Negotiations on Indonesia’s China-funded rail project cost overruns hit snag

China and Indonesia have hit a snag over funding a U.S. $2 billion overrun for a Beijing-backed high-speed rail project linking Jakarta with Bandung, the head of the consortium building it said Thursday.

Indonesian President Joko “Jokowi” Widodo on Thursday inspected the project and expressed optimism the rail line would become operational in June 2023, amid talk that he and Chinese President Xi Jinping would test ride the railway next month after the G20 summit in Bali.

Dwiyana Slamet Riyadi, president director of the consortium, PT Kereta Cepat Indonesia China (KCIC), said he hoped to soon end negotiations with the Chinese on the cost overruns “so that the problem does not interfere with the progress” of the project.

“Each side works on different assumptions,” Dwiyana told reporters, adding that the Chinese side had a lower estimate of the cost overrun because it assumed the network band used in railway communications is free.

The 900 Mhz band is used by cellular operators, meaning KCIC would need to invest 1.3 trillion rupiah (U.S. $84.4 million) to clear the frequency “so there will be no interference,” Dwiyana said. 

“We hope the Jakarta-Bandung high-speed train will spur greater mobility of people and goods, better competitiveness and give rise to new centers of economic growth between Jakarta and Bandung,” Jokowi told reporters. 

Dwiyana said there had been a plan for government leaders to test out the train.

“There was a high level discussion where I couldn’t contribute, but the idea is that Indonesia President Joko Widodo and [Chinese president] Xi Jinping will do a test ride of 15 km to witness the advanced technology here,” he told reporters.

Once operational, the trains are expected to reach speeds of 350 kph (217 mph) and make up to 68 trips per day between Jakarta and Bandung. Travel time is expected to be between 34 and 45 minutes, compared with 2.5 hours by regular trains, Transportation Minister Budi Karya Sumadi told reporters in August.

The project is part of the Belt and Road Initiative, China’s $1 trillion-plus program to finance and build infrastructure across the globe.

Since construction began in 2017, the rail line has been dogged by criticism about its impacts on surrounding areas as well as concerns about costs rising to nearly $8 billion, compared to the original estimate of $6 billion.

In October 2021, Jokowi decided to allow the government to share the cost of the project, contradicting an earlier pledge and decree in 2015 that prohibited the use of state funds for its construction.

A month later, the finance minister told a parliamentary panel that the government had decided to inject 4.3 trillion rupiah ($299 million) into the project. Critics had expressed concern the move could deplete state coffers and lead Indonesia into a debt trap.

The Indonesian government proposed that the China Development Bank, which is financing the project, shoulder 75 percent of the cost overrun, with the consortium of Indonesian and Chinese companies covering 25 percent. KCIC is a joint venture of four Indonesian state-owned companies – KAI, Wijaya Karya, PTPN VIII, and Jasa Marga – and a consortium of Chinese companies.

The Indonesian consortium controls 60 percent of KCIC, while China Railway Engineering Corp. and other Chinese companies control the rest.

In February, the consortium said the high-speed rail service was expected to become profitable 40 years after completion – not 20 as earlier projected – partly because plans to move the national capital from Jakarta to Borneo could sharply reduce the number of riders.

‘Needs of few people’

Suryadi Jaya Purnama, a member of Parliament’s transportation and infrastructure commission, warned that many citizens could not afford to ride the train.

“Because with high ticket prices, the train will only serve the transportation needs of few people,” he told BenarNews.

The $8 billion price tag is much higher than the original cost proposed by Japan following its feasibility study for the project, he said. Japan’s proposal cost 600 billion yen, or $5.29 billion at current rates, according to a report in Nikkei Asia.

Following a bidding process, China was awarded the project. The Jokowi government said it opted for Beijing’s bid because it did not require any Indonesian government financing or a government guarantee.

Muhammad Andri Perdana, a researcher at the Center of Economic and Law Studies, said the government should insist that the China Development Bank fund its share of the cost overrun.

“This is an investment project, but how come they aren’t willing to share the risk of the investment?” Andri told BenarNews.

An AidData study released last year noted that Indonesia owes $17.28 billion in “hidden debt” to China. Nearly 70 percent of China’s overseas lending is directed to state-owned companies and private-sector institutions, meaning the debts, for the most part, do not appear on government balance sheets, said the U.S.-based international development research lab.