Domestic Policies and Practices Could Increase Social and Ecological Risks Along the BRI: Insights from Indonesia

By Blake Alexander Simmons

Rapid development has become a global priority as countries strive to meet the UN Sustainable Development Goals by 2030. China’s Belt and Road Initiative (BRI), a multi-trillion-dollar push to increase international investment, finance and trade, offers a potential pathway for countries to reach their national development goals. Indeed, Chinese financing is strongly linked with host country economic growth – even more so than financing from the World Bank – and it’s estimated that the BRI could boost global GDP by nearly three percent.

Of all the participants in the BRI scheme, Indonesia is expected to see some of the greatest economic benefits. The country is among the top ten recipients of both Chinese foreign direct investment (FDI) and overseas development finance from China’s two largest policy banks – the China Development Bank (CDB) and Export-Import Bank of China (CHEXIM) – over the last decade. FDI from China continues to increase rapidly in Indonesia, amounting to over $17 billion during 2015-2020 alone, largely concentrated in three sectors: the metal industry (42 percent), transportation, warehousing and telecommunications (20 percent) and electricity, gas and water (19 percent). Overall, the World Bank anticipates a total of $50 billion could be directed to Indonesia under the BRI.

However, the boom in Chinese FDI and development entails substantial risks to Indonesia’s social-ecological systems, including risks of deforestation, pollution and the subsequent effects on local and Indigenous communities. A recent study from the Boston University Global Development Policy Center found that 40 percent of Indonesian development projects financed by CDB and CHEXIM in the last decade present considerable risks to biodiversity and/or Indigenous communities. Chinese FDI projects affiliated with the BRI may pose similar risks, but research in this space has been scarce.

A new journal article by a team of researchers at the University of Indonesia Research Center for Climate Change (RCCC) and the Boston University Global Development Policy Center (GDP Center) uses Indonesia as an exemplar case study to explore risks to biodiversity and local communities from Chinese FDI and how domestic policies and inefficient governance of BRI investments can heighten social and ecological risks. The study found evidence of multiple risks to people and nature, which may be amplified by convoluted governance of BRI projects and misdirected domestic policies.

Multiple risks to people and nature

The study focuses on 14 clusters of Chinese FDI projects related to the BRI across Indonesia – including power plants, roads, railways, mines, industrial parks and other facilities – representing sites of national ecological and economic importance and showcasing the diverse suite of Chinese investments in the country.

Habitat loss has occurred in all 14 projects, though there is considerable variation. Projects like the Morowali Industrial Park have resulted in large and ongoing land clearing over time, whereas several hydropower projects have not shown substantial land use change. Yet, even modest amounts of habitat loss can be detrimental. For example, the SDIC Cement Project in West Papua has resulted in relatively less land clearing, yet 180 hectares (445 acres) of this clearing has occurred within the Maruni protected forest.

The stripping of topsoil and habitat loss further increases carbon emissions and pollution risks, which are already a substantial concern given the surge in coal-fired power plants associated with the BRI in Indonesia. The ecological and social footprints of coal consumption surrounding coal mines is a particular concern in Sumatra and Kalimantan (Indonesian Borneo). For example, the PT Kaltim Prima Coal project in East Kalimantan – the second largest production site in Indonesia – has led to river contamination, flooding and the displacement of local people. The Paiton power plant in East Java – the largest coal-fired steam power plant complex in Southeast Asia – may also be jeopardizing the food chain in the coastal seas surrounding the power plant, which have seen a 0.58°C increase in sea surface temperature.

These risks will have a domino effect on vulnerable species and local livelihoods. Our study identified at least 42 threatened species across the 14 BRI sites that may be negatively impacted by development activities. Additionally, changes in land use from agriculture/forestry to extraction/mining is likely to adversely impact the livelihoods, health and identities of Indigenous communities.

Convoluted governance of BRI projects

Host countries have a responsibility to ensure robust and accountable governance of BRI projects. Many BRI projects have been adopted into Indonesia’s national development plans to ensure alignment with the country’s own development strategy. However, this practice can introduce complexities into the governance of BRI projects that may ultimately amplify social-ecological risks.

For example, with the rapid growth of Chinese investment and implementation of the BRI, there has been a shift from the previous state-led Government-to-Government (G2G) scheme in Indonesia to a Business-to-Business (B2B) scheme for BRI-affiliated projects. Yet, because many Chinese FDIs are listed as national strategic projects – which justifies state funding to Indonesian partners as a government investment or loan – the funding often comes from the lending of Chinese financial institutions to the Indonesian government using the G2G scheme, rather than the B2B scheme. This mismatch results in complicated financial flows between Indonesian ministries, Chinese investors, national and multilateral banks, regional government and state- or privately-owned enterprises. In combination with overlapping authority among coordinating ministries, this convoluted governance of BRI projects weakens controls and increases the risks for fraudulent misconduct in the entire governance process.

Domestic policies may increase risks

China’s “country systems” approach to overseas finance means much of the oversight of BRI projects is the responsibility of host countries, and risk management practices depend on the domestic policies in place to guide them. Domestic environmental, economic and social policies are thus crucial to ensuring BRI projects are environmentally sustainable and socially responsible.

In Indonesia, a recent Omnibus Law (Job Creation Law No. 11 of 2020) has raised tremendous concern from civil society over its adverse implications for mitigating social-ecological risks from BRI investments. The law aims to strengthen cooperatives and micro, small and medium enterprises (MSMEs), improve the investment system and accelerate state investment and national strategic projects. In doing so, it amends more than 1,200 articles stipulated in 78 sectoral laws, including environment, forestry, fisheries, investment, land affairs and spatial planning with a newfound focus on streamlining business permitting processes and land appropriation.

Some of the key policy drawbacks of the Omnibus Law include:

• Political prioritization of investment security over environmental protection, which jeopardizes the state of the environment and the supply of crucial ecosystem services.
• A new centralized system for business (and environmental management) permitting, which erodes the authority of regional and local governments in natural resource management and reduces the participation of affected communities and concerned groups in the approval process of environmental impact assessments.
• Favorable policies on land appropriation for commercial establishment, which may increase land conflicts, potentially maintaining historical rent-seeking behavior in business activities.

The Omnibus Law may thus reduce the due diligence necessary to prevent adverse outcomes from BRI development activities on Indonesia’s people and nature.

Recommendations for Indonesia and China

The question remains: how can the Indonesian regulatory framework be up to the significant challenge of preventing social, ecological and economic damages from the BRI?

Globally, there is a stronger trend toward stringent environmental and social safeguards within the financial industry and certain extraction industries, yet such safeguards are not a staple of BRI financing. Chinese policy banks and investors should adopt more safeguards into their finance and investment practices.

Market-driven initiatives, like the Roundtable on Sustainable Palm Oil (RSPO) and the International Council on Mining and Metals (ICMM), have been gaining legitimacy and could be another valuable tool for mitigating risks from certain BRI projects in Indonesia. Other international initiatives, like the Green Investment Principle (GIP) and the Belt and Road Initiative International Green Development Coalition (BRIGC) could also be adopted within BRI projects in Indonesia. Individual companies under the BRI scheme, in particular, should adopt these principles and practices internally, which could provide a positive image of the companies and may affect prices of their products when certification schemes exist.

The study presents a glimpse into the potential impacts of BRI investments across Indonesia. More research remains to be done on this topic, as threats to specific species and the ways those species interact with each other can magnify risks of ecosystem degradation and even potential collapse. In all, the research serves as a contribution to a larger concerted effort to illuminate the consequences of development in BRI countries, which can then be used to weigh the potential costs against the purported benefits.

Ultimately, much rests on the shoulders of national institutions, the standards they set and their capacity for implementing those standards to mitigate the social and ecological risks associated with development activities. The BRI and its accompanying investments could certainly bring substantial benefits, yet the potential risks may also be substantial if managed poorly. Indonesia and other BRI countries have the responsibility to determine their own outcomes by ensuring national standards and practices are adequate for the task at hand.

This article is the first product of an ongoing collaboration between the Boston University Global Development Policy Center and the University of Indonesia Research Center for Climate Change investigating the environmental impacts of the Belt and Road Initiative in Indonesia. Subscribe to our Global China Initiative Newsletter to receive updates.