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Indonesia rethinking partnership with Japan on rail project

To cut costs, government inviting other countries to bid

The line between Jakarta and Surabaya is a core part of the Indonesian railway network.

JAKARTA -- Indonesia may seek bids from foreign governments to build a new railway on the island of Java, despite its current engagement with Japan.

The government of President Joko Widodo is said to be considering inviting foreign governments to bid on the railway project in an attempt to reduce costs. In 2015, for a different high-speed railway project in the country, Indonesia ditched Japan at the last minute for China. Another move along those lines would inevitably hurt the relationship between Japan and Indonesia.

The planned train will run on a 750km or so route between the capital city of Jakarta and Surabaya, Indonesia's second-largest city. The plan is to drastically overhaul an existing state-owned railway and cut the travel time by more than half from the current 11 hours.

Indonesia initially agreed to Japan's proposal to remove railroad crossings to speed up the train. But it suddenly demanded that the railway be run entirely on electricity, pushing up the estimated cost to over 800 billion yen ($7.03 billion). The project then began looking murky.

Indonesia is especially worried about a cost increase. Japan first suggested a yen loan and Indonesia seemed to like the idea. But in July last year Widodo chose Sri Mulyani Indrawati, who is keen on maintaining fiscal discipline, as finance minister in a cabinet reshuffle. The government then began calling for a public-private partnership rather than accepting a yen loan because such a partnership does not increase debt.

Last December, Indonesia's Transportation Ministry said, without prior notice to Tokyo, it has agreed to team up with Japan on the railway project. Since then, Widodo's confidant, Luhut Binsar Pandjaitan, coordinating minister for maritime affairs, has visited Japan many times and told Japanese government officials that Indonesia intends to work with Japan on the project.

The Indonesian government, however, reportedly tapped other countries behind Japan's back and China, among others, showed interest in bidding for the project.

The ministry has drawn up a plan for an auction, attaching conditions, such as trains must be run on electricity and the use of a PPP. This in effect undoes the promise to work with Japan. But government officials are said to be still divided and the final decision is up to the president.

All this bodes ill for Japan. Government officials fear "a repeat of the nightmare" two years ago when Japan lost the all-but-secured chance to build a high-speed railway between Jakarta and Bandung to China.

At the time, it appeared almost certain that Japan would supply "shinkansen" bullet trains to Indonesia. But things changed after Widodo became president in October 2014. In the end, Indonesia chose China, which proposed a PPP and demanded no financial contribution from the Indonesian government. Japan's Chief Cabinet Secretary Yoshihide Suga described the decision as "beyond common sense." Relations between Japan and Indonesia have since deteriorated.

The final judgement on the latest project will likely be made by the president as early as August.

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