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Belt and Road

Indonesia turns to state coffers as China-led rail project's costs soar

Belt and Road deal sours amid mounting delays for Jakarta-Bandung line

A tunnel under construction for the Jakarta-Bandung railway: The long-delayed 140 km link would slash travel time between the cities to 45 minutes from three and a half hours.   © Reuters

JAKARTA -- When Indonesia awarded the contract for the Jakarta-Bandung high-speed railway to a Chinese consortium six years ago, the project was supposed to be completed by 2018 with no financial contributions or guarantees required from the Indonesian government.

But with construction years behind schedule and billions of dollars over budget, President Joko "Jokowi" Widodo issued a decree Sept. 6 that lets the government put state funds into the project -- negating one of the biggest perks that had led Indonesia to choose the Chinese proposal over a Japanese alternative.

Much of the rail link's woes stem from poor initial planning, which failed to identify all the ways the project could go wrong. Indonesia's experience could have wider implications for the growing race to build infrastructure in Southeast Asia, with China's Belt and Road initiative on one side and efforts by Japan and the U.S. on the other.

China and Indonesia signed a deal in September 2015 for construction of the 140 km rail link providing a 45-minute connection between Jakarta and the West Javan city of Bandung, compared with three and a half hours on existing trains.

Indonesia originally expected construction to cost $5.5 billion, but had increased its projection to $6.07 billion as of January, five years since the project broke ground.

A more recent review by Kereta Cepat Indonesia China, a joint venture among Indonesian state-owned enterprises, Chinese rail companies and the operator of the project, pegged the cost at no less than $7.97 billion.

The Jakarta-Bandung high-speed railway has already overrun its budget by $1.9 billion, an executive at state rail operator Kereta Api Indonesia (KAI) told a parliamentary hearing in early September.

KAI said land acquisition and construction costs exceeded expectations, while repeated delays ate into the projected income. Tax and financial consulting fees piled up, the company also said.

KCIC was supposed to finish acquiring land for the project by the end of 2016. But faulty records kept by authorities made it harder to find the actual landowners. The rail link also required about 30% more land than originally planned, raising costs further.

Who covers these overruns has become a major issue as well. The project was to fund 75% of its costs through loans from the China Development Bank, and the rest from KCIC coffers. KCIC, in turn, is 60% owned by the Indonesian side and 40% by the Chinese side.

But the Indonesian side apparently did not inject enough capital, and China is refusing to provide additional loans through the CDB or have Chinese companies shoulder any more costs.

Before China secured the project, Japan had proposed building a shinkansen-style rail link from Jakarta to Bandung. It was to cost 600 billion yen ($5.29 billion at current rates), with 450 billion yen funded via 40-year official development assistance (ODA) loans. Japan offered a rate of 0.1% on the loans -- lower than the typical rate of at least 1% -- in exchange for a Japanese company winning the contract.

But Widodo chose the Chinese option, which promised the transfer of high-speed rail technology and kept Indonesia off the hook for any costs or debt repayment. China's plan to finish construction in 2018, compared with Japan's potentially lengthy screening process before even breaking ground, also contributed to the decision.

"For Japanese ODA projects, we conduct a thorough cost analysis beforehand to avoid incurring extra costs down the line," a Japanese government official said. Tokyo scrutinizes the recipient government's plans for securing needed land when official loans are involved.

The rail link is about 79% complete, with operations not expected to start until the end of 2022 -- later than the 2021 date in the Japanese proposal. Other advantages of the Chinese plan have also dissipated, with costs now over 40% higher than under the Japanese proposal and Indonesia preparing to put state funds into the project.

Southeast Asia has emerged as a battleground for development as Japan and the U.S. vie with China for greater influence in the region. But Chinese assistance is accused of fueling greater corruption in developing countries.

While Japan stresses its sustainable, high-quality and transparent development aid, the country has struggled to cinch infrastructure contracts in Southeast Asia. Indonesia's quagmire could provide hints on how Tokyo can better woo the region.

Additional reporting by Bobby Nugroho.

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