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Opportunities abound in toll road industry
The Jakarta Post , Jakarta | Sat, 11/11/2006 11:57 AM | Opinion
Montty Grianna, Jakarta
In recent decades Indonesia has seen a tremendous growth in human mobility, and thus, in the number of private vehicles on our national road network.
Java accounts for a large proportion of the national population, and its large number of private vehicles reflects this. Its roads are increasingly congested. It is time to build a freeway system, the Trans Java, connecting a number of large cities along the north corridor of the island.
Toll charges levied on travelers would allow the system to be self-financed. That would be useful, since the resources for road infrastructure have been shrinking, a longstanding side effect of the 1997 monetary crisis. Self-financing also creates an opportunity for private sector participation.
Our freeway industry was initially regulated in 1978 by a state-owned company, Jasa Marga, which was assigned the right to organize toll road development and operations throughout the country. Through a Build Operate and Transfer scheme, the first toll road was entrusted to the private sector in 1987 as a public-private partnership (PPP).
A 2004 law deregulated the industry and provided more opportunity for players. Jasa Marga no longer has the monopoly on toll roads. However, private participation has been stagnant since the crisis. Currently, there are approximately 600 kilometers of toll roads in operation. Of those, close to 500 kilometers are operated by Jasa Marga and the rest by private companies.
For PPPs to be successful in the toll-road industry, several potential risks should be identified and remedies explored. These include traffic volume accuracy, land acquisition and rights-of-way.
Traffic volume forecasts are always subject to error. However, these forecasts are the backbone on which proposals for toll-road development are prepared. They affect not only potential revenues but also toll rates and ultimately investor interest.
Private investors are supposed to undertake their own due diligence to ensure the reasonability of forecasts included in proposal requests. But this should not eliminate the need for the government to take pains to ensure that traffic volume forecasts are reliable.
Land acquisition for toll road projects requires government's direct involvement. In most cases, land does not need to be acquired if it is owned by the government. But since toll-road development is unique in both the distance and the quantity of land required, both the private sector and the government must work hand in hand to obtain the necessary land to build the network. Land must often be acquired by eminent domain. That is the government's responsibility.
Rights-of-way must also be acquired where it is not possible or practical to buy land. Annual payments for rights-of-way must be included in the annual operating budget under which tolls are determined. Once again the private sector and the government have to work cooperatively to achieve the best results. While the right-of-way would remain the responsibility of a private operator, government must work closely with the operator to insure that the right is granted either through direct agreement or through eminent domain.
In addition, the Trans Java should be broken into a number of sections, or unbundled, for purposes of private participation. Unbundling gets the maximum benefit out of partnership with the private sector. It allows government to detail those portions to be commercially developed, where investors can build and operate a project profitably.
Sections that are located close to urban areas are anticipated to generate an average of 30,000 vehicles per day, and are ideal for private investors. Longer sections covering rural highways connecting two adjacent cities may turn out to be the responsibility of the government, and may function as a feeder network for the potentially privately-operated highway network.
Another must is a supportive toll pricing policy to enhance the attractiveness of the toll road industry. This policy should reflect the true cost of providing turnpikes, but should not excessively burden travelers. Price caps or a rate of return need to be explored. There must also be rules enabling the automatic adjustment of toll rates using appropriate formulas. Both the level and the adjustment of toll rates should be locally specific and, thus, the rates may not be the same across the Trans Java road.
It is necessary to ensure the sustainability of financing for the development of the Trans Java. Local capital markets should be the primary target as a source of financing, since financing predominantly with the local currency can avoid or reduce the exchange rate risks. Local financial institutions and investors have a better understanding of the environment and the government policies, and are more willing than foreign investors to assume local political risks. Labor and materials, other than the equipment, can largely be provided locally, which obviates the need to fund construction costs in foreign currency.
As a result of last week's infrastructure summit, a greater number of private investors are said to be willing to develop the Trans Java. Proper procedures for screening potential private investors need to be formulated and agreed on. Pre-qualification must be in place to ensure that bidders can actually carry out the project.
There must be incentives for private investment without undue risks to the government, including clear procedures for soliciting bids, and project development assistance to aid in the preparation of feasibility studies, tender documents, contracts and negotiations toward completed agreements. With these, the opportunity can be transformed into reality.
The writer is Director for Energy, Mineral Resources, and Mining at the National Development Planning Agency (Bappenas). These are his personal views.
