“How did we lose to China in Indonesia!?”
This is the question being worriedly debated in government offices and executive suites throughout Japan.
What makes the question–and its answer–particularly urgent and fraught for Japan is a nagging suspicion, and fear, that China’s come-from-behind victory in the two country competition for the $5 billion high speed rail project could be a harbinger of further humiliating and costly defeats in competition for Asian infrastructure projects.
Continued losing in such competition would gravely imperil one of Japanese industry’s key growth strategies and, not trivially, undermine a pillar of the Abe government’s Asian regional diplomatic strategy.
Just now the shock and disappointment of losing this particular project in arguably the most attractive Asian market for new infrastructure–Indonesia, with a population of 250 million–is already shaking Japanese confidence.
The bad news was delivered in Tokyo on September 29 by Indonesia’s national development planning minister, Sofyan Djalil, in a meeting with Abe government cabinet secretary Suga Yoshihide. The message was that Indonesian president Joko Widoko had made a choice between the Japanese and Chinese project proposals and had selected the one from China.
Commenting later, Suga called the decision “extremely regrettable” and “difficult to understand.”
Teten Maskuki, the Indonesian president’s chief of staff, was quoted as saying that Joko’s decision rested mainly on China’s final approach, which was to take a more “business-to-business” approach, as opposed to Japan’s more “government-to-government” approach.
But such an explanation tells us little about the history, the back story, or, indeed, the denouement–if it is the denouement–of this battle of Asia’s industrial titans for a symbolically, as well as substantively, important project.
The back story was informatively told in a Japanese language article dated September 22 on the
Toyo Keizai Online site. The article appeared after the Indonesian government had announced on September 3, to the surprise of everyone (see my
post) that it was rejecting both of the “final” proposals that had been received after frantic jockeying, sweetening, and maneuvering for advantage by Japan and China.
“Seven years of Japanese efforts have come to nothing,” began the article. Planning of project–a high speed (300 kms/hr) rail line extending 730 kilometers across the island of Java from Jakarta to Surubaya–began in earnest in 2009 with a Japanese government-sponsored feasibility study.
The study concluded that commercial feasibility–in terms of highest expected demand from passengers–was strongest for the 144 kilometer section between Jakarta and Bandung. Having performed the study, and fully confident in the world-beating quality and reliability of Japan Rail’s Shinkansen technology and knowhow, Japan expected to get the project mandate.
Japan’s project plan called for a five year construction period, including a full one year trial operation period. If construction were to start in 2018 the line would be ready to take passengers in 2023. Total cost would be some Rupiah 64 trillion (JPY 534.6 billion, or $4.5 billion).
The Japanese government operating through JICA (the Japanese International Cooperation Agency) would finance 75% of the cost with a 0.1% long term yen loan (terms and conditions in conformity with international convention for concessionary financing). The remaining 25% would have to be raised by the Indonesian government and private enterprises.
Importantly, Japan’s concessionary loan would–in accordance with international conventions for official government lending–require an Indonesian government guarantee.
Then, in October 2014, as the Japanese agencies and companies prepared for the project, something happened in Indonesia: the swearing in as president of Joko Widoko.
Campaigning for office Joko had called for greater infrastructure investment, and it was taken for granted that he was a supporter of the Java high speed rail project. However, Joko had campaigned as a “man of the people” whose priority would be improving welfare for Indonesia’s common and rural people over the more affluent people in the big cities.
In January this year the Joko government essentially stopped preparations for the high-speed rail project. In March, Joko traveled to Tokyo and Beijing.
In Tokyo March 22-25 Joko with Prime Minister Abe and other officials. Joko got a commitment for Japanese yen loan support for improving Jakarta’s municipal rail network, but no progress was made on resolving issues with the Jakarta-Bandung high-speed rail project.
Then, on March 26, Joko visited Beijing and met Chinese president Xi Jinping. Xi publicly announced support for the Indonesian high speed project and the two governments signed a memorandum specifying China’s interest in the Jakarta-Bandung line.
Well before the Joko-Xi meeting China had entered competition for the project. China’s proposal was for a total project cost of Rupiah 74 trillion (JPY 618.2 billion, $5.2 billion). The cost was higher than Japan’s, but China committed to financing
the entire amount at an interest rate of 2%. Moreover, the project would be completed in three years–meaning
taking passengers in 2018.
Indonesia had hired an investment bank to evaluate the Chinese and Japanese proposals. What seemed to matter most, however, was Indonesia’s increasingly firm demand that the project should not even be included in the government’s budget and insistence that no government guarantee would be given.
The high costs of project proposals were also declared unacceptable. When the cost was determined to be associated with the proposed 300 kms/hour speed of the line, Indonesia officials offered that a speed of 200-250 kms/hour would also be acceptable, expecting therefrom to cut construction costs by 30-40%.
That China was awarded the project and Japan rejected seems to owe mainly to China’s willingness to accept the financial risk of the project (i.e., to forego an Indonesian government guarantee and also, thereby, possibly to finesse international ODA norms) and of Japan’s inability or unwillingness to do so.
The
Toyo Keizei piece makes the point that such projects’ risks are not small. Taiwan is an example. Taiwan’s high-speed rail line enjoys relatively heavy business passenger traffic, which allows relatively expensive ticket prices. But the high prices seem to have discouraged non-business passengers, such that ridership numbers have fallen short of forecasts and revenues have proven insufficient to cover debt service requirements.
Compared with Taiwan, Indonesia is a very poor country. Given that business traffic will be relatively limited, ticket prices will have to be set low to be affordable for average citizens (and to avoid political backlash). Generating sufficient cash flow for debt service looks like a formidable challenge.
That China is willing to take the risk speaks volumes about how China views infrastructure aid in the Asian region. According to press reports China sweetened its offer in other ways as well, including committing to establish a joint venture with Indonesian firms to produce rolling stock for high-speed rail, electric rail, light rail systems, not only for Indonesia, but also for export to other Asian countries; to transfer related technology; and also to renovate and rebuild train stations.
Having benefitted immensely from Japan-China competition in one project, Indonesia is hoping to keep Japan (and of course also China) interested in the next ones. Sofyan was careful when delivered the negative verdict to assure Japan that there are many other projects for which Japanese technology and aid will be warmly welcomed.
Intriguingly, so far China’s Ministry of Foreign Affairs has not officially reacted to China’s winning of the project. Does this mean that the mandate has not officially been awarded? Is Indonesia holding out for more concessions?
That would seem unlikely. The project seems to be China’s. Whether it will a “successful” from a conventional commercial perspective is unknowable. But in terms of China’s economic diplomacy, it is certainly a deeply meaningful and significant advance. While for Japan, it is an occasion for deep rethinking of policies and strategies in Asia.
Japan's Rail Project Loss To China: Why It Matters For Abe's Economic Diplomacy And For China's
