Toll Road Projects In Indonesia: Regulatory Framework
By Wiyono Sari, S.H., LL.M
I. Overview on Toll Road Projects in Indonesia
The Government of Indonesia has issued a masterplan for the development of Indonesian welfare so called "MP3EI", which lays down steps for Indonesia to accelerate and expand economic development in order to support its transformation to become a developed country by 2025.
To achieve that goal, the economic growth shall be 7-8% a year. The private sector will have an important role with respect to the Masterplan implementation, investment, production and distribution. The Government will position itself as the regulator and facilitator in coordinating the ministries and regional Governments.
One of the MP3EI projects is the development of toll road infrastructure in Indonesia. Currently there are 24 on-going toll road projects in Indonesia, which are still on the development stage i.e.
1. Trans Java Toll Road Projects:
a. Cikampek-Palimanan (PT Lintas Marga Sedaya) - 116 kilometer (km);
b. Pejagan-Pemalang (PT Pejagan Pemalang Toll Road) - 57.5 km;
c. Pemalang-Batang (PT Pemalang Batang Tol Road) - 39 km;
d. Batang-Semarang (PT Marga Setia Puritama) - 75 km;
e. Semarang - Solo ( PT Trans Marga Jateng) - 75 km;
f. Solo-Mantingan-Ngawi (PT Solo Ngawi Jaya) - 90.1 km;
g. Ngawi-Kertosono (PT Ngawi Kertosono Jaya) - 87 km;
h. Kertosono-Mojokerto (PT Marga Hanurata Instrinsic) - 40.5 km;
i. Surabaya-Mojokerto (PT Marga Nujyasumo Agung) - 36.27 km.
2. Jakarta Outer Ring Road (JORR) II Toll Road Project
a. Cengkareng-Batu Ceper-Kunciran (PT Marga Kunciran Cengkareng) - 15.22 km;
b. Kunciran-Serpong (PT Marga Trans Nusantara) - 11.19 km;
c. Serpong-Cinere (PT Cinere Serpong Jaya) - 10.14 km;
d. Cinere-Cimanggis (PT Translingkar Kita Jaya) - 14.7 km;
e. Cimanggis-Cibitung (PT Cimanggis Cibitung Tollways) - 25.39 km;
f. Cibitung-Cilincing (PT MTD CTP Expressway) - 34.5 km;
a. JORR seksi W2 Utara (PT Marga Lingkar Jakarta) - 7 km;
b. Bekasi-Cawang-Kampung Melayu (PT Kresna Kusuma Dyandra Marga) - 21.04 km
c. Depok-Antasari (PT Citra Waspphutowa) - 21.55 km;
d. Bogor Ring Road (seksi II dan III) (PT Marga Sarana Jabar) - 7.15 km;
e. Ciawi-Sukabumi (PT Trans Jabar Tol) - 54 km;
f. Gempol-Pandaan (PT Margabumi Adhikarya) - 3.61 km;
g. Gempol-Pasuruan (PT Transmarga Jatim Pasuruan) - 33.73 km;
h. Waru (Aloha)- Wonokromo-Tanjung Perak (PT Margaraya Jawa Tol) - 17.72 km;
i. Pasuruan-Probolinggo (PT Trans Jawa Paspro Jalan Tol) - 45.32 km.
The above list does not include:
- Bali Toll Road connecting the Bali airport (Ngurah Rai) to Benoa and Nusa Dua, the construction of which has been completed and will commence its commercial operation in August 2013; and
- Kanci - Pejagan Toll Road, which has been in commercial operation stage.
For trans java toll road projects, please see the further details as follow :
1. Cikampek-Palimanan (PT Lintas Marga Sedaya - a joint venture of PLUS Expressway International Berhad (Malaysia) and PT Bhaskara Utama Sedaya (Indonesia)):
a. Length: 116 KM;
b. Total investment cost: Rp12.6 trillion (approx. US$1.26 billion);
c. Estimated land acquisition cost: Rp525 billion (approx. US$52.5 million);
d. Traffic volume/day: 27,501 vehicles.
2. Pejagan-Pemalang (PT Pejagan Pemalang Toll Road - currently owned by MNC Group):
a. Length: 58 KM;
b. Total investment cost: Rp5.52 trillion (approx. US$525million);
c. Estimated land acquisition cost: Rp371 billion (approx. US$37.1 million);
d. Traffic volume/day: 15,773 vehicles.
3. Pemalang-Batang (PT Pemalang Batang Toll Road - owned by Mitra Jaya Group):
a. Length: 39 KM;
b. Total investment cost: Rp3.82 trillion (approx. US$382 million);
c. Estimated land acquisition cost: Rp244 billion (approx. US$24.4 million);
d. Traffic volume/day: 15,566 vehicles.
4. Batang-Semarang (PT Marga Setia Puritama):
a. Length: 75 KM;
b. Total investment cost: Rp7.21 trillion (approx. US$721 million);
c. Estimated land acquisition cost: Rp836 billion (approx. US$83.6 million);
d. Traffic volume/day: 14,827 vehicles.
5. Semarang-Solo (PT Trans Marga Jateng - a subsidiary of Jasa Marga, the largest toll road operator in Indonesia):
a. Length: 73 KM;
b. Total investment cost: Rp6.21 trillion (approx. US$621 million);
c. Estimated land acquisition cost: Rp1.69 trillion (approx. US$169 million);
d. Traffic volume/day: 27,190 vehicles.
6. Solo-Ngawi (PT Solo Ngawi Jaya - a subsidiary of Thiess):
a. Length: 90 KM;
b. Total investment cost: Rp5.14 trillion (approx. US$514 million);
c. Estimated land acquisition cost: Rp995 billion (approx. US$99.5 million);
d. Traffic volume/day: 9,842 vehicles.
7. Ngawi-Kertosono (PT Ngawi Kertosono Jaya - a subsidiary of Thiess):
a. Length: 87 KM;
b. Total investment cost: Rp3.83 trillion (approx. US$383 million);
c. Estimated land acquisition cost: Rp864 billion (approx. US$86.4 million);
d. Traffic volume/day: 5,325 vehicles.
8. Kertosono-Mojokerto (PT Marga Hanurata Intrinsic - a member of Astra International Group):
a. Length: 41 KM;
b. Total investment cost: Rp3.48 trillion (approx. US$348 million);
c. Estimated land acquisition cost: Rp298 billion (approx. US$29.8 million);
d. Traffic volume/day: 18,570 vehicles.
9. Mojokerto-Surabaya (PT Marga Nujyasmo Agung - a subsidiary of Jasa Marga):
a. Length: 36 KM;
b. Total investment cost: Rp3.21 trillion (approx. US$321 million);
c. Estimated land acquisition cost: Rp169 billion (approx. US$16.9 million);
d. Traffic volume/day: 22,002 vehicles.
Other than the project listed above, based on MP3EI, there are several toll projects to be further developed in Indonesia, among others:
1. DKI Jakarta New 6 Toll Road Projects
These toll road projects were planned to have 70KM in length with total investment cost of about Rp40.1 trillion (approx. US$4.01 billion). The overall development will be divided into 3 (three) stages, i.e.:
a. First stage: Semanan-Sunter section and Sunter-Pulo Gebang section - the construction should commence in 2013 and in operation in 2016;
b. Second stage: Duri Pulo - Kampung Melayu section dan Kemayoran-Kampung Melayu section to be constructed in 2016 until 2018; and
c. Third stage: Tanah Abang-Ulujami section dan Pasar Minggu-Casablanca section to be constructed in 2018 until 2020.
The projects are being developed by Jakarta Tollroad Development (JTD) a consortium formed by PT Jakarta Propertindo, Pembangunan Jaya Group, PT Hutama Karya, PT Pembangunan Perumahan Tbk (PTPP), PT Wijaya Karya Tbk (WIKA), PT Adhi Karya Tbk (ADHI), and PT Citra Marga Nusaphala Persada Tbk (CMNP).
2. Medan - Binjai Toll Road (15.8 km)
This project is located in North Sumatera, Sumatera island, Indonesia. The total estimated project cost is Rp1.204 trillion (approx. US$120.4 million). The construction of the project is targeted to be commenced in 2013 and completed in 2016.
3. Panimbang - Serang Toll Road
This project is located in Banten, Java island, Indonesia, with total estimated project cost is Rp12.5 trillion (approx. US$1.25 billion). The project is targeted to be completed in 2015.
4. Probolinggo - Banyuwangi Toll Road (215 km)
This project is located in East Java, Java island, Indonesia with total estimated project cost is Rp13.960 trillion (approx. US$1.396 billion). The project is targeted to be completed in 2019.
5. Pandaan-Malang Toll Road
This project is located in East Java, Java island, Indonesia with total estimated project cost is Rp2.932 trillion (approx. US$293.2 million). The project is targeted to be completed in 2025.
6. Pasir Koja - Soreang Toll Road (10.57 km)
This project is located in Bandung, East Java, Java island Indonesia with total estimated project cost is Rp1.430 trillion (approx. US$143 million). The project is targeted to be completed in 2015.
7. Manado-Minut-Bitung (49 km)
This project is located in North Sulawesi, Sulawesi island, Indonesia with total estimated project cost is Rp1.732 trillion (approx. US$173.2 million). The project is targeted to be completed in 2014.
II. Foreign Investment in Toll Road Projects in Indonesia
1. Foreign Ownership Limitation
The maximum foreign ownership in a toll road company based on the Indonesian investment regulation is 95% (ninety five per cent). It means that the remaining 5% shall be owned by local shareholders.
2. Investing in Toll Road Projects in Indonesia
There are 2 ways to have an investment in toll road projects in Indonesia, i.e.:
a. By acquiring share in an existing toll road company having a concession right
As one of the alternatives to have an investment in toll road project in Indonesia is by acquiring an existing toll road company. The acquisition may be undertaken by (i) purchasing issued shares from the existing shareholders; or (ii) subscribing new shares to be issued by the toll road company.
The change of shareholders in a toll road company will require the following approvals:
(i) Approval the Minister of Public of Work of the Republic of Indonesia
This approval is a condition under the toll road concession agreement for any change of shareholders taken place prior to commercial operation of the toll road.
(ii) Approval from the Lenders
In case the toll road company has obtained a loan facility from any lenders to finance the development of the toll road project, normally an approval from the lenders is also required for any change of shareholders.
(iii) Approval from the shareholders of the road company.
Under Indonesian company law, the change of shareholders needs to be approved by the shareholders of the company. This approval may be given in a shareholders meeting or by virtue of a shareholders circular resolution.
(iv) Approval from the Indonesian Investment Coordinating Board (Badan Koordinasi Penanaman Modal or"BKPM")
Under Indonesian investment law, any share ownership by foreign individual or foreign company shall require an approval from BKPM, which shall be obtained in advance prior to the purchase of shares or subscription of new shares by the foreign investor.
b. By participating in tender process for new toll road projects
Based on the Indonesian toll road regulation, there are 3 (three) types of toll road projects i.e.:
(i) Toll road project that is economically and financially not feasible. This kind of project will be developed by the Government of Indonesia through state owned enterprises.
(ii) Toll road project that is economically feasible but financially not feasible.
For this kind of project, the Government may provide certain support such as land acquisition of the toll road will be done and financed by the Government and part of the construction will be undertaken and financed by the Government.
(iii) Toll road project that is economically and financially feasible.
This kind of project will be tendered out by the Government to private sector and will be undertaken through a Public Private Partnership scheme. The project is deemed to be economically and financially feasible if the projected Internal Rate of Return (IRR) of the project is 12% or more.
III. Indonesian Toll Road Concession Agreement
1. The Toll Road Concession Agreement
Following the announcement of the winning tenderer, the members of consortium shall incorporate and establish a special purpose vehicle (SPV) to undertake the toll road project. The shareholders of the SPV shall be the consortium members, and the SPV is not allowed to have any other business other than to undertake the toll road project.
After the SPV is established, the Government and the SPV will execute a Toll Road Concession Agreement (Perjanjian Pengusahaan Jalan Tol or "PPJT" or "Concession Agreement") which governs rights and obligations of the Government and the SPV with respect to the development, design, financing, construction, operation and maintenance of the toll road.
The Concession Agreement is in a standard format as generally applicable to all toll road projects in Indonesia.
2. Bankability of the Indonesian Toll Road Concession Agreement
Prior to the amendments introduced in 2010, many banks and financiers considered that the Indonesian toll road concession agreement was not bankable due to few fundamental reasons i.e.:
- There was no certainty on the termination compensation to be received by the concessionaire and the lenders if the concession was terminated by the Government. There was no clear provision on how much and when the termination compensation is to be paid.
- The step-in right that allows the lenders to take over the project in case of default was not exercisable by the lenders without an involvement from the Government.
- The toll road and the land whereupon the toll road lies are belonged to the Government. The concessionaire is not allowed to encumber the toll road and the land to the lenders. While the encumbrance on the concession right is permitted but without prior consent from the Government the enforcement by the lenders was questionable;
- There is no Government Guarantee and the lenders' rights were not well protected by the Government under the concession agreement.
In 2010 few major banks entered into discussion and negotiation with the Government of Indonesia with an objective to make the concession agreement become bankable and acceptable to the banks so that the banks may finance the toll road projects being developed.
Following such negotiation, some major changes were agreed upon by the stakeholders. Under the amended concession agreement, although there is still no Government guarantee, but the termination compensation and the step-in right have been well defined.
In addition, to protect the lenders' rights, a tripartite agreement was introduced whereby the lenders will be a party to the tripartite agreement. By having the tripartite agreement, which is also signed the Government as one of the parties, the lenders' rights such as step-in right, right on shares pledged and right to change shareholders and management of the concessionaire are well recognized and preserved.
3. Immediate Obligations Following the Execution of the Concession Agreement
There are some obligations to be immediately performed by the toll road company following the execution of the Concession Agreement:
a. Performance Bond
The toll road company shall deliver a performance bond to the Government at the latest 14 (fourteen) days after the execution of the Concession Agreement. The performance bond must be in the value equal to 1% (one per cent.) of total project cost (excluding the land acquisition cost) or minimum Rp5,000,000,000 (five billion Rupiah) (approx. US$500,000), whichever is higher. The performance bond shall be valid until 12 (twelve) months after the end of the construction work. The performance bond may be claimed by the Government if the toll road company is in default pursuant to the Concession Agreement.
b. Opening of Land Acquisition Bank Account ("Land Account")
Within 14 days after the execution of the Concession Agreement, the toll road company is required to open the Land Account with Indonesian bank. Also, within such time frame, the toll road company is required to deposit 5% (five per cent.) of estimated land acquisition cost into the Land Account, which shall be used to fund the operational cost and expenses for the land acquisition.
4. Toll Tariff Adjustment
The initial toll tariff shall be set in accordance with the business plan as agreed by the toll road company and the Government. In setting the initial toll tariff, the Government will take into account the ability to pay of the toll road user, the benefit of vehicle operation by using the toll road and the feasibility of the investment.
The toll tariff will be evaluated and adjusted every 2 (two) years in accordance with the local inflation rate, provided that the toll road company has complied with the minimum services standard.
5. Termination of the Concession Agreement and Termination Compensation
The Concession Agreement may be terminated under the following situations:
a. The concession period has lapsed.
In this case, the toll road company shall hand over the toll road and all its equipment to the Government at the end of the concession period without getting any further compensation from the Government.
b. The toll road company is in default under the Concession Agreement and the Government elects to terminate the Concession Agreement
In the case the Government terminates the Concession Agreement due to the default of the toll road company, the toll road company will get termination compensation in the amount equal to 80% of Completed Works Value, which will be paid by a new toll road company appointed by the Government to take over the toll road.
Completed Works Value (CWV) comprises of land acquisition costs + construction costs (including design engineer & supervisor costs and Interest during construction) minus depreciation & amortization and retender costs.
c. The Government is in default under the Concession Agreement and the toll road company decides to terminate the Concession Agreement.
If the Concession Agreement is terminated due to the Government's default, the toll road company will get termination compensation in the amount equal to 100% of Completed Works Value minus dividend that has been previously distributed to the shareholders, which compensation will be paid by a new toll road company appointed by the Government to take over the project.
d. Termination due to force majeure
The Concession Agreement may be terminated by the Government due to the occurrence of force majeure and such force majeure badly affects the concession or continues for more than 6 months. In this case, the Government will nominate a new investor and the new investor shall pay termination compensation in the amount equal to 50% CWV of the unaffected portion of works.
IV. Land Acquisition
1. New Law on Land Acquisition
On 14 January 2012, the Government enacted Law No. 2 of 2012 on the Land Acquisition for the Development for Public Interest (the "New Land Acquisition Law"). The New Land Acquisition Law provides more certainty on the land acquisition time frame and cost.
One of the key improvement introduced under the New Land Acquisition Law is that once the payment of land compensation has been made (including by way of keeping the money with the court - in case the land owner refuses to receive it), the title over the land is automatically revoked by the law. By having such provision, the refusing land owners cannot block the construction works.
Under the previous laws, the land title of the refusing land owner will not be revoked unless the President decided to revoke the land title after a long process has been pursued.
Unfortunately, for the 24 existing toll road projects, they are not entitled to enjoy the benefits introduced under the New Land Acquisition Law.
2. Government Support for the Development of Toll Road
For certain projects, which are considered not financially feasible, the Government may provide Government Support in the form of, among others, land acquisition to be financed by the Government or part of construction to be undertaken and financed by the Government. Such Government Support must be stated in the tender documents. The toll road company cannot ask for Government Support if it is not written in the tender documents.
In case the Government acquires the land before the tender, the land acquisition cost will not form part of investment cost. However, if the project is financially feasible, the winning tenderer may be required to reimburse the land acquisition cost to the Government. As a result thereof, the land acquisition cost will form part of the investment costs.
3. Land Revolving Fund
For the land acquisition, the Government provides a revolving fund facility (which in Indonesia known as "BLU Fund"). This BLU Fund is similar to a bridging facility from the Government to finance the payment of land acquisition compensation to the land owners.
Once the land has been fully acquired and handed over to the toll road company, the toll road company shall repay the BLU Fund to the Government plus interest as agreed by the toll toad company and the Government.
This BLU Fund is provided to minimize the risk of the toll road company spending its own fund while there is no certainty when the land acquisition can be completed.
4. Land Cost Capping
The Concession Agreement provides estimation on land acquisition cost to be borne by the toll road company. If somehow the actual land acquisition cost incurred is higher than the estimated amount, the toll road company shall only be liable to finance the land acquisition cost up to an amount equal to:
a. 110% of the estimated Land Acquisition Cost; OR
b. 100% of the estimated Land Acquisition Cost plus 2% of total investment cost;
whichever is higher. Any amount exceeding such capped amount will be borne by the Government.
V. Financing Toll Road Projects
There are few challenges faced by the stakeholders in structuring a financing for toll road projects in Indonesia, some of those challenges might not be existed in other markets, such as:
No Guarantee from the Government
One of the stumbling blocks faced by the lenders in structuring the financing for toll road projects in Indonesia is that the Government of Indonesia will not issue any guarantee or letter of undertaking or even letter of comfort for the interest of the lenders.
For some other projects in Indonesia such as power and water projects, the Government is willing to give certain support and guarantee for the interest of the lenders but for the toll road projects the Government will not give the same.
Although there is no government guarantee, but the lenders are satisfied with the fact that the government is willing to sign the tripartite agreement, which provides certain level of protection and comfort to the lenders.
Full Guarantee from the Sponsors
Almost all toll road project financing require full guarantee from the sponsors/shareholders of the concessionaire. In some projects the sponsors cannot give a corporate guarantee due to the existing covenant in other agreement prohibiting them to give a corporate guarantee. In those cases, the banks require the sponsors to issue letter of undertaking to the effect that in case the concessionaire experiences cash shortfall then the sponsors undertake to inject additional fund to the concessionaire so that the concessionaire may service all its obligations to the lenders as well to fund operational costs.
Recently, in one toll road project financing assisted by our firm, the banks agree to limit the scope of the undertaking to be given by the sponsors to the completion of the construction of project and for the cash shortfall for the first few years of commercial operation. This is a significant landmark for toll road project financing in Indonesia.
The Long Tenure of the Loan
Another challenge faced by the parties is the mismatch of the concession period and the tenure of loan. The concession period for a toll road project is normally between 25 - 35 years however the longest tenure of the loan available in Indonesia market is 15 years.
This mismatch renders the bankability of the toll road project in Indonesia reducing. Toll road project is a long term investment. If the concessionaire needs to repay the loan within 15 years, then it will be a challenge for the concessionaire to manage the cashflow for loan repayment.
Financing in Indonesian Rupiah
Almost all toll road project financing in Indonesia are financed in Indonesian Rupiah (IDR) by local banks. The main reason is that the toll revenues are all in IDR. Thus, financing in other hard currencies, such as USD or Euro, will require hedging instrument both for the currency fluctuation and the interest rate.
In a recent toll road financing, an offshore export import bank agrees to fund up to USD100 million. However, the other local banks do not allow the concessionaire to buy hedging facilities. After much thought put on the discussion, eventually the parties successfully structure the financing without the hedging facilities while on the other hand the financing by the offshore export import bank is still in USD while the loan received by the concessionaire is in IDR and payment is in IDR. The scheme requires a local fronting bank to fund in IDR and an international prime bank to issue SBLC and the placement of USD deposit by the export import bank as well as certain support from the sponsors on exchange rate risk.
Environmental and Social Issue
Multinational agencies like International Finance Corporation (IFC) and Asian Development Bank (ADB) are interested to finance toll road development in Indonesia. However, to allow them to fund the toll road projects in Indonesia, the concessionaire and the projects shall comply with certain environmental and social standards and requirements as adopted by those multinational agencies.
The challenge for the toll road projects in Indonesia is that pursuant to the concession agreement the land acquisition is undertaken by the Government of Indonesia pursuant to the prevailing laws and regulations. The land acquisition process in Indonesia may not precisely meet the requirements set by those multinational agencies. Additional works must be done and additional costs shall be spent in order to catch up with the environmental and social standards and requirements set by the multinational agencies.
VI. Construction of Toll Road Projects in Indonesia
1. Appointment of the Contractor
Based on the Indonesian construction law, the contractor shall be selected through a tender process. Further, Article 20 of the Law No. 18 of 1999 concerning the Construction Services provides that a party is prohibited to award construction work to its affiliated party without pursuing or holding an open tender or limited tender process.
2. Grade 7 Contractor
Due to the size and complexity of toll road construction work, the contractor appointed shall have a Grade 7 qualification. This qualification is to be certificated by the Construction Services Development Board (Lembaga Pengembangan Jasa Konstruksi or LPJK).
To be certified as Grade 7 contractor, a construction company shall fulfill the following criteria:
a. has more than Rp10,000,000,000 net worth assets;
b. has the current financial capability (for all package of work) of more than Rp64,000,000,000;
c. has 1 (one) certified technical expertise (minimum) having an experience of more than 8 years;
d. has 1 (one) certified expertise for each construction field (minimum) having an experience of more than 8 years;
e. in the past 7 years, has the experience in performing Grade 6 construction work (with minimum 3 works) having a total minimum value of Rp25billion or the highest price of construction work package in the minimum value of Rp10,000,000,000;
f. has obtained ISO 9000-94 certificate or version 2000.
3. Foreign Contractor
If a foreign contractor wants to do construction works in Indonesia, including undertaking the construction of toll road, such foreign contractor shall fulfill the following requirements:
a. it must obtain a certification from LPJK. The foreign contractor must have the qualification as Grade 7 construction company;
b. it must obtain a license for foreign contractor from the Ministry of Public Work;
c. to do the construction work, the foreign contractor must enter into a cooperation (either in the form of joint operation or consortium) with local construction company 100% owned by Indonesian. The Indonesian construction company must fulfill the following criteria:
(i) the Indonesian company must be in the form of Limited Liability Company;
(ii) owned by 100% Indonesian company or individual;
(iii) qualified as big contractor (kualifikasi besar) having minimum Grade 5 as certified by LPJK;
(iv) has obtained a certification from LPJK; and
(v) has obtained Construction Services Business License.
Recently there are many improvements under Indonesian regulatory framework made by the Government of Indonesia in order to give certainty and protection to the investors of toll road projects and other stakeholders, especially lenders.
Nothing in this paper shall be construed as our legal advice and will create any attorney-client relationship. The readers/investors are strongly recommended to seek for proper and professional legal advice before making any decision to invest in any toll road project mentioned in this paper. We give no representation and warranty on the accuracy, completeness and reliability of any information and data quoted herein. We owe no liability whatsoever (legal or otherwise) to any person whosoever relying on information quoted in this paper.
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