The status of Indonesia rail went through several weeks of uncertainty. Construction was even temporarily cancelled. But in the end, the Indonesian government chose China over Japan to build the nation’s high speed rail system.

A 150 kilometer line will connect Jakarta and Bandung, West Java’s business hub. Asia’s two largest economies both vied for this US$5 to US$6 billion contract ever since China joined the bidding game.

There were a few dramatic developments before this contract was awarded. The Indonesian government had many different views from its ministers.

Some ministers questioned whether having a high-speed train in a corridor already served by medium-speed trains and road transport is appropriate.

This argument’s climax took place when the Indonesian government abandoned the idea. Minister Rizal Ramli held a press conference providing clarification that a high speed train was unnecessary. He said that a “medium-speed” train will meet Indonesia’s needs.

With the race’s winner decided, here’s an analysis of why China won. To start off, we’ll further examine the terms both Japan and China provided.

 

China to Build Indonesia Rail Faster and Cheaper

Looking at the time needed to finish construction, China is the more attractive option. They promised the project would finish in just three years compared to Japan’s five. China got bonus points for saying construction can begin just a month after the signing date.

In terms of contract value, China proposed a much lower price of $5.5 billion when compared to $6.2 billion from Japan.

The timeframe wasn’t a make-or-break factor. But financing terms were.

Analysts agree the Chinese financial package far exceeded the Japanese one. China didn’t need a funding guarantee from the Indonesian government. But Japan’s bid depended on Indonesian government financing combined with a low-interest loan from Japan.

Consequently, it was financing which became the deciding factor between the two countries. Indonesia’s National Development Planning Minister explained that he wanted to bring this project to life. But he didn’t want to guarantee state funding.

Japanese firms were unwilling to compromise on this issue though.

With the contractor finally selected after an intense bidding war and dramatic developments from the Indonesian government, the beginning of construction is here.

A project team from China is already working in Jakarta. It will break ground before the end of this year. With their expertise in constructing high-speed railways, Chinese contractors want to deepen their relationship with Indonesia through more practical cooperation.

The Indonesia railway will begin operation by 2019, according to the government’s schedule. Economists hope the rail system, along with other projects, can boost Indonesia’s growth.

 

About Reid Kirchenbauer

Reid Kirchenbauer is the Founder of InvestAsian. He's experienced with trading stocks and buying property in Thailand, Cambodia, and elsewhere. He's been featured in publications such as Forbes, Nomad Capitalist, Property Report, and Seeking Alpha. Download his free investment guide by clicking here.

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