Indonesia is close to having its first high-speed line between Jakarta and Bandung. The project, started in 2015, is expected to be completed by 2021…

The development of high-speed line infrastructure in Indonesia is continuing at quite a pace, even if the project is ultimately delayed. The joint venture company, Kereta Cepat Indonesia China was established on 20th October 2015 and after four years the completion of the construction work currently sits at around 40 per cent.

This is quite fast development compared to other many projects, especially in Europe where it is common for the period of time between the creation of a consortium (first phase of the project) and the completion of the works would be more than ten years. The project is led by Chinese technology and it is important to remember that right now China is a leader in terms of kilometres of high-speed lines in operation.

Right now, around 60 per cent of all high-speed rail infrastructure is in China (more than 31,000 kilometres) and this is one of the reasons why the President Joko Widodo decided to shift from a Japanese project to a Chinese project.

In fact, before 2015, the idea to complete a line from Jakarta and Bandung was developed by Japan. The new project had to be completed in 2019, but several external factors forced a delay: in particular, the land acquisition process was more complex than expected. The new line from Jakarta to Bandung, with two intermediate stops is 142.3 kilometres long and also includes a depot in Tegalluar.

The interesting points go beyond just the process of construction but includes the business model that the company wants to develop as well.

Concerning the construction and operation, it is important to underline that in recent years, there has been ‘anticipation’ of the development of construction of high-speed rail. The operation of high-speed lines started in the European countries, Japan and South Korea when the level of gross domestic product per capita (at constant US Dollar level of 2010) was between $12,000 to more than $30,000 (for South Korea). Since China has entered into the market the level of a countries’ GDP at the implementation of high-speed rail has gone down.

China, Morocco and Indonesia all had or will have a level of GDP per capita lower than US$5,000 at the point of first operating a high-speed line.

It is a clear trend that in the last year, the GDP limit for the construction of the high-speed lines went much lower than US$10,000.

This is an interesting way to understand what level of development a country needs to achieve in order for its population (potential customers) to be willing to pay for high-speed rail if the business model could work with a marketable idea. The first element to be taken in consideration is the yield, the average revenue of the ticket per passenger in kilometre.

We can find different business models around the world, but if we take private rail companies, there are not many cases. For example, in China the average price of the ticket is around US$0.08 per passenger kilometre, but many lines are losing money even if the access charge (which is one of the main costs for all railway undertakings) is not included in the cost.

In Japan and Italy, we find two different business models: open access in Italy and vertically integrated railway companies in Japan. The competition system in Italy started officially in April 2012, when a private competitor, Italo (managed by Nuovo Trasporto Viaggiatori), entered the market, where Frecciarossa, managed by Trenitalia, was already operating services.

Trenitalia is an enterprise held one hundred per cent by the national railway company Ferrovie dello Stato Italiane, that is currently a holding of the different divisions (service, infrastructure, transportation of goods, etc.) of the railway sector, as provided for by the European legislation about the separation between the infrastructure manager and the service operator.

In 2018, around 17.5 million customers used Italo trains around a wide network and this year the private railway company will have more than 20 million of passengers on board. Italo is now very profitable with an EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortization) of 35 per cent of the revenue and with a continue increasing of the number of the passengers.

In Japan, where the opposite model is utilised, private operator JR East does not only manage the high-speed services, but also regional services and real estate development. Thanks to the competition, the price of a high-speed rail ticket has decreased 40 per cent in the last seven years of competition. In Japan, the yield is almost three times higher than for Italo.

In Indonesia it is not clear what kind of business model will be chosen by the government, but the forecast for the yield is quite high.

In particular the average price of the ticket (for the same distance) will be more than 20 per cent higher than for Italo, but 50 per cent cheaper than in Japan.

It is important to take in consideration the purchasing power of the customers and the forecast of the price of the ticket in Indonesia could be a big risk: in fact, the price is much higher than Italy where the GDP per capita at PPP level is three times higher than in Indonesia.

At the same time, it not only the pricing that could risk losses and subsidies in Indonesia. In the next two years it is important to develop customer-oriented technology for the business model of the railway company.

The concept of efficiency in the railway industry has really changed with Italo. A good use of the assets (higher productivity of the rolling stock), innovation in the relationship with the customer (one-to-one customer relationship management), a wider use of the revenue management, capability to reduce the operational cost thanks to the innovation are some of the elements that can make a difference in the railway business.

The big question is if the railway operator in Indonesia is ready for these innovations and if it is clear the strategy to reach the customers whilst avoiding losses or relying on subsidies in the high-speed rail business.

The good news is that Indonesia still has two years to reach these targets, but two years is very short period in the development of this technology.

Andrea Giuricin is the CEO of TRA Consulting and Senior Rail Sector Advisor to the World Bank Group. He gives speeches on the rail sector around the world from Bangkok to Lisbon