Indonesia Seeks Debt Relief on China-Built Fast Rail Project

Another BRI project hits financial speed bumps

Our Correspondent

Apr 20

∙

Guest post

After years of delays and cost overruns that have added US$1.2 billion to the cost of its first high-speed train project, built and funded in cooperation with the Chinese government, Indonesian officials are now trying to negotiate payment terms that wouldn’t leave the government mired in budget problems.

Problems began at the start of the project, with published investigations citing inadequate planning on land acquisition, utility transfers, theft, and other issues and geological obstacles in tunnel construction. There are also questions over the line’s future profitability. The cost of the 142.3 km railway project, which connects Jakarta with the city of Bandung, has now reached US$7.27 billion, a 19.7 percent increase from the original US$6.07 billion. To cover the swelling cost, Indonesia is borrowing Rp8.3 trillion (US$555.9 million) from the China Development Bank. However, Indonesia considers the 4 percent interest rate set by China as burdensome.

Indonesia is only the latest problem child for China’s enormous Belt and Road initiative, a global web of infrastructure projects conceived under President Xi Jinping to assert China’s place in the world. Sri Lanka and Pakistan are swimming in debt to China, their economies on the brink because of repayment problems and cost overruns debt. Several African countries face similar problems. Zambia defaulted on US$17 billion in debt in 2020. As Foreign Policy Magazine reported, in 2017, China overtook the World Bank and the International Monetary Fund (IMF) to cement its position as the world’s biggest creditor, although Beijing has since scaled back its lending.

“But many of its borrowers—still reeling from the Covid-19 pandemic and Russia’s war in Ukraine, alongside Beijing’s lending practices—are now battling to pull their economies back from the brink,” the magazine reported. “Around 60 percent of China’s overseas loans went to financially distressed countries in 2022, compared with just 5 percent in 2010…Unable to pay China back, some cash-strapped governments are pushing for debt relief, forgiveness, or restructuring.”

Luhut B. Panjaitan, Indonesia’s Coordinating Minister for Maritime Affairs and Investment, recently visited Beijing seeking to negotiate the interest rate, later saying China was willing to lower interest on debt to 3.4 percent with a tenor of 30 years, still far from the figure the government wants of 2 percent with a tenor of 40 years, the initial financing scheme. Luhut said the government would not give up and would continue to negotiate.

China has requested that the State Revenue and Expenditure Budget (APBN) guarantee the loan, a deviation from the initial agreement in which China offered a business-to-business (B2B) scheme without government guarantees. Indonesia chose China for the project instead of Japan over the issue of government guarantees. The government has yet to agree, instead recommending guarantees to be carried out off-budget through PT Penjaminan Infrastruktur Indonesia (PII), an SOE under the Finance Ministry that is responsible for providing government guarantees for infrastructure projects developed under the Public-Private Partnership (PPP) scheme.

"Indeed there are still psychological problems,” Luhut said. “So they (China) want (guarantor) from the state budget. But we explained that the procedure will be lengthy. So we are pushing (guarantees) through PT PII because this is a structure the Indonesian government has just created since 2018."

China's demands are considered to have the potential to burden the state budget, with the government already having poured Rp3.2 trillion from the annual spending document to cover project expansion through state capital investment. From the beginning of planning for the project, Jokowi promised not to use state funds for the construction.

Many critics argue that loans to cover cost overruns only benefit China, given that the Indonesian government will bear the consequences of the mistakes in the initial planning process. The government, they say, was lured by over-optimistic project planning and creditors offering cheap interest. The critics expect that China won’t lower the interest rate to 2 percent because it knows Indonesia is stuck with continuing the project, considering that the country has already spent a lot of money. In the end, Indonesia will receive the interest expense from the cost overrun, which is actually very far from the initial agreement on the project.

Some 75 percent of the funding comes from a China Development Bank (CDB) loan, with the remainder a capital deposit from consortiums from each of the two countries, 60 percent Indonesian and 40 percent from a Chinese consortium. Work on the project began in 2016 and was targeted to operate in 2019. However, by the end of March, progress had reached 88.8 percent, and is scheduled to operate in August.

The high-speed train project has been controversial since its inception. China and Japan competed for the project even though Japan had already conducted a feasibility study. Jokowi set several conditions including the project being off the state budget and having to go through a B2B scheme. Indonesia issued no guarantees regarding project funding. This is more in line with China's offer, which originally proposed a US$5.5 billion fee through the business-to-business scheme without state revenue funds. Japan proposed the project cost at US$6.2 billion, using a government-to-government scheme with a 50 percent government guarantee. The Japanese projected the venture to start in 2017 and finish four years later.

Jokowi chose China with the main consideration being project development without state budget and government guarantees. He had high hopes that the fast train could expedite and facilitate the mobility of goods and people, increase competitiveness, and create new economic growth. However, Indonesian government participation in co-funding the expansion of the project now is contrary to Jokowi's prohibition of the use of state funds for project development.

Experts argue that even though China doesn’t want to reduce interest rates, it doesn’t mean Indonesia has the potential to default, but rather that the debt burden would be very heavy and would fall on the state budget. But if indeed Indonesia were to default, China would take over management of the fast trains, including revenue from fares. If that were the case, instead of reaping profits from the project, Indonesia would only incur losses.