The Dutch were the last to build a railway in Indonesia and that was before World War Two. Their soldiers marched people off their land at gunpoint. The question of compensation did not arise. Now, it’s the Chinese that are coming to build a new railway in Indonesia. China Railway Group has been awarded a $4.8-billion contract to build and maintain the new line in southern Sumatra. The railway will run from the Tanjung Enim coal mine, the richest deposit in Indonesia, to a new port in the Sunda Strait. From there, the coal will be shipped to the northern hemisphere to power China’s industrial engine, part of a strategy of building infrastructure for resources that Beijing has employed successfully elsewhere in the world.
The quest is not as simple, or as brutal, as it was under colonial rule. Getting land, licences and locals onboard requires a hearts-and-minds campaign and illustrates why, despite a return to investment grade, betting money on Southeast Asia’s gest economy isn’t for the fainthearted.
Ratings agencies have been raising Indonesia’s credit rating at a time when they have been downgrading Western economies. Recently, Moody’s Investors Service returned Indonesia to investment grade for the first time since the Asian financial crisis in 1997-98. Indonesia needed an International Monetary Fund bailout to recover from that crisis, but it avoided tumbling along with the world’s largest economies and neighbouring countries into a global recession in 2008-2009.
Now, helped by a global commodities boom, Indonesia is one of the fastest-growing countries in the G20, and could join Brazil, Russia, India and China -- the BRIC economies -- as the next emerging markets powerhouse. An estimated 35 million of its population of 240 million are now considered middle class.
Fitch Ratings brought Indonesia back to investment grade last month after 14 years of junk ratings, citing President Susilo Bambang Yudhoyono’s efforts to kick-start infrastructure. A long-awaited land acquisition law was passed on December 16, allowing Indonesia to accelerate road, port and airport projects, and could be a major turning point in the country’s efforts to ignite an economic boom. Investors, hungry to dig into the archipelago’s vast deposits of oil, gas, and minerals, expect the land-acquisition law to spur government infrastructure projects. But it will be no help for private projects such as the Sumatra railway.
President Yudhoyono has pledged to double spending on roads, seaports and airports to $150 billion to help deliver average growth of 6.6 per cent over the remainder of his term ending in 2014. Poor infrastructure is the gest impediment to foreign direct investment and Yudhoyono hopes foreigners will pony up much of the money to improve it. But Indonesia, which has had a feisty democracy since the fall of long-time autocrat Suharto in 1998, remains a stubbornly difficult country in which to do business, and Yudhoyono may find it easier to raise that kind of money than to spend it.
GREASING THE WHEELSIn a country where property deeds can be as scarce as snow, getting land and local permits is likely to remain the gest impediment to investment. An examination of the railway project in Sumatra shows that investing in projects in the provinces has become much harder than during the Suharto dictatorship, when Indonesia was last rated investment grade. Since then, Indonesia has decentralised much of its power. Now a myriad of local interests must be accommodated, inevitably causing delays.
That has been the case with the Sumatran railway. Investors in the project have had to pay off gangs, build swimming pools for the government, step around delicate religious sensibilities and try to overcome years of mistrust from locals. They are fine with the latest rail project -- as long as they get paid for the land and young people get jobs. Otherwise, there will be trouble, they vow.
The Chinese have helped fund and build infrastructure projects in resource-rich countries from Myanmar to Zambia. But Indonesia has nursed a deep distrust of communism since a bloody, failed coup in 1965 by a pro-Beijing communist party, and populist resentment over local ethnic Chinese wealth. But with demand for investment growing, that may have begun to change. Indonesia is seeking $100 billion of private funding to overhaul its creaking transport network. Chinese Premier Wen Jiabao, on a visit to Jakarta last April, pledged $19 billion of investment credit for Indonesia, including $9 billion of soft and commercial loans for infrastructure development.
Investors call the challenges “the three Ls -- licences, land and loans”. Indonesian bureaucracy has a reputation among foreign investors for being obstructive and corrupt. Even having local partners has not stopped many from pulling out of Indonesian projects to stem their losses.
Getting the land is the last and highest hurdle. Few people have land rights documents in an archipelago of 17,000 islands with hundreds of tribes and ethnic groups, and conflicting claims can turn violent. Once a developer finds a landowner, negotiations over the acquisition price usually begin with only a vague sense of market value. Prices of land along the route range from 100,000 rupiah per sq m to one million rupiah, residents said.
Since local governments spend almost nothing on local infrastructure, officials stand to benefit by taking advantage of “corporate social responsibility” (CSR) spending by companies. “We ask government officials how we can help via CSR in order to smoothen the process,” said a miner. “If CSR only builds facilities, like roads, the local people would not directly feel it, but if we give them packages then they’re very happy.”
Mine workers, most of them hired locally, are also part of the campaign. A short drive from the moonscape of the open pits is a different world, where hundreds of whitewashed colonial houses with palm tree gardens provide accommodation for senior staff. Workers have access to a swimming pool, a basketball court, a soccer pitch and a golf course. The housing development has the feel of a university campus during summer break.
The land is fertile. Cocoa and coffee grow in the thick, red, volcanic soil of the highlands, while lush rice paddies carpet the lowlands. Cash crop plantations producing rubber, clove and palm oil crowd the landscape towards the southern tip of the province. With such abundance, it’s easy to see why not everyone is so keen to give up their land. “It’s better to forgo a watch than a machete,” as one local saying goes.
“We want the company who builds the railway to be open in their approach and give us fair and honest explanations -- not sweet promises and then a stab in the back ... this will create danger,” people say. Across the archipelago in the past year, disputes over development of resources often turned deadly. In northern Sumatra, a mob burned down the exploration camp of an Australian gold miner. In central Sulawesi province, local residents pushing for better public facilities attacked oil firms with Molotov cocktails, killing two and shutting a field’s oil output for two weeks. And in eastern Indonesia’s Papua province, copper miner Freeport Indonesia’s operations were paralysed by a three-month strike that led to blockades, shootings and sabotage, as tribesmen armed with bows and arrows joined irate miners.
“I think there’s real concern from local communities -- I don’t think they’re against development, but they want the development to be done in an equitable way,” said Scott Poynton, chief executive of non-governmental organisation The Forest Trust. Poynton suggested creating jobs and services, such as hospitals in remote communities, would help.
Before an investor can speak to a villager about buying his land, he first has to get permission from the provincial governor, then the district chief, before tracking down the house of the village head and asking him to talk to a member of his clan. Graft, being endemic in Indonesia, is a problem not only for the buyer, but also for the seller: corruption makes it difficult for residents to trust their leaders. Residents along the rail route repeatedly said they suspect government officials and hereditary village chiefs will try to hoodwink them over land acquisition deals.
Either way, keeping the locals happy, from village communities to senior government mandarins, will be critical to the success of Indonesia’s drive to overhaul its infrastructure. “Don’t think that just because we’re poor and you’re wealthy, that we’re uneducated and you’re well-educated, you can play with us,” one village elder said. n
(Janeman Latul and Neil Chatterjee wrote the original report for Reuters.)