T

he Indonesian government has seemingly settled on building a new Rp 800 trillion (US$58 billion) high-speed railway between Jakarta and Bandung with China '€œwinning'€ the bid, as they say.

The economic value of this project covering 144 kilometers is highly doubtful, due to a well traversed railway and toll road in already in place. State-Owned Enterprises (SOEs) Minister Rini Soemarno claims it was a default position and both China and Japan were rejected, then China actually '€œwon'€ as it would use no state funding. That position is also misleading, as will be mentioned later.

This project is being done for political reasons no doubt, not utility. Political reasons for not only Indonesia to showcase it, but also China. Japan is wise to take note of this in future projects and may want to consider a '€œlookback'€ on ongoing projects.

There are three problematic areas with this project in regards to systems and finance. Some are not apparent, but will rear their ugly heads soon once the ground breaking commences.

First, the entire project appears on paper to be a giant turnkey project. This means all the skills and know-how transfer will be tightly controlled by China with it institutions guiding its progress. In the plethora of news about it recently, from Tempo to The Economist magazines, there is no mention of any labor commitment or who will actually '€œdo'€ the work.

China has gotten into significant problems bidding on (even negatively bidding on) projects simply so it can employ its own people. A precedent has been set with Chinese mega-projects in Indonesia, where Presidential Regulation No. 72/2014 is frequently violated, for example with power plant construction in Buleleng, Bali,

Make no mistake about it: Chinese SOEs, vertically from menial laborers from Gansu province to top level Jiaotong engineers in Shanghai will use this project for their skills inventory for future railway projects in other Asian countries. The hilly and volcanic land in West Java will prove a vast training ground for them.

Not for Indonesians, who may be given a few token jobs but will largely be shut out of the project. It is doubtful the SOEs on the Indonesian side of the consortium have insisted on this, but the Chinese side will. To that end, this entire project is simply a labor and skills warm-up for the Asian Infrastructure Investment Bank (AIIB).

Second, the building consortium will be borrowing about $2.5 billion for this project. This is a very dicey proposition in Indonesia, where revenues to pay back the dollar loans are in rupiah, and it has precipitously declined against the dollar during that time. The project could be financed in rupiah or better yet, yuan, which would tie the costs closer to real prices of Chinese equipment and labor. China has already devalued its currency once this year, while the dollar has continued to soar.

Third is the Indonesian SOE consortium itself. The statement issued by Minister Rini that '€œno government guarantees are being made'€ a precondition of the winning bid, shows a disconnect from the financial issue of fungibility of money and commingling of assets, and perhaps a base misunderstanding of state-owned companies altogether. State-owned companies don'€™t go bankrupt.

Technically, they can through accounting gimmicks, but in substance, they can'€™t. It would mean the government goes bankrupt, and political instability would ensue, as in this case, the government and
company are one. They may be put out of their misery and shut down, or sold off, but the government must still assume all legacy costs associated with SOEs, including loans and pensions. The obligations still exist. The obligations with this railway project will crop up again. There is no '€œplausible deniability'€.

Four Indonesian state-owned companies are involved in this consortia: Jasa Marga, PT Kereta Api Indonesia, PTPN VIII, and Wijaya Karya (WK). The first three of them will provide mostly land, with only WK putting up a large share of the money. If the project goes broke, it is critical to note that WK and Jasa Marga have received (and may continue to receive) state infusions of capital via the mechanism of government equity injection.

The SOEs may claim the money is for other projects and not for the railway, but the financial rules about money being fungible into other projects and issues are clear.

It will be hard to police where exact lines are drawn between funding the railway and other things. To that end, state funds will actually be used on this project.

Indonesia should take a playbook from the Chinese regarding high-speed railways. Except for small cities, rarely is the beginning and end point in the center of a big city.

Consider Shanghai'€™s two high-speed lines (CSV and Maglev respectively) are in the Shanghai Hongquiao Station and Pudong (not the Shanghai central station) or Beijing'€™s South Station.

A main reason for this is the overcrowding and congestion '€” with more travelers and high-speed infrastructure '€” that is created in an urban center. An unwritten reason is that the Chinese government does not want masses of low-paid labor from satellite cities flooding into its urban centers, daily or weekly, driving down local wages and creating more traffic and pollution.

Sometimes efficiency can be too effective. Suburban stations create a '€œspeed bump effect'€ whereby people will think twice if they have to make that extra 10 km journey into the center with additional transportation costs. To that end, Jakarta should consider a terminus for this train in Manggarai or even Halim stations, certainly not Gambir. It will be a congestion disaster if effective.

With this logic implied, Japan may possibly be a better candidate for more useful high-speed rail from Jakarta to Surabaya (or an extension from Bandung to Surabaya). If the Shinkansen is really the life-blood of Japan, it will get a second crack at the wheel when these issues manifest.

A real winning bid should demonstrate a technology and skills transfer plan, utilization of a local or investing Asian currency, like the yen, in the project finance, and finally clearly demarcated government guarantees based on the net present value of fixed ticket prices in local currency into the future.

As the Chinese well know with these projects, Indonesia should know as well, there is no free deal. If China can'€™t get money out of the project, it will take it in kind with know-how, which it will then transfer to other projects, maybe in Indonesia again.