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8qqc, Dec.. lIqG Public Disclosure Authorized EFFECTIVE Public Disclosure Authorized PRIVATE PARTICIPATION IN TOLL ROADS By Joris Van der Ven, Senior Transport Economist, EA3IN Public Disclosure Authorized Public Disclosure Authorized INDONESIA DISCUSSION PAPER SERIES NuMBER 7 EAST AsIA AND PACIFIc REGION COUNTRY DEPARTMENT III SUMMARY EFFECTIVE PRIVATE PARTICIPATION IN TOLL ROADS Joris Van der Ven Senior Transport Economist, EA3IN Worldwide experience indicates that effective private participation in toll roads does not come about easily. Many schemes have taken too long to come to financial closure and even more have not come to closure at all. This paper examines how the Government of Indonesia's objective of increasing private sector participation in toll roads can best be achieved, taking into account the special characteristics of toll road investments, experiences in other countries and in Indonesia, the potential volume of investment, and the institutional structure of the Indonesian highway sector. This report, which was originally published in December 1996, is part of the Indonesia Road Sector Study. DISCuSsIONPAPERS PRESENT RESULTS OF COUNTRY ANALYSESUNDERTAKEN BY THE DEPARTMENTAS PART OF ITS NORMALWORK PROGRAM. To PRESENTTHESE RESULTS WITH THE LEAST POSSIBLE DELAY, THE TYPESCRIPTOF THIS PAPERHAS NOT BEENPREPARED IN ACCORDANCEWITH THE PROCEDURESAPPROPRIATE FOR FORMALPRINTED TEXTS, AND THE WORLDBANK ACCEPTSNO RESPONSIBILITYFOR ERRORS. SOME SOURCESCITED IN THIS PAPER MAY BE INFORMAL DOCUMENTSTHAT ARE NOT READILYAVAILABLE. THE WORLD BANK DOESNOT GUARANTEETHE ACCURACY OF THE DATA INCLUDEDIN THIS PUBLICATIONAND ACCEPTSNO RESPONSIBILITYFOR ANY CONSEQUENCE OF THEIR USE. CONTENTS A. Policies,Objectives and Forms of PrivateParticipation In TollRoads ........................ 3 Objectivesand Policies RegardingToll Roads............................................3 GOI PoliciesRegarding Private Sector Participation in Toll Roads........................... 4 Forms of Private SectorParticipation and Financingin Toll Roads ........................... 6 Role of the CountryBusiness Environment..............................................8 B. Issues In PrivateProvision of TollRoads.................................................9 High ita oss...............nitial........................Costs..................... 9... Long LeadTimes to Acquirethe Right of Way ........................................... 9 UncertaintyRegarding Costs and Revenues..............................................9 UnattractiveCash Flow of Toll Road Investments.........................................9 Project DevelopmentCost ........................................................... 10 UncoordinatedRoad Development.................................................... 10 Level and Adjustmentof Toll Rates....................................................10 Cost erus...................Overruns............................................... 1 ConstructionQuality............................ .................................... 1 AdequateMaintenance .............................................. I...............12 Length of Concessionand Disposalof Concession........................................12 AdequateRetumn Versus Excessive Profit...............................................12 Sourceof Fundsand Termof Finance..................................................13 PrematureInvestment - Subsidies..................................................... 13 Taxes and...............D........ties...................13.....1n uie ................ Value tue........................Capture...................................14.......1 C. Dealingwith the Key Concernsof BOTT'oll Road Sponsorsand Lenders....................1 5 Risks andExpected Project Retumns...................................................1 5 TollRoad Concession Risks in Indonesia...............................................1 5 ProjectDevelopment Risk....................................................... 16 Land AcquisitionRisk.......................................................... 16 Constrction CostRisk..........................................................17 TrafficRisk.......................17.......1 .................................... N o 0 N a S I A D I a C u S a I a N P A P C ft S a f I a S TollRate....................Risk....................1.......1 teRs ............... Role of Governmentin RiskManagement..............................................1 8 D. Addressingthe Issuesof Concernto Governmentand the Public...........................20 Achievingthe Efficienciesof PrivateToll Road Provisionand EnsuringThat All Parties Gain.....20 Road SectorDevelopment Planning and Management.....................................20 A BalancedConcession Agreement....................................................21 A CompetitiveProcess for Selectinga ConcessionHolder ................................. 22 SectorR........g...........a........i.......n........23.....2 uaio ................... E. AlternativeApproaches for PrivateParticipation ......................................... 25 PartialPrivatization of Jasa Marga.................................................... 25 Concessioningof ExistingRoads ..................................................... 27 F. Conclusionand Recommendations..................................................... 28 Priorities .............................................................. 28..........2 The LongTerm Modelfor Public/PrivatePartnership in Road Provision...................... 28 Outlookfor Private Participation...................................................... 29 En n ts...........d...............o.......................s...............31............ I N D 0 N E 8 I A D I 5 C U 8 S I 0 N P A P E R S E R I E S I NDONESIA "IDISCUSSION PAPIER SERIES Effective Private Participationin Toll Roads By Joris Van der Ven,Senior Transport Economist, EA31N Thispaper examines how the Governmentof Indonesia's (GOI)objective of Tincreasing private sector participation in toll roads can best be achieved, taking into account the special characteristics of toll road investments, experience with private toll roads in other countries and in Indonesia, the potential volume of investment, and the institutional structure of the Indonesian highway sector. 2. Worldwide experience indicates that effective private participation in toll roads does not come about easily. Many schemes have taken too long to come to financial closure and even more have not come to closure at all. Also, among the schemes that have been implemented there has been a relatively high failure rate. The principal reasons for failure are that: WORLDwiDE (a) high capacity toll roads have an unattractive cash flow profile; (b) toll roads are UpERIENCE risky ventures for sponsors and lenders, owing to a host of issues such as high devel- INDICATESTHAT opmentcosts, toll rate setting,and trafficuncertainty; and (c) the countriesconcemned EFCTVPRAE often lack an effective framework for addressing these issues and appropriate proce- EFCTVPRVE dures for inviting the private sector to participate in toll road development. PAirTICIPATIONIN 3. Until 1995 Indonesia followed a cautious pace in securing private participation NOTLCOMES ABOUT in toll roads using a negotiatedbuild-operate-transfer (BOT) concession approach. In NTCM BU mid 1995, a different approach was used when 19 links totalling some 700 km were EASILY. offered to private investors on the basis of a selection procedure and a uniform BOT concession agreement in the form of a joint venture between Jasa Marga (the Indone- sian state toll road corporation) and private investors. The new approach, however, still falls short in three key areas. First, it is not derived from an arterial road masterplan and is not well coordinated with plans for capacity expansion on parallel roads. Second, economidcand financial viability for most sections have not been clearly established. Third, the concession agreement fails to deal with some critical risks faced by sponsors and lenders and by the public sector. 4. Also in 1995 GOI began to consider seriously the partial privatization of Jasa Marga. However, pursuing joint venture BOT concessions in parallel with the privatization of Jasa Marga without having dealt with the key risks faced by private BOT sponsors and lenders and by potential investors in Jasa Marga will severely complicate implementation of both approaches. 5. Given the many issues that need to be resolved to effectively implement BOT concessions and to priva- tize Jasa Marga, this paper recommends another approach, the competitive concessioning of roads under opera- tion. This would include roads still to be built by Jasa Marga or with public funds to be concessioned as soon as an initial traffic volume has been confirmed. This approach would permit the same level of resource mobiliza- tion as under a BOT concession, and, because it substantially reduces risks for the private sector, it would be much easier to implement. IN D 0 N E S I A D I S C U S S I 0 N P A P E R S E R I E S 6. At this point the priority for GOI is to establish a strategic planning framework for toll roads and to develop an effective strategy for private participation. Establishing the planning framework involves: (a) firm- ing up the strategic road network and defining the most appropriate alignments of the key links; (b) firming up the timetables for construction of individual links based on corridor studies; and (c) before inviting the private sector to participate, clearly