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.