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Has BRI-backed Rapid Rail-Link Broken Indonesia's Investment Logjam?

With clear progress now having been made on the Jakarta-Bandung High-Speed Railway Link, investors are hoping that other high-profile projects will also be green-lit, with the Belt and Road Initiative continuing to act as a catalyst.

Photo: Finally beyond the prototype stage: The Jakarta-Bandung High-Speed Railway Link.
Finally beyond the prototype stage: The Jakarta-Bandung High-Speed Railway Link.
Photo: Finally beyond the prototype stage: The Jakarta-Bandung High-Speed Railway Link.
Finally beyond the prototype stage: The Jakarta-Bandung High-Speed Railway Link.

With work finally under way on the Walini Tunnel, part of the first phase of the Jakarta-Bandung High-Speed Railway Link, optimism is high for the successful completion of the project, the most high-profile component of the Belt and Road Initiative to get the official go-ahead in Indonesia. Construction work on the tunnel began just two months after the official signing of the US$4.5 billion loan agreement between China and its southerly neighbour that secured the funding for Indonesia's first High-Speed Railway (HSR).

At the time, the signing of the agreement was warmly welcomed across the region. It was seen as ensuring the completion of a strategic element of the Belt and Road Initiative in Southeast Asia's largest and most populous country, while also representing a high-profile public-private collaboration in support of Indonesia's multi-billion-dollar infrastructure-development programme.

The deal followed an agreement with the project's developer, Kereta Cepat Indonesia China (KCIC), a Sino-Indonesian consortium, that the China Development Bank (CDB) would become the largest single investor in West Java's Jakarta-Bandung High-Speed Railway Link. As a consequence, the 142-kilometre link will now be built by KCIC, which is 60%-owned by a consortium of four state-owned Indonesian companies (collectively known as Pilar Sinergi BUMN Indonesia) and China Railway International, China's largest rail operator, which owns the remaining 40%.

Once completed, the link will run 52.6km at ground level, 73km at an elevated level and 16.8km via tunnels. With an expected average speed of about 250kph, the journey between Jakarta, the Indonesian capital, and Bandung, the capital of West Java province, should take about 45 minutes. Although the project is scheduled to become operational in 2019, it still faces something of a funding shortfall, with a further $1 billion required, according to current estimates.

Despite the need to find further investment, the deal is seen as marking a sea change in Indonesia, with a number of bureaucratic and legal issues having scuppered several such mega-projects in the past. If, indeed, the go-ahead for the rail link does mark a turning point for the country, the potential opportunities open to investors are seen as immense.

According to the World Bank, Indonesia is the world's 10th-largest economy. As an archipelago consisting of more than 17,000 islands and with a population of more than 260 million, the country's sustainable economic growth is seen as dependent upon upgrading its overall infrastructure and boosting the connectivity between its major cities, rural areas and the wider Asian markets.

In a bid to boost growth, create jobs and raise living standards, Joko Widodo, the country's President, has prioritised the development of a number of strategic infrastructure projects, including highways, ports, airports, railways, water plants and power stations, since being elected in 2014. His government has also eased investment rules in order to attract a high level of private-sector funding and has announced plans to increase the overall infrastructure budget by 17% in the 2018 fiscal year.

The country, however, is still seen as having a long way to go. A recent report by McKinsey, the New York-headquartered management consultancy, estimates that Indonesia needs to spend $600 billion in the next 10 years just to plug the gaps in its critical infrastructure. The sheer scale of the problem has obliged the government to seek private-sector funding for at least 30% of the projected costs, with the Jakarta-Bandung railway deal seen as a blueprint for future public-private partnership deals.

Acknowledging the problem, as well as China's role in tackling it, Widodo said: "I believe that the Belt and Road Initiative is certain to strengthen economic relations between Indonesia and China, something that is especially important given our focus on infrastructure development, connectivity and maritime issues."

Underlining the importance of this relationship, Chinese investors are believed to have committed to about $1.4 billion of funding for Indonesia-based projects in 2016. As well as being funded by Chinese state banks, the majority of these projects have also been undertaken by Chinese construction and engineering companies.

As well as giving investors hope that a number of long-postponed projects will now be approved, the go-ahead for the high-speed rail link has also highlighted some of the issues likely to frustrate moves to proceed with a number of other infrastructure initiatives. Most obviously, despite official backing, construction work on the link continues to be hindered by wrangling over land-procurement rights, with the KCIC still struggling to secure clearance to proceed on a critical 600 sq km site.

For overseas investors, land acquisition has often proved to be a deal-breaker when it comes to backing Indonesian infrastructure projects, with the long delays occasioned by securing land titles often resulting in escalating costs. Another problem has been the country's centralised labour and tax regulations, which leave infrastructure projects obliged to require multiple approvals from local and national authorities, inevitably adding to any delays and cost-overruns.

Marilyn Balcita, Special Correspondent, Jakarta

Content provided by Picture: HKTDC Research
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