Realising 1,000 km of Toll Roads

May 13, 2015, Investor Daily, 13 May, 2015, Page 4, Section: Opinion

In the National Medium-Term Development Plan (RPJMN) of 2015 – 2019, the Government has launched the construction of 1,000km of toll roads over the next five years. That means, the average construction of toll roads during 2015 – 2019 is 200km per year.

The addition of 1,000km of toll roads consists of Trans Sumatra, Trans Java, Samarinda – Balikpapan Toll Road and Manado – Bitung Toll Road. Based on data from Jasa Marga, the funds needed to build the 1,153km of toll roads amount to Rp 132.9 trillion, or about Rp 115.27 billion per km.

So far, the demand for toll roads has been quite high when compared with the growth in the number of vehicles, which continues to increase at 17 percent per year. Meanwhile, the growth of road length has only been one percent per year. Currently, the total length of toll roads operating in Indonesia has reached 820.2km. This toll road length lags far behind other countries (see figure). Toll roads in Malaysia reach a total length of 3,000km, South Korea has 2,623km, and China has 65,065km. In fact, toll road construction in Indonesia has been running for 36 years, while China began to build toll roads in the 1980s.

Land Acquisition Problems
When viewed historically, for 36 years (from 1978 to 2014), the length of toll roads that could be built in Indonesia was just 820.2km. A lot of the Indonesian toll roads were built in the days of the New Order (1978 – 1999), which on average reached 26.3km per year. Meanwhile, during 2011 – 2014, the average length of toll roads built was at 15.7km per year.

Therefore, the construction of 1,000km of toll roads over the next five years (2015 – 2019) is expected to be difficult to achieve, given that the toll road construction has never reached 200km per year. The construction of toll roads over the 36-year period merely reached 820.2km, or an average of 22.8km per year. This is because the construction of toll roads has been hampered by land acquisition problems. Delays in land acquisition lead to increased investment costs, or cost overrun, that the investors must bear.

One of the government’s strategies to achieve the target of 1,000km of toll roads is to enact better regulations, especially related to land procurement rules. Acceleration of land acquisition becomes a major positive catalyst for toll road construction in 2015. The government implements Law No. 2/2012 on Land Procurement for Development Purposes in Public Interest in relation to land acquisition beginning in 2015.

Under the Law (UU), land acquisition for public purposes is a responsibility of the government and this is carried out by the Land Acquisition Committee (P2T) with the amount of time for the land acquisition set at between 312 – 552 working days. Completion of the land acquisition itself consists of four stages, namely planning, preparation, execution and delivery of results.

To support the implementation of the Law, the government has issued Presidential Regulation
(Perpres) No. 71/2012 on Implementation of Land Procurement for Development Purposes in Public Interest. The Perpres also sets out the technical mechanism of land acquisition stages, including for waqf land and customary land. This Perpres has undergone three revisions, namely Perpres No. 40/2014, Perpres No. 99/2014 and Perpres No. 30/2015.

The three revisions of the regulation can describe how difficult land acquisition is in Indonesia. Perpres No. 40/2014 changes, among others, one provision of land acquisition for public interest involving not more than five hectares, allowing it to be done directly by the agency requiring the land. Subsequently, Perpres No. 99/2014, among others, provides an additional clause allowing projects whose land acquisition process has not yet achieved 75 percent completion of the total land requirement as of 31 December 2014 to use the new land acquisition rules.

The Perpres represents a third amendment to Perpres No. 71/2012. This Perpres states that the financing of land acquisition for public purposes can be sourced first from business entity as the organisation requiring the land and getting the power of attorney under the agreement. The land acquisition financing by the business entity will later be reimbursed by the government through the state budget (APBN)/ local government budget (APBD), or it may take the form of a calculation of the returns on investment.

Increase in Construction Costs
Besides the issue of land acquisition, another risks being faced is an increase in construction costs. The biggest component of the operational costs of the toll road industry is the cost of construction (38.6 percent), followed by the cost of toll road maintenance (20.1 percent). The growth of wholesale price index (IHPB) in the first quarter of 2015 registered a decrease, but the average growth of construction sector IHPB in January 2014 – March 2015 amounted to 7.48 percent, still higher than the average growth in construction sector IHPB of the 2012 – 2013 period at 4.34 percent.

Postponement of tariff increase by the government also can potentially lead to a reduction in the return on investment of toll road. Adjustment of toll rates is set in accordance with Law No. 38/2004 on Roads and Government Regulation (PP) No. 43/2013 regarding the Second Amendment of PP No. 15/2005 on Toll Roads.

Adjustment of toll rates is calculated based on inflation and conducted every two years, and to be made effective by Decree of the Minister of Public Works (PU). Based on Toll Road Concession Agreements (PPJTs), there are 20 toll roads whose toll rates have been planned to rise in 2015. However, the plan to increase the toll rates may be delayed, as it depends on the evaluation results of the minimum service standards (SPM) of the toll roads in question by the Ministry of Public Works.

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