Toll Road Development in Indonesia

Toll Road Development in Indonesia In Indonesia, road is classified into Public Road and Toll Road. Public road means the road provided for general traffic. Road itself mean land transportation infrastructure that comprises all parts of the road, including the supplementary building along with the equipment thereof dedicated for transportation. Meanwhile the definition of Toll Road in Indonesia is public road that become part of a road network system and as a national road in which the users are required to pay toll Function of Toll Road in Indonesia Based on Law 38/2004 and Government Regulation 15/2005, toll road has position and function described as the following : The toll road is operated to: a. ensures an obstructed traffic in a developed area; b. increases the efficiency and effectiveness of the goods and services distribution service in order to improve the economic development; c. alleviate the financial burden of the Government by means of including the participation of the road user; and d. to improve the equal distribution of the results of development and justice. The toll road shall be managed by the Government and/or a business entity that is qualified to do so. The user of a toll road shall be subjected to a mandatory requirement of paying a fee for the toll to be used as a return of investment, maintenance and development of the toll road. Requirement of Toll Road The toll road shall have a higher specification, higher safety and convenience service levels than those of the existing public roads which have requirement as follows: The toll road used for intercity traffic shall be designed at least eighty (80) kilometers per hour, and a toll road in urban areas shall be designed at a speed plan of at least sixty (60) kilometers per hour. The toll road shall be designed to enable it to hold the heaviest axle of eight (8) tons at the lowest; Each toll road link shall have railings and be served by crossing facilities in the form of bridges of tunnels. The pints which may be dangerous to toll road users shall be equipped with safety structures with the strengths and structures that are able to absorb vehicle crash energy. Economic Function of Toll Road The main principle economic function of toll road is based on achieving economic optimum that can be described as follows : Policy to encourage road network development and its benefits, as well as balanced inter-regional development Ensuring equal distribution of development activities and gains, and equilibrium in area development with due principle of justice, Increasing the efficiency of distribution services for improvement of the economy particularly in the more developed areas Ease the financial burden of the government through road user participation Decreasing congestion in highly growth regions resulting efficient travel times and low vehicle operating costs Concept of Public Private Partnership (PPP) The term of public-private partnership was used first time in the United States to definite correlation between joint public and private sector for educational programs for urban renewal in the 1950s until 1960s(Yescombe 2007). In fact, there is no single or uniformed definition of PPP in the world including in Indonesia. According to Delmon (2009) PPP is defined as an arrangements between public and private entities for delivery of infrastructure services and are seen as a way of raising additional funds for infrastructure investments but more importantly as a means to extend or leverage better budget funding through efficiency gains. In UK, PPP is explained as an arrangement by which a government service or private business venture is funded and operated through a partnership of government and the private sector. (NAO 2009) The term PPP covers a range of different structures which can be used to deliver a project or a service. The term can cover a spectrum from relatively short term management contracts; through concession contracts; to joint ventures and partial privatizations where there is a sharing of ownership between the public and private sectors which depend on the country and the politics of the time. PPP fills a space between traditionally procured government projects with governments budget and full privatization with privates budget, where government no longer has a direct role in ongoing operations. PPP enables to develop projects which do not have enough profitability with revenues only from projects and are not self-sustaining. Under traditional public sector approach, the public sector designs, builds, operates, and maintains infrastructure, and sets level of quantity and standards of service quality, while under privatization approach, the private sector conducts all of these aspects in place of the public sector. Under PPP approach, the public sector is ultimately accountable for service provisions, although the private sector designs, builds, operates There are various characteristics of PPP as follows: PPP is an arrangement between public and private sector. Usually, it takes form of Contract or Agreement. PPP is applied as a method for provision of public services. Public Services in this definition, are not limited to road services. Public sector remains responsible for the project because a PPP project is operated to deliver public services specified by public sectors. PPP often includes investment and construction of facilities by private sectors. But there can be PPP which does not include facility construction. PPP is applied only when it delivers Value for Money. It means adoption of PPP is recommended if it can bring larger benefits to the public compared to other means of project. PPPs can follow a variety of structures and contractual formats. However, all PPPs incorporate three key characteristics: A contractual agreement defining the roles and responsibilities of the parties, Sensible risk-sharing among the public and the private sector partners, and Financial rewards to the private party commensurate with the achievement of pre specified outputs. PPP is one tool available for decision makers in reforming infrastructure or service delivery. It is most effective way when it is accompanied by other reform activities to underpin and reinforce the PPP and to support sustainable improvement. A successful PPP is designed with careful attention to the context or the enabling environment within which the partnership will be implemented. Where the operating environment can be reformed to be more conducive to the goals of PPP, this should be accomplished. Where elements of the operating context cannot be changed, the PPP design must be tailored to accommodate existing conditions. To be successful, PPP must be built upon a sector diagnostic that provides a realistic assessment of the current sector constraints. Specifically, the sector diagnostic will cover: (1) technical issues; (2) legal, regulatory, and policy frameworks; (3) Institutional and capacity status; and (4) Commercial, financial, and economic issues. Objectives of PPP The prime objective of government in using PPP is to achieve improved value for money, or improved services for the same amount of money as the public sector would spend. Besides that, other objective is desiring to provide increased infrastructure provision and services within imposed budgetary constraints by utilizing private sources of finance, if possible, via off balance sheet structures or to accelerate delivery of projects which might otherwise have to be delayed. The Main Principles of PPP According(Agency 2012) in Design, Build, Finance and Operate (DBFO) of Road Project, the main principles of PPP are: a. Transfer of Risk The risk allocation between every stakeholder must be well informed therefore every party both government and private know every risk on staging of toll road development such as design, construction and operation/maintenance, including financing of its project. b. Value for Money The government has authority to determine the economical and financial of project, in using government money and private money or combination both of them. c. Managerial Responsibility Private sector have capability and responsibility to manage, operate and maintain of road project d. Payment for Service For road project that full financed by government, the staging of road development is carried out by Private Sector. The Government has authority to regulate and monitor every progress of its staging. Government will pay the private sector based on performance of project and has right to terminate project if it is needed. e. Partnership The government and private are committed to cooperate in practice to get efficient and effective result. f. Private-sector Innovation By understanding risk factors in road project, the private sector has used innovation for efficiency of road development staging. The Private Sector concept encourages a productive partnership between the public and private sectors, by using private capital and commercial expertise to fund initial construction and long-term maintenance of Private Sector roads in operation year. Investment Concept Regarding (Horngren 1994) investment decisions concerning long-term plan for the use of capital (capital budgeting) consist of six staging process: (1) identification stage, choosing type of investment suitable with organizational objective, (2) search stage, seeking alternative investment capital that can meet the organizational goals, (3) information-acquisition stage, searching data and qualitative and quantitative analysis of various alternative investment capital, (4) selection stage, choosing one capital investments based on financial analysis by the method: discounted cash flow ( net present value (NPV) and internal rate of return (IRR)), payback and accrual accounting rate or return, (5) financing stage and (6) implementation and control stage. Those all concepts shall be directly apply to initial investment concept, including Public Private Partnership Risk Allocation in Public Private Partnership Definition of Risk In term definition, risk is unpredictable variation in value. It includes the possibility of unexpectedly good or unexpectedly bad, outcomes. The risk of a project is unpredictable variation in the total value of the project, taking account not only of the value of the project company but also of the value accruing to customers, the government, and other stakeholders. A stakeholders risk in a project is unpredictable variation in the value of the stakeholders interest in the project. Each risk should be allocated, along with rights to make related decisions, so as to maximize total project value, taking account of each partys ability to(Irwin 2007): 1. Influence the corresponding risk factor. 2. Influence the sensitivity of total project value to the corresponding risk factor, for example, by anticipating or responding to the risk factor. 3. Absorb the risk. Risk in Public Private Partnership The purpose of the risk identification stage on toll road project is to define as extensively as possible, a list with all types and sources of risks and uncertainties that might have an impact on the project. It is a crucial stage for the risk management process, because if a risk cannot be identified, it cannot consequently be evaluated and managed. (Tanaka, et al. 2005) Toll Road project risks should be assigned to the public or private entity that is best at controlling and managing them. In most of the cases, the private sector has taken on risk associated with the design, financing, construction, operation and maintenance of facilities, general regulatory risks as well as cover for insurable force majeure events. On the other hand, the public sector has been responsible for environmental license approvals and other planning permits, right-of-way land acquisition, discriminatory regulatory risk, and uninsurable force majeure events and political risks. Risk Allocation Principles in Public Private Partnership Determination of the Concession obligations in a PPP Agreement need to conform with the risk allocation principles understood by every party . An optimal risk allocation is vital in maximizing the value for money. The common principle for risk allocation is that a risk should be allocated to party which is relatively able to manage the risk, or having the least cost of absorbing such risk. If this principle is implemented properly, it is expected that the risk premium and the project cost would be lower leading to positive impact to the project stakeholders. The implementation examples of such principle in the market are as follow: Risks which have not been managed well in the past, or those which the agency has little experience in managing, should be transferred if cost-effective, particularly where the risk can be influenced by the controlling party; Risks which are outside the control of either party, or are equally influenced by both parties (e.g. certain force majeure events) should be shared; Risks that the government can manage well, or is in a more informed position to control than the private sector (e.g. planning approvals, legislation risks) should be retained; and There may also be some risks that, while transferred, may possibly remain an exposure for the public sector (e.g. risk of sponsor default). If an event cannot be resolved satisfactorily, the government steps in and assumes full responsibility for the risk (or the project as a whole). This is appropriate where the project is delivering critical social infrastructure and associated services. Models of Risk Allocation of Public Private Partnerships One of PPPs benefits is there is possibility to share the possible risk of the project between private sector and government. On one hand, the private sector has the capability to deal with commercial risk, but on the other hand, they need to relief from non-commercial risk that beyond their control (Soedjito 2009). Models of risk allocation in public private partnership is depicted in The common models for public private partnerships are BOT and concession and the difference between these two depends on the level of support provided by the government. Risk Assessment Approaches From a review on the existing methodologies used for the evaluation and assessment of risk in the financial appraisal of projects, two main categories of approaches were identified: qualitative techniques and quantitative techniques. Qualitative Techniques Qualitative techniques have been used for compiling a list of the main risk sources and describing their likely consequences, without entering in details about the quantification of their probability of occurrence. (Merna and Njiru 2002). The next step after all sources of risk are identified is to define some kind of order of priority. On the limited time, risk assessment may be biased towards the use of relatively simple procedures such as qualitative and semi-quantitative techniques (Ward, 1999). Quantitative Techniques Quantitative techniques aim to represent the likelihood and impact of risks in terms of the usual planning measures, such as time and money (Grey, 1995). Two of the most widely used quantitative risk analysis techniques in the financial appraisal of projects are: deterministic analysis techniques and probabilistic analysis techniques (Merna and Njiru, 2002). Sensitivity analysis, as part of deterministic techniques, is probably the most representative approach among the quantitative techniques. Sensitivity analysis examines the effect of changes in the value of the models dependent variable resulting from the changes in the value of one or more of the input variables to the model. The most popular form of sensitivity analysis is the one-factor-at-the time approach, wherein the main advantage is that it allows interpretation of the results in an easily understandable way. Another form of sensitivity analysis is the scenario analysis, which recalculates the model for a combination of simultaneous changes in the input variables (Van Groenendaal and Kleijnen, 1997). Frequently, three types of scenarios are distinguished: an optimistic case, a base case, and a pessimistic case. Some of the major shortcomings of using sensitivity analysis are: 1. Equal probability of occurrence is given to all scenarios (despite the likelihood of getting some scenarios with extreme values is lower); 2. Possible inter-dependencies between the variables are ignored; 3. In big projects with many items/activities, a combination of all variables can create a too large set of scenarios. Implementation of Public Private Partnership (PPP) in Indonesia Indonesian government through Ministry of Public Works based on Decree of Minister of Public Work number 567/KPTS/M/2010 operated 757.47 km and plans 4618 km of toll roads as part of the national road network divided in 5 major islands in Indonesia (see ) In the implementation of toll road development in Indonesia, there were some periods due to regulations and legislation in valid at that period of time as follows: First Period (1978 1983), Fully financed by Government funds (Government Equity). Second Period (1983 1990), Subsidiary Loan Agreement (SLA) to PT Jasa Marga (two step loan), State Own Enterprise for toll road development. Third Period (1990 1994), Cooperation with private sector using BOT scheme. Fourth Period (1994 2005), Modified BOT scheme (i.e., revenue sharing concept, land acquisition cost is part of investment cost borned by the investor). Fifth Period (2005 present), using Build Operate Transfer (BOT)/ PPP Scheme Law and Regulation for Public Private Partnership of Toll Road in Indonesia After regulatory reform with the Road Law No.38/2004 and Toll Road Government Regulation No.15/2005 allow the development of toll roads through public private partnership, including domestic and international investor. Main regulatory framework for toll roads includes law, regulations, and decrees are presented as follows: Law No. 38 of 2004 concerning Road Government Regulation of the Republic of Indonesia No.15 of 2005 concerning Toll Road Regulation of Minister of Public Works No. 295/PRT/M/2005 Concerning Indonesia Toll Road Authority Public Work Ministerial Decree No. 369/KPTS/M/2005 on National Road Network Master Plan to include toll road network master plan Presidential Decree No. 36/2005 on Land Acquisition for Public Purpose Presidential Decree No.67/2005 on PPP Between Government and Enterprises on Infrastructure Provision Finance Ministerial Decree No.518/KMK.01/2005 on Risk Management Unit Decree of Minister of Public Work number 567/KPTS/M/2010 on Status of Toll Road in Indonesia Implementation Framework on Toll Road Project in Indonesia According to the Road Law No.38 of 2004 concerning Road and the Government Regulation No.15 of 2005 concerning Toll Road, roles and institutional framework of toll road project are defined as showed in and Figure 2.. Government of Indonesia set up Indonesia Toll Road Authority (BPJT) which has authority for preparing feasibility study, Environmental Impact Analysis (EIA), bidding documents and selecting private concessionaires. Indonesia Toll Road Authority also has duty to implement a part of toll road management in Indonesia such as set toll road concession, commercialization of toll roads, supervision of toll roads including monitoring and evaluation in Indonesia. This authority is also to deliver Public Private Partnership scheme in toll road investment. Toll Road Investment Procedure in Indonesia Procedure of toll road investment, from project preparation through sign of concession agreement, is shown in . The whole process take approximately 24 months (2 years). Then, it is followed by implementing the agreement through the whole period in accordance with the concession period agreed which vary 30 to 40 years depend on the project condition and project by project basis. AGREEMENT IMPLEMENTATION (ÂÂ ± 14 months) (ÂÂ ± 4-6 months) PREPARE PQ DOCUMENT SUBMIT PQ DOCUMENT PREPARE BID PROPOSAL SUBMIT BID PROPOSAL BID BOND RECEIVE NOTICE AWARD PRIVATE SECTOR SIGN CONTRACT PERFORMANCE BOND, LAND ACQUISITION COST, FINANCIAL CLOSURE BID CONFERENCE-BID PREPARATION PQ AND BID INVITATION PREQUALIFICATION OF BIDDER RECEIPT AND OPENING BID PROJECT PREPARATION EVALUATION OF BID APOINTMENT OF SUCCESFUL BIDDER CONSESSION AGREEMENT BPJT/GOVERMENT PREPARE SPECIAL PURPOSE VEHICLE Figure 2. Toll Road Investment Procedure (source: BPJT 2010) Existing PPP Model of Toll Road Project in Indonesia There are 3 (three) models that can be applied under the PPP scheme in Indonesia, depend on the economic and financial viability of the projects (Karsaman 2008). These models are shown in Figure 2. Scheme 1, where the economic viability of the toll road is good but its financial viability poor, the government take over the finance and construction of the toll road, but when it has been finished, then it will tendering for its operating maintaining to private sector. This has been applied in Tanjung Priok Access Road, Jakarta and Suramadu Bridge, East Java. Scheme 2, where the economic viability of the toll road is good but its financial viability is marginal, the Government can support Land Acquisition and partly construction cost and the private sector has to finance and constructing other part and then operate and maintain the toll road. This scheme is applied in Solo-Ngawi-Kertosono Toll Road (Central Java and East Java) case and might be applied in other links. Scheme 3, where the economic and financial viabilities of the toll road are good, the private sector has to finance and constructing all of the road and then operate and maintain it through the concession period. This scheme is applied in most of the toll road development in general. Financial Feasibility of Toll Road Investment Indikator Kelayakan yang akan dipergunakan dalam studi ini, adalah : 1. Net Present Value (NPV) Net Present Value adalah selisih antara Present Value Benefit dikurangi dengan Present Value Cost. Hasil NPV dari suatu proyek yang dikatakan layak secara finansial adalah yang menghasilkan nilai NPV bernilai positif. Dalam hal ini semua rencana akan dilaksanakan apabila NPV > 0, atau persamaan di atas memenuhi : Net Present Value (NPV) = PVBenefit PVCost = positif Hal tersebut berarti bahwa pembangunan konstruksi jalan akan memberikan keuntungan, dimana benefit/ cash flow positif akan lebih besar dari pada cost/ cash flow negatif. 2. Internal Rate of Return (IRR) 3. Payback Ratio Rasio DSCR Public private partnership (PPP) are a generic term for the relationships formed between the private sector and public bodies often with the aim of introducing private sector resources and/or expertise in order to help provide and deliver public sector assets and services. The term PPP is used to describe a wide variety of working arrangements from loose, informal and strategic partnerships to design-build finance- operate (Private Sector) type service contracts and formal joint venture companies. (4Ps, UK local government procurement agency) In general, the basic concept of toll road development and management are as follows.1 The Government establishes Master Plan of Toll Road Network as a guidance of toll road development, while the toll road links will be determined by the Minister. Government holds authority of toll road development, where as parts of the authority concerning toll road business are being executed by Indonesia Toll Road Authority BPJT (Task and authorities of BPJT are described in Minister of Public Works Regulation No.295/PRT/M/2005.) Toll road business can be financed by the Government and/or qualified business entity. Financing by Government is for the toll road links that economically feasible, but not financially feasible. Financing by business entity is for toll road links which are both economically and financially feasible. Under particular conditions, where the toll road can not be developed by business entities, the Government will take proper action in accordance with the authorities. Initial tariff will be established by Minister as stated in concession agreement. The tariff will be adjusted every two years based on inflation index, an determined by the Minister. Procurement of either part of all aspects of toll road operation will be done through an open and transparent tender process. Land acquisition is responsibility of the Government, however its budget can be provided by Government and/or business entity.