Indonesia asks Chinese bank to cut loan interest rate as mega rail project exceeds budget
- A top minister says Indonesia can repay its debt with the interest rate at 3.4 per cent, but will push for 2 per cent to cope with a US$1.2 billion cost overrun
- It is ‘highly likely’ that Indonesia will have to use its state budget to cover the train’s operations each year, analyst notes
Luhut Pandjaitan, Indonesia’s coordinating minister of maritime and investment affairs, said on Monday that Jakarta intended to again persuade the China Development Bank (CDB) to lower the interest rate for a US$560 million loan to 2 per cent. The bank had agreed to reduce the initial rate of 4 per cent to 3.4 per cent during Luhut’s trip to Beijing last week.
“Yes, we want 2 per cent, but we can’t achieve everything. If you borrow from overseas, the interest now can reach 6 per cent. So if we get 3.4 per cent [loan interest], we’re doing OK, even though it’s not really OK,” Luhut said on Monday. “We still want to negotiate again.”
Indonesia’s China-built rail link chugs along despite overshooting budget
The US$560 million loan must be repaid within 30 years.
Andry Satrio Nugroho, head of centre of industry, trade, and investment at Jakarta-based Institute for Development of Economics and Finance, said the 3.4 per cent interest rate was an “acceptable” number for both parties.
“China certainly doesn’t want to [provide a loan] at a 2 per cent rate. The 3.4 per cent rate is a number that can be accepted by both parties,” he said.
“The question now is whether KCIC will be able to optimise operations, and how long will it take for KCIC to [pay off] its debts,” he said, referring to PT Kereta Cepat Indonesia-China, the joint venture between Indonesian and Chinese consortiums behind the project.
Sixty per cent of KCIC shares are owned by an Indonesian consortium of state-owned companies, while the rest are held by their Chinese counterpart.
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Presidents Xi and Widodo watch Chinese-built Indonesian bullet train make first trial run
Andry said the amount of debt – including a previous US$4.55 billion loan from CDB that accounted for 75 per cent of the project funding – that Jakarta owed Beijing now to complete the high-speed railway would not put Southeast Asia’s biggest economy at risk of the so-called debt trap.
“But it’s highly likely that the government will have to use the state budget every year to fund the operations of the train,” Andry said.
Indonesia has been using state coffers to cover the cost overrun. In December, for example, it injected US$214.8 million into its consortium to keep the project running.
Both parties still need to negotiate on the loan guarantee, with Beijing preferring it to be provided for from the state budget, while Jakarta wants it to be guaranteed by PT Penjaminan Infrastruktur Indonesia, a state-owned institution under the Ministry of Finance that was established to assume debt obligation for contractual risks related to government actions.
Worker deaths revive safety concerns in Indonesia’s China-backed rail project
The new train service is expected to be inaugurated by Widodo on August 18, a day after independence day, marking yet another delay in the five-year project as Jakarta previously aimed for it to be fully operational by June.
The US$7.2 billion project, which will slash the travel distance between Jakarta and the city of Bandung in West Java from a two-hour drive to 45 minutes, has been marred by controversy since it started construction in 2018. The latest incident occurred in December, when a series of work trains derailed, killing two Chinese workers and injuring four others.
The 142.3km-long, high-speed train was initially budgeted at US$6.07 billion, but additional costs relating to construction and relocation of facilities sent the budget soaring.
