Switch to China on Indonesian Rail Line Angers Japanese

The Indonesian government is feeling the heat after Japanese investors reportedly have threatened to relocate factories and reconsider investment plans after a 150 km. fast-train project from Jakarta to Bandung was given to Chinese investors. The Japanese side thought they had won the deal.

Strangely, neither China nor Indonesia has officially announced the US$5 billion project. It was first announced by a Japanese official who told local media his country had lost out.

“The policy suddenly changed — it’s hard to understand how the Chinese plan was adopted, and I can only describe it as extremely regrettable,” said Yoshihide Suga, the Japanese chief cabinet secretary said late last month in Tokyo.

Money Talks

An official from Jakarta’s Ministry of State Enterprises said the decision “was based on the financial, not purely on the technical,” with China offering to take on the project without a loan guarantee from the Indonesian government.

“The development will not use any part of the state budget, directly or indirectly. The government will not provide any viability gap fund. The cooperation will be under a business-to-business scheme,” President Joko Widodo was quoted as saying.

The project is also seen as part of China’s sweeping global push to build infrastructure as part of its New Silk Road initiative. Indonesia is a strategic place for both countries as they compete for influence.

The news came as a blow for Japanese investors, considering that the Indonesian government has sent mixed messages on the project. An Indonesian government spokesman, however, said that the government understands Japan’s disappointment and urged Tokyo not to relocate their investments elsewhere as there are many more infrastructure projects needed to modernize Indonesia’s creaking public services.

China and Japan are largely seen as the chief competitors for Indonesia’s plans to spend tens of billions of dollars on infrastructure over the next few years, largely because the two countries offer very competitive government-backed financing packages. Japan is already building Jakarta’s first modern mass transit rail system

Abe Defeated

The contract award is a setback to the geopolitical aspirations of Japanese Prime Minister Shinzo Abe, who has made it a major foreign policy goal to check rising Chinese influence in the region by using loans and grants to fund important infrastructure projects. Japan also seeks to use the Asian Development Bank, which it effectively controls by traditionally appointing the bank’s president. Abe himself has pledged ¥750 billion (US$6.1 billion) in regional aid as part of a plan to increase infrastructure funding by 25 percent.

Indeed, according to Bloomberg, the ADB has increased its lending in the region by 17 percent to keep up with the Asian Infrastructure Investment Bank proposed by China President Xi Jinping and launched with considerable fanfare last October, although no lending plans have been announced. The AIIB, as it is called, is supported by 37 regional and 20 non-regional members. Some 53 prospective founding members have signed the Articles of Agreement that form the legal basis for the proposed bank.

Although the Japanese thought they had won the project, some observers anticipated that Jokowi would give it to the Chinese, as his government has engaged in billions of dollars in infrastructure projects with Beijing. Last year, Jokowi also demanded a bigger role in the AIIB, by proposing that the bank open its headquarters in Jakarta.

Wrong Signals for Investors

However, critics say the confusion over dealing with Japan and China has sent the wrong signals to investors. First, Jokowi said the government would scratch the whole plan for technical reasons, saying that the railway wouldn’t reach its maximum speed Then he mulled a new plan to develop a medium-speed train instead, telling both China and Japan to submit new bidding schemes. The Japanese and Chinese envoys to Indonesia didn’t hide their displeasure regarding the government’s decision to cancel the original plan after the two had competed for months to secure the contract. The new train will be “fast” but not “high-speed.”

Speaking to reporters after being briefed by Coordinating Economy Minister Darmin Nasution, Japanese Ambassador to Indonesia Yasuaki Tanizaki cited two reasons behind his disappointment.

First, he said, Japan had spent a large amount of money undertaking a three-year feasibility study for the project, bringing in experts to work in partnership with their Indonesian counterparts.

Second, Tanizaki said, Japan had planned to infuse the project with the world’s finest and most advanced technology, which would have ensured high security standards for the project.

China Wins on Price

China’s feasibility study was said to offer a more competitive price than its Japanese counterpart. It also listed no requirements for Indonesian government funding and promised that construction would begin this year, with the network up and running no later than 2019, while Japan's proposal is slightly more expensive and is only promising trains will hit the tracks in 2021.

Indonesia hired the Boston Consulting Group as a third party to assess the bids but the final decision was Jokowi’s call. After months of silence, he sent Indonesia’s national planning minister Sofyan Djalil to deliver Jakarta’s decision to Yoshihide during a visit to Tokyo at the end of September.

The Chinese government, however, has remained quiet after the announcement, and Indonesia is currently under an intense spotlight from foreign investors after the derailment.

According to the Indonesian Investments website, Singapore was Indonesia’s largest foreign direct investor in 2014, investing a total of US$5.8 billion, followed by Japan (US$2.7 billion), Malaysia (US$1.8 billion), the Netherlands (US$ $1.7 billion), and the United Kingdom (US$1.6 billion). Japan has huge stakes in the automotive and mining sectors.

During Susilo Bambang Yudhoyono’s presidency, the Indonesian and Japanese governments agreed to conduct a detailed feasibility study on adopting Japan’s Shinkansen high-speed rail technology to connect Jakarta and Indonesia’s second largest city, Surabaya, a distance of about 750 km. Critics have questioned the need for a bullet train with a maximum speed of 300-350 kilometers per hour that would also make up to eight stops between Jakarta and Bandung, a distance of about 150 kilometers. This is why the eventual rail line will not reach bullet-train speeds.