Final Seminar Institutional Arrangements in the Toll Road Sector WB PPIAF TF023613

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Final SeminarInstitutional Arrangements in the
Toll Road Sector WB PPIAF TF023613

• Tasman Economics

Jakarta 8 September 2003
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Presentation to Final Seminar

• By
• Dr Michael Porter
• Team Leader
• Amy Auster
• Finance Expert
• Eka Putra
• Project Officer

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1. Why reform?
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Reasons for reform stock take

• Institutional
• Conflict of interest within Jasa Marga
• Lack of incorporation of toll roads in network
  planning
• Weak Government control over BOT contracts
• No mechanism to incorporate Laws 22 25
• Financial
• GOI unable to fund sufficient toll road
  investments
• Jasa Marga heavily indebted
• Rp20 trillion of priority projects pending
• Competitive
• Other countries offer much more transparent and
  effective models, so receive better access to
  funds
• Predictable income flows also lowers risk and so
  reduces the cost of capital and resulting toll
  tariffs

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Current structure of concessions

• Lack of control over concessionaire
• Unclear allocation of risk
• Jasa Marga absorbs cost of Government failure
• Jasa Marga absorbs cost of operator failure

Kimpraswil
Delegation (Law 13/80 PP8)
Jasa Marga
Toll road operator
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Cost of current arrangements

• To the GOI
• Soft funding arrangements for Jasa Marga (Rp3.3
  tr)
• Part of cost of land acquisition (Rp2.0 tr)
• Taxes owed pre-94 (Rp2 bn)
• Liabilities from defaulted investors not paid by
  Jasa Marga (Rp 4.6 tr)

• To Jasa Marga
• Burden of loss-making toll roads
• Uncertain and political income stream
• Contingent liabilities from PKP defaults
  (potential Rp2.0 tr)
• Example JORR total 2.6 tr of which Jasa Marga
  paid Rp1 trillion debt including 50 cash payment
  in one year

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Regulatory and legal issues
Toll tariffs, real year-on-year change ()

• Tariffs by decree 67 real decline 1990-2003
• Unpredictable timing and cost of land acquisition
• Unpredictable policies regarding competing roads
  and transport modes

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Goal of new model
Policy planning
Jasa Marga
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The search for a new model
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Principles followed

• Contribute to economic efficiency and higher
  living standards
• Promote private sector participation for transfer
  of finance and technology, management, efficiency
  and effectiveness
• Reflect international best practice and
  Indonesian experience
• Clearly allocate risk to the party best placed to
  mitigate
• Assure reasonable cost of implementation in
  Indonesia and consistent with existing budget
  constraints
• Consistent with decentralisation policies and
  goals

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International study conclusions

• Concession contracts remain most widely used
  mechanism for PSP in toll roads internationally
• Contracts most effectively managed by an
  independent agency of Government
• Must be clear lines of responsibility and
  authority among Government entities, including on
  planning and feasibility issues
• Transparency and full disclosure of information
  required at all stage of process

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Institutional arrangements in best practice
countries

• The institutions
• Brazil National Agency for Land Transport
• South Africa National Roads Agency
• UK Highways Agency
• Ontario Superbuild
• Victoria CityLink

• What they have in common
• Contract management function, incl. regulation
  where in contract
• Technical advice and assistance function
• S Africa, Brazil UK, local govts involved
• Corporatised, legal entities protected from
  political interference

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Indonesian precedent BP Migas

• Contract management function in the oil gas
  sector
• Signs production sharing contracts on behalf of
  GOI
• GOI stands behind contractual agreements
• Legal form is BHMN, a not-for-profit legal entity
  owned by GOI

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Institutional recommendations
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New contract management body

• Indonesian Toll Road Authority (ITRA)
• Contracting management function
• Regulation function, where regulation is in the
  contract
• Technical advice and assistance function to
  central, provincial and local governments
• ITRA Local Government Liaison department
• Obliged to study nominated projects
• Provides advice and support
• Facilitates local toll road development

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Roles and authorities of ITRA
Kimpraswil
Delegation (Law 13/80 PP8)
Jasa Marga
Toll road operator
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Roles and authorities of ITRA
Kimpraswil
MoF

• Independent agency reporting to Minister for
  Kimpraswil
• With MoF on Executive Board
• With obligations to service provincial and local
  govts

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Technical advice function
policy
GOI
GOI
Transport policy
Transport policy
Kimpraswil
Kimpraswil
Road network plan
Road network plan
Feasibility criteria
ITRA
Likely toll roads
Unlikely toll roads
Likely toll roads
Unlikely toll roads
Feasibility study
ITRA
Analysis Conclusion
Analysis Conclusion
decision
Kimpraswil
Yes
No
Yes
No
ITRA
Design concession contract
Design concession contract
authorise
No
Yes
Kimpraswil
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ITRAs functions

• Determine and implement toll road criteria
• Undertake pre FS and detailed feasibility studies
• Determine key features of concessions, with
  defined boundaries of Ministerial intervention
• Undertake procurement via competitive bidding and
  sign concession agreement
• Monitor concessions against contracts
• Represent GOI in disputes / arbitration resulting
  from concession agreement

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Regulation by contract function

• Toll tariffs initial setting and adjustment
  mechanism
• Standards design, construction, operation
  maintenance
• Land acquisition - eminent domain and ROW
• Competition roads and alternative modes of
  transport
• Fees concession and administrative payments and
  structure
• Risk allocate including materially adverse
  events among parties
• Takeover Government step-in in certain
  circumstances
• Dispute settlement including default

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New form of contracts
GOI
ITRA
Concession Agreement Project Regulation Fees Stan
dards Circumstances of compensation
If Government honors contract, no GOI liability!
Toll road operator (concessionnaire)
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Regional governments
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Limitations on local government participation in
toll roads

• Institutional
• Local toll road agencies would duplicate
  specialist skills and create additional expense
• Financial
• Insufficient local creditworthiness to back up
  contractual obligations DAU technically central
  government revenue that is shared
• Competitive
• In other countries, investors sign one contract
  with highest level of government
• Cost of capital will be lower with ITRA model,
  and so allow lower toll tariffs

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How to overcome obstacles

• Identify local / provincial government body to
  liaise with ITRA (ie BAPEDA)
• Use ITRAs technical advice and support function
  to build local capacities
• Use sovereign creditworthiness to support local
  development initiatives
• Develop new contracts that clarify rights and
  obligations of local and provincial governments
  vis-à-vis toll road operators and the central
  government

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Regional government involvement
Local govt / BAPEDA
Nominate toll road project
ITRA
Conduct feasibility study
Yes
No
ITRA LG/ BAPEDA
Design concession contract
LG/BAPEDA Kimpraswil
Authorise concession contract
Yes
No
Memorandum of Understanding Designated Road
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Designated road concept

• Provincial / local governments grant ITRA the
  authority to manage road
• Road becomes national road for duration of
  contract
• Agreement details rights and obligations of ITRA
  and local governments
• Split concession and administrative fees
• Obligations for land acquisition

ITRA
Local / provincial Government (BAPEDA)
Memorandum of Understanding DESIGNATED ROAD
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Contract structure with local government
involvement
Local / provincial govt
ITRA Local / provincial government
GOI
MOU
Designated road
Concession Agreement Project Regulation Fees Stan
dards Circumstances of Compensation
Toll Road Operator
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Regulatory and legal issues
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Crucial legal changes
ITRA / interim ITRA CONTRACTING BODY
Jasa Marga
PT Jasa Marga Operations TOLL ROAD OPERATING
COMPANY
Investment company PKP RENEGOTIATION AND
RESTRUCTURE
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Crucial regulatory changes
International toll tariffs, US / km
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Setting and adjusting tariffs

• Setting an initial tariff
• Bid criteria or set in concession contract
• Based on direct costs, ability to pay and/or
  congestion
• If does not cover direct costs, subsidy required
• Car / truck owners have ability to pay

• Adjusting tariffs
• Adjustment mechanism must be automatic (no
  presidential decrees)
• Must be set out in contract
• Most usually indexed to CPI
• Other formula (ie including FX movements) show
  questionable results

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Crucial planning issues

• Full incorporation of toll roads into the
  planning and design process for the road network
• Establishment of criteria that express the public
  interest in tolling a road segment with all
  economic, social and environment benefits
• Will assist use of eminent domain to advance and
  create certainty around land acquisition
• Will also create greater certainty around
  competing roads / transport policies

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End of Part I
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Part II Transition issues and interim
arrangements
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ITRAs organisation chart
Board committees
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Reporting lines

• Executive Board with Chairman reporting to
  President and Board reporting to Minister of
  Kimpraswil
• Ministry of Finance sits on Board and is
  consulted on tender, bidding and contractual
  process
• Board recruits and appoints General Manager
• Board and General Manager oversee five department
  heads
• Senior management may be recruited from Jasa
  Marga, Kimpraswil or private sector but must have
  top-notch commercial, financial, technical and
  legal skills
• Established criteria and standards of probity
  apply

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Budgets and financing arrangements

• Preliminary estimate Rp9 bn / annum
• Payroll, including contract employees and
  consultants
• Salaries competitive with private sector
• Overhead, ie office, equipment and IT
  requirements
• Offices not in Kimpraswil or Jasa Marga
• Travel, particularly for the local government
  department
• Procurement, particularly for feasibility studies
  
• Funded by administrative levies on concessionaire
  toll revenue (1-2 of annual) but with / -
  received by or supplemented by MoF

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Checklist to establish ITRA1. Recruit senior
management
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Checklist to establish ITRA2. Premises and work
scope
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Interim arrangements

• Establishment of ITRA requires new Road Law
• Road Law 13 / 1980 establishes that state-owned
  company shall manage toll roads
• Law says legal form must be persero, perum or
  perjam
• Need for ongoing work to ensure ITRA incorporated
  into new Road Law
• Options for implementation prior to passage of
  new Road Law under discussion