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Not a Grandstand Project

Translator

Editor

9 February 2016 09:26 WIB

President Joko Widodo sign an inscription stone marking the ground breaking the Jakarta-Bandung high speed train project. TEMPO/Aditya Herlambang Putra

TEMPO.CO, Jakarta - President Jokowi may have taken a wrong and dangerous path when he signed, in quick succession, two contradictory regulations that will impact the Jakarta-Bandung rapid rail project.

The first, Presidential Regulation No. 107/2015 on the acceleration of infrastructure and facilities, stipulates that the Rp74 trillion project will be entirely funded by the private sector, in other words by the Indonesia-China Fast Railway Consortium. The government will not provide any guarantees, the clause that assured the Chinese consortium's victory over its rival Japanese bidder. 

Three months later, in January, Jokowi signed Presidential Regulation No. 3/2016 on the acceleration of strategic national projects, which raised the possibility of a guarantee for the Jakarta-Bandung venture. The appendix stated that it could be characterized as strategic and as such could qualify for a government guarantee.

Next came the inconsistent statements from the president's own ministers. According to Finance Minister Bambang Brodjonegoro, the government would not be providing any financial guarantees. State-Owned Enterprises Minister Rini Soemarno then weighed in, saying the government would have to give a 'political guarantee' an expression that is difficult to separate from a financial guarantee if the project runs into money problems. 

The contradiction between the two regulations could have serious implications for the future of the project. What is more, the experience of other nations teaches us that rapid rail projects lose money, or at least have problems turning a profit. For example, Japan's Tkaid Shinkansen broke even only after eight years of operation. Of five fast rail projects in China, only one has recovered its costs, while the rest are still in the red. And a rapid-rail consortium in Taiwan is on the verge of bankruptcy.

The Taiwan example is relevant to the Jakarta-Bandung rapid railway because the Taiwan High Speed Rail Consortium initially promised to provide all the funds needed a total of US$18 billion, or Rp243 trillion. The involvement of the Taiwanese government was limited to a feasibility study. The Taiwanese-Japanese consortium obtained a 35-year concession under a build-own-transfer arrangement.

The 339-kilometer line linking Taipei in the north with Kaohsiung in the south was completed in 2007, 20 years after the feasibility study. Money trickled in and in the fourth year the consortium booked a 'profit', but this was apparently the result of accounting tricks.

After 20 years of operation, the government was forced to inject capital into the operation to keep it running. But this did not solve the problem. Now the consortium is pondering a restructuring, which would include extending the concession period from 35 to 75 years. With a mountain of debt and a long concession period, rapid rail in this case is just not turning out to be a profitable business.

Given the experiences of Japan, Taiwan and even China itself, there is a huge risk of losses or outright failure. The project might grind to a halt at the financing stage, but this could also happen after the railway starts operating. For example, the Taiwan consortium was laid low by its inability to bear the financial burden of depreciation and interest rates. It is highly likely Indonesia will face similar problems.

The four state-owned companies that are part of the Indonesia-China consortium are now in a state of confusion as they try to raise Rp750 billion of initial capital, or 60 percent of the partnership's shares. This burden will only grow when the loan is added on. With such a large ownership share, Indonesia also has more to lose in the event of failure than the Chinese.

To ensure there are no unwelcome surprises, Jokowi should revise Presidential Regulation No. 3/2016. And the government should reevaluate the capacity of the consortium to raise the necessary funds and the ability of our state enterprises to bear the expected operational losses. If the project does not make business sense, the government should not hesitate to delay or cancel it.

The provision of mass rapid transport links to reduce congestion and improve the welfare of the people is a noble goal. But this ideal should not be reduced to mere grandstanding because of a prestige project. The government should assure its people that this project is viable as a business. We do not want the experience of Taiwan to be repeated here. (*)

Read the full story in this week's editio of Tempo English Magazine



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