Jurisdiction - Indonesia
Reports and Analysis
Indonesia – Jakarta’s Airport Rail Link: The Key Issues Coming Down The Line.

10 September, 2013

 

Legal News & Analysis – Asia Pacific – Indonesia – Energy & Project Finance

 

For a copy of the full report, please click here.

 

Imagine an airport operating at 260 per cent capacity, bracing for passenger numbers to swell beyond 80 million by 2030, four times design capacity. Located 20 kilometers from a booming megacity on the world’s most densely populated island, it is connected by a single highway built on a tidal plain that regularly floods. Throw legendary traffic jams into this mix.

 

That airport, Soekarno-Hatta Airport (SHIA), serves Jakarta, Indonesia’s capital. The world’s 9th busiest, SHIA moves more passengers than Dubai, New York-JFK, Singapore or Hong Kong.

 

After years of worsening access, Indonesia is poised to greenlight two new rail lines. A State consortium will extend a commuter line to SHIA, but will not provide express service from central Jakarta.

 

The second, more ambitious scheme is the SHIA Rail Link, a light rail line offering premium express service from central Jakarta. Planned as a public-private partnership (PPP), feasibility and design efforts target a 2014 tender. While perhaps more manageable if rail and operations are offered separately, it is conceived as a unitary project

 

The PPP Approach – Necessary, but Untested

 

Budget constraints and cosmetics drive an untested PPP approach. No Government will want to foot the US$2 billion bill alone. Air-conditioned express rail service targets relatively affluent fliers, and poorer regions short on power and clean water may object to funding this convenience.

 

Fundamentally sound, Indonesian PPP regulations require feasibility assessment, open tender and appropriate risk allocation. They address evils associated with failed projects in the 1990s – unsolicited bids with no competitive tender, and disregard for proper feasibility studies and risk allocation. The first PPP rules (drafted by this author in 1998) spawned further iterations in 2005 and 2010 and are now backed by a land acquisition law, State funding support and Governmentsponsored champions such the Indonesian Infrastructure Guaranty Fund.

 

However, after nearly 16 years, few PPP projects have been built. None is a rail project.

 

Private Rail Redux

 

Private rail development is not new to Indonesia, but given its current novelty and untested nature, it may as well be. From the sector’s infancy the State’s role has always been central.

 

Indonesia’s first railway, completed in 1867, was an entirely private undertaking of the Netherlands East Indies Railway Company. The first commuter line, Batavia-Buitenzorg completed in 1873, was also a private venture. The Dutch colonial administration was soon called upon to pay for the Semarang line extension to Jogjakarta.

 

Since 1945 Government has been the sole player, acting as owner, developer and operator of the entire network and all rolling stock. After more than 60 years of expansion until the 1930s, the network suffered 70 years of shrinkage and stagnation under public administration. State managers can claim some early successes. The war-damaged network was rebuilt in the 1950s. Diesel replaced steam.

 

Still, the network shrank. Java’s extensive light “tramways”, providing urban, feeder and agricultural transport, disappeared (with the exception of Central Java’s Purosari-Wonogiri line). Network abandonment in the 1970s and 1980s included the Aceh and West Sumatra systems and Java’s feeder lines.

 

The Rail Link is the first light rail project in Indonesia in a century and the first passenger project of the modern era driven by private investment.

 

Land Acquisition – A Continuing Problem

 

State purchase of land is essential to success, but the line route – at least five alternatives have been tabled – must first be settled.

 

Land acquisition routinely impedes Indonesian projects. With compulsory purchase powers recently improved, Government holds clear authority to seize land, as long as it pays for it. Funding is the challenge.

 

2011’s Land Acquisition Law, received as the great panacea, eliminates owner’s rights to block land seizure while safeguarding rights to compensation. Optimists overlook that Government long held compulsory purchase powers, first introduced in 1870 and reaffirmed in 1960, 1961, 1975, 1993 and 2005.

 

The Law applies to Rail Link, a project in the “public interest”. Land seizure for railway facilities, and importantly PPP projects, is expressly authorized. Owners may challenge valuation, but not seizure. Time limits promise certainty, but not speedy execution. A 583-day cap raised complaints the Law will prolong delays, not resolve them.

 

One report cites land costs as a primary cause of Rail Link’s delay. Restriction on use of private funds puts huge upfront costs on the State. Land is transferred only when paid for, and until all land is acquired, projects may not progress from preparation stage – Rail Link’s current status – to transaction stage, when a winning bidder is selected. Bidder reimbursement of land costs follows bid selection and contract closing, long after funds are needed. New approaches – such as options exercised using bid winner funds – might relieve the State’s funding burden, but we find limited interest in exploring these.

 

All of this highlights the importance of Government’s new, untested Land Revolving Fund (for bridge funding repaid by bid winners) and Land Acquisition Fund (for land contributed by the State).

 

Planning and Participation – Meet Your New Partners

 

There is no shortage of local interests to accommodate. The project runs through Banten and DKI Jakarta provinces. At least three Jakarta sub-municipalities will host track. We witnessed keen lobbying three years’ ago, and recent mooting of route alternatives shows the issue’s tenacious hold. Satisfying all local hopes to host stations will compromise express service.

 

Indonesia’s sole authorized rail operator, State-owned Kereta Api Indonesia (KAI), is assured a role. The Rail Law permits cooperation with private parties, and presumably the project tender will offer KAI as a partner. Bidders must weigh whether KAI intends to play an active operational role. Project sponsors also must cooperate with State airport operator Angkasa Pura II, which controls land for rail rights-of-way, SHIA station and possibly the rail yard.

 

These companies may seek project company shares. As PPP advisor to the Indonesian Transport Ministry, this author regularly met officials who promote direct involvement of State companies in PPP projects. Many assume Government must be a full business partner, not merely concession grantor.

 

The Competitive Landscape

 

Predicting traffic demand is a challenge. Rail Link faces competition from new airports and the SHIA commuter rail. Given demand uncertainty, bidders may hope for availability charges not offered in past projects. Unwritten Government policy places demand risk on private parties.

 

Paradoxically, rising demand drives forecasting uncertainty because a new airport is needed. Despite current expansion, SHIA will still struggle absent a third runway and fourth terminal. Expansion targets 62 million passengers per year. Operating today at 57 million passengers, this leaves little headroom.

 

Government, with Japan’s support, proposes to build Karawang International Airport east of Jakarta. West Jakarta Province opposes Karawang, championing a new airport in nearby Kertajati for which it bought land. Each would handle 70 million passengers, and staged roll-out and overlapping passenger catchment areas complicate Rail Link’s demand modeling. Limited domestic services due to restart at Halim Air Force Base should also affect SHIA’s passenger loads. A proposed airport on reclaimed Jakarta Bay land proved a fanciful notion quickly forgotten.

 

The SHIA commuter rail will compete with Rail Link. However, it will not serve Rail Link’s South Jakarta catchment area, and commuter services standards may not appeal to Rail Link-targeted travelers.

 

Viability Gap Funding and Operating Subsidies

 

Urban rail capital costs are never recoverable from fare revenue, and fare yields usually fall short of operating expenses. MRTs in neighboring Hong Kong, Singapore and Taipei all rely on State funding.

We foresee State viability gap funding of capital costs, permitted up to 50 per cent. Government must view this funding and land contribution as unrecoverable sunk costs, typical given rail’s unavoidably high capital needs.

 

Operational viability requires subsidies, which Government will hope to avoid. The Farebox Recovery Ratio (fares to operating expense) will fall materially below 1 – an operating loss – because fares must reflect income and GDP levels and cheap taxis (US$4 per person when full). Expect fare levels no higher than in neighboring, wealthier countries, ranging US$0.06 – 0.15 per km.

 

Compensation on Termination

 

Indonesia has long resisted paying compensation on concession termination. A compensation covenant recently offered in a toll road restructuring provides investor protection, but is flawed, generating substantial negative carry during the 18 months until guaranteed pay-out.

 

Officials view compensation as a guaranty, and after geothermal arbitration losses following the Asian Financial Crisis, Indonesia developed an allergy to paying investors who exit failed projects. Officials struggle to accept compensation is fair and desirable, and standard in other markets.

 

Investors and financiers need assurance they will be repaid if operating rights are lost. Government should pay, as it controls re-grant to a new owner/operator and tariffs. We consistently advocate for full senior debt coverage and equity pay-out with agreed returns (but none if project company defaults). Financiers promised repayment by an investment grade government lend when they otherwise would not, and lend longer, more and cheaper.

 

On contract termination, neither the project company nor Government can use stranded assets that are material to provision of essential services. This is a poor outcome for Government, owners, lenders, and importantly, the public. Compensation on termination effectively buys the project, unlocking the stranded assets. Government also benefits, as stipulated compensation should cap liabilities from investor claims under bilateral investment treaties.

 

Security and Service

 

As Rail Link’s terminus will be inside a major international airport, security will be paramount. Rail Link’s design must permit swift cessation of service in the event of airport emergencies, allowing trains en route to return to the previous station to disembark passengers. The construction programme will reflect that airport access is security restricted. Output specifications for operations and maintenance must accommodate security procedures.

 

Track and facility design should allow for rolling stock removal to facilitate track and rolling stock maintenance. Given limited land availability in Jakarta, rail yard facilities may be located on airport land and subjected to airport security procedures.

 

Development activities must minimize disruption to ongoing airport operations, which will significantly impact construction programmes. Contractors will have limited possession windows for works in the airport area. This may require daily removal of equipment and reinstatement, adding construction time and cost. Similar access issues will affect operating period maintenance.

 

Rail service interruptions add criticality if causing missed flights, although probably would not result in project company losses through the performance regime. As Rail Link is entirely self-contained new build, with limited interface with Indonesia’s rail network, this may be a minor risk.

 

The SHIA commuter rail will also serve SHIA station, and Rail Link service disruptions caused by the SHIA commuter rail should not penalize the project company. Joint use of SHIA station will require rules and procedures to allocate risks and liabilities. Rail Link’s design might include remote check-in facilities at the embarking station, operated by third parties, and will be similarly subject to rules allocating risks and liabilities. Design integration of rail and airport facilities, such as passenger flow and way-finding/signage between SHIA station and SHIA arrival and departure facilities, require coordination with airport operator Angkasa Pura II.

 

Retail and property development is an important revenue source for mass transit systems and airports alike. SHIA currently yields about 20 per cent non-aeronautic revenue, well below the global norm of nearly 50 per cent. We expect SHIA will seek to substantially increase its retail revenue, and retail development at SHIA station will face competition from SHIA’s retail operations.

 

Clyde & Co

 

 

For further information, please contact:

 

Michael Horn, Partner, Clyde & Co
michael.horn@clydeco.com

 

Energy & Project Finance Law Firms in Indonesia

Comments are closed.