Concerns over China-backed high-speed railway do not derail Indonesia’s agency

The long-delayed, China-backed Jakarta-Bandung high-speed railway opened to the public on Oct 2, with the journey of its first bullet train bringing to a conclusion the fraught process of building high-speed rail in Indonesia. China provided substantial financial backing for the project through its policy banks and state-owned enterprises.

Despite concern this could be intended to gain influence in the largest economy of Southeast Asia, Indonesia has firmly maintained its agency and minimised the impact on the sovereignty of its economy by making sure it did not put up its state budget as collateral for the project, which vastly overran its original cost estimates.

This project is one of many seen through the prism of geopolitical rivalry in Southeast Asia, even though it ​​seems like a strategic economic win for both Indonesia and China where Indonesia was able to fill its connectivity infrastructure gaps while China was able to assert its influence through its Belt and Road Initiative (BRI). However, the project was plagued by economic troubles.

DEBT TRAP DIPLOMACY?

With construction beginning in 2016 at the influential zenith of China’s BRI, a majority of the project’s financing was provided by the China Development Bank, with a bumper budget that started off at US$4.5 billion in concessional financing through Indonesia-China joint ventures. However, due to COVID-19 and other logistical delays, the project ran over time and over budget by US$1.2 billion.

To cover the overrun, China wanted Indonesia to put up its state budget as collateral, raising questions about whether China was practicing debt trap diplomacy in the developing world.

Questions still remain about the pressure on Indonesia to repay the mammoth loan, with China pushing for a repayment interest rate of 3.4 per cent while Indonesia insists on a much lower 2 per cent.

But China was not the only country to offer financing for this project. Funding for the Jakarta-Bandung high-speed railway was originally a competition between China and Japan. After Japan’s success in meeting Jakarta’s population density challenge by building the Jakarta Mass Rail Transit System in the 2000s, an opportunity to improve inter-city connectivity was proposed in the form of the Bandung-Jakarta high-speed railway.

In 2015, both China and Japan submitted a bid. While there were added advantages to the Chinese bid, such as an offer of technology transfer, the key reason cited for Japan losing the bid was its insistence on a guarantee of loan from the Indonesian government. This highlights how Indonesia sought to maintain its sovereignty.

Given that Indonesia rejected Japan’s bid on these grounds, Indonesia insisted it would require the same of China. However, Beijing played hardball when asked by Jakarta to pay the budget excess, an encounter that put a strain on the once strong Indonesia-China economic relationship.

Similar large infrastructure projects, such as Nusantara - Indonesian President Joko Widodo’s ambitious project to move the country’s capital to East Kalimantan - initially attracted Chinese funding interest from companies such as Alibaba Cloud but ultimately failed to come to fruition.

SOUTHEAST ASIAN COUNTRIES HAVE AGENCY

What the high-speed rail project has illustrated, however, is that Indonesia is intent on maintaining its agency over such initiatives, evident in its decision to pay out of its own budget for the overrun costs. And there is a growing trend in Southeast Asia of countries following suit despite the promise of large infrastructure investments from China.

The East Coast Rail Link in Malaysia, financed by the Export-Import Bank of China, has faced similar issues. Stalled since 2016, with an initial projected cost of US$16 billion, the project was renegotiated by Prime Minister Mahathir Mohamad in 2019 to US$11 billion and a favourable contract for Malaysian workers to make the investment a more equitable deal between Malaysia and China.

Similarly in Thailand, China was set to build a high-speed railway connecting Bangkok to Nakhon Ratchasima, securing funds from China’s EXIM Bank and state-owned enterprise China Railway International Company Limited. Estimated at a cost of 179 billion baht (US$5 billion), of which 13.2 billion baht would come from the Thai government’s budget, China would provide the remaining 166 billion baht through concessional financing.

However, the funding conditions caused concern for Thailand’s Public Debt Management Office. The terms of China’s loans, specifically the transfer of technology (the loan clause stipulated that Thailand was restricted to using Chinese technology) and the requirement that Chinese materials and workers be used for the construction, were not accepted by the Thai authorities.

As a result, the project reached a stalemate.

The Jakarta-Bandung high-speed railway project highlights that even though China’s economic role remains substantive through its development finance, the agency of Southeast Asian countries cannot be discounted.

This has broad implications for the region’s geopolitics, which are often only seen through a US-China rivalry lens. Southeast Asian nations will ultimately protect their own interests without necessarily choosing a “side” or depending on any great power.

Teesta Prakash is a former research associate in the Southeast Asia Program and Jack Sato is a data analyst for the Asia Power Index at the Lowy Institute. This commentary first appeared on the Lowy Institute’s blog, The Interpreter.