Costs Zoom for Indonesia's Delayed High-Speed Train

Project faces delays, cost overruns, state bailout looms

Work on Indonesia’s 140-km high-speed Jakarta-Bandung rail project, which China beat out Japan to build, is now three years behind projected completion, with the cost having ballooned by nearly 20 percent from US$6.07 billion to US$8 billion and with a state bailout now looming.

The Indonesian government will likely be forced to disburse trillions of rupiah to finance the cost overrun for construction, which was supposed to be completed by 2019 but has now been delayed to at least 2022. Land acquisition problems, over-optimistic planning, and poor project management are accused of contributing to the cost overrun.

The rail project is the capstone of a spate of 71 projects agreed by President Joko Widodo. According to the US-based research firm AidData, although officials refuse to classify it as such, Indonesia is reckoned to have hidden debt according to 2017 figures, of at least US$17.28 billion, equivalent to Rp246 trillion. It is the latest example of problems with China’s vaunted Belt and Road Initiative, which has featured construction of ports, rail lines, highways costing hundreds of billions of dollars all over the globe, most of it financed by Chinese banks.

As Asia Sentinel reported on October 8, while many of the BRI projects are bringing development and prosperity to many regions in others it is losing its momentum over debt and cost overruns, corruption, unsustainable projects, and antagonism over the fact that too often the projects use Chinese labor at the expense of local workers across Africa, Asia, Latin America, and Central and Eastern Europe. Some projects have been canceled or mothballed.

AidData found that of the 165 countries where China has made development loans since 2000, some 40 percent – 42 – now carry debt to China equal to or greater than 10 percent of gross domestic product. According to the study, Laos, Angola, Kyrgyzstan, Djibouti, Suriname, the Maldives, the Congo, and Equatorial Guinea all have debt to China that totals more than 30 percent of GDP. In Asia, both Sri Lanka and Pakistan are also struggling with debt repayment problems as project costs have ballooned.

China and Indonesia signed the agreement to build the rail line in March 2016, designed to shorten the trip from the nation's capital to Bandung from three and a half hours to 45 minutes. Although Japan had already carried out a feasibility study that began in 2014, China offered a cheaper investment value of US$5.5 billion, of which 25 percent was to be funded using joint capital with the rest coming from loans with a tenor of 40 years at 2 percent interest per year.

However, the projection was increased to US$6.07 billion in January this year. The Japanese government had proposed an investment value of US$6.2 billion, of which 75 percent was to be financed by Japan in the form of a 40-year loan with an interest rate of 0.1 percent per year.

China has also promised that construction would only use the Business to Business (B2B) cooperation scheme without the need for guarantees from the government. Japan required government guarantees. That was said to be the main reason the Indonesian government agreed to China's proposal.

Construction is being carried out by PT Kereta Cepat Indonesia China (KCIC), a combination of Indonesian and Chinese consortiums holding 60 percent and 40 percent of the shares respectively. The Indonesian consortium consists of four SOEs, namely PT Wijaya Karya (WIKA), PT Perkebunan Nusantara (PTPN) VIII, PT Kereta Api Indonesia (KAI), and PT Jasa Marga.

The project was considered controversial from the start. Some experts said the Jakarta-Bandung route doesn’t really need a fast train because of the short distance, with two transport developments that already serve the community, namely the Cipularang Toll Road and the Argo Parahyangan Train.

When construction got underway, the Minister of Public Works and Public Housing Basuki Hadimuljono revealed that the project faced safety problems from unstable land prone to landslides, especially if it was projected for the construction of bridges and underground tunnels. Also, the project design has not yet obtained certification from the Road Tunnel and Bridge Safety Commission. This was later identified as the cause of the change in project design.

KCIC management revealed that some of the factors that contributed to that problem included design changes due to changing geological and geographical conditions from the beginning of planning, increased land acquisition costs, cost for electrical installations, and usage cost for the Global System for Mobile Communication (GSM-R). As a result of the delay, interest costs from project loans also increased by US$200 million.

Arya Sinulingga, Special Staff of the Ministry of State-owned Enterprises, said the cost overruns are normal, considering that the Covid-19 pandemic has hampered completion, which in turn increased development costs. He acknowledged costly design changes and the land acquisition problems as well as the inability of the Indonesian consortium companies to inject funds into the project. Nonetheless, Arya said, progress has reached almost 80 percent and completion is targeted for 2022.

But there are growing financial problems In the fact that China has refused to provide additional loans through the China Development Bank in the midst of the Indonesian consortium companies’ insufficient funds to continue construction.

"Everywhere in almost all countries, the government does intervene in funding high-speed rail," Arya said. He added that the fast train is needed as a symbol that Indonesia has become a modern country.

President Joko Widodo recently issued a Presidential Regulation that came into effect on October 6 allows the government to use the government budget to help finance the project, whether through a loan guarantee or a state capital injection.

Herman Khaeron, a member of Commission VI of the House of Representatives, which deals with trade and investment issues, said he suspects that the cost overruns may be due to miscalculation, overly optimistic planning, and the pandemic situation, which has impacted the financial capacity of the three Indonesian consortium companies. He called for an investigation by the federal Audit Board to give the proposed capital injection a legal basis.

Public policy observer Agus Pambagio said the high-speed rail project has been problematic from the start, given that infrastructure projects take a long time to turn a profit and in many cases never do. It has been widely acknowledged that many individual BRI projects don’t produce sufficient returns on investment, which is why they are usually built by governments and not private industry. In this project, these advantages are difficult to obtain, Agus said. "It will take decades to cover the construction costs itself," he said.

Considering the value of such a large investment, it is likely that ticket prices borne by consumers will be much more expensive than other currently existing transportation. If this happens, the high-speed train will not be of much interest to the public, ultimately affecting projected profit, which could well lead to ticket subsidies, also burdening the state budget.

Bhima Yudhistira, director of the Center of Economic and Law Studies, said the government's policy to cover project cost overruns would be a burden because the amount of state debt would increase directly or indirectly.

"This is called a debt trap," said Bhima. "Initially the problem was that the project approved (by the government) in a feasibility study was problematic, then the project cost swelled, then, in the end, the government had to step in."

Bhima called for the project to be stopped over the debt problems. Cancellation, he said, won’t have a negative impact on investor confidence in Indonesia. It is unlikely to fold it at this stage of completion. Indonesia is going to have a high-speed train between Jakarta and Bandung, and it will have to live with that.