Decision to transfer capital to Nusantara Another setback for China-backed BRI project hit by major cost overruns and delays

Indonesia’s recent decision to move its capital from Jakarta to a jungle area in East Kalimantan is expected to harming the economic viability of the country’s high-speed rail project which has already experienced repeated delays and massive cost overruns.

Earlier this year, the Indonesian parliament approved a bill to move the national capital from Jakarta at a new location (named Nusantra) which encompasses an area of ​​180,000 hectares between the regencies of Kutai Kartanegara and Penajam Paser Utara.

Indonesia’s first high-speed railway is currently being built by a consortium of Chinese-Indonesian companies. The joint venture was established in October 2015 between a consortium of Indonesian state-owned enterprises and China Railway International.

When completed, a 142 km rail link will connect its current capital Jakarta and the city of Bandung in West Java. The high-speed train will reduce the journey between the two central hubs to 36 minutes from the current 3-5 hours.

The Jakarta-Bandung HSR, a project under the Belt and Road Initiative (BRI) project, is China’s first overseas high-speed rail project and the first of its kind in Southeast Asia with a speed maximum design speed of 350 kilometers (km) per hour.

During a recent parliamentary hearing, Dwiyana Slamet Riyadi, Chairman and CEO of Kereta Cepat Indonesia China (KCIC), the consortium building the high-speed rail link, acknowledged that the time it takes to break even on the project , estimated to be 26, will now be 40.

“Looking at the value of the investment, the number of passengers and the price of the tickets, it is very difficult to follow the previous feasibility study where the assumption of a return on investment will occur within 20 years”, Riyadh noted.

Riyadi said revised estimates were made based on a recent feasibility study, taking into account the COVID-19 situation, as well as “the relocation of the capital”.

A previous study had estimated a daily passenger volume of 61,000, but another recent study reduced the estimates to 31,000 passengers per day, Riyadi noted.

The groundbreaking ceremony for the project was held in 2016 and the original plan was to run Southeast Asia’s first high-speed train in 2019. But the progress of the project has been plagued by delays due to land acquisition issues and environmental permits.

According to the latest status shared by the consortium, nearly 80% was complete at the start of this year. KCIC also plans to start a trial on part of the line by the end of this year.

Escalating costs

The project has also been affected by rising costs. Indonesia initially forecast construction to cost $5.5 billion and revised it up to $6.07 billion last year. However, the final price is expected to be $7.9 billion, at least $2 billion more than the $5.5 billion expected when the project was first agreed in 2015.

When the project was first awarded to the Chinese consortium in 2015, Indonesia said the project would not require any public funding or financial guarantees. But in September last year, President Joko Widodo had to retreat and issue a decree authorizing the government to contribute public funds to the project, eroding one of the main selling points of the Chinese proposal over a Japanese alternative.

Jose P. Rogers