China invests in Indonesia's infrastructure sector

 

In early 2019 Indonesia proposed the involvement of Chinese companies in dozens of projects worth an estimated $91bn. Although specific details about many of these developments are still unclear, Luhut Pandjaitan, coordinating minister of maritime affairs and investment, told local media that they would include seaports, industrial estates, power plants and tourism developments. These could fall under the umbrella of the Belt and Road Initiative (BRI), China’s global strategy for enhancing trade through infrastructure development.

Closing the Gap

The infrastructure projects proposed for Chinese involvement are planned in four locations: North Sumatra, North Kalimantan, North Sulawesi and Bali, which are collectively known as the Regional Comprehensive Economic Corridor. These locations were chosen as they are peripheral areas of the country, and align with the plans of President Joko Widodo, better known as President Jokowi, to spread development across the vast archipelago, particularly in areas likely to be attractive to Chinese investors. For example, North Sumatra is regarded as a strategic location because of its close proximity to the Malacca Strait, one of the world’s most important shipping lanes.

Infrastructure gaps have posed a major challenge to Indonesia’s economic growth for decades, but the current administration plans to spend $412bn to overhaul critical infrastructure, with the support of private companies and overseas development partners. To this end, on the sidelines of the G20 Summit in Osaka in July 2019, China and Indonesia agreed to prepare special funds for BRI projects in Indonesia.

Indonesia’s flagship Chinese-funded project is the Jakarta-Bandung high-speed rail link, which will be 40% owned by China Railway International. Upon completion, the line will cover around 142 km and is estimated to cost $5.9bn. Although the project has faced challenges related to land acquisition, local players are confident in its economic benefits. “The Jakarta-Bandung highspeed rail link is set to transform not only transport, but the whole basis of economic activity in West Java, by making it easier to move between Bandung and the capital,” Julian Smith, global transport and logistics leader based in Indonesia at PwC, told OBG. “The project will be a success for the BRI, as long as it is effectively integrated with other modes of transport.”

Treading Carefully

However, economists have warned Indonesia to exercise caution with regard to its involvement in the BRI out of fears that the country could possibly fall into a debt trap. It is believed that eight countries – including Laos, the Maldives and Pakistan – that have accepted Chinese funding for projects, including those that form the BRI, are already at serious risk of not being able to repay their loans to China.

Indonesia does, however, appear aware of the risks, and the government has introduced four mandatory measures for investors. Companies that invest in Indonesia’s infrastructure projects must employ environmentally friendly technologies. While Chinese investors may use their own labour in the initial stages of a project, they must then transfer skills to local workers. Businesses must also transfer their technological knowledge to local partners through training programmes. Lastly, the projects must create added value in upstream and downstream industries, in order to reduce reliance on extractive industries.

While Indonesia continues to push ahead with its ambitious infrastructure plans, it is likely that the country will experience short-term disruption as a result of the global spread of Covid-19 in early 2020. It remains to be seen how far the virus will impact the BRI and Chinese-funded projects in general, in terms of both funding and travel restrictions that limit Chinese experts and officials from entering the country. Additionally, the pandemic could also result in an increase in antiChina sentiment across the region. At the same time, the economic impact of Covid-19 may cause China to prioritise its domestic economy, rather than pursue projects involving large-scale overseas investment.

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The Report: Indonesia 2020

Infrastructure & Transport chapter from The Report: Indonesia 2020

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