The future of toll road investment

The future of toll road investment

This is the first of two articles on Indonesia's toll road
sector by Heru Dewanto, the executive director of the Jakarta-
based Center for Technology and Industry Development.

JAKARTA (JP): The Asian economic crisis has cast a long,
though uneven shadow over the region. It also has led to a severe
decline in infrastructure investment in Indonesia. Major
investments in electric power, transportation and
telecommunications infrastructure, much of which was supported by
the private sector, have had to be deferred, and investment in
Indonesian toll roads is no exception.

It was in 1978 that the first toll road in Indonesia was
opened for operation, and the state-owned toll road corporation,
Jasa Marga, was established as both the state toll road authority
and operator.

The government made its policy clear at that time: toll roads,
built to the highest standards, are legal only as alternative
routes to existing roads, thus enabling motorists to take the
toll-free option. This is in line with global practice.

Since the first toll road opened, Indonesia now has 515
kilometers of toll roads, consisting of 354 kilometers owned by
Jasa Marga and 161 kilometers operated by the private sector
under Build-Operate-Transfer (BOT) schemes.

The government allowed Jasa Marga to develop into a strong
national corporation, with initially strong government support.
Between 1995 and 1996, Indonesia succeeded in attracting the
interest of international competitors in BOT concessions for 19
toll road projects, with a total length of 767 kilometers and an
investment estimated at US$3.5 billion.

These projects had the potential to stimulate the economy just
prior to the onset of the economic crisis.

Because of the rapidly developing economy, with traffic growth
rates of between 7 percent and 15 percent per annum around the
main wealth-generating urban areas, the high cost of capital
here, in addition to short-term uncertainties in assessing
traffic flows and tariffs, were able to be accommodated.

On the other hand, when the network was extended to smaller
urban areas and long intercity links in slower growing economic
areas, traffic build-up uncertainties and limits on Jasa Marga's
ability to provide support became constraints on further
expansion in the face of higher financing costs.

In fact, behind the success story of private toll road
development a number of fundamental questions remained
unanswered.

The decision to introduce the policy on toll road development
was driven by the recognized limitations of government funding to
meet increasing demands for transportation, and to overcome
intolerable traffic congestion in a rapidly developing economy.
Congestion causes inefficiency and significant increases in
travel costs.

In developing areas, the external costs are internalized in
the form of toll charges. The toll charges can then be allocated
to build or increase the capacity of toll roads, as well as
providing for their maintenance.

The user-pay system must therefore offset the economic costs
of under-use of a toll road in the early years, if this is the
case, and the need to maintain the existing or parallel public
roads.

In this way, the government can focus their budget on
constructing roads in less developed areas, without neglecting or
spoiling the self-perpetuating nature of growth in the areas that
have begun to take off.

While the first generation of toll roads was fully financed by
the national budget, the second generation required financing
from foreign soft loans.

As the rate of development could no longer be supported by the
state budget alone, the government had to invite private sector
participation in order to keep the national debt-to-equity ratio
at a manageable level.

Private-owned toll roads have been developed on the basis of
the BOT scheme in a form of cooperation with Jasa Marga. The
first generation of private toll road companies had the advantage
of not having to cover the land acquisition costs.

This no longer holds, however, and the private sector not only
has to bear this expenditure, but also must take all the risks
associated with land clearing. This can be a problem,
particularly for projects that are only marginally viable in
terms of return on investment.