Indonesia: Railroaded Into Debt By Beijing

Indonesia: Railroaded Into Debt By Beijing

A case study of Beijing’s blatant disregard for accepted lending and business practices.

tippinsights Editorial Board

With much fanfare, the Indonesian government under President Joko Widodo awarded the coveted Jakarta-Bandung high-speed rail project to China, in 2015, instead of Japan as was expected. But Jakarta was stepping onto a slippery slope of debt and into the ruthless clutches of the dragon.

BRI And Indonesia

Guesstimated to cost around USD 1 trillion, the monstrous BRI project involves around 140 countries spread across Asia, Europe, and Africa.

72 Indonesian projects fall under President Xi Jinping's flagship Belt and Road Initiative, totaling a bill of $21 billion. According to AidData, an international development research lab based at the College of William and Mary in Virginia, nine projects under the scheme, worth $5.2 billion, are already riddled with "scandals, controversies or alleged violations," and four were flagged for "financial wrongdoing."

There is nothing rosy about this picture.

The Jakarta-Bandung high-speed rail is one such contract. The 143-kilometer railroad between the capital and Bandung, the country's major technology center, was to be ready by 2022. The project cost of US$6.07 billion was to be funded by a $4.5 billion Chinese loan. According to AidData report, the railway loan is to be paid over ten years and attracts a 2% interest.

Ousting Japan

It is interesting to note that Japan had completed an exhaustive feasibility survey before China entered the picture. The proposal was for a Jakarta - Surabaya rail line, a total of 453 miles that would connect the two ends of the island, Java.

Japan presented internationally acceptable/offered terms, while China gave copious amounts of financial aid and unusual sops like waiving sovereign guarantees. Beijing offered Jakarta a $50 million "general loan package" loan before the papers were signed. The Indonesian government was to bear no fiscal burden of the project.

All the promises made by China to one-up Japan have come to naught. The project is not cheaper, not being commissioned faster, nor is not free of mismanagement issues.

Now, Jakarta is being forced to tip into its state budget to meet the cost escalation and complete the rail line that critics claim will not be affordable to most regular commuters in the stretch.

Financial Strain

Dogged by construction delays, held-up environmental permits, and land acquisition troubles, the rail line is two years behind schedule, and the projected cost is 8 billion. Officials claim that nearly a third of the project is complete. Yet, crucial aspects like the construction of three of the 13 tunnels are pending. Many believe the rail line will take much longer to materialize.

There have been indications of financial stress among the four state enterprises part of the joint venture. Wijaya Karta Tbk, a 38% stakeholder, handed over control to another partnering firm. There are also reports that the government pumped in an additional $286.7 million into the venture from its 2022 State Budget.

Sliding Into Debt

The AidData report presents a grim picture. It is estimated that Indonesia has $4.95 billion of sovereign debt exposure to China and an additional 17.23 billion in "hidden debt." This means that more than a third of the country's debt to another is "off the government books."

The debt trap is real. There will be harsh consequences for defaulting on payments. Sri Lanka had no recourse but to hand over Hambantota Port to China's state-owned Merchants Port Holdings on a 99-year lease as the country could not pay back the funding capital debt to China. The island nation's story is a stark warning to others who have borrowed heavily from Beijing and its state-owned enterprises and financial institutions.

Finance, or more specifically credit, is one of China's largest exports to the world. Yet, such massive lending is not reported to the IMF, the BIS, or the World Bank. Shockingly, the largest creditor in the world is not a member of the Paris Club. Reputed credit institutions often question China's terms of lending. Usually, projects like the Jakarta-Bandung high-speed rail will attract very low-interest rates and long repayment windows.

That Beijing gets away with such blatant flouting of acceptable standards of lending and business practices exposes the wide gap in credit sought and given to developing countries.


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