Toll Road (NEUTRAL) Accelerating development - Danareksa

Reevaluating 24 toll roads
The government has reevaluated 24 toll roads that have received operating licenses (PPJT) since 2007, as no progress has been made in regard to their development. The developers have cited slow land acquisition as a major obstacle, even though the government has implemented a land capping policy and has provided revolving loans for land acquisition. Given this situation, the government has decided to amend the agreement by adding an automatic termination in the case that the investor fails to fulfill certain conditions. The amendment is now awaiting approval from Vice President Boediono.

What is new?
The proposed amendment of the toll road operating license clearly states the terms and conditions that need to be fulfilled in order to avoid automatic termination. Firstly, investors are required to put up 1% of the total paid up capital (assuming a 70:30 debt equity composition of total project costs). Secondly, if land acquisition has reached 75%, paid up capital must be raised to one-third of the total capital required. Thirdly, investors must sign credit agreements with banks within six months. This will ensure the financing for construction of the toll road. Fourth, the government will schedule a certain timeline of work progress. However, the government has not clearly defined the meaning of “certain timeline and work progress”, meaning this ruling is still a bit ambiguous – thereby opening up the possibility for disputes between the government and investors. Failure to meet all these requirements will trigger automatic termination.

What happens if termination is applied?
The government has identified three possible responses to automatic termination. They are: 1) Re-tender the project. This, however, would be time consuming and would extend the construction period and reduce returns on the concession period unless the concession received an extension to compensate for the longer construction period. 2) The government could appoint a new investor to continue the project. This implies that the new investor would have to have better credibility and capability to ensure the completion of the project – certainly not easy to do. 3) The government could appoint state-owned companies to take over the project. This is the most likely solution, we believe, with Jasa Marga favored as a preferred investor due to its track record on toll road construction.

New legislation under discussion
Early this year, the government submitted a draft of new legislation for land acquisition for public purposes. The idea is to have a certain timeline for land acquisition in order to speed up the development of infrastructure. Under the proposed legislation, land rights can be revoked. This is a key matter since the main problem of land acquisition in Indonesia has always been poor administration of land rights since speculation can push up land prices to unrealistic levels. The House of Representatives is forming a special committee to oversee the government’s proposal. From what we have heard, the main debate is on the issue of justice, especially to anyone having their land rights revoked. The House of Representatives aims to complete its overview by July 2011.