Jakarta-Bandung railway: Japan’s lost bidding lesson
William Hickey ; An associate professor and public policy
adviser for
the School of Government and
Public Policy in Jakarta
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JAKARTA
POST, 03 November 2015
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The Indonesian
government has seemingly settled on building a new Rp 800 trillion (US$58
billion) high-speed railway between Jakarta and Bandung with China “winning”
the bid, as they say.
The economic value of
this project covering 144 kilometers is highly doubtful, due to a well
traversed railway and toll road in already in place. State-Owned Enterprises
(SOEs) Minister Rini Soemarno claims it was a default position and both China
and Japan were rejected, then China actually “won” as it would use no state
funding. That position is also misleading, as will be mentioned later.
This project is being
done for political reasons no doubt, not utility. Political reasons for not
only Indonesia to showcase it, but also China. Japan is wise to take note of
this in future projects and may want to consider a “lookback” on ongoing
projects.
There are three
problematic areas with this project in regards to systems and finance. Some
are not apparent, but will rear their ugly heads soon once the ground
breaking commences.
First, the entire
project appears on paper to be a giant turnkey project. This means all the
skills and know-how transfer will be tightly controlled by China with it
institutions guiding its progress. In the plethora of news about it recently,
from Tempo to The Economist magazines, there is no mention of any labor
commitment or who will actually “do” the work.
China has gotten into
significant problems bidding on (even negatively bidding on) projects simply
so it can employ its own people. A precedent has been set with Chinese
mega-projects in Indonesia, where Presidential Regulation No. 72/2014 is
frequently violated, for example with power plant construction in Buleleng,
Bali,
Make no mistake about
it: Chinese SOEs, vertically from menial laborers from Gansu province to top
level Jiaotong engineers in Shanghai will use this project for their skills
inventory for future railway projects in other Asian countries. The hilly and
volcanic land in West Java will prove a vast training ground for them.
Not for Indonesians,
who may be given a few token jobs but will largely be shut out of the
project. It is doubtful the SOEs on the Indonesian side of the consortium
have insisted on this, but the Chinese side will. To that end, this entire
project is simply a labor and skills warm-up for the Asian Infrastructure
Investment Bank (AIIB).
Second, the building
consortium will be borrowing about $2.5 billion for this project. This is a
very dicey proposition in Indonesia, where revenues to pay back the dollar loans
are in rupiah, and it has precipitously declined against the dollar during
that time. The project could be financed in rupiah or better yet, yuan, which
would tie the costs closer to real prices of Chinese equipment and labor.
China has already devalued its currency once this year, while the dollar has
continued to soar.
Third is the
Indonesian SOE consortium itself. The statement issued by Minister Rini that
“no government guarantees are being made” a precondition of the winning bid,
shows a disconnect from the financial issue of fungibility of money and
commingling of assets, and perhaps a base misunderstanding of state-owned
companies altogether. State-owned companies don’t go bankrupt.
Technically, they can
through accounting gimmicks, but in substance, they can’t. It would mean the
government goes bankrupt, and political instability would ensue, as in this
case, the government and company are one. They may be put out of their misery
and shut down, or sold off, but the government must still assume all legacy
costs associated with SOEs, including loans and pensions. The obligations
still exist. The obligations with this railway project will crop up again.
There is no “plausible deniability”.
Four Indonesian
state-owned companies are involved in this consortia: Jasa Marga, PT Kereta
Api Indonesia, PTPN VIII, and Wijaya Karya (WK). The first three of them will
provide mostly land, with only WK putting up a large share of the money. If
the project goes broke, it is critical to note that WK and Jasa Marga have
received (and may continue to receive) state infusions of capital via the
mechanism of government equity injection.
The SOEs may claim the
money is for other projects and not for the railway, but the financial rules
about money being fungible into other projects and issues are clear.
It will be hard to
police where exact lines are drawn between funding the railway and other
things. To that end, state funds will actually be used on this project.
Indonesia should take
a playbook from the Chinese regarding high-speed railways. Except for small
cities, rarely is the beginning and end point in the center of a big city.
Consider Shanghai’s
two high-speed lines (CSV and Maglev respectively) are in the Shanghai
Hongquiao Station and Pudong (not the Shanghai central station) or Beijing’s
South Station.
A main reason for this
is the overcrowding and congestion — with more travelers and high-speed
infrastructure — that is created in an urban center. An unwritten reason is
that the Chinese government does not want masses of low-paid labor from
satellite cities flooding into its urban centers, daily or weekly, driving
down local wages and creating more traffic and pollution.
Sometimes efficiency
can be too effective. Suburban stations create a “speed bump effect” whereby
people will think twice if they have to make that extra 10 km journey into
the center with additional transportation costs. To that end, Jakarta should
consider a terminus for this train in Manggarai or even Halim stations,
certainly not Gambir. It will be a congestion disaster if effective.
With this logic
implied, Japan may possibly be a better candidate for more useful high-speed
rail from Jakarta to Surabaya (or an extension from Bandung to Surabaya). If
the Shinkansen is really the life-blood of Japan, it will get a second crack
at the wheel when these issues manifest.
A real winning bid
should demonstrate a technology and skills transfer plan, utilization of a
local or investing Asian currency, like the yen, in the project finance, and
finally clearly demarcated government guarantees based on the net present
value of fixed ticket prices in local currency into the future.
As the Chinese well
know with these projects, Indonesia should know as well, there is no free
deal. If China can’t get money out of the project, it will take it in kind
with know-how, which it will then transfer to other projects, maybe in
Indonesia again. ●
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