China's infrastructure diplomacy in Indonesia

Despite enormous offer for infrastructure investment from China, President Joko Widodo must remember not to fall in the debt trap and become too dependent on China.

As the lack of infrastructure is seen as a bottleneck for growth, nations throughout the world have made this their primary focus. The realization that developing countries face difficulties with this and need very much support has given rise to a new kind of diplomacy — infrastructure diplomacy.

Without doubt, Sino-Indonesian relations are one of the best — if not the best — case study for infrastructure diplomacy today. The former is a large economy seeking new markets, the latter a large economy with a huge infrastructure gap looking for financial support.

Fortunately for a China that is seeking new markets, other developing countries, too, are in dire need of financial support.

As many of these countries have turned to China to bridge their huge infrastructure gaps, China is increasingly seen as an infrastructure financer. But to limit the term to“infrastructurefinancing diplomacy” would be unwise, as China targets all four phases of infrastructure development — financing, planning, constructing and operating.

When it comes to financing, the Chinese economic prowess is largely unparalleled. A shortage of funds seems beyond worry, as institutions are established with the sole purpose of financing projects, including the Asian Infrastructure Investment Bank, BRICS’ New Development Bank and the Silk Road Fund.

Its financing capacity presents China with the opportunity to take part in a project’s planning process, even dictating and altering the design, making sure the project is in line with its own ambitions — notably the One Belt One Road mega-project.

This can be done by throwing great funds at a specific project, preventing or at least slowing down other projects that may be less advantageous to Chinese interests. When there are alternative options for implementing a project, excessively supporting one alternative will also make sure that other, less preferable alternatives are not chosen.

When President Joko “Jokowi” Widodo attended the Belt and Road Forum in May, it was further made clear that the One Belt One Road initiative will be the framework for any infrastructure financed by China, meaning that countries are actually receiving loans to materialize China’s ambitions.

Offering very low interest rates or guarantee-free loans is not a huge problem for China, as it can bring binding strategic contract clauses to the table. These clauses are usually far from the financing realm — which makes Beijing’s proposals rather attractive for governments of developing countries. Clauses often revolve around the obligation to use Chinese resources, both human and natural.

This clears the way for Chinese companies, Chinese workers and Chinese products to enter the host country. The influx of these new competitors — bringing in different cultures without great efforts to integrate, has already disrupted local communities in Indonesia. This phase forces the host country to import resources even when local resources are deemed sufficient, in turn solving China’s oversupply issue by creating a new outlet for its economic output.

A recent trend has also seen China demand shares in projects it finances, especially in countries deemed more risky, as in the case of China’s Three Gorges Dam Corporation demanding 75 per cent ownership of a dam project in Nepal. In some cases it was the host country itself that offered China a degree of control over the new infrastructure.

In 2016, in light of its debt problem and inadequate returns from their project, Sri Lanka offered Chinese companies some of its largest infrastructure projects, including the Mattala International Airport and the Hambantota deep sea port. To some extent, the country’s inability to pay for the loan, and the infrastructure’s failure to achieve quick results, paved the way for China to bind the country further.

This is again affirmed as projects of marginal financial feasibility are usually attached to other, more beneficial projects. It has been reported that China Railway International owns 40 per cent of the shares in the consortium |PT Kereta Cepat Indonesia-China — one of Indonesia’s largest projects so far, for a high-speed railway connection between Jakarta and Bandung.

As the project itself was declared profitless “public infrastructure,” it has been expanded to include the development of areas along the route — to ensure that the loan is paid back. This means Beijing will own a part of other projects, including real estate and tourism sites along the route, which does not rule out the possibility of developing other high-speed railways in the country.

To sum things up, China may be building infrastructure outside its territory, but by the end of the day it is building to support its own ambitions, and it is even making someone else pay for it through interest rates. While Xi Jinping’s tagline for the expansion is the motto “for a greater good,” the diplomacy will pave way for the country’s growth for at least the next decade, addressing its oversupply of resources with artificial demand and at the same time cementing its influence in other countries.

Some have even described this as a colonization in progress — creating ripples of unrest among the community.

Nevertheless, Jokowi and his Southeast Asian counterparts must remember not to fall into a debt trap and become over-dependent on China. Given the difficulty of bridging the infrastructure gap, the emergence of China with its accessible financing capabilities is truly an oasis in the desert. But it is worth noting that China’s ultimate goal is the realization of the One Belt One Road initiative.

If the trend continues, it will not be long before we see infrastructure not only in Indonesia but along the Belt and Road initiative that are built, owned and operated by China.

Eriz Wicaksono is a researcher at the University of Indonesia’s School of Strategic and Global Studies, Jakarta. This article first appeared in The Jakarta Post on 3rd August 2017.