China’s Debt Trap in Jakarta-Bandung High-Speed Train

In order to improve national transportation services, PT Kereta Cepat Indonesia China is building a high-speed train project connecting Jakarta and Bandung. The company is a joint venture between state-owned enterprises through PT Pilar Sinergi BUMN and a consortium of Chinese railway companies through Beijing Yawan High Speed Railway Company Limited.

Initially, this mega project was planned to have a Jakarta-Surabaya route in 2008. However, the government estimated that the construction would cost up to 100 trillion rupiah. Interest from Japan and China made the Jakarta-Bandung high-speed train project start to materialize. In 2014, the Japan International Cooperation Agency (JICA) provided funding to conduct feasibility studies for the project worth 3.5 million US dollars. According to JICA’s calculations, the investment value of the high-speed train project reached 6.2 billion US dollars. 75 percent of the investment value is financed by Japan through a 40-year loan with an interest rate of 0.1 percent per year.

On the other hand, China suddenly participated in the feasibility study of the high-speed train project, which had been previously funded and studied by Japan, and received a positive response from the former Minister of State-Owned Enterprises, Rini Soemarno. Then, China offered a cheaper investment value than Japan, which was worth 5.5 billion US dollars. The investment scheme was 40 percent funded by China and 60 percent by state-owned companies. A fifty-year loan with a 2 percent interest rate per year. Through a selection process, the government chose China to handle the Jakarta-Bandung high-speed train project. China was chosen because they were willing to build without burdening the state budget.

During the bidding process for the Jakarta-Bandung high-speed train project, China offered a much lower bid than Japan. However, after winning the bid, there were various escalations and delays during the project’s construction, which could potentially increase the final cost by over 30 percent, making the project economically unfeasible and draining the state’s finances. China Development Bank openly asked the government to shoulder the extraordinary inflated costs, even though the main point of choosing China was its B-to-B (Business to Business) commitment without burdening the state budget, lower costs, and open technology transfer.

The existence of this project certainly has important objectives, namely:

• Creating equitable development and income for society so that all Indonesians can enjoy and experience a prosperous and prosperous economy.
• Connecting advanced regions with isolated regions.
• Shortening and speeding up the mobility of the community.

In response to the need for transportation facilities in the form of high-speed trains, it can be seen through the activities of Indonesian society that the majority of society cannot escape the use of transportation. With a fairly high mobility rate, public transportation is very much needed by the public. Reducing expenses and the time needed to reach destinations, high-speed trains are an efficient solution.

Since the Jakarta-Bandung high-speed train project started, its construction has not been completed yet. As of September 5, 2022, the physical progress of the Jakarta-Bandung high-speed train has reached 76.34 percent, investment progress has reached 85.39 percent, bridge construction has reached 95 percent, and the subgrade has reached 82 percent. For the tunnel, all of it has been penetrated. The target is that the project can start operating in June 2023.

Reasons for the delay
The delay in the project’s completion is due to several factors, including the escalating cost of land, extreme geological conditions in Tunnel 2, expensive use of GSM-R, electrical installation, and the COVID-19 pandemic.

Impact of the delay
This delay will have significant impacts on various aspects, particularly on the country’s finances. Ultimately, project cost overruns cannot be avoided. The overrun is predicted to be between IDR 18.3 trillion to IDR 22.5 trillion with a rate of IDR 14,100/US$. Initially, the project was estimated to cost US$6.07 billion or equivalent to IDR 86.5 trillion, but now it has increased to US$7.9 billion or IDR 113.1 trillion due to the delay.

Government’s steps
The project development process did not go smoothly. The China Development Bank has requested that the Indonesian government share the project’s cost. As reported by one national media on Tuesday (10/12/2021), in response to the impact, the government issued Presidential Regulation №93 of 2021, which amends Presidential Regulation №107 of 2015 concerning the Acceleration of the Implementation of Infrastructure and Facilities for the Jakarta-Bandung High-Speed Train. The revision includes several provisions, including funding the Jakarta-Bandung high-speed train project using the state budget (APBN), which was previously not allowed.

Impact of using APBN funds
The impact of using APBN funds is the potential threat to other ongoing projects outside of Java Island due to the imbalance of government funding allocation. In the long term, the centralized APBN funds for a single project will endanger the increasing debt burden and burden the state’s fiscal aspects. The risk is even greater with the target budget deficit still at 4.85 percent of Gross Domestic Product (GDP).

Dark side of the project
The government’s increasing debt directly or indirectly caused by the burden. The feasibility test project has become problematic, resulting in soaring costs, and ultimately, the government has to share the project’s costs. The use of APBN funds is inversely proportional to the scheme agreed upon by China, where this is indicated as a debt trap targeting poor and developing countries.

What is disturbing is the extent of China’s credibility and feasibility tests, resulting in an extraordinary cost overrun. All issues that hinder the project’s development should have been resolved during the feasibility study. Will this not create a debt trap that endangers Indonesia if the APBN is forced to cover it? Indonesia must learn from Sri Lanka, which was caught in debt from China. To avoid a similar fate, it would be wise for Indonesia to conduct more thorough feasibility studies and audits regarding its ability to repay debts and enforce regulations.