The Indonesian government will dip into state funds to fund a bloated Chinese-backed rail project

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The Indonesian government will dip into state funds to fund a bloated Chinese-backed rail project
A passenger train crosses the Chikubang bridge as it travels from Bandung to Jakarta near Padalarang in West Java, Indonesia, Aug. 25, 2015.

Experts and an opposition lawmaker warned on Tuesday that the Indonesian president’s decision to allow the government to share the cost of a financially bloated China-backed railway project could deplete state coffers and lead his country into a debt trap.

Last week, President Joko “Jokowi” Widodo signed a presidential decree authorizing the government to provide funds for the Jakarta-Bandung high-speed railway, China’s flagship One Belt, One Road (OBOR) project in Indonesia, which is running about $2 billion over budget.

A presidential spokesman said Jokowi’s directive would allow the project to be completed, but an economist said Jokowi’s decision came at an inopportune time.

“The decision will place additional strain on the state budget, which is already under stress as a result of the pandemic,” Mohammad Faisal, executive director of the Indonesian Center for Reforms of Economics (CORE), told BenarNews, an RFA-affiliated online news service.

Jokowi’s new decree supersedes one he signed in 2015, which prohibited the use of state funds for the project – Indonesia’s first foray into building a high-speed rail line. The latest decree makes no mention of how much money the government will put into the project, the cost of which has risen to $7.9 billion from an estimated $6 billion.

According to Faisal, state revenues are currently in disarray.

“The government needs to rethink its priorities,” he said.

Separately, Finance Minister Sri Mulyani Indrawati stated on Tuesday that the budget deficit for this year may be higher than previously estimated. She predicted that COVID-19 measures would cause it to rise to 5.82 percent of GDP, up from the previous estimate of 5.7 percent, as a result of a horrific surge in infections between June and August.

Local state-owned companies make up 60% of the PT Kereta Cepat Indonesia China (KCIC) consortium that is building the railway, but the domestic firms operate as commercial entities with no government assistance.

According to the Jakarta Post, Arya Sinulingga, spokesman for the Ministry of State-Owned Enterprises, said in a statement Sunday that the pandemic had depleted the cash flow of many construction SOEs involved in the high-speed rail project.

Jokowi, according to presidential spokesman Ali Mochtar Ngabalin, is determined to see the project through.

“What’s wrong with using the state budget to expedite the completion of a national strategic project?” Ngabalin spoke to CNN Indonesia.

However, a politician from the opposition Prosperous Justice Party (PKS) chastised Jokowi for breaking his earlier promise that no money from state coffers would be spent directly on the high-speed rail project.

“This demonstrates how poorly planned it is,” said PKS lawmaker Ecky Awal Mucharam in a statement.

The Jakarta-Bandung rail line, inaugurated by Jokowi in 2016, is expected to reduce travel time between the Indonesian capital and Bandung to 40 minutes from three hours, according to officials.

The project is part of Beijing’s OBOR infrastructure program, which is expected to cost more than $1 trillion USD to build a network of railways, ports, and bridges across 70 countries.

Since it began construction in 2017, the rail project has been plagued by criticism about its effects on surrounding areas, as well as concerns about rising costs.

Critics claim it has harmed the homes of many people who live along the 89-mile stretch of the future line, as well as deteriorated air quality and clogged canals.

Rising rail project costs, combined with government intervention, could lead Indonesia into a debt trap, according to Bhima Yudhistira, director of the Center for Economic and Law Studies (CELIOS).

“The government would then be forced to continue collecting more taxes from the public or increase debt in the future,” Bhima explained to BenarNews.

That means the government may have to borrow to fund the project, which is now set to be completed in 2022, three years later than its original 2019 deadline.

According to a study released late last month by AidData, Indonesia owes China $17.28 billion in “hidden debt,” which is more than four times its reported sovereign debt of $3.90 billion.

According to AidData, a U.S.-based international development research lab, nearly 70% of China’s overseas lending is now directed to state-owned companies and private-sector institutions, and the debts, for the most part, do not appear on government balance sheets.

“The ‘hidden debt’ problem is less about governments knowing that they will have to service undisclosed debts (with known monetary values) to China than it is about governments not knowing the monetary value of debts to China that they may or may not have to service in the future,” the report stated.

According to a deputy at the Coordinating Ministry for Economic Affairs, this is not hidden debt.

“They are Chinese investments,” Iskandar Simorangkir told BenarNews.

CELIOS’s Bhima urged the House of Representatives (DPR) to conduct an evaluation of the project.

“The DPR must investigate the true cause of the project’s cost increase.” “It’s risky for the state’s finances in the long run,” Bhima said.

Aside from cost overruns, the rail line cannot be commercially viable, according to Agus Pambagio, a public policy expert and former government trade negotiator. The reason, he claims, is that the rail line’s stations are not in densely populated urban areas.

“I warned Jokowi that things like this could happen. “It was a blunder from the start,” Agus told CNN Indonesia.

Design changes and rising land prices, according to the Ministry of State-Owned Enterprises, were factors in the project’s cost overrun.

“Almost every country has gone through this, and this is our first [high-speed train project],” ministry spokesman Arya said.

Agung Budi Waskito, CEO of PT Wijaya Karya, a member of the consortium of local companies, stated in April that the group was negotiating with China to increase its stake in the project due to rising costs.

There has been no word on how those negotiations progressed since then.

A spokeswoman for the Indonesian-Chinese consortium building the rail line, Mirza Soraya, declined to comment on the controversy.

“We’re concentrating on speeding up the construction,” she explained.

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