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'Debt trap' danger looms in Jakarta-Bandung high-speed train project

Jakarta Post - April 17, 2023

Kornelius Purba, Jakarta – President Joko "Jokowi" Widodo can only blame himself for the prolonged delay of the Jakarta-Bandung high speed train project, and the huge cost overrun which hit US$982 million according to China, and $1.49 billion according to Indonesia.

There were too many loopholes in the contract when it was signed in 2016, clearly because Indonesia was so ambitious to realize the mega project as soon as possible. So, do not blame China.

Now Indonesia must pay dearly for its "take it lightly" attitude and the damage caused by our negligence in the contract negotiation will likely continue, even long after President Jokowi ends his second five-year term in October next year. The next president who is not Jokowi's ally will exploit the train mega project as an easy tool to delegitimize Jokowi's achievements, especially in infrastructure.

Several economists and experts have warned of the possibility of Indonesia falling into China's "debt trap". "Now China is insisting to convert the overrun cost into the government with ridiculously high-interest rates. This is too scandalous for us to ignore, and will go down as one of Jokowi's legacies," said a senior government observer in a recent conversation.

Indonesia is still very far from the "debt trap" danger because it has a strong capacity to service its debt to China. But Indonesia will face an alarming situation if we do not learn from our failure to sign a clear-cut contract with China.

To be fair, however, China's reputation as a global lender of mega infrastructure projects will also be in trouble.

It was almost unbelievable for many Indonesians when they were told the Jakarta-Bandung high-speed train project was facing a $1.49 billion cost overrun, including to pay the Global System Mobile-Railways (GSM-R). Do you know why? China reportedly assumed the facility was for free and only later Indonesia informed that it should be included in the cost.

Does such an explanation make sense to you?

Long before Jokowi eventually awarded the project to China, Japan had offered to cover 75 percent of the cost in long-term and soft loans. The project was estimated to cost $6.2 billion. Its interest rate was just 0.1 percent, and the loan term was 40 years. Repayment would start 11 years after the railway started operation.

But Japan demanded a government-to-government deal, while China offered a business-to-business model. Eventually, China also demanded a government guarantee from Indonesia.

Coordinating Maritime Affairs and Investment Minister Luhut Pandjaitan is confident the high-speed train will start operation in the middle of this year, four years later than the 2019 original schedule. But honestly, I do not believe, at least today, that passengers will be able to board in Jakarta and alight in Bandung or vice versa.

I regularly pass the Jatiwaringin toll road exit. The train's Halim station in East Jakarta is still being constructed, and I do not think it will be ready for full operation anytime soon. Both stations in Jakarta and Bandung are located far away from the city centers and face interconnection problems with other transportation modes. I may not constantly follow the project, but many friends share my confusion.

The train's final destination is Tegalluar station, on the outskirts of Bandung. The train will pass Karawang and Padalarang before reaching Tegalluar. To my knowledge, the four stations connecting the railway lack seamless inter-mode transportation facilities, giving passengers quite a headache especially if they carry several luggage or travel with children.

On China's part, it is ridiculous that they assumed the GSM-R frequencies used for the train signaling were free, as in the case in China. As reported by The Jakarta Post, the frequencies are provided through a frequency-sharing program with Telkomsel, meaning there is a cost.

Indonesia's Development Finance Comptroller (BPKP) included it in the project's cost overrun, leading it to a total of $1.49 billion cost overrun.

Earlier Luhut stated the additional cost was $1.2 billion. According to the contract, Indonesia is responsible to bear 60 percent of any additional cost while China the rest. Understandably Indonesia protested the scheme, but China persisted.

The Post quoted Luhut as saying the two countries had agreed on a $560 million loan from the China Development Bank (CDB) that will bear some part of the $1.2 billion overrun. The rest of the cost will be financed partly by the equity in PT Kereta Cepat Indonesia China (KCIC), the consortium responsible for the project.

I understand that China set a 4 percent interest for the new loan and lowered it to 3.4 percent. It was much higher than the 2 percent interest for the principal loan the two countries had agreed in 2016. And China demanded an official government guarantee for the new loan.

"The Chinese government wants the loan guarantee to be made directly through the state budget but [Indonesia] wants to guarantee the loan through PT Penjaminan Infrastruktur Indonesia [PII]," he said.

How is China's debt trap from the Chinese perspective?

In the January edition of China Daily, the heading of an article read "West's smearing of BRI as 'debt trap' won't help developing countries".

"The international community has been criticizing the Belt and Road Initiative, claiming it will push the Belt and Road countries into a debt trap," and added, "Yet there has been no substantive research confirming the claim is true."

Citing a World Bank study, the newspaper said that China has also taken the initiative to "reduce the burden" of debtor countries and ease their debt difficulties.

"In 2020, China actively responded to the Group of 20 debt moratorium initiative. That year alone, China's debt moratorium exceeded $1.3 billion, accounting for nearly 30 percent of the G20 total debt moratorium, making it the largest contributor among the G20 countries."

Jokowi cannot do much to mitigate the negative impacts of the problematic contract, including a possible debt trap. I do not know whether Jokowi will be able to prove that the Jakarta-Bandung railway project will be beneficial for all, from the passengers to the government of Indonesia and China.

[The writer is a senior editor at The Jakarta Post.]

Source: https://www.thejakartapost.com/opinion/2023/04/17/debt-trap-danger-looms-in-jakarta-bandung-high-speed-train-project.htm