CDB provides $2.3805 billion loan tranche for the Jakarta-Bandung High Speed Rail Project (Linked to Project ID#61321, #61322, and #96344)

The Jakarta-Bandung High Speed Rail (HSR) Project was originally going to be financed by the Japan International Cooperation Agency (JICA). In January 2014, JICA included the project in its Overseas Development Aid plan for Indonesia and agreed in principle to bankroll 75% of the total cost of the project at a 0.1% interest rate so long as the host government provided a loan repayment guarantee. However, Beijing was determined to win the contract for the HSR project and sought to outcompete Tokyo on several dimensions, including cost, speed of implementation, and level of public liability. In early 2015, Indonesian President Joko Jokowi invited China to submit an alternative proposal, and it proposed a lower cost version of the project that could be fully-financed with a government-guaranteed (CDB) loan at a 2% interest rate and implemented on a shorter timeline (3 years rather than 5 years). Then, in September 2015, when President Jokowi was expected to announce the winning bidder, he surprised everyone by rejecting Beijing’s offer and Tokyo’s offer and “cancelling” the project. The stated rationale for his decision was that the project would lead to a ballooning of public debt. Tokyo responded by offering a 50% reduction in the amount of debt that would need to be backed by a sovereign guarantee. Beijing responded by scrapping the sovereign guarantee requirement altogether and proposing an off-public balance sheet transaction, in which CDB would work around the country’s public debt ceiling by extending a loan to a special purpose vehicle (jointly owned by Chinese and Indonesian state-owned companies) rather than the Government of Indonesia. Beijing’s revised offer was sufficiently attractive to seal the deal. On October 16, 2015, a consortium of Indonesian state-owned companies (called PT Pilar Sinergi BUMN) and a consortium of Chinese state-owned companies (called Beijing Yawan HSR Co Ltd) established a joint venture and special purpose vehicle called PT Kereta Cepat Indonesia China (also known as PT Kereta Api Indonesia China or KCIC) to design, finance, implement, and manage the Jakarta-Bandung High Speed Rail Project. PT Pilar Sinergi BUMN (PSBI) — a joint venture of PT Wijaya Karya Tbk (38% ownership stake), PT Kereta Api Indonesia (25% ownership stake), PT Perkebunan Nusantara VIII (25% ownership stake), and PT Jasa Marga (Persero) Tbk. (12%) ownership stake — holds a 60% ownership stake (shareholding interest) in KCIC. Beijing Yawan HSR Co Ltd — a joint venture of China Railway International Co. Ltd., China Railway Group Limited, Sinohydro Corporation Limited, CRRC Corporation Limited, and China Railway Signal and Communication Corp. — holds the remaining 40% ownership stake (shareholding interest) in KCIC. Then, on May 14, 2017, China Development Bank (CDB) signed a $3.9675 billion loan agreement with KCIC for the Jakarta-Bandung High-Speed Rail Project. The loan consists of two tranches: a USD-denominated tranche worth $2.3805 billion (captured via Project ID#61320) and an RMB-denominated tranche worth $1.587 billion (captured via Project ID#61321). The USD-denominated tranche carries the following borrowing terms: 40-year maturity, 10 year grace period, 2% interest rate, and no sovereign guarantee. The RMB-denominated tranche carries the following borrowing terms: 40-year maturity, 10 year grace period, 3.46% interest rate, and no sovereign guarantee. ICBC is the security agent for the loan. The borrower was to use the proceeds of the loan to partially finance an EPC contract between KCIC and seven Indonesian and Chinese state-owned firms, which was signed on April 4, 2017. The total cost of the Jakarta-Bandung HSR Project is $5.29 billion and it is being financed according to a 75:25 debt-to-equity ratio. The equity contribution of Beijing Yawan HSR Co Ltd. is captured via Project ID#61322. The purpose of the Jakarta-Bandung HSR Project is to construct a 142.3 km high-speed railway from the city of Jakarta to Bandung, the capital of West Java. Upon completion, the railway is expected to reduce the travel time between Jakarta and Bandung from more than 3 hours to less than 40 minutes. Construction began on January 21, 2016. However, the first CDB loan disbursement ($170 million) did not occur until May 2018. CDB planned to disburse another $1.1 billion before the end of July 2018. In May 2019, the 608-meter Walini tunnel was built. By September 2019, 32.8% of the project’s construction activities were complete and land acquisition progress reached 99%. By mid-February 2020, construction progress had reached 44% and land acquisition progress reached 99.96%. Then, in March 2020, the 442-meter No.5 tunnel was finished. Due to the COVID-19 pandemic, work on the project was temporarily halted during the spring of 2020. Construction resumed in June 2020, and as of September 2020, the Director of KCIC Xin Xuezhong reported that construction progress had reached 60% and land acquisition progress had reached 100%. The Jakarta-Bandung HSR Project, which was originally scheduled for completion in May 2019, has encountered a number of different problems during implementation. First, Indonesia Law No. 32/2009 regarding Environment Management and Control requires an environmental impact assessment (EIA) be developed over at least one year (and include analysis for both dry and rainy seasons) for a project of the Jakarta-Bandung HSR’s scale. However, the EIA for the project was completed in less than 6 months, and environmental NGOs claim that it contains inaccurate and flawed data analysis regarding the project’s actual environmental impacts. Second, the project reportedly violated Government Regulation No. 27/2012 regarding environmental permits, which requires public participation in the making of the EIA document. Environmental NGOs claim that, due to a lack of public participation in the EIA process, the project has serious design defects, including a planned route through numerous geological faults, which has led to delays, cost overruns, and local opposition. Third, although KCIC exclusively appointed PT Pilar Sinergi, a state-owned enterprise to deal with land acquisition issues, the process has not proceeded as smoothly as the Indonesian government had hoped. In July 2018, three lawsuits resulted in legal approval from the courts to proceed with claims seeking compensation for their properties affected by the project. Fourth, Indonesia’s Ministry of Public Works and Public Housing (PUPR) ordered a temporary halt to the project on March 2, 2020 after flooding blocked the main toll road between Jakarta and the city of Cikampe. Acting Director General of Public Works Danis Sumadilaga said piles of soil dumped on roadsides had buried drainage channels and caused the flooding, adding that shoddy management practices paid scant attention to health, safety, and environmental degradation concerns. Fifth, during the construction process, gas pipelines owned by the national Pertamina Oil Company were damaged, which caused an explosion and killed a Chinese worker in Melong, near Cimahi town. Sixth, blasting work for tunnels in the area of the Tipar Sari Asih housing complex in the West Java town of Cimahi has caused serious damage. According to Meiki Paendong, executive director of WALHI West Java, an environmental NGO based in Bandung, “[m]any walls of [nearby] houses cracked … [and] there was information that [the company] would examine the impact, but until now, the results of the inspection have not been made public.” Seventh, when flooding hit the Jakarta suburb of Bekasi in January 2020, Deputy Mayor Tri Ardhianto Tjahyono pointed to the HSR project as a cause, as did officials in the West Bandung regency which also flooded. Arief Maulana, head of Bekasi City Public Works and Water Management, said that “[o]ne of KCIC effects… is the problem of drainage control in several project activity locations, which are close to the drainage area that causes sedimentation and also disrupted waterways.” Maulana argued that it is the responsibility of KCIC to fix all drainage damage due to the project. KCIC eventually agreed to repair and restore the drainage system after the State-Owned Enterprises Ministry demanded an assessment of the project in March 2020, due to environmental degradation concerns. Meiki Paendong, executive director of WALHI West Java, argues that the flooding in Bekasi and elsewhere demonstrated that the project’s EIA was flawed, as it failed to address the closure and loss of drainage flows due to land-use change. For example, drainage canals were covered by landfills, which reportedly increased flooding throughout the rainy season. In 2015, Indonesian President Joko Jokowi signed a decree prohibiting the use of government funds for the Jakarta-Bandung High Speed Rail Project. However, during implementation, the project encountered major cost overruns worth an estimated $2 billion due to various factors, including but not limited to higher-than-expected land procurement costs, delays in construction due to the Covid-19 pandemic, the rising prices of materials, and additional project insurance costs and debt service reserve account (DSRA) requirements. Then, in October 2021, President Jokowi reversed course, issuing a new decree and authorizing a government bailout of the Jakarta-Bandung HSR Project. The Indonesian government reportedly authorized the use of $286.7 million from state coffers to inject liquidity into PT Kereta Cepat Indonesia China (the borrowing institution) in the next fiscal year. It also made clear that it was prepared to provide additional funding on an as needed basis. At the time, a spokesperson for the Indonesian Ministry of State-Owned Enterprises (SOEs), said that ‘like it or not, … we have to ask the government to participate in funding the project if we want it to be finished on time.’ Then, in July 2022, the project’s prime contractor (PT KCIC) reported that the project had achieved an 85% completion rate. At that time, Jakarta-Bandung HSR saw the laying of ballasted tracks begin on its main line. One month later, in August 2022, high-speed bullet trains for the Indonesian Jakarta-Bandung HSR rolled off the assembly line in Qingdao within China’s Shandong Province. Eleven pairs of high-speed electric multiple units (EMUs) and one set of comprehensive testing bullet railcars were ready to be shipped to Indonesia. As of August 2022, all Jakarta-Bandung HSR tunnels had been completed and more than 90 percent of the subgrade, bridge and station civil works had been completed. By October 2022, the project had achieved a 88.8% completion rate. Also, during the last quarter of calendar year 2022, Indonesian state auditor BPKP reported that the cost overruns associated with the Jakarta-Bandung HSR Project were just under $1.5 billion (rather than the earlier estimate of $2 billion). On October 18, 2022, Indonesia’s Deputy Minister of SOEs Kartiko Wirjoatmodjo announced that ‘[w]e are currently in the final negotiation with CDB for additional loans for cost overruns'. He also indicated that KCIC would contract one or more supplementary loans worth $1.03 billion (IDR 16.1 trillion) from CDB to cover approximately 75% of the project’s cost overruns (worth $1.45 billion). Then, on November 9, 2022, KCIC Director Dwiyana Slamet Riyadi told a legislative committee that the project’s cash flow would run out by the end of the month and China’s National Development and Reform Commission (NDRC) agreed that 75% of the project’s cost overruns should be funded with the proceeds of an additional CDB loan. At the time, KCIC was also asking parliament to make another IDR 3.22 million cash injection into the project company (as an additional equity contribution on behalf of PSBI) in conjunction with an additional IDR 2.15 trillion equity contribution from Beijing Yawan HSR Co Ltd. KCIC Director Dwiyana Slamet Riyadi told the legislative committee that completing the project by June 2023 would require receipt of additional project debt and equity by the end of November 2022. On March 31, 2023, the track laying of the whole line of the Jakarta-Bandung High-Speed Railway was completed. Then, on April 10, 2023, Indonesia' Chief Investment Affairs Minister Luhut Binsar Pandjaitan said that KCIC had been working with CDB to lower the interest rate attached to the supplementary loan to cover the project's cost overruns. The Indonesian Government proposed a $560 million loan at a 2%interest rate from China Development Bank (CDB) to pay for the cost overruns. In April 2023, Luhut told a press briefing in Jakarta that '[CDB] is already willing to bring the interest down from 4 percent. The first offer is a reduction from 4 percent to 3.4 percent, but we want it to be even lower. [...] We do want a 2 percent interest, but it is impossible to have everything [we want] come true. If you ask for loans [outside China], the interest can go up to 6 percent. So if we end up with a 3.4-percent rate, we are doing okay, although not that okay. But that would be better than [borrowing money from other countries].' Luhut also noted that a 3.4 percent interest rate would not necessarily be problematic: 'Do not underestimate our country. We are getting better. Our state tax revenue has grown by 48.6 percent [in January 2023] thanks to better efficiency with digitalization, etc.' As of April 2023, the Jakarta-Bandung High-Speed Railway was expected to launch its commercial operations on August 18, 2023 — one day after the 78th anniversary of Indonesia's independence day. Then, in May 2023, Indonesia’s Transport Ministry and three consulting firms -- Mott MacDonald, PwC and local law firm Umbra -- pushed back on the suggestion that the project could achieve full-fledged commercial operations by August 18, 2023. At the time, the Chinese participants in KCIC reportedly wanted a full operational worthiness certificate for the Jakarta-Bandung HSC despite the incomplete construction of a railway station, but the Indonesian Transport Ministry and its consultants suggested that KCIC might not achieve full-fledged commercial operations until December 31, 2023. Then, in June 2023, Reuters reported that KCIC was still in negotiations with CDB over a $560 million supplemental loan (captured via captured via Project ID#96344). After CDB offered an interest rate of 3.46% on the loan's RMB-denominated tranche, KCIC reportedly countered with a 2.8% interest rate request.

Additional details

1. The Indonesian project title is Proyek Kereta Cepat Jakarta - Bandung Belum Rampung. The Chinese project title is 雅加达至万隆高铁项目 or 雅万高铁项目. 2. AidData has coded this transaction as a collateralized loan because ICBC was selected as the security agent (i.e. collateral agent) for the loan. When lenders take collateral as security for their loans, a collateral/security agent is often appointed to enforce rights against the collateral in the event of the borrower’s default under the loan.

Number of official sources

17

Number of total sources

66