THE INDONESIAN JOURNAL OF BUSINESS ADMINISTRATION Vol. 2, No. 1, 2013:6-16

THE EFFECT OF SOEKARNO‐HATTA INTERNATIONAL AIRPORT – RAILWAY TRAIN PROJECT TO PT KERETA API FINANCIAL PERFORMANCE

Adhi Nugraha and Subiakto Soekarno School of Business and Management Institut Teknologi , Indonesia adhi.nugraha@sbm‐itb.ac.id

Abstract— Soekarno‐Hatta is the largest and busiest airport in Indonesia. So far, the transportation route in and out of the airport is only via the highway road (toll or non‐toll) that will pass ring road Jakarta. Currently, the growth of vehicles in Jakarta is very surprising to cause severe traffic jam. The traffic jam that often occured is also affected either directly or indirectly to the traffic conditions and from the Soekarno‐Hatta Airport. Indonesia Government through Presidential Decree number 83 of 2011 assigned PT Indonesia Railway to build railway transportation infrastructure through a circular route Jakarta to Soekarno Hatta. The purpose is to develop alternative transportation to help reduce transport problems in the future. For PT KAI itself, as the government‐owned company that has a public service obligation (PSO), the project must be done, but there will be a question of whether this project will give positive or negative impact for the company in the future, especially in terms of financial performance. Therefore, to analyze the velua added of this project, the future financial statements between if PT KAI do the project and if they don’t do the project must be compared. As a first step analyzed the financial condition of PT KAI current through the analysis of time series, cross section, a ranking based on two methodologies (BUMN & Moody's), and the current capital structure. Furthermore, the feasibility and demand analysis of the project will be presented as information. To determine how much value the project given, the projected consolidated financial statements and financial statement projections of the project will be conducted. Next step will compare and analyze the results of these projections, which are the consolidated financial statements without a project with projected financial statements consolidation plus project. From the results of the comparison will be observed whether the project also increased ratings of PT KAI. This research provides business solutions to PT KAI to improve financial performance and corporate value by increasing the financial indicators and investment rating. In the end, the project can be roled as a business solution in the future

Keywords: Railway Train, Capital Structure, Project Investment, Financial Performance

1. Introduction

PT Kereta Api Indonesia (PT KAI) or Indonesian Railways is the only one commercial railway train operator in Indonesia. PT KAI is one of Indonesia State‐Owned Enterprise (Badan Usaha Milik Negara) which the main core business in transportation industry. It served both passenger and freight trasport. PT KAI has a role as Public Service Obligation company (PSO) that has liability to serve the Indonesian people according to government order.

Indonesian government as Peraturan Presiden no 83 tahun 2011 had give an obligation to PT KAI to build infrastructure and rolling stock that will serve the route from Jabodetabek to Seokarno‐ Hatta International Airport in Tangerang, Banten. This action came from the condition of traffic in Jakarta city that often have traffic jam. The growth of personal vehicle number that not align with road growth leads to the crowded traffic. This condition also affects the traffic condition to Soekarno‐ Hatta International Airport in Tangerang, which is the only transportation to go there is by road. By the obligation of the company, PT KAI must perform the project as order of the government. But the

6 Nugraha and Soekarno / The Indonesian Journal of Business Administration, Vol.2, No.1, 2013: 6‐16 question emerge as if the project bring positive impact or not to the company in the future, especially for the financial performance

2. Business Issue Exploration

This part discusses the approach to explore the business issue. There are many factors that important to the financial performance assessment, that will be explained in following chapter A. Conceptual Framework To analyzed the business issue, a proper conceptual framework need to build. This conceptual framework will role as guidance from current financial performance, until the comparation with the future financial performance. The conceptual framework describe as follow diagram

Figure 1. Conceptual Frameworks

The first step is analyzing the current financial performance of PT KAI. The analysis will using financial ratio analysis like time series and cross section, and rating approach like BUMN performance assessment and Moodys rating methodology. The next step is to analyze whether the project is feasible to perform, and demand analysis to get information about the market. The last step is to know whether the project give value added to the financial performance of the firm by compare two projected financial statements: the one without project, and the one with project performed B. Business Situation For business industry analysis, this research using Porter Five Forces as the tools. The analysis is: 1. New entrance • High market demand • Monopoly by PT KAI • High capital and require huge investment • Regulation permit private company • High operating cost Conclusion: Moderate 2. Threat of Substitute • Increasing market demand of low cost carrier

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• Highway construction • Moderate switching cost Conclusion: Moderate 3. Industry Rivalry • Monopoly by PT KAI Conclusion: Low 4. Power of Buyer • Not price sensitive • Few options of good and cheap transportation moda • Switching cost are relatively high for some economic class Conclusion: Low 5. Power of Supplier • Many options for rolling stock manufacturer • Few options for infrastructure (rail) • Few options of oil supplier Conclusion: Moderate

The conclusion of this analysis is the current business situation of railway train is still low in competition, yet monopoly by PT KAI. But, eventhough the industry are attractive, some consideration about huge investment and competition with local player (PT KAI) C. Current Financial Performance Assessment For analyze the current financial performance of PT KAI, there are several tools used. The first one is time series analysis. This tools presented the financial performance of company from year‐to‐year. For PT KAI, the analysis will conducted from 2007‐2011

Table 1. PT KAI Time Series Analysis

The second tool is cross section. This analysis involves the comparison between several different firms financial ratios at present time. For the comparation with PT KAI, this research using Indian Railways and Korean Railroad, since PT KAI didn’t have similar competitor in Indonesia. The cross section analysis calculated into industry average financial ratios, that compared again with PT KAI financial ratios in the table below

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Table 2 – Financial Ratio Combined Analysis

The third tool is to rate the current financial performance using Indonesian State‐Owned Enterprise Framework. The calculation based on Keputusan Menteri BUMN no 100 tahun 2001. The calculation result is in the table below (only financial aspect analyzed)

Table 3 . BUMN Standard Financial Aspect Assessment

The other rating methodology is Moodys. The international rating institution had release a global passenger railway rating methodology to explain the method they used to rate Railway Company in the world. Based on this methodology, PT KAI has rating Bb2 with scoring in table below.

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Table 4 .Moodys Rating Scoring Assessment

The other approach to assess the current financial performance is analyzing the capital structure. The current capital structure of PT KAI calculated as assumptions and the results below

Table 5 .Current WACC calculation

Rp Debt 880.623.076.766 Rp Equity 3.904.428.172.844 Total Rp Capital 4.785.051.249.610 Cost of 9% Debt Cost of 19.52% Equity Tax Rate 25% WACC 16.51%%

By the current capital structure, next assessment is to determine the optimal capital structure of the firm. This calculation using assumption that value of the firm is maximizing as the cost of capital is minimizing. For the calculation of cost of debt and cost of capital, using an assumption that the cost of debt and equity will increase as the debt to equity ratio increase to compensate the higher risk. The cost of debt incement using a synthetic bond rating calculation, and the cost of equity increment using unlevered beta that incremenr as the debt‐to‐equity ratio increase. The curve of the optimal capital structure is in following figure, which the composition os 38% debt and 62% equity bring maximum value to the firm for 1,339,978,895,966

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Figure 2. Optimal Capital Structure Curve

D. Soekarno ‐Hatta Airport – Jakarta Project The Soekarno‐Hatta – Jakarta Railway route will be build as the need of alternative transportation from/to Soekarno Hatta Airport. The traffic condition of Jakarta that often jammed affected directly to the traffic road of the airport. Furthermore, the soekarno‐hatta airplane passenger estimated will become 141 million people in 2030

Table 6. Seokarno‐Hatta Passenger Projection

E. Business Issue Exploration Conclusion By the analysis above, there are several preliminary conclusion to the business issue: • Several financial indicator is below the optimum score: — Return on Equity — Return on Investment — Total Asset Turnover — Employee to passenger ratio — Revenue • Current capital structure of the PT KAI is not optimal, thus not given a maximum value to the firm • The project must be analyzed whether it will bring value added to the financial performance to the company in the future or not

3. Business Solution

The business solution will explain three main approach, the first is to determine improvement target for current financial performance, the second is analyze the feasibility of the project, and the third is to analyze the value added of project to future financial performance. F. Current Financial Performance Improvement Target For the current financial analysis based on ratio analysis or the rating methodologies, there are several indicator that have to be improve.

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Table 7. Current Financial Improvement Target

Objective Indicator Target Source Return on Indonesian 6.24% > 15% Equity Gov. Return on Indonesian 9.91% > 18% Investment Gov. Total Asset Indonesian 111.9 > 120 Turnover Gov. > US$ Size and US$ 667 3 Moodys Revenue million billion (PT+PK)/Total 0.00796 >0.5 Moodys Employees

The other improvement target is to increase the debt proportion so tht the value of the firm will increase Table 8 – Proposed Optimal Capital Structure

Proportion Current 2011 Proposed Debt 18.40% 38% Equity 81.60% 62%

G. Project Analysis Before execute the project, usually there is one analysis called feasibility study. From this study, the company who wants to make an investment will know whether the investment will bring value or profit in the future or not. To calculate the project of Soekarno‐Hatta, used the discounted cash flow method with assumptions and results as follow

Table 9 . Project Feasibility Result

Variable Value Cost of Debt 9% Cost of Equity 19.52% Debt to Equity 28.63% Discount Rate 16.51% (WACC) Observation year 30 years Net Present Value 1,077,787 Internal Rate of 20,92% Return Pay Back Period 6.18 years

From the analysis, we can conclude that the project is feasible.

H. Future Financial Performance Analysis The next question is whether the project will give positive impact to the financial performance of the firm in the future, furthermore, can improve the financial condition or rating. To analyze this, the current financial statements of PT KAI must be projected. Also the financial statements of the Soekarno‐Hatta project. The current financial statements projection is the projected financial statements without project (non project). And the second projected financial statements is the current financial statements projection plus project financial statements projection. This financial statements is the financial statements with project (project). The next step is compare the financial ratios of this two projected financial statements. The results is as follows.

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Table 10 . Financial Ratio Comparation

I. Project as Financial Performance Improvement From the future financal performance analysis, the ratio of the with‐project financial performance give better score in several indicators, especially for profitability. But to know the value added to the rating, BUMN standard would be used again to rate the future financial performance. The comparation is in following table.

Table 11. BUMN Rating Comparation

And from this analysis, the with‐project financial statement is excel much better from without‐project financial statements. This can be read in long‐term project execution, the project will raise the rating

13 Nugraha and Soekarno / The Indonesian Journal of Business Administration, Vol.2, No.1, 2013: 6‐16 of the PT KAI based on financial aspect. So in conclusion, the project in the long term can be the improvement agent for financial performance of PT KAI

4. Conclusion and Implementation Plan

From the analysis of the business issue exploration and solution, there are several conclusions: 1. The current financial performance of the firm is record increasing performance since 2009, where PT KAI record loss in their profit and loss account 2. Based on benchmarking analysis, the current financial performance is excel in several indicator, since there are several differences in financial strategy and condition between the benchmarked company 3. For rating assessment, the rating in Indonesian State‐Owned Enterprise framework and Moodys framework both record good rating, although need several improvement 4. For the capital structure, PT KAI still have a space to eager the debt ratio to increase the value of the firm 5. The project feasibility study conclude that the project is feasible to be performed 6. The project would bring value added to the firm, thus increase the rating of the company so it is very recommended to the management to optimize the project the best

The implementation plan of Soekarno‐Hattta Project is started from 2012 and estimated in 2014 the route ready to operate. To build the route, PT KAI will use existing from Manggarai – Sudirman ‐ Tanah Abang – Duri – Batu Ceper (loop line Jabodetabek) and must constructed the new track from Batu Ceper to Soekarno‐Hatta Airport.

For folling stock, PT KAI will use Electic Multiple Unit 10 train set with initial investment as follow

Table 12 . Rolling Stock Investment Plan

For the initial investment is as follows

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Table 13. Initial Investment for Soekarno‐Hatta Project

For financing the project, PT KAI will use loan as funding source. The scenario of payment will describe in the following table

Table 14. Loan Payment Scenario for Soekarno‐Hatta Project

References

Annual Report PT. Kereta Api Indonesia (Persero) 2011 Damodaran, Aswath, 2006. Applied Corporate Finance: A User’s Manual, Second Edition. New Jersey: John Wiley & Sons, Inc Damodaran, Aswath, 2006. Damodaran on Valuation: Security Analysis for Investment and Corporate Finance, Second Edition. New Jersey: John Wiley & Sons. Inc Financial Statements Indian Railways 2007 – 2011 Financial Statements Korean Railroad 2007 – 2010 Financial Statements PT. Kereta Api Indonesia (Persero) 2007 – 2011 Gitman, L.J., Zutter, C.J., 2012. Principles of Managerial Finance, 13th Edition. Essex: Pearson Global Passenger Railway Company, 2008. Moody’s Rating Methodology Global Freight Railroad Industry, 2009. Moody’s Rating Methodology Government Owned Rail Network Operators, 2009. Moody’s Rating Methodolog Government Related Issuers: Methodology Update, 2010. Moodys Keputusan Kementeian Badan Usaha Milik Negara Republik Indonesia nomor KEP‐100/MBU/2001 Tentang Penilaian Tingkat Kesehatan Badan Usaha Milik Negara Lazuardi, Mandra, 2011. Dr. Hasan Sadikin General Hospital Financial Performance Optimization To Fulfill Investment Financing Needs Internally. MBA ITB

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Peraturan Presiden no 83 tahun 2011 Tentang Penugasan Kepada PT Kereta Api Indonesia (persero) Untuk Menyelenggarakan Prasarana dan Sarana Kereta Api Bandar Udara Soekarno‐Hatta dan Jalur Lingkar Jakarta‐Bogor‐‐Tangerang‐Bekasi Rahardjo, Adi Prasetio, 2012. BPR KB Financial Performance Improvement Action Plan. MBA ITB Studi Kelayakan Finansial & Teknis Pembangunan Jalur Kereta Api Jakarta ‐ Bandara Soekarno‐Hatta via Tangerang – LAPI ITB Wiranata, Angga, 2012. Financial Performance Analysis of Garuda Indonesia Related to Its Initial Public Offering (IPO) Stock Price and Future Prospect. MBA ITB World Bank, 2011. Railway Reform: Toolikt for Improving Rail Sector Performance

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