Expressways still in the slow lane despite urgent need

Yenwy Wongso, Research Analyst

Last year, we finally witnessed the second Indonesia infrastructure conference being held in November, after being postponed several times.

However, it is still too early to tell whether the projects put on the table during the summit will progress rapidly or end up like those from the first infrastructure conference (which only saw a handful proceeding to the construction phase). At stake are several key expressways -- projects that are badly needed by the economy.

Since the financial crisis in 1997, Indonesia has seen very little construction of new expressways. As a result, congestion has increased as sales of cars (and motorcycles) have vastly outstripped the rate of construction of new highways.

This must now be rectified through a major highway construction drive, including the construction of new expressways.

Yet apart from the completion of the Jakarta-Bandung (Cipularang) expressway in 2005, we continue to see limited progress in highway development. Many issues are associated with this phenomenon.

During the preliminary stage, the problems include complex tendering processes as a result of the absence of an adequate regulatory framework.

Furthermore, the significant commercial risks involved in expressway projects have resulted in caution on the government's part (hence, longer delays) in determining tender winners. Further delays then ensue as the tender winner tries to secure financing for the project.

Further down the line -- upon the announcement of the winner -- the investor may also face difficulties with land acquisition. Protracted delays in land acquisition expose the contractor to the risk of project-cost inflation.

For example, the slashing of fuel subsidies in 2005 triggered a spike in inflation that rendered pre-bidding cost estimates obsolete (thus requiring tender winners to recalculate costs based on the new prices).

What has been done to date to address these issues?

The government has come up with a new "policy package" to overcome these problems and promote infrastructure development through a number of newly issued regulations and laws.

The Accelerated Infrastructure Development Program was launched to create a more investor-friendly environment through investment cooperation, subsidies (based on the public service obligation), guarantees and the establishment of a revolving fund for land acquisition.

Any unexpected increases in land acquisition costs will be compensated for by an increase in the amount of the initial per-kilometer toll, as well as an extension of the concession period.

Furthermore, based on Presidential Decree No. 36 of 2005 on land acquisition for the development of public facilities, the government may compulsorily acquire land for the construction of public infrastructure, such as expressways.

Meanwhile, the finance minister issued Decree No. 38 of 2006 to provide more protection for investors as regards land acquisition and dispute resolution; investors only have to carry the cost of up to 10 percent of any increases in land prices from the time their proposals are submitted.

But in spite of this, progress in terms of actual construction remains fairly limited. Perhaps the presidential decree should go further and specify detailed mechanisms for land pricing and dispute resolution, as opposed to the general guidelines currently set out in the decree.

The finance minister's decree is more encouraging as it more evenly divides the risk between government and investors. However, it remains to be seen how well the decree will be implemented in practice.

Hence, the pace of expressway construction still hinges on a myriad of factors. It is in the interests of the nation that the modest progress evident from the two rounds of expressway tenders last year does not recur this year.

Difficulties in land acquisition and regulatory deficiencies, as well as lack of detail in the new regulations, must be addressed before there will be any significant acceleration in the pace of expressway development.

In short, the government should take the lead in handling land acquisition, not the investor.
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