Japanese ODA: Good for China, Great for Indonesia
    Category: Column By : Raj Kannan Read : 1898 Date : Friday, January 16, 2015 - 18:31:55

    A frequent complaint I hear about the Jakarta MRT (MRT) project is that it is being built entirely by the Japanese with no benefit to Indonesia. The MRT project is being funded via Japan’s Official Development Assistance (ODA) scheme.  Some pundits lament that ODA is also too expensive. These sentiments are way off the mark.

    Let’s set the record straight. First the issue of financing. It is not expensive. If the MRT was financed by an Indonesian bank without including any profit margin, the interest would be around 6%.  If the government had financed it with a special bond, the coupon rate would be over 8%. Compare these rates with the ODA loan interest, which is 0.4% over 40 years. The low cost of the ODA is clear.

    Second, there is the claim that “everything” is done by the Japanese. One need only take a look at the signboards along Jalan Sudirman. These list many local state and private contractors, material suppliers and engineering consultants as joint venture partners of the Japanese main contractors. While the Japanese have a big role in the project, it is not true that the Japanese are doing everything.  

    China is the best paradigm of the benefit of Japan’s ODA loans. Japan has been the single largest bilateral lender (more than 50%) for China’s massive infrastructure program. Japan undermined its own position as the world’s second largest economy by helping build China‘s infrastructure, enabling China to overtake Japan for the number two spot. In fact, from 1979 to 2005, Japan provided China over ¥3.5 trillion (around $35 billion) in untied loans, grants and technical assistances as well as training over 30,000 Chinese.

    Another key benefit of the ODA loans is evident in the myriad Chinese state enterprises that years ago joint ventured with Japanese companies. These firms today are multibillion global companies competing with their Japanese counterparts.  Japan’s “prosper thy neighbor” policy has been a huge success in creating a vibrant Chinese economy.

    In Indonesia, Japan has big programs for helping the country, via myriad ODA and grant programs. Sadly during the last decade, the previous government wasted precious time debating the efficacy of ODA loans, rather than calculating their economic benefits. Interestingly, the ODA loan for the MRT project was signed during President Jokowi’s tenure as Jakarta governor. I am hopeful that under his leadership more ODA funded, high-impact projects can be restarted, which  that are already in the pipeline.  At the same time, the government should also explore how ODA loans can support alternative funding strategies like Performance Based Annuity Schemes (PBAS) to harness the private sector’s capability to deliver more strategic projects, such as ports, roads and railways. It is clear that ODA helped to catapult China to its current economic leadership. Getting more ODA assistance could be a great choice for Indonesia to reach its goal of becoming the 7th largest economy in the world by 2025.