Jakarta-Bandung high speed rail project poses big challenge for Jokowi

The Jakarta-Bandung high-speed-rail project is part of President Joko “Jokowi” Widodo’s ambition to upgrade Indonesia’s lagging infrastructure. The Indonesian leader has designated it a national strategic project, meaning that all government agencies are supposed to give it priority treatment, such as accelerating the issuance of permits.

If successful, the project will cut travel time between the two cities in western Java from about three hours by car to just 40 minutes. The US$5.5 billion (S$7.3 billion) project is funded mainly by a loan from China.

Controversies, however, have surrounded the project from the very beginning.

Much has been discussed about how Japan, the initial bidder, was outdone by China’s more attractive financing scheme that does not require any government guarantee.

Nevertheless, some argue that the scheme offered by China is misleading since Indonesia’s state-owned enterprises (SOE) have to eventually bear the cost of the project.

In addition, there are doubts about the project’s return on investment, which has so far been based on unrealistic projections on expected numbers of passengers.

SOE Minister Rini Soemarno has been a key person in advancing the project and in ensuring that it was awarded to China. This caused intra-cabinet tensions between Soemarno and former Transport Minister Ignasius Jonan, who was eventually removed from his position, ostensibly to smoothen the issuance of permits for the project.

Ms Soemarno has faced criticism in Parliament for what was seen as an intrusion on the authority of the Transport Minister.

Interestingly, it was President Jokowi who had personally assigned Ms Soemarno to lead the implementation process.

Coordinating Minister for Maritime Affairs Luhut Binsar Pandjaitan — a close confidant of the President — has also pushed for the project.

Notwithstanding support from top political leadership in Indonesia, the project has made little progress due to complicated land rights issues.

The construction was to begin in August 2016 but has largely stalled.

According to project developer, PT Kereta Cepat Indonesia China (KCIC), as of September 2017, only around 55 per cent of the total 600-hectare land needed for the 142-kilometre railway project has been acquired.

The government had initially awarded PT KCIC a fixed concession period of 50 years starting from May 31, 2019. However, delays in project construction mean that both parties will need to consider moving the project completion date to 2020 or even later.

One issue that the Indonesians faced was the tough stance taken by the China Development Bank (CDB), designated by the Chinese government as the lender.

It initially took the stand that 100 per cent of the land must be legally procured before the loan agreement could be signed.

Moreover, it required the project to be included in the national spatial plan (Rencana Tata Ruang Wilayah or RTRW) and the area designated for the railway route clearly specified.

Without this legal basis, local authorities could not procure some of the required areas. In April 2017, Mr Widodo finally signed a new government regulation including the project into the national spatial plan.

The next month, when he attended the Belt and Road Initiative Summit in Beijing, CDB signed a loan agreement with PT KCIC amounting to 75 per cent of the US$6 billion total project cost.

In other words, CDB had compromised on its earlier refusal to proceed before all the required land parcels had been fully acquired.

But by July 2017, Mr Widodo was worried about increased financial risks around the project.

He considered to offer China a majority stake in the project — possibly up to 90 from 40 per cent — in order to lessen the burden on Indonesia’s SOEs, and has asked Mr Pandjaitan and Ms Soemarno to evaluate the viability of reducing Indonesia’s shareholding composition to just 10 per cent.

The current shareholding arrangement has four Indonesian SOEs holding 60 per cent of the HSRP consortium: PT Kereta Api Indonesia, PT Wijaya Karya, PT Perkebunan Nusantara VIII and PT Jasa Marga.

All of these SOEs have huge financing needs, as they are also tasked with building other infrastructure projects, including toll roads, ports and dams.

The Jokowi administration is clearly facing both financial and time pressure to get the Jakarta-Bandung project running.

It requires China’s loan in order to expedite project construction, but the new loan disbursement agreement is conditional on land acquisition and various legal frameworks being completed first at the local levels. In short, even though Mr Widodo has signed a national spatial plan, it has to be synchronised with related regional spatial plans.

Cautious as China already is about putting money into the infrastructure project too early, it may not be as interested in greater ownership of the project as it is in lending money and undertaking the construction.

Among Indonesians, trust in the benefits of foreign investments, especially from China, is low. For instance, following Mr Widodo’s invitation for China to invest in Indonesia, critics accused him of wanting to “sell” the country to China.

A significant portion of Indonesians remains sceptical of the advantages of closer economic relations with China.

This is mainly due to a fear of competition and a history of ideological suspicions towards Beijing.

The Jakarta-Bandung high-speed rail project will put Mr Widodo’s ability to accelerate infrastructure development in Indonesia to the test. Despite the many controversies that surround the project, the president seems to strongly believe that it will boost the economy along the railway route, especially through transit-oriented development.

Mr Widodo has high expectations on the success of the high-speed rail project, expecting it to grow the tourism, manufacturing, logistics and property sectors and lay the foundation of a Jakarta-Bandung megapolitan area.

While there has been some progress on the ground, many challenges lie ahead, including for the President. For one, he will face a daunting task getting round the many regulations at both the local and national levels.

Moreover, in the short-term, the trickle-down effects of the project will not be obvious to the public. Hence it may not benefit Mr Widodo’s electability in the 2019 presidential election.

On the contrary, protracted land acquisition conflicts could easily be used by his political opponents to attack him, along with the oft-used nationalist line of selling out to the Chinese.

In short, the president will need to weigh more clearly the political benefits and costs of the project and decide how he plans to navigate this potential minefield in the months ahead.

ABOUT THE AUTHORS:

Siwage Dharma Negara and Leo Suryadinata are respectively Fellow and Senior Visiting Fellow at ISEAS–Yusof Ishak Institute. This is adapted from a piece in ISEAS Perspective.