Revisiting the Belt and Road Initiative in Indonesia: Progress, Challenges, and Prospects.

• Date: 01 April 2024
• Author: Negara, Siwage Dharma
• Published date: 01 April 2024

1. Introduction

As China's Belt and Road Initiative (BRI) reaches its tenth year, it is important to examine how the Initiative has progressed, its overall impact on the recipient countries, as well as the challenges it faces ahead. The BRI, announced by Chinese President Xi Jinping in 2013, has become the centrepiece of China's global diplomacy. The Initiative aims to support infrastructure development and economic integration between China and the partnering countries, thus promoting growth and prosperity. Under this programme, China offers financial resources, technologies, as well as human resources, in response to the demand for infrastructure development, especially in underdeveloped and developing countries. Naturally, in various infrastructure projects, there are some successful and failed projects. Some BRI projects, such as Hambantota port in Sri Lanka, the East Coast Rail Link (ECRL) in Malaysia, and the Jakarta-Bandung High-Speed Rail in Indonesia, have encountered practical and implementation challenges. These projects have been used to criticize China's BRI as a poorly designed scheme, leading the recipient countries to be indebted to China and causing them to be caught in a major debt-trap situation. This criticism has triggered adverse reactions and pushback in some countries (Jones and Hameiri 2020).

Given their size and scope, it is difficult to measure the overall success of China's BRI projects to date. Part of the problem is that the projects are very diverse, ranging from hard infrastructure to people-to-people mobility, and from maritime to digital sectors. Moreover, many infrastructure projects take years to complete and will take longer to show their economic impact and arguably, the environmental and social implications are more challenging to measure.

Nevertheless, since the Initiative was announced, we have observed increased Chinese overseas investments, followed by growing bilateral trade flows. This rising Chinese outward investment and trade flows have also coincided with the increasing number of BRI projects. Southeast Asia is one of the primary beneficiaries of China's investment, including the BRI projects. Singapore is the largest recipient of Chinese outward investment in the region, while Indonesia is the second-largest recipient (Figure 1). As a comparison, between 2014 and 2022, Singapore received around 44 per cent of Chinese overseas investments to ASEAN, while Indonesia received about 16 per cent in the same period. It is important to note that Singapore, as a major financial centre in Southeast Asia, plays a vital role in linking Chinese investment to other countries in the region.

FIGURE 1
                Distribution of Chinese Investments to ASEAN, 2014-22 (Percentage)
                Singapore 44%
                Indonesia 16%
                Malaysia 9%
                Vietnam 9%
                Thailand 8%
                Lao PDR 7%
                Cambodia 5%
                Myanmar 1%
                Philippines 1%
                SOURCE: CEIC's China Premium Database
                Note: Table made from line graph
                

In Indonesia, BRI has supported a number of strategic government programmes, including infrastructure, downstream industry and power generation. Most of China's investment, including BRI projects, in Indonesia was directed to the base metal industry. This aligns with Indonesia's industrial policy to build mineral processing industries and smelters to increase the value added. The country has decided to ban mineral ore exports, particularly nickel, and encouraged domestic processing, then exported processed mineral products. Also, since its launch in 2013, China has actively built several coal power plants in Indonesia under Engineering, Procurement and Construction (EPC) contracts. This was in response to Indonesia's electricity needs to support its growing economy. As one of the biggest coal producers, Indonesia relies on coal-fired power plants to supply electricity to the nation. It makes up about 66 per cent of the country's total energy mix. (1)

One example of a China-built power plant as part of the BRI is the Celukan Bawang coal-fired power plant in Bali. The investment is worth US$700 million and has been funded by the China Development Bank. (2) The construction of this 380-megawatt (MW) power plant by China Huadian Engineering Co. Ltd (CHEC) began in 2013 and was completed in 2015. The project is deemed economically vital for Bali in anticipation of future surges in electricity consumption as the island expects rapid tourism sector growth. Yet, coal-fired power is invariably controversial, as its impact on the environment is severe. There are also reports on the power plant's adverse health, environmental, and social effects. (3) However, economic consideration frequently trumps the environmental and societal costs of the project.

There has been some criticism of the BRI as "risky economic cooperation" since it spreads Beijing's opaque, authoritarian model of governance and adds to countries' debt burdens (Dezenski 2020). Moreover, many BRI projects lock countries into carbon-intensive futures, tilt the playing field in major markets towards Chinese companies, and draw countries into tighter economic and political relationships with Beijing (Dezenski 2020; CFR 2021). (4) For its critics, China's BRI traps borrowing countries in unrepayable debts to gain political leverage. (5) In response to that criticism, President Xi Jinping, during the second BRI summit in 2019, pledged to reform the BRI in two significant ways.

First, China plans to "multilateralize" the BRI. Mr Xi said that China will work more closely with other multilateral development banks in the host countries. He also said that the Initiative will adopt multilateral rules and international best practices on project development, from the tendering process right until its operation.

Second, China will make the BRI more sustainable, both financially and environmentally. In the area of finance, a BRI Debt Sustainability Framework, one similar to that of the International Monetary Fund and World Bank, was released to help in decision-making by partner countries. Concerning the environment, China aims to launch green infrastructure projects and provide green financing.

Against this backdrop, this paper provides an update on the BRI projects in Indonesia. It discusses the progress and challenges of China's outbound investment and infrastructure projects under the Initiative. It also discusses how perceptions about the BRI have evolved in Indonesia since the 2019 BRI Forum. Based on selected project case studies, this paper sheds light on the issues and problems associated with BRI implementation and discusses the readjustment of future BRI projects to contribute to Indonesia's environmental commitments under the United Nation's Sustainable Development Goals.

2. China-Indonesia Economic Relations

To better understand how Indonesia perceives China's BRI, it is important to examine the dynamics of the countries' bilateral economic relations over time. Diplomatic relations were normalized in 1990 after being frozen since 1967 (Anwar 2019). Since then, economic ties between China and Indonesia have intensified. Bilateral trade and investment increased as both countries gradually opened up their economies. At the height of the 1997-98 Asian Financial Crisis, China provided assistance and an alternative source of funding for Indonesia through both bilateral agreements and regional mechanisms. This earned the country the goodwill of Jakarta's policymakers (ibid.).

During President Susilo Bambang Yudhoyono's era (2004-14), bilateral relations between Indonesia and China were elevated to an even higher level. The two countries signed a strategic partnership deal related to trade and investment in April 2005 during Chinese President Hu Jintao's state visit to Indonesia (ibid.). Then, during President Xi Jinping's state visit to Indonesia in October 2013 to attend the Twenty-First APEC Economic Leaders' Meeting in Bali, Indonesia and China agreed to upgrade their relations to the level of a comprehensive strategic partnership and enhance cooperation on trade and economic development, science and technology, sociocultural areas, the defence industry, and in regional and global arenas (ibid.).

Since the signing of the comprehensive strategic partnership, China gradually became an important trade partner for Indonesia. Its rapid growth has boosted demand for Indonesia's export products, especially commodities such as coal, rubber, and palm oil. By 2013, trade with China had proliferated and surged to overtake that with Japan, Singapore and the United States. (6) In 2005, trade with China was still only around 8.7 per cent of Indonesia's total trade value. This share increased rapidly to 27 per cent by 2023 (Figure 2). The growth in trade is contributed partly by various BRI projects, including smelter and power plants, which require the import of machinery and equipment from China.

Initially, the trade balance leaned towards China, given its strong manufacturing export competitiveness. China enjoyed a growing trade surplus of around US$18 billion in 2018. Later, the trade surplus gradually declined and turned into a deficit of around US$2 billion by 2023 (Figure 3). There are several reasons for this trend. First, Indonesia's exports of manufactured goods to China increased significantly after the COVID-19 pandemic, driven by several goods such as ferro nickel, coal, and palm oil. (7) Second, imports from China have declined slightly due to global supply chain disruptions (Figure 3).

The surge in bilateral trade is driven partly by rising investment from China. Indonesia has been actively promoting foreign direct investment (FDI) to support economic growth and create jobs for millions of its labour force. Under President Joko "Jokowi" Widodo's administration, the Investment Coordinating Board (BKPM) has established a special task force to facilitate Chinese investment. (8) The special desk provides consultation, facilitation, and information services in Mandarin. Moreover, BKPM...