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Analysis: RI-China reach agreement on Jakarta-Bandung HSR cost-overrun

Jakarta Post - February 22, 2023

Tenggara Strategics, Jakarta – Deputy State-Owned Enterprises (SOEs) Minister Kartika Wirjoatmodjo announced an agreement had been reached between Indonesia and China regarding the amount of Jakarta-Bandung High Spseed Rail (HSR) project cost overrun, but the figure seems to be classified. The agreement resolved the dispute between both countries about the HSR project's cost overrun, which had hampered its development progress.

Previously, China assumed that the Global System Mobile-Railways (GSM-R) frequencies used for signaling trains were free, like in its country. That led to China estimating the HSR project's cost overrun at US$982 million (Rp15.2 trillion). However, GSM-R in Indonesia is provided through a frequency-sharing program with Telkomsel, which has an investment cost. Therefore, Indonesia's Development Finance Comptroller (BPKP) included it in the project's cost overrun, leading it to $1.49 billion.

The agreement between the two countries regarding the cost-overrun figure was important to allow the Indonesian government to proceed with disbursing another Rp 3.2 trillion of state-capital injection to Kereta Cepat Indonesia China (KCIC) through the Indonesian rail SOE PT Kereta Api Indonesia (PT KAI).

The previous agreement regarding the cost overrun was for a capital injection to finance 25 percent of the funding gap with 60 percent, or Rp 3.2 trillion according to Indonesia's estimate, to be paid by the Indonesian consortium, while the remaining 40 percent, or Rp 2.14 trillion, would be paid by the Chinese consortium. The remaining 75 percent of the cost overrun, or Rp 16 trillion, would be funded by new loans from the China Development Bank (CDB).

The high proportion of the loan from CDB in the funding for the HSR project's cost overrun risks Indonesia's ownership over KCIC, since the country may opt to reduce its stake in the HSR project to pay off the loan. If that happens, Indonesia would be handing control of a critical infrastructure to a foreign party, raising questions over its infrastructure-development goals.

In the meantime, KCIC is rushing to meet the target set by President Joko "Jokowi" Widodo to complete the project by July this year. However, after the project construction was halted due to the COVID-19 pandemic mobility restrictions, the project met with various accidents, adding delays and likely contributing to the cost overrun. To top it all off, the profitability of the project after operating is in question since the market sees falling demand for its transportation service caused by moderate post-pandemic economic growth.

What's more

KCIC signed a memorandum of understanding (MoU) with 20 other companies that include, among others, GoTo Gojek Tokopedia, Traveloka and various SOEs to share the burden of operating the Jakarta-Bandung HSR's ticketing, payment system, accessibility features, integration with other modes of transportation and implementation of renewable energy. The firm is also open to selling the naming rights for the train stations which are part of the Jakarta-Bandung HSR line.

Aside from easing the burden of operations, KCIC's MoU with those 20 other firms could also allow the firm to focus its resources on meeting the project's target for starting its operation. The integrated transportation collaboration would also prevent the struggles between ridesharing services and older transportation services in other public transportation facilities. Meanwhile, the ticketing collaboration would expand KCIC's reach to consumers, probably at the expense of reduced revenue per ticket sold.

What we've heard

Several sources in the government said the cost overrun for the Jakarta-Bandung HSR project of US$1.2 billion has been agreed as a compromise to bridge the difference in cost overrun calculations between Indonesia and China. According to the sources, the Chinese side is aware that a tug-of-war on the agreement will push the project behind schedule and could potentially further increase costs.

During the negotiations in China, China's National Development and Reform Commission (NDRC) initially insisted on rejecting a number of cost items included in the cost overrun calculation. They later relented after learning that the Indonesian government had disbursed a state capital injection of Rp 3.2 trillion to PT KAI.

Even so, the NDRC still objected to cost items that they believed should not be included in the cost overrun components and asked them to be re-examined by the Indonesian government, such as the matter of payments for the global signal mobile-railway system (GSM-R), which accounts for roughly Rp 77.3 million or 5.34 percent of the total cost overrun.

Although an agreement has been reached, the China Development Bank will not automatically disburse new loans to cover the cost overruns. A source said the CDB was still waiting for PT KCIC to receive the capital injections from PT KAI.

As the holder of 60 percent of KCIC's shares, the Indonesian state-owned enterprise (SOE) consortium must provide Rp 3.2 trillion in equity when referring to BPKP calculations. Meanwhile, the Chinese consortium provides the remaining Rp 2.14 trillion. By agreeing on cost overrun figures, the equity calculations that each consortium must prepare will be reduced. PT Pilar Sinergi BUMN Indonesia (PSBI) and Beijing Yawan are said to be making an agreement regarding the amount of cost overrun to determine the proportion of paid-up capital for each consortium.

The source said initially KCIC hoped that the Indonesian SOE consortium would be able to disburse $217 million from the capital injection they received in January 2022 and the Chinese consortium would inject US$145 million in funds. However, this projection was missed because the cost overrun agreement was only reached in February 2022.

KCIC also hopes that the remaining CDB loan for the original budget can be disbursed in February 2023, amounting to $233 million. Meanwhile, new loans to meet cost overruns can enter in May 2023. Some of the funds are to pay for the engineering, procurement and construction (EPC) contractor work until September 2023.

In order to meet the operation deadline, KCIC also wants to speed up the work in the form of building access to a number of stations. Another source said KCIC would build a bridge from DI Panjaitan to Halim Station. Construction of access to the station will also be accelerated at Karawang Station.

"There will even be special access from Kota Baru Parahyangan to Padalarang Station," said the source. A similar project will also be prepared at Tegalluar Station, which is to build a bridge connecting the Summarecon Bandung integrated area and Tegalluar Station.

[This content is provided by Tenggara Strategics in collaboration with The Jakarta Post to serve the latest comprehensive and reliable analysis on Indonesia's political and business landscape.]

Source: https://www.thejakartapost.com/opinion/2023/02/22/analysis-ri-china-reach-agreement-on-jakarta-bandung-hsr-cost-overrun.htm