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Why Indonesia Should be Cautious in Extending its High-Speed Railway

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Pacific Money | Economy | Southeast Asia

Why Indonesia Should be Cautious in Extending its High-Speed Railway

The eastward extension to Surabaya may make economic sense, but Jakarta should first learn from the troubles faced during the construction of the Jakarta-Bandung line.

Why Indonesia Should be Cautious in Extending its High-Speed Railway

Workers lower an electric multiple unit, part of Chinese-made high-speed passenger train, onto a truck at Tanjung Priok Port in Jakarta, Indonesia, Friday, Sept. 2, 2022.

Credit: AP Photo/Dita Alangkara

Recently, Indonesia’s Ministry of Transportation announced plans to extend the high-speed railway linking Jakarta and Bandung. Risal Wasal, the director general of railways at the ministry, said that with the China-backed Jakarta-Bandung Fast Train slated to begin operations on August 18, it should later be extended to the city of Surabaya in East Java.

While Risal did not give a timeframe for the extension, the Indonesian government has been seriously considering the plan since it was first announced last year. Currently, four ministers are carrying out the feasibility study, namely, Minister of Maritime Affairs and Investment Luhut Binsar Pandjaitan, Minister of State-Owned Enterprises Erick Thohir, Minister of Transportation Budi Karya Sumadi, and Minister of Public Works and Public Housing Basuki Hadimuljono.

While it is still unclear which country will be the main investor in the project, there are several reasons to believe that Indonesia will once again partner with firms from China, which have helped build the 142-kilometer Jakarta-Bandung line.

In an interview in June of this year, Luhut Binsar Pandjaitan, the main proponent for China’s involvement in the railway project, stated that PT Kereta Api Indonesia China (KCIC), the joint venture firm that completed the project, is ready to conduct a preliminary study for the extension of the railway route to Surabaya. He argued that China’s experience in high-speed rail made it the obvious candidate. “If we look at it now, China is the one that produces the most high-speed trains in the world, with 40,000 kilometers,” he said.

Luhut believes that Chinese firms will be more cost-effective than their main rivals, and even suggested that the construction of the extension could cost less than the Bandung-Jakarta line, given the skills and technology that were transferred to Indonesia during the construction of the latter. Another figure who has hinted at China’s involvement in the extension of the line is Transport Minister Budi Karya Sumadi.

Nonetheless, reflecting on the challenges of the Jakarta-Bandung high-speed rail project, which was colored by controversies and unexpected cost overruns, Indonesia should be cautious in once again signing on with Chinese firms.

The first thing to note is that the debt to finance the construction of the Jakarta-Bandung High-Speed Railway is still mounting without any clear sign of when it will be paid off, due to delays and cost overruns.

Chinese firms completed the feasibility study for the project in just four months (from May to August 2015), and Indonesia initially hoped to complete the project by 2019. It quickly became apparent that this would not be possible. The project is now scheduled to launch next month, resulting in a substantial cost overrun from $6.07 billion to $7.27 billion. These total costs have now gone beyond the Japanese government’s initial proposal of $6.2 billion, which also carried a lower rate of interest of 0.1 percent over 40 years. Initially, the Chinese bid proposed a lower total cost of $5.5 billion.

While the Chinese proposal ended up beating out the competing Japanese bid because it was considered capable of building the railway at a cheap price, due to the unpredictability of the global supply chain and Indonesia’s dependence on imports, the project’s cost has risen, placing additional strain on Indonesia’s economy. While other countries such as Zambia and Malaysia have successfully renegotiated their debts with China, the Indonesian government has failed to convince Chinese authorities to decrease interest rates from 3.4 percent to 2 percent for the cost overrun of the Jakarta-Bandung megaproject. Beijing feels that the pegged loan interest rate given to Indonesia is already less expensive in comparison to what it lends to other countries, which can reach 6 percent.

While initially the government had promised not to use the state budget to fund the project’s ever-increasing cost, in 2021, President Joko “Jokowi” Widodo issued a presidential regulation that modified the terms of the project’s financing. While it is still unclear whether Indonesia will fall into a Chinese “debt trap,” the project has significantly raised Indonesia’s foreign debt to China, which now stands at 315.1 trillion rupiah ($20.8 billion).

The potential financial loss is also paramount. Only if enough people are enticed to board the trains can the project’s projected breakeven point of 38 years be achieved. If they are discouraged by skyrocketing ticket prices, which could reach 150,000-350,000 rupiah (between $10 and $23), they may not do so. The government is planning to discontinue the already available cheaper and popular options such as the Argo Parahyangan train service, which also serves the Jakarta-Bandung route for just 80,000-120,000 rupiah ($5.30-$7.95) so that people will be forced to take the high-speed option. At least 5,000 people have signed a petition opposing the plan on

The extension of the high-speed rail eastwards to Surabaya makes sense, and many people will benefit from such a route, especially given that fast trains make more sense over long distances. At the same time, Indonesia needs to be cautious in moving forward with an extension.

The government needs to study whether the project is really in line with the needs of the community, particularly given that other modes of transportation are already available and have been relatively successful over the years. The government is also advised to conduct more thorough feasibility studies, to avoid the drama and cost overruns that have attended the Jakarta-Bandung project.

When taking on projects of this magnitude, Indonesia should exercise stronger due diligence and decision-making procedures than it did in the case of the Jakarta-Bandung line; billion-dollar projects shouldn’t only be undertaken for political reasons alone. Instead of only engaging with its traditional partners like China or Japan, the Indonesian government should consider partnering with other countries that have successfully developed fast trains. The ultimate choice ought to be supported by a reasonable financial analysis that doesn’t harm the Indonesian people or the nation’s fragile environment and has long-term benefits.