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Analysis: KCIC requests concession extension due to low demand, competition

Jakarta Post - December 21, 2022

Tenggara Strategics, Jakarta – The Jakarta-Bandung high-speed railway (HSR) service is expected to see lower demand than initially projected. At its inception, the Jakarta-Bandung HSR was estimated to transport 60,000 passengers per day, but a new study conducted after the emergence of the COVID-19 pandemic has cut the estimate by half. This means that the new railway services needs around 80 years to break even and start making a profit.

PT Kereta Cepat Indonesia China (KCIC), a joint venture between Indonesian and Chinese state-owned enterprises (SOEs), asserted that the COVID-19 pandemic had significantly impacted the transit project in many aspects, from infrastructure development costs to railway passenger projection and to operations strategy and management.

The Indonesian economy has seen conservative growth of around 5 percent in the last four quarters, after it rebounded from a contraction that had lasted from the second quarter of 2020 until the first quarter of 2021.

This had resulted in reduced passenger demand for the HSR service than initially forecast. Meanwhile, the KCIC could no longer take into account potential revenues from transit-oriented development (TOD) projects, as the company needed to instead focus on solving the cost overrun of the HSR project.

The demand forecast was conducted by the University of Indonesia Center for Testing, Measurement, Training, Observation and Engineering Services (Polar UI) using a stated preference survey involving 1,829 respondents in Greater Jakarta. The survey results indicated a demand forecast of slightly over 30,000 potential HSR passengers in 2023, assuming economic growth of 5 to 6 percent.

The Jakarta-Bandung HSR will also be competing for passengers against existing transportation modes. The most preferred transportation to travel between Jakarta and Bandung is private car at 59 percent, followed by intercity shuttle or chartered car at 18 percent, by train at 16 percent, and finally by bus at 7 percent. These estimates were obtained from observing 259,495 travelers between Jakarta and Bandung on a single day, with up to 11 percent of travelers expected to shift to the Jakarta-Bandung HSR.

Traveling by car or bus between Jakarta and Bandung grew in popularity after the Jakarta-Cikampek II Elevated Toll Road opened, which cut travel time to a minimum 45 minutes, while the upcoming South Jakarta-Cikampek II Toll Road is expected to reinforce the trend.

In terms of transportation costs, private car users spend roughly Rp 200,000 for gas and Rp 77,500 for tolls, while passengers of intercity shuttles or chartered cars spend between Rp 90,000 and Rp 165,000 for tickets, inclusive of other costs. Buses offer the most affordable option at just Rp 65,000 per passenger. Tickets for the Argo Parahyangan train, which has a 3-hour travel time, start at Rp 80,000 for an economy class seat.

In comparison, the Jakarta-Bandung HSR takes just 36 to 45 minutes for a one-way trip, with tickets to be sold at the promotional price of Rp 250,000 per passenger for the first 3 years of operations.

Rumors have been circulating that the Argo Parahyangan train will be discontinued to encourage passengers to shift to the HSR. However, the shift is unlikely to happen because of the threefold difference in their ticket prices, especially since the Argo Parahyangan's passengers belong to the most price-sensitive consumer segment.

The government expects private car users to also make the shift to the Jakarta-Bandung HSR, but it faces tight competition with the rapid development of the Jakarta-Cikampek II toll road.

What's more

The biggest deal-breaker for passengers is that the HSR stations are located far from city centers, whereas intercity shuttles and ordinary trains take passengers directly to either the city center or transit points.

The Jakarta-Bandung HSR has four stations, namely Halim, Karawang, Padalarang, Tegalluar, but all four are still under development. Halim Station, projected to transport 14,878 passengers per day, is only 74.19 percent complete. Karawang Station is projected to carry 7,226 passengers per day and is 72.7 percent complete. Padalarang Station, projected to carry 7,591 passengers per day, is only 11.9 percent complete, and Tegalluar Station, with a daily passenger projection of 2,755, is 86.29 percent complete.

Halim Station in East Jakarta will be connected to the Jakarta-Bogor-Depok-Bekasi (Jabodebek) light rapid transit (LRT) service, which will take HSR passengers to Dukuh Atas Station in the downtown Jakarta in 20 minutes once it is operational. Similarly, Padalarang Station will be connected to a feeder train that will take HSR passengers to Bandung Station in 22 minutes, but the Transportation Ministry only recently started building the infrastructure.

Meanwhile, government officials and analysts believe that a passenger estimate 50 percent lower than the initial projection is still too high. Furthermore, the HSR service is expected to operate at loss for the first three years due to its promotional ticket price.

The KCIC has also not found a solution to the cost overrun. Although the Indonesian government has agreed to provide the consortium with a state capital injection (PMN) amounting to as much as 60 percent of the cost overrun and the Chinese government has agreed to a loan to cover the remaining 40 percent, the two sides have not agreed on the value of the cost overrun. This is primarily because China does not recognize the land acquisition tax and Global System Mobile-Railway (GSM-R) items in the project budget, because these are free in China.

As a result, the Indonesian government has been unable to disburse the PMN worth an estimated Rp 3.2 trillion (US$204 million). If the capital injection cannot be disbursed by the end of December, the HSR project is at risk of another delay, adding more pressure on the KCIC's profitability and need to extend the concession.

What we've heard

A source within the Transportation Ministry said the KCIC management's request to extend the high-speed train project concession from 50 years to 80 years was triggered by a projected cash deficiency that the company would experience after the trains were operational.

The source said the company would only be able to recoup its investment 38 years after the trains were operational. The delay in capital investment was triggered by losses due to large expenses to repay the principal debt and interest from financing the construction of the Jakarta-Bandung high-speed railway.

A potential loss of US$1.047 billion is predicted for the 2023-2061 period. Meanwhile, cash flow from projected income is lower than expenses for repaying debt and interest. The source said the loss figure was calculated after spending on debt and after the cost overrun occurred.

The cash deficiency may get bigger because the estimated cost overrun will likely increase with the results of the third BPKP audit. So far, the BPKP has estimated the cost overrun for the high-speed train project to be US$1.449 billion. This figure could still increase by US$450 million pending the results of the third assertion from BPKP, bringing the total cost overrun to a possible US$1.9 billion.

The increase in capital expenditure is not only due to cost overruns. The concession period adjustment was also triggered by projections that found demand was unlikely to reach the daily target. The source said earlier that KCIC doubted the target of 31,000 passengers per day could be met, even though this figure had been decreased from an initial 61,000 passengers per day.

The projected decline in passenger demand was triggered by the addition of infrastructure facilities for the Jakarta-Bandung corridor toll road and the cancellation of a transit development project around the station. Due to cost constraints, the project was postponed.

If the number of daily passengers is below 31,000, the potential cash flow from income could be lower than spending to pay debts. In the end, the cash deficiency figure and the time needed for KCIC to recoup the investment could be even longer than 38 years. This is where the plan emerged to abolish the Argo Parahyangan train.

Another source said that to cover the cash deficiency, the government was considering several options, such as providing subsidies or PSO for KAI. KCIC is also currently researching potential revenue from the non-fare box business – which is only 1 percent of ticket revenue.

Source: https://www.thejakartapost.com/opinion/2022/12/21/analysis-kcic-requests-concession-extension-due-to-low-demand-competition.htm