Indonesia Refuses to Be Railroaded Into Debt

Its decision on infrastructure spending sets an example for other developing nations.

Not in our backyard.

Photograph: ChinaFotoPress/Getty Images

It was a deal that a developing nation such as Indonesia wasn't supposed to refuse. In return for a $5.5 billion Chinese loan to be repaid over 50 years, Indonesia would receive its first high-speed rail line, a 93-mile high-tech bauble to run from the capital, Jakarta, to the country's third-largest city, Bandung. But late last week, President Joko Widodo's government did the unexpected and refused it -- and a less-attractive Japanese proposal -- in favor of soliciting bids to build a slower train that will cost about 40 percent less. According to Bloomberg News, the high-speed line was not considered "commercially viable."

Widodo's choice is a good one for Indonesia. The proposed line was planned with eight stops, and thus trains were unlikely to ever reach the advertised 300- to 350-kilometers-per-hour speeds over its short distance, anyway. But far more important is the example that's being set for other infrastructure-needy countries, especially in developing Asia, where China and Japan are in fierce competition to build -- and finance -- hundreds of billions of dollars' worth of high-speed rail and other big-ticket infrastructure projects for their own political and economic benefits. Having the will, and clearsightedness, to turn down those projects when they don't meet actual needs will be crucial to ensuring the long-term health of developing economies across Asia.

Of course, both China and Japan have fair claims that high-speed rail is worth the money in the long term. Japan's high-speed rail system turned 50 last year, and among other accomplishments it has enabled workers who previously couldn't conceive of commuting into Tokyo to join its labor force. Likewise, China's much younger and bigger system -- the world's largest network, with nearly 10,000 miles of track -- is running with full trains on its main routes, such as Beijing to Shanghai, offering needed, relatively affordable competition to the country's airlines while knitting together once-distant regional economies.

Nonetheless, the rapid growth of China's high-speed rail lines, like its broader economy, has slowed, leaving the country's state-run train builders with huge overcapacity. One solution is export, and in recent years China has been aggressive in seeking customers for its trains, high-speed and otherwise, and achieving record profits in doing so. In Southeast Asia, those exports align with long-term geopolitical and economic imperatives. In particular, China has proposed -- and is seeking to build -- an extensive high-speed rail network that links Southeast Asia's economies to China, which hungers for access to their ports, raw materials and low-cost labor. Japan, wary of growing Chinese influence in the region, is offering competing proposals anywhere the Chinese are hoping to build, including in California.

Theoretically, at least, that's good news for countries looking for bargains on top-shelf infrastructure. But unlike China and Japan, which largely self-financed their high-speed rail lines, developing countries in Asia are being asked to pick up some if not most of the tab for expensive foreign-built high-speed rail lines. That has caused hesitation from Thailand to Myanmar. Japan is facing blowback, too, especially in Vietnam.

Laos, for example, is reportedly on the verge of a $7 billion deal with China to build a high-speed line between its capital, Vientiane, and Kunming, China. Eventually, China hopes, the line could be extended to Singapore through Bangkok. Most of the financing -- about $5 billion -- will be borrowed from the state-run Export-Import Bank of China and reportedly guaranteed by Laotian mining concessions. That's a steep price, amounting to about 60 percent of Laos's gross domestic product, and it raised concerns at the International Monetary Fund, which warned in 2013 that the project could raise Laos's level of external debt to 125 percent of GDP. The commercial viability and operating costs for the rail line remain unclear.

But the far more important question concerns need and whether it's truly in the interest of developing countries to borrow money for the rail equivalent of a Tesla when a Ford F-150 might do the trick for the foreseeable future. In the case of Laos, at least, the case for spending money on roads, public health and education remains much more compelling than a rail line that will -- at least initially -- serve to move goods in and out of China more quickly while placing a developing country on uncertain financial ground. That might meet China's needs, but it certainly doesn't meet those of Laos -- or Indonesia.

There is a middle way, and Indonesia's decision to open up its cheaper, slower train to international bids, including from China and Japan, offers hope that the country's needs -- and not just geopolitical rivalries -- will determine how infrastructure is financed and built across developing Asia in coming years. But if it doesn't, Indonesia at least has demonstrated that the power to say no can be a crucial tool for governments across the region. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.