Bandung’s city properly (hence the irony in the name), this travel option arguably still promotes travel efficiency and could increase the local economy along the four stations. Karawang, for example, is known as an industrial complex, and the KCJB could theoretically open up new economic possibilities in the area.
Yet, despite the high expectation, would KCJB live up to its name as a gift to Indonesians as they celebrate the Independence Day this year?
China’s Magnetic Pull
China’s business proposal has a greater pull among Indonesian decision-makers compared to its principal competitor in this project, Japan. This is despite some initial issues that placed a big question mark on the origin of the project.
Issues relating to KCJB were first detected before Indonesia and China signed the agreement in 2015. The then Minister of State-Owned Enterprises, Rini Soemarno, was given a mandate by President Joko “Jokowi” Widodo to look into the operation of fast trains in Indonesia. Rini’s decision to choose China as a development partner was alarmingly quick.
For example, the feasibility study by China was completed in less than a year (from May to August 2015). This is on top of the fact that the fast train project was not included in the Ministry of Transportation’s 2030 National Railway Master Plan. The Indonesian government also seems to be pushing for the project’s completion by 2019, which in hindsight proves to be unrealistic today.
China set an estimated price of US$5.5 billion, arguably a cheap bill for such a project (compared to Japan’s US$6.2 billion). Under China’s scheme, the project is also slated to benefit Indonesia, which retains 60% of the project’s ownership as opposed to China’s 40%. A quarter (25%) of the funding comes from joint capital, while the remainder comes from loans, with an annual interest of 2% for 40 years.
China’s pull also comes from its promise not to require the Indonesian government to use the state budget to finance the project, a point that was demanded by President Jokowi, who stated that the people’s coffer would not be touched at all for this project. In contrast, Japan’s proposal requires the Indonesian government to guarantee the project, as a pure business-to-business model is difficult to realize a project of such a scale.
To put a cherry on top, China also claimed that they would ensure technological transfer to Indonesian firms and workers.
Yet, these dazzling promises turn out to be problem-laden.
First is the perennial issue that comes with the “Made in China” label. Though cheap, China’s trains have a lesser quality compared to Japan’s. China is also a “newbie” in the fast train industry. China only took its first step in this industry in 2004 when the Ministry of Railways planned to build trains that could travel 200-300 km per hour, which attracted such investors as Kawasaki Heavy Industries (Japan), Bombardier (Canada), Siemens (Germany) and Alstom (France).
Japan, on the other hand, have a long history of constructing and operating fast Shinkansen bullet train since 1964. The service was initiated in preparation for the 1964 Olympic Games in Japan. It is also noteworthy Shinkansen trains have not experienced any fatal derailment accidents, though the service has had troubles from earthquakes before. In comparison, China’s D3115 express train from Hangzhou to Wenzhou lost power after being struck by a lightning and was hit by another train, which resulted in dozens of deaths.
Second is the projected long-term consequences that seem to be dismissed by the Indonesian government, as indicated by its attitude and pronouncements. The KCJB was supposed to begin operation in 2019 but has now been delayed until August 2023, suggesting a substantial cost overrun.
The agreed initial price of the project was US$6.07 billion but this has inflated to US$7.27 billion after an increase of US$1.2 billion in cost overrun. It should be noted that as of now, KCJB’s total costs have exceeded Japan’s initial proposal of US$6.2 billion and lower debt interest (at 0.1% for 40 years).
The exchange rate becomes a pain point, considering the rupiah’s weakness against US dollar. Indonesia’s dependency on importing machines, steel and iron amidst global supply chain instability could increase the project’s cost and further burden Indonesia’s economy.
Broken Promise and Projected Loss
The latest blow occurred in the broken promise by the Indonesian government not to use the state budget to finance the project’s ever-increasing cost. The government’s decision on this was first detected in 2021 when Jokowi issued Peraturan Presiden Nomor 93 Tahun 2021 (Presidential Regulation Number 93 of 2021 – Perpres), which altered the stipulation about the project’s financing.
This complete U-turn not only hurts the government’s and Jokowi’s credibility as well as capability to handle big projects but also fuels the ever-present unease that the KCJB would emerge as a debt trap to Indonesia.
Even if it eventually does not, the project has substantially increased Indonesia’s foreign debt to China, which has remained at the top of Statistics of Indonesia’s Foreign Debt ranking since 2018. According to official resources, Indonesia owes as much as Rp315.1 trillion to China today.
Indonesia is also projected to suffer financial losses from this project. The relatively close distance between Jakarta and Bandung, plus the fact that the trains would not stop within Bandung city proper, have been cited as reducing the appeal of the KCJB.
As it becomes operational, the government would also have to build a culture for people to opt for the train service and ditch their cars to travel between the two cities, something which has been the tradition for decades. After all, the project’s envisioned breakeven point of 38 years could only be realized if enough people can be encouraged to board the trains, which they will not do if they are deterred by stratospheric ticket prices, reaching Rp150.000-350.000.
There is an ongoing discourse to shut down the long-running and popular Argo Parahyangan train service (which also caters for the Jakarta-Bandung route for only Rp 80.000-120.000) to make way for the KCJB as the primary train service for the route. However, such a plan could potentially invite a backlash from regular commuters and has been opposed by at least 5,000 signatories on Change.com.
The cost overrun itself – believed to be the result of planning mistakes and errors in the feasibility study – must also be disproportionately borne by Indonesia, which must take and pay loans plus interest. A proposed solution is to offer a debt swap with a subsidized ticket program, which hopefully could alleviate some financial burden borne by Indonesia. However, the key to ensure this option’s success is to get the people to board the train service in the first place.
Above all, however, there is a case to be made that Indonesia should conduct better due diligence and decision-making process in undertaking projects of such a scale: politics should not be the only driver behind taking up billion-dollar projects.
It should be noted that discourse on fast trains does not stop at the KCJB, as there is a mounting interest to open another route to connect Jakarta and Surabaya, the latter of which is Indonesia’s second-largest city on the other side of Java Island. Minister of Transportation Budi Karya Sumadi has stated that a feasibility study will be conducted beforehand and it is crucial for the Indonesian government to avoid the same mistakes it made when deciding on the Jakarta-Bandung route.
It would make more sense for the government to invite multiple potential development partners to the negotiating table instead of just engaging China and Japan this time around (provided the latter is still interested). The final decision should be made based on a sound financial calculation that does not incur costs to the Indonesian people and the country’s deteriorating environment.
The Indonesian government should have realized years ago that Chinese megaproject investment could easily descend into a colossal debt problem if the destination country fails to manage the money and the project professionally and transparently. The debt trap narrative, which has affected such countries as Sri Lanka, Laos and Uganda – whether rightfully or wrongfully – only strengthens the argument for the need of good governance in handling projects, something that has been demanded by Western creditors but disliked by destination countries. It is not in the interest of the Indonesian government to be added to that list of countries that have had difficulties handling Chinese money. The onus is actually on Jokowi, who is due to complete his presidency by next year. As a man of infrastructure, he only has a year left, if not less, to ensure that problematic megaprojects will not tarnish his legacy.