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Economy

Indonesia to use Japan loans and private capital for $4.5bn railway

Spending limits force Jakarta to seek alternative infrastructure funding scheme

A Japanese-made railway car for Jakarta's Mass Rapid Transit is delivered on April 5. Indonesia will also seek Japanese funding and private sector involvement for a railway project stretching across Java.   © Getty Images

TOKYO -- Indonesia will seek funding from the Japanese government and private sector for a $4.5 billion railway project stretching across the island of Java.

Basuki Hadimuljono, Minister of Public Works and Public Housing, told Nikkei on Friday that the project involved upgrading 750km of existing track on the Jakarta-Surabaya line and building around 300 flyovers at an estimated cost of 62 trillion rupiah ($4.46 billion), which will be financed by Japanese loans.

Elements such as the construction of station buildings and surrounding facilities, on the other hand, will be developed through public-private partnership schemes.

Indonesian President Joko Widodo confirmed that the railway would be built jointly with Japan in an interview with Nikkei in December last year, but Hadimuljono's comments mark the first time a minister has mentioned private sector involvement. The deal is still being finalized, he added, and the terms may change before the planned groundbreaking by the end of the year.

If completed, the trans-Java railway upgrade would halve the travel time between Jakarta and the country's second largest city to about five and half hours.

Embarking on the project will help improve ties between the two countries, which were strained when Tokyo lost out to a Chinese bid for the Jakarta-Bandung railway project in 2015.

At the time, Jakarta claimed China had won the deal because its proposal would not burden the government budget.

Involving the private sector in the Jakarta-Surabaya project represents way of catering to Indonesia's strict limits on its budget deficit -- which by law needs to be kept below 3% of GDP -- as well as concerns over an increase in foreign debt.

Hadimuljono said Indonesia would also seek to partner with Japan on a 40km access road in West Java connecting Patimban port, which is being financed by Japanese government loans, and a 90km toll road on the island of Sumatra. The access road to Patimban will cost around four trillion rupiah.

The minister was speaking on the sidelines of a symposium held by Nikkei Inc. in Tokyo to mark the 60th anniversary of diplomatic relations between Japan and Indonesia.

Bambang Brodjonegoro, Minister of National Development Planning, had said in his opening remarks that infrastructure development is key to "promoting sustainable economic growth" and "avoiding the middle-income trap."

Faced with a considerable shortage of public funds, attracting private-sector companies has become key to realizing Widodo's pledge to boost growth through infrastructure development.

The Indonesian president has called for around 70% of the plans to be financed by the private sector, but little noticeable progress has been made in securing investment.

Other projects that have been earmarked for private investment include the construction of a new airport near Yogyakarta and the expansion of Kertajati International Airport, which is being built near Bandung, the capital of West Java Province, along with the development of surrounding urban areas.

The power generation industry has successfully made use of private capital to develop infrastructure without burdening state coffers. A number of investors now sell electricity to the state-owned electric power company to recover their outlay and earn revenue.

On the flip side, there are projects that are unlikely to generate much cash but require significant investment, and the risks involved deter many would-be investors.

The Jakarta-Bandung line, Indonesia's first high-speed railway project, is a case in point. State-owned Indonesian and Chinese companies are tasked with construction and management, but the project has ground to a halt two years on from the groundbreaking in January 2016.

Acquiring the necessary land has been problematical, hampering the project's ability to raise the estimated $5.6 billion required.

To facilitate investment, Jakarta has started relaxing regulations such as limits on foreign capital, and simplified procedures for collective processing by the central government.

Japan, for its part, has its own challenges. "Japanese companies are so [segmented. They] don't have enough experience in transit-oriented development in the public-private partnership model," said Tadashi Maeda, chief executive of the Japan Bank for International Cooperation. "The issue is how can we share the burden between host countries and the private sector."

Nikkei staff writers Bobby Nugroho and Eri Sugiura contributed to this story.

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