Monday, April 11, 2016

How to Make China-Indonesia Railway Cooperation Work

I WANT IT LIKE THIS. Indonesian President Joko Widodo briefed stakeholders during the groundbreaking ceremony of Indonesia's first high-speed railway project connecting Jakarta and Bandung. China won the tender of the project to the dismay of Japan, who was the first to float the idea and had lobbied the Indonesian government for eight years.

(Photo courtesty of Dita Alangkara/Associated Press)

In infrastructure development, the enigma about China is that it has both the most efficient system in the world but perhaps the least understood one. 

In Indonesia, months of debates and media circus have stalled the construction of the 145-kilometer Jakarta-Bandung railway project, with various policymakers, business stakeholders and representatives from NGOs trading jabs in newswires over the project's feasibility. It was not an appetizing sight for a project that was initially devised as the paragon of China's infrastructure expansion in Asia.

Earlier this year, I reflected our domestic political brouhaha with irony inside a high-speed train from the capital Beijing to Harbin, a major city in northeast China.

The Beijing-Harbin railway spans 1,250 kilometers, a distance that is equivalent of Jakarta-Bali, and I felt somewhat chagrined that Indonesia found it so difficult to construct a railway project that would only be a tenth of its distance.

My Chinese professor had an explanation why infrastructure development in his country could be so ruthlessly effective: "In democratic countries you face more constraints, but here in China you face rule of man, not rule of law."

The multi-billion dollar question now here is whether the economic cooperation between Indonesia and China, which are two countries with strikingly different political systems, can prosper. 

As far as the economic cost is the only concern, the Indonesian government's decision to grant China, not Japan, with the responsibility of building the Jakarta-Bandung bullet train project is justifiable. 

A study from the World Bank office in Beijing shows that the construction of China's high-speed railway - defined as those that can be traveled by trains with maximum speed of 350 kilometers per hour - has a typical infrastructure unit cost of about US$17-21 million per kilometer, excluding land, rolling stock and interest during construction. 

In European countries such as France and Spain, a similar infrastructure is estimated by the World Bank to cost $25-39 million for every kilometer, while in California, the US, the price tag stands at $51 million. 

The efficiency was driven by the fact that, over the past decade, China has built more high-speed railway infrastructure than any other country, with the mainland now boasting a network of more than 12,000 kilometers of high-speed railway routes - the longest in the world.

The notion prevalent among Indonesians that "Made-in-China" products come in cheap prices but questionable quality is purely misconception. In reality, China currently possess the technical know-how in building railway networks with the fastest and cheapest way possible, thanks to their highly standardized railway infrastructure design and a successful localization of manufacturing of its goods and components. 

The predicament faced by Chinese firms, however, is that building railway network in their own turf and in Indonesia might be a totally different ball game. 

To start, Chinese and Indonesian state-owned enterprises (SOEs) have stark difference in perspectives and working culture, which means the cooperation between the two camps is unlikely to be smooth. Unlike in China, where SOEs basically act as the government's developmental tools in a highly centralized economy, Indonesian SOEs are not backed with political support that is as strong as their Chinese counter parts. They instead possess a relatively high degree of independence.

In addition, Chinese firms were accustomed to the authoritarian-style infrastructure building approach, the imposition of which sometimes came at the expense of environmental degradation and violation of human rights, with reports showing there were many Chinese citizens who were forcefully evicted from their homes or lands without receiving sufficient compensation.

If China wants to be successful in its push to strengthen its regional influence, and to eventually emerge as the next global superpower on the same par with the US, it needs to learn better about democracy, particularly how to do business in countries with strict environmental, governance and transparency standards.

And so far, their track record on that is not good.

"Some commodity-rich countries have balked at dealing with Chinese firms, troubled by their weak record of social responsibility, which has forced Beijing to explore new ways of doing business," once wrote Elizabeth C. Economy, a noted author who specializes in China's foreign policy.

Nevertheless, the burden does not lie in Beijing alone. For the central government in Jakarta, the political ruckus surrounding the China-backed railway project has sent the wrong signal for foreign investors, exposing the inefficiency of our bureaucracy and the messiness in the decision-making process for infrastructure development under President Joko Widodo.

For Indonesia to attract more Chinese investors and capitalize on the mainland's outward investment push, the government could improve itself in three fronts. 

First, the government needs to cut bureaucratic hurdles and set investment guidelines very clear for Chinese investors who - unlike their Japanese or American counterparts - have little business history in Indonesia.

Second, Indonesian local leaders - from governors, regents to mayors - should be instructed to undertake more efforts to court the Chinese investors and improve the governance in the local level. This is because in their home country, Chinese businesspersons are accustomed to have strong bond with local leaders, who will always be ready to help them go through the bureaucratic red tapes while acting as the "political guardians" of their investments. 

Third, Indonesian government officials or other local business stakeholders should really avoid making public any disagreement on China-related projects, as that situation can make existing and future Chinese investors very uncomfortable. 

That should be noted because in Indonesia some policymakers have the culture of having "roundtable meeting in newspapers" as they prefer to voice their disgruntlement to journalist to garner public support, instead of solving the issue with the persons in charge directly. China, a country that has very limited press freedom, values the culture of secrecy where dissenting opinions among officials or businesspersons in public are considered taboo.

Indonesia could reap the maximum benefits from the Jakarta-Bandung bullet train project. For Indonesian SOEs in particular, this is the moment to absorb Chinese technological expertise for our future infrastructure development - a strategy that was exactly applied by Chinese SOEs in 2004, when China demanded technology transfer from German companies as a prerequisite for the rights to develop the mainland's high-speed railway networks.

The inconvenient truth here is that an authoritarian China and a democratic Indonesia were not match made in heaven. And just like an in-love couple with strikingly different personalities, the two countries have so much to do to make their relationship work. 

This article was published in The Jakarta Post on Monday, April 11 2016   

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