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Analysis: Toll road development: Policy updates
Shortly after receiving a capital injection of Rp 3
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Shortly after receiving a capital injection of Rp 3.6 trillion (US$279 million), unlisted state-owned construction company Hutama Karya signed a toll road concession agreement (PPJT) for the 17-kilometer Medan-Binjai toll road, one of four Trans-Sumatran toll road sections assigned to Hutama Karya, in accordance with Presidential Decree (PP) No. 100/2014.
To further accelerate Trans-Sumatran toll road projects, the government plans to issue a new decree to form a consortium between Hutama Karya and three other listed state-owned companies (Jasa Marga, Waskita Karya and Wijaya Karya) to develop other toll road sections, utilizing the same scheme that was successful in constructing the Bali Mandara toll road.
However, we are currently awaiting the details of the new decree as unfavorable consortium agreements could result in financial losses for all four state-owned companies involved, especially considering the Trans-Sumatra toll road's relatively low internal rate of return IRR (7-17 percent).
Several issues with Law No. 2/2012 on land-acquisition processes prompted the government to release PP No. 30/2015, which has two main points. The first, private investors are permitted to fund land acquisitions, which would then be reimbursed by the government after the land had been acquired.
The second, concession holders are allowed to continue land-clearing processes without using the new land-acquisition law, as long as agreement letters on the construction sites (SP2LP) have been authorized by the local government.
We believe the government has included the first point of the new decree to accelerate the land-acquisition process, given the limitations of the annual land-clearing budget, while the second point was likely included to address complaints from concession holders who have been hesitant to restart the land-clearing process for existing toll road projects.
In accordance with the government's regulation allowing toll-road-tariff hikes every two years, the Indonesia Toll Road Authority (BPJT) plans to raise tariffs for 18 toll road sections in 2015. Despite having recently lowered our 2015 inflation target to 4.31 percent from 5 percent, we continue to expect a 2015 average toll-tariff increase of 13 percent, translating into 2.4 percent higher revenues in 2015 and 9.8 percent in 2016 for the overall sector (Table1).
Meanwhile, on the issue of the 10 percent valued added tax implementation on toll road tariffs, we expect the government to closely monitor Indonesia's inflation figures, especially in the second half of 2015, to determine whether to implement the new tax at the same time as the tariff hikes in the fourth quarter of 2015 or to push it back to 2016.
In summary, while recent policy changes indicate government support for toll road development, we retain our neutral rating as an increased number of toll road construction projects (Table 2) could pressure overall margins. Meanwhile, other risks to the sector include lower traffic volumes due to construction delays and lower-than-expected toll-road-tariff hikes.
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The writer is an analyst at the research department of Bahana Securities.
