Editorial: Service quality, not the tolls

The inflation-indexed adjustment of toll road fees every two years, as stipulated in the 2004 Law on Highways, has significantly improved the outlook of the toll road industry in Indonesia.

It is within this perspective that we should view the increases to road tolls, of 11 to 13 percent, made for 14 segments of turnpikes in Java and North Sulawesi last week.

However, this policy will hurt consumers and the economy if the fee adjustment is not measured against the minimum service standard, as set by the government.

Because toll roads cost so much to build, with a long pay-back period, this industry requires a strong legal framework for fee adjustment over a fixed period of time that can avoid political debates at the House of Representatives.

That, we think, is the legal certainty provided by the highway law.

Toll road development in Indonesia has been painfully slow because very few private investors have been interested in forking out the large sums of capital required for this basic infrastructure that takes such a long time to generate returns.

Indonesia’s first toll road project dates back to the 1970s with the completion of the Jakarta-Bogor turnpike in 1978. But despite strong demand for freeways with the increasing populations of Indonesia’s urban areas and rapid industrial development, there are currently only around 760 kilometers of free highways.

Financing had initially been the main handicap because it was extremely difficult to get bank loans with maturities of more than 10 years because domestic bankers usually have a time horizon of only up to five years.

The 2004 Law on Highways, which guarantees an inflation-indexed review of toll road fees, has made toll road investment more attractive to banks and more viable for long-term debt instruments as bonds with long tenors.

Toll road investors and the government, however, should not take it for granted the legal provision on the toll road tariff adjustment. The quality of the toll roads, which determines the level of driving comfort and safety, should weigh prominently in the factors considered in these tariff adjustments.

Rest areas along toll roads are also vital in the provision of safer services.

While investors have no control on the setting of toll fees, they can greatly influence the toll rates through their good corporate governance. Good management of the toll road investment costs — including construction, land acquisition and financing costs — is crucial, as these factors affect how much the investment depreciates over time and the overall costs that will have to be borne by the developer or operator for the operational lifespan of the road.

While these costs often depend on the complexity of the turnpike being built, the construction cost per kilometer is also a helpful gauge of the level of efficiency and maintenance costs of the facility during its operational lifespan.

The government, however, should be responsible for controlling the second-biggest component of the cost — land acquisition — that has now become the biggest handicap to toll-road development in the country.