The project, which is partly funded by China, has seen its cost increase by nearly 20 percent, forcing Indonesia to seek additional loans from the China Development Bank (CDB). However, economists warn that if the project fails to generate enough revenue or results in debt defaults, it could be considered a bad investment that would saddle Indonesia with debt and place further pressure on its already inflated state deficit.
Weeks ago, a renowned Indonesian economist, Yusuf Wibisono, who is also the Director of the Indonesia Development and Islamic Studies (IDEAS), raised a pertinent question whether Indonesia has fallen into the debt trap.
He insisted that the original agreement was supposed to operate under the business-to-business scheme. Unfortunately, it didn’t.
The high-speed rail project, which is expected to be completed by 2024, is the first of its kind in Southeast Asia. The 142-kilometer rail line is designed to reduce travel time between Jakarta and Bandung from more than three hours by car to less than an hour by train. The project is also expected to boost economic development and improve quality of life in both cities and along the route.
However, the project has also been plagued by various problems, such as land acquisition disputes, environmental concerns, technical issues, and political controversies. The most pressing problem, however, is the financial burden that the project imposes on Indonesia.
According to the latest estimates, the project's cost has increased from $6.07 billion to $7.3 billion, up 19.7 percent representing a cost overrun of $1.23 billion. The cost increase is mainly due to currency fluctuations, inflation, and changes in design and specifications.
Again, as Yusuf said, the joint venture owned 60 percent by four Indonesian state-owned enterprises and 40 percent by a consortium led by China Railway was also obligated to pay for any cost overruns, which “… none of these things happened,” he said.
To cover the cost overruns, Indonesia has sought a $560 million loan from the CDB, which is already providing 75 percent of the project's financing. The loan agreement was signed in March 2023 and is expected to be disbursed soon. However, this also means that Indonesia's debt to China will increase, raising concerns about its debt sustainability and sovereignty.
Economists have warned that the high-speed rail project could be a bad investment for Indonesia if it does not meet its revenue targets or results in debt defaults.
According to a study by the Institute for Development of Economics and Finance (INDEF), a Jakarta-based think tank, the project's internal rate of return (IRR) is only 8.56 percent, which is lower than the minimum acceptable rate of return of 10 percent. The study also found that the project's break-even point would be reached only after 40 years of operation.
Moreover, the project could place a further strain on Indonesia's finances, which are already under pressure from the COVID-19 pandemic and other economic challenges. Indonesia's state deficit reached 6.09 percent of gross domestic product (GDP) in 2022, exceeding the legal limit of 3 percent.
The government has also increased its borrowing to finance its stimulus spending and infrastructure projects. As of February 2023, Indonesia's public debt stood at $436.9 billion, equivalent to 38.8 percent of GDP.
If the high-speed rail project fails to generate enough revenue or results in debt defaults, it could have a negative impact on Indonesia's credit rating, making it more expensive for the government to borrow money in the future. It could also lead to higher taxes or cuts to public services in order to pay for the debt.
The Indonesian government has defended the high-speed rail project, arguing that it will boost the economy and improve quality of life. However, some critics have argued that the project is a luxury that Indonesia cannot afford, especially given its current financial situation. The project has also been criticized for its lack of transparency and accountability.
It is important to note that the high-speed rail project is just one of many infrastructure projects that the Indonesian government is currently undertaking. The government has ambitious plans to build new roads, railways, airports, and other infrastructure projects in the coming years. However, critics worry that the government is overextending itself and that it may not be able to afford to complete all these projects.
The Indonesian government needs to carefully manage the high-speed rail project to ensure that it is completed on time and within budget, and that it meets its revenue targets. If the project is not carefully managed, it could have a significant negative impact on Indonesia's economy and finances.
And what can the Government of Malaysia learn from this? A lot.
* Ahmad Zaim Ahmad Tawfek used to assist a few Ministers in shaping the right and progressive economic, youth and foreign policies for Malaysia.
** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.
