Indonesia Stuck With China's High-Speed ​​Train Project

Cost overruns rise question whether project is viable

Cost overruns of Indonesia’s high-speed rail project have far exceeded the initial target, now swelling to US$1.2 billion and forcing the government in Jakarta into negotiations with China Development Bank (CDB) to fund the excess costs. Given the delays in construction and the huge costs being borne by the government, many are questioning the worth of the project. 

KCIC, also known as the Jakarta-Bandung Fast Train (KCJB) project, is part of the Belt and Road Initiative —a Chinese government program worth more than US$1 trillion to finance infrastructure development around the world. It is being carried out by PT KCIC, a joint venture of Indonesian state-owned enterprises and a consortium of Chinese railroad companies. The 142.3-kilometer railway, which is projected to cut travel time between Jakarta and Bandung to just 35 minutes, is the first phase of a planned 750 km line that would run across the island of Java. The trains are forecast to be the fastest railway services in all of Southeast Asia. 

Deputy Minister of State-Owned Enterprises Kartika Wirjoatmodjo said Indonesia and China agreed to increase calculation assumptions. Swelling costs will be covered from equity deposits by 25 percent and debt loans by 75 percent. Of the portion of the loan, Indonesia bears as much as 60 percent while China 40 percent according to share ownership. The government, through PT KCIC, is currently negotiating debt to the China Development Bank (CDB) of US$550 million to cover the swelling costs. That means that with an initial estimated cost of US$6.07 billion plus a US$1.2 billion cost overrun agreement, now the KCJB project cost has reached US$7.27 billion.

Indonesia is hardly an outlier in attempting to cope with Belt and Road debt. Sri Lanka and Pakistan are reeling from overextension to China, their economies on the brink because of debt. Several African countries face similar problems. Zambia defaulted on US$17 billion in debt in 2020. As Foreign Policy Magazine reported earlier this month, In 2017, China overtook the World Bank and the International Monetary Fund (IMF) to cement its position as the world’s biggest creditor, although Beijing has since scaled back its lending.

“But many of its borrowers—still reeling from the Covid-19 pandemic and Russia’s war in Ukraine, alongside Beijing’s lending practices—are now battling to pull their economies back from the brink. Around 60 percent of China’s overseas loans went to financially distressed countries in 2022, compared with just 5 percent in 2010…Unable to pay China back, some cash-strapped governments are pushing for debt relief, forgiveness, or restructuring.”

Bhima Yudhistira, an economist from the Center of Economic and Law Studies (Celios) said the government is faced with a difficult choice. If it chooses to continue the project, Jakarta will have to bear the increasing development costs which can burden the state's finances. The government also has to pay the construction debt to the Chinese with interest. If construction costs increase, the interest will also increase. However, if this is not continued, this project will stall, which would cost the state trillions of rupiah and has the potential to violate the law.

Other observers consider that the continuation of financing by Indonesia for the increase in the cost of this project is irrational. The government is trapped in a 'sunk cost fallacy', where it continues to add to losses because it does not dare to stop projects that have already spent a lot of funds and resources. It is even considering unpopular policies such as abolishing the Argo Parahyangan train route —a regular train service – slower but far cheaper – from Jakarta to Bandung. 

Regarding the government's debt to CDB, President Joko Widodo, known as Jokowi, diplomatically stated that all parties must support the use of mass transportation rather than private vehicles. Jokowi recently met with Chinese Foreign Minister Qin Gang at the State Palace, and reportedly requested that the construction of the high-speed rail project be completed immediately. 

The high-speed train project has been controversial since its inception. China and Japan competed to be appointed as the party to work on the project even though Japan had already conducted a feasibility study. Jokowi set several conditions in selecting their proposals including the project being off the state budget and having to go through a business to business (b to b) scheme, and there were no guarantees by Indonesia regarding project funding. This is more in line with China's offer, which originally proposed a US$5.5 billion fee through the Business to Business (B to B) scheme and without funds from the state revenue.

Construction was to start in 2016 and be completed in 2019. Meanwhile, Japan stated in its proposal that the project would cost US$6.2 billion, using the Government to Government (G to G) scheme and a 50 percent government guarantee. Projects were to start in 2017 and finish four years later.

Jokowi chose China with the main consideration being project development without state budget and government guarantees. He has high hopes that the fast train can expedite and facilitate the mobility of goods and people, increase competitiveness, and create new economic growth points. However, the participation of the Indonesian government in co-funding the expansion of the project now is contrary to Jokowi's principle which prohibits the use of state funds for project development. 

This project initially was expected to be completed and operational in 2019. However, several things hindered the construction of the project, such as land acquisition and the Covid-2019 pandemic. In 2020, the government stopped all construction projects and focused on handling Covid-19. Construction began again in mid-2021 after the pandemic cases began to subside. 

The government hopes the train will begin operation in mid-2023. The construction project is 84 percent complete, with several railroad tracks not yet installed. Trials of the high-speed line, which will travel up to 360 km/h, are expected to start at the end of May. However, even though everything is now said to be going according to plan, many are pessimistic that the train will start operating in June-July. 

Skepticism arose regarding this project including in terms of project accessibility, profitability, and security. Regarding accessibility, the public questions the availability of public transportation that is integrated with the last KCJB station, which is not in the city center. The government plans to build integrated public transportation and other supporting infrastructure facilities after the project is completed.

Many also doubt that the project will be profitable. Experts argue that the cost overruns are the result of poor planning so there has been no risk mitigation from the start. Recently the consortium asked the government to increase its operating rights (concession) from 50 to 80 years. The company claims that the delays and the increase in project development costs have resulted in it taking longer to recover investment costs before handing over the project to the government.

One analyst reckons that if the 80-year concession request is not granted, it will have implications for expensive ticket prices. It is feared that this mode of transportation will be expensive which in the end will not be of interest to the public. If this happens, it is likely that the government will issue a ticket subsidy policy, which in turn will burden the state's finances further. Based on the results of the interim study, the fast train fare is estimated at Rp350,000 for the farthest route.

The safety of the high-speed rail system has also recently become a public concern. In December 2022, two Chinese workers were killed and at least four seriously injured when a locomotive derailed at a construction site. According to an Indonesian government official, the locomotive's brakes had a problem, and human error may have also contributed. Later Beijing and Jakarta concluded that the accident did not endanger overall safety. Construction restarted before the results of a government investigation into the tragedy were made public by the consortium.