China to Build Indonesia's High-Speed Railway Jakarta-Bandung Project

Initially it seemed that Japan would be handed the contract to establish the Jakarta-Bandung railway as the country had spent several years and millions of US dollar to make preparational studies for the project. However, earlier this year - and rather out of the blue - China showed interest in the project and send a proposal for construction of the project to the Indonesian government. After Indonesian President Joko Widodo announced in September 2015 that he cancelled Indonesia's first-ever high-speed railway project on grounds that the route was too short for the high-speed line (as it would not be able to reach a high level speed because the train needs to stop at various stations on the 150 km route hence make it less commercially viable), it seemed the project would not take-off. However, China came back with a new proposal (without requesting financial assistance nor guarantees from the Indonesian government and with three quarters of the funding coming from the China Development Bank), and this proposal was quickly accepted by the Indonesian government, leaving Japan empty-handed.

Apart from more attractive terms and conditions for the Indonesian government, it is also believed that Indonesia favored China for this project in order to maintain a balance between both nations (China and Japan) regarding the handing out of high profile infrastructure projects. Previously Japan had been awarded contracts to construct Jakarta’s mass rapid transit (MRT) system as well as the nation’s largest (2,000 MW) coal-fired power plant in North Java (a joint venture between Indonesian coal miner Adaro Energy and Japan's Itochu Corporation and Electric Power Development Co Ltd).

Construction of the Jakarta-Bandung line is expected to start in early 2016 and will require at least two years of construction. The line should start operating in the first half of 2019. With trains reaching a maximum speed of 250 km/hour, the travel duration between both cities can be cut to one hour (from three hours currently). The price of a one-way ticket between both terminals is expected to be set at around USD $16 (twice as expensive as the existing rail-line).

For Indonesia, infrastructure development is much-needed as the country is currently plagued by a lack of adequate infrastructure (both in quantity and quality), hence causing logistics costs to rise steeply. As Indonesia requires about USD $416.5 billion worth of funds for infrastructure development in the 2015-2019 period, the government needs to rely heavily on private sector involvement.

However, a high-speed line between Jakarta and Bandung is regarded an odd choice as existing infrastructure between both cities is relatively well-developed (there already is a medium-speed train line as well as a toll road). Meanwhile, the Jakarta-Bandung route is not a critical place to build a railway for business (a high-speed line between Jakarta and Indonesia's second-largest city of Surabaya in East Java would make more sense economically).

It has been speculated that the consortium consisting of China Railway International Co. Ltd and several Indonesian state-owned companies will also bid for other infrastructure projects, in Indonesia as well as in other countries in the ASEAN region and the Middle East).

Three-quarters of the investment required for the construction of the Jakarta-Bandung line will originate from the China Development Bank. The remaining 25 percent will come from the Indonesian state-owned companies. Wijaya Karya said it may issue a global bond.

Key Points:

• The Jakarta-Bandung railway will become Indonesia's first ever high-speed line

• Critics consider the project an odd choice as existing infrastructure between both cities is relatively adequate (railway and roads) while the route is not that critically important for business

• Indonesia is plagued by inadequate infrastructure (both in quality and quantity) causing high logistics costs while making the country's investment climate less attractive. It also causes social issues as it limits people's access to healthcare

• Two listed state-controlled companies are involved in the project: Jasa Marga and Wijaya Karya

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