in Developing Countries in FY2010 Access Road in Republic of Indonesia SUMMARY March 2011

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1 Study on Private-Initiative Infrastructure Projects in Developing Countries in FY2010 Study on the PPP Project Formulation of Tanjung Priok Access Road in Republic of Indonesia SUMMARY March 2011 第 1 章 第 2 章 The Ministry of Economy, Trade and Industry Prepared by: Ernst & Young ShinNihon LLC Japan External Trade Organization (JETRO) Infrastructure Development Institute-Japan Nippon Koei Co., Ltd. Yachiyo Engineering Co., Ltd. Mitsubishi Research Institute, Inc.

2 (1) Background and Necessity Tanjung Priok Access Road (TgPA) has been planned to provide better access to Tanjung Priok Port from Jakarta and nearby cities, and to improve the network of expressways and their bypass functions. Areas in the vicinity of Tanjung Priok Port have experienced chronic traffic congestion since 2004, when development of the access road was proposed. The congestion became severe due to an increase in container handling at the port and an increase in car ownership in the Jakarta Metropolitan Area in recent years. If the east section (Cibitung -Cilincing) of the Jakarta Outer Outer Ring Road (JORR2) being separately built is completed, access to Cikarang in East Jakarta from the Tanjung Priok Port will be remarkably improved. Many Japanese companies in the industrial parks in nearby areas (East Jakarta Industrial Park (EJIP), etc.) are expected to benefit from this. Japan has provided yen loans (Special Terms for Economic Partnership, STEP) for the project for two periods in a plan for a 12.1km road. The initial project cost was 64.7 billion yen, and the Government of Indonesia has started the project. However, the results of a detailed design (D/D) performed in 2007 as the project got under way indicated that the project cost would greatly exceed the originally planned cost due to soaring prices of materials and equipment and changes in the road alignments resulting in the total length increasing to 15.5 km. It was difficult to develop the remaining sections entirely with yen loan support, and new funds from the Government of Indonesia were not expected easily. This led to the need to study the possibility of procuring funds by Public Private Partnership (PPP) for the remaining W sections (about 5.2 km). It is thought that application of PPP to complete the expressway network with an early opening of TgPA by utilizing private funds will contribute a great deal to realizing smooth urban transportation in the Jakarta Metropolitan Area.

3 (2) Basic policy for the project contents With the E-1, E-2 and NS-Link sections being constructed with yen loan support, a scheme in which the remaining W sections will be operated and maintained to receive toll revenue to repay the loans and interest used for the construction of the W sections will be considered. However, the entire cost of construction in the W sections cannot be covered by PPP. It is assumed that the remaining need for construction funds will be met by the Government of Indonesia, with support from a yen loan. In calculating future toll revenue, the toll for TgPA will be set in reference to the level of tolls in adjacent roads. Operation and maintenance costs will be calculated based on TgPA traffic conditions, with reference to the actual operating costs of adjacent roads. The feasible scope of PPP involvement in the construction of the W sections will be determined after the future toll revenues and operation and maintenance costs are set. In addition, a proposal for constructing the W sections entirely with government funds and handling Operation and Maintenance (O&M) by concession was considered. (3) Outline of the Project 1) Outline of the project Table 1 shows an outline of the project in which part or all of the construction cost of the W sections is borne by a PPP concessionaire. It is assumed that the project period is 30 years, that the remaining section will be constructed with yen loan support or with funds from the Government of Indonesia in the form of government assistance, that the land acquisition cost will be borne by the government, and that business risk will be guaranteed by Indonesia Infrastructure Guarantee Fund (IIGF).

4 Table 1: Outline of the PPP Project Project name Implemented by Project content Expected mode of business based on the financial analysis Project cost and other Tanjung Priok Port Access Road PPP Construction, Operation and Maintenance Project (1) Investor: Expressway companies, construction companies in Indonesia and Japan (1) Construction of W sections by PPP concessionaire bearing part or all of the costs The scope of W sections to be constructed by PPP concessionaire is set as far as profitability is assured on the basis of financial analysis. The remaining W sections to be constructed by government funds, including yen loan support (2) Operation and maintenance of entire TgPA The concession period to be set at 30 years (3) Land acquisition cost to be borne by the government (1) With the toll set at 4,000 Rp. 50% of the construction cost to be borne by the PPP concessionaire (Financial Internal Rate of Return ; FIRR 16.2%) 50% of the construction cost to be assisted by the government (2) With the toll set at 7,000 Rp. All of the construction cost to be borne by the PPP concessionaire (FIRR 16.3%) No government assistance in construction cost (3) Non-financial assistance: business risk guarantee by government IIGF Total cost of construction 36.5 billion JPY (432 million US dollars) Economic evaluation EIRR=20.05%, NPV=81.2 billion JPY, B/C=1.34 Table 2 shows an outline of the project, in which it is assumed that the W sections will be entirely constructed with Government financing, and that an O&M concession will be executed.

5 Table 2: Outline of O&M Concession Project Project name Implementing body Project content Expected mode of business based on the financial analysis Other Project cost and other Tanjung Priok Port Access Road, Operation and Maintenance Project Investor: assumed to be the expressway companies of Indonesia and Japan (1) Construction of W sections to be implemented with government funds (including yen loan) (2) Operation and maintenance of entire TgPA. Concession period to be set at 30 years. (1) With the toll set at 4,000 Rp. It is possible to pay 55% of the annual toll revenue to the government (FIRR 12.5%). (2) With the toll set at 7,000 Rp. It is possible to pay 74% of the annual toll revenue to the government (FIRR 12.7%) Assuming a revenue sharing system in which private operator and government share the revenue. Total cost of O&M 900 million JPY (10.9 million US dollars) Economic evaluation EIRR=20.05%, NPV=81.2 billion JPY, B/C=1.34 2) Environmental and social aspects of project By offering W sections for use as a result of the project, it is expected that it will contribute to reduction of exhaust gas emissions by alleviating traffic congestion more than would be the case without the W sections. The construction site of W section is public land owned by the government and the publicly operated enterprises. Therefore, no voluntary or non -voluntary resident relocation should occur. Depending on installation of toll systems, additional toll gates will be needed, and accordingly that leads to generate voluntary resident relocation. (4) Planned Project Schedule A project implementation schedule from the announcement of bidding to operation and maintenance was examined. The time needed for bid announcement and prequalification was set at 14 months and the period for contract negotiation was set at 4 months based on the standard schedule indicated by the Government of Indonesia. The PPP conce ssionaire must hire a consultant and contractors by general competitive bid as stipulated in the government regulations, and one year is set aside from retaining a consultant to the hiring of a contractor as indicated in the Table 3.

6 Table 3: Project Implementation Schedule 1st year 2nd year 3rd year 4th year 5th year Bid announcement, PQ (14 months) PPP contract negotiation (4 months) 6th year and onwards Selection of consultant (3 months) Review of detailed design (6 months) Selection of contractor (4 months) Construction (3 years) Operation and maintenance (30 years) (Source: Study Team) (5) Feasibility of implementation Considering value for money (VFM), scheme B (public funded/private managed) is most desirable for the Government of Indonesia. Therefore, the construction of W section is expected be financed by the government including ODA (STEP). W section s EIRR is more than 20%, and FIRR is more than 16% with relatively small government fund subsidiary to the private. Therefore, if the government fund is not sufficient for constructing whole W section, it is feasible to apply PPP scheme for construction of W section. And the feasibility of the project will increase further if a low-interest Japan International Cooperation Agency (JICA) loan, which the Government of Japan is considering resuming, becomes available. On the other hand, risks involved in implementing the project should be flexibly addressed by appropriate provisions in the project contract. These would include provisions pertaining to acquisition of land by the government as planned, thorough quality assurance for the sections built with government funds, fluctuation of demand risk emerging in the operation and maintenance phase, defects in project facilities, and changes of toll levels.

7 (6) Technical Advantages of Japanese Companies The participation of Japanese companies in the TgPA sections is considered to offer significant advantages. Japanese companies have over 50 years of management and maintenance experience since the first expressway was opened in Japan. They have provided excellent and very safe operation and management of expressways and comfort for users. For longevity of road structures, Japan has excelled in asset management technology from the early stage of operations, including preventive maintenance technology. Japanese companies also have a wealth of experience in construction in urban areas such as the Tokyo Metropolitan Area and the Kansai Region, and they excel in doing construction work safely in limited spaces. As the project requires restriction ove r a long term of the current roads with heavy traffic in addition to the expressways, Japan s experience is expected to be utilized. Prompt introduction of Electric Toll Collection (ETC) is expected in Jakarta Outer Ring Road (JORR), including the sections being studied. It is necessary to mitigate congestion at toll gates. Japan has actively raised the rate of ETC utilization since the introduction of ETC in Today the utilization rate has climbed to more than 80%, and congestion at toll gates has been virtually eliminated. In the future, it will be possible to aggressively introduce the use of ETC in Indonesian expressway projects, construct ETC lanes step-by-step considering the utilization rate, and apply other techniques Japanese companies have experience in.

8 (7) Schedule up to realization of the project and risks that might prevent it 1) Specific schedule up to realization of the project The results of this study show that the importance of the Government of Indonesia indicating the direction in which construction of the TgPA by PPP will proceed, and that a feasibility study be conducted at an early stage. In the feasibility study, the scope of PPP construction will be identified after traffic demand is estimated from the viewpoint of investors, after an examination of toll systems, and calculation of operation and maintenance costs. The remainder of the construction work must be undertaken with parallel financing from a yen loan and funds from the Government of Indonesia. Table 4: Implementation schedule toward the contruct 1st year 2nd year 3rd year 4th year The Study Decide construction by PPP for the relevant sections (Government of Indonesia) Precommitment to IIGF Approval by IIGF FS (JICA Cooperation Preliminary Study (construction period of 10 months) Preparation of tender documents Bid announcement, PQ (14 months) PPP contract negotiation (4 months) (Source: Study Team) 2) Risks that might prevent realization The major risks that would prevent realization of the project include: a downswing in traffic volume, a delay of construction schedule due to delays in land acquisition and relocation of utilities, increasing operation costs, toll setting problems, and a fluctuation of exchange rates. Under the current system, the risk of a downswing in traffic volume is borne by the PPP concessionaire, and it is necessary to draft an operating plan incorporating this risk. Concerning the risk of a delay in construction due to problems with land acquisition of W section, it is desirable to aquire operation and maintenance rights of the E-1, E-2 and NS-Link sections, which will be opened before the start of construction of the W sections.