Indonesia toll road update

(a) Tariff: Another ground for tariff adjustment

The general rule is that toll road operators (the BUJT) may apply for inflation-adjusted tariff adjustment every two years to the Minister of Housing and Public Works. Evaluation of tariffs will be based on two components, namely (i) the inflation rate that is applicable in the relevant region, and (ii) compliance with minimum service levels (or SPM).

The Road Law now introduces other grounds for tariff adjustment, in addition to the regular two-yearly increase – these new grounds are:

(i) there is a procurement of traffic services in the toll road network system in certain regions;

(ii) there is an expansion of scope in the business plan of BUJT that impacts investment viability; and/or

(iii) there is a central government policy that affects investment viability.

It is important to note that these additional grounds for tariff increase have actually existed in many of the toll road concession agreements (known as PPJT). PPJT usually offers a relief or compensation to BUJT through, among others, tariff increase or extension of the concession term should these circumstances occur. The third ground (ie policy) is captured in PPJT under ‘change in law’, being the issuance of new law or amendment of law or change in interpretation of law that takes place after the PPJT is signed by the parties which has a detrimental effect on BUJT. The Road Law has now codified these into the legislation to give legal certainty for investment; in particular it has a binding effect on the Minister of Housing and Public Works whose approval is a pre-requisite to pass a new tariff (whereas PPJT is only binding on BPJT – an agency under the Ministry).

(b) Investment return: “Clawback”

The Road Law now gives the government the right to ‘clawback’ the return on investment if it exceeds the pre-agreed rate of return. BUJT and BPJT would usually agree on the rate of return at the start of the project and such agreement is documented in minutes attached to the PPJT. In the event that the rate of return of BUJT during operation improves such that it exceeds that determined by central government, then the balance (after being audited by the state audit) must be paid by BUJT to the government and be deemed as non-tax revenues. The government is required to use the fund for the development of the toll road network.

Imposing a ceiling on the rate of return enjoyed by investors in infrastructure projects that are based on a user-pay model is not common in Indonesia. One may grapple with finding symmetry of incentives in this: any upside as a result of a business performing successfully will not be enjoyed by BUJT, and on balance there is no mechanism for BUJT to ‘clawback’ its loss of return, for example, due to political risks apart from concession extension or tariff adjustment. However, it is noteworthy that in some of the latest generation PPJTs signed quite recently (although we would not say this is the norm), BUJT may claim for cash compensation (up to a threshold) for losses due to political risks; the idea is to put BUJT back in the position it would be had the political risks not occurred.

Law No 38 of 2004 on Roads was amended on 12 January 2022 by Law No 2 of 2022 (the Road Law) and we have identified three changes which impact investment in the toll road sector. One is relating to tariff, the other on government’s right over the upside rate of return (clawback) and lastly, on source of funding for land acquisition in unsolicited projects.allenovery.com

(c) Land procurement: Funding of land acquisition costs for unsolicited projects

The general rule that land procurement is carried out by government pursuant to the compulsory land acquisition regime – that is under Law No. 2/2012 on Land Procurement for Development for Public Interest (as amended, Law 2) – is re-emphasised in the Road Law. The Toll Road Law states that “land procurement for public road is carried out based on the laws and regulations relating to land procurement for public interest” (and this refers to Law 2). According to Law 2, it is the responsibility of the government to undertake land procurement and further, Law 2 in article 52 specifically states that the source of funding for the land acquisition is the State Budget/Regional Budget (APBN/APBD).

What is new is that the Toll Road Law now contains an express statement that for unsolicited projects, the BUJT is responsible for land procurement costs. This was not expressly regulated before although in practice, for both solicited and unsolicited projects, it may often be the case that the BUJT is required to procure the funding of the land acquisition and, as agreed with the government, LMAN (a unit under the Ministry of Finance) will later reimburse the cost – this is known as the Bridging Fund which was introduced back in 2015. With this new requirement, it is now clear that for all unsolicited projects, the cost of land acquisition is the sole responsibility of the BUJT. We expect sponsors will need to commit substantial capital for this, as lenders would in the past require land acquisition to be complete before funding construction and development of the project.