INDONESIA RISING. Policy Priorities for 2010 and Beyond 53481 Roads to Growth and Development Key Messages 1. Development of the Trans-Java Highway and addressing the backlog in expressway development. Considering its long term socioeconomic benefits, the GoI should consider making a strategic decision to develop the trans-java highway project. As one possible option, the GoI could pre-fund land acquisition and consolidate different concessionaires into a single holding company with open capital to raise additional financing from private investors (shareholders). 2. Separation of policy formulation from service delivery and clarification of roles and responsibilities of the road sector institutions: Set up a sustainable financing mechanism to preserve all roads based on second generation road funds principles; Introduce and mainstream Output and Performance­Based Road Contracts to maintain and manage road projects on long term basis (3-7 years); Restructure national road management in line with business-like management practices: Establish an autonomous national road agency for non-toll roads; Establish semi-autonomous regional road agencies for the strategic planning and management of extended provincial road networks (Provinces and Kabupaten). 3. Prepare a national road safety strategy and plan of action that sets specific timeframes for a scaled up institutional strengthening program and targeted interventions. The amendment of the Traffic and Road Transport Where Indonesia Stands Now Law No 22, that notably provides for the establishment of a road preservation fund (Article 30). Transport by road accounted for 70 percent of freight The creation of a fiscal space through the reduction ton/km and 82 percent of passenger/km, making it the of fuel subsidies. The October 2005 fuel price increase predominant transport mode in Indonesia. Transport added approximately US$10 billion to the budget investments fell from over 2.2 percent of GDP before annually making possible increased in spending on 1997 to a low of just over 0.7% percent of GDP in 2000, development priorities, including roads. The removal of and have since risen to around 1.7 percent of GDP in 2007 the remaining large energy subsidies (especially fuel) (Figure 1). This level of investment has not been sufficient would further reduce distortions in transport costs and to meet Indonesia's growing demand for transport allow increased spending on transport priorities.2 infrastructure, and is becoming an impediment to socio- Enhanced private sector participation. Legislation economic development and around 15 million people in was passed and the Risk Management Unit (RMU) remote communities still lack direct access to the all- in the Ministry of Finance (MoF) was created to season road network1. enhance private sector participation in infrastructure. The enactment of Perpres 67/2005 and Kepres 38/2006 The government recognizes the challenges and is taking set the criteria for Public-Private Partnership (PPP) action to fill the gap, allocating more than 60 percent of projects requiring the government's financial support. total public expenditure in the transport sector to roads in Progress has also been made through the establishment 2008. The government has also initiated a number of fiscal of special funds for land acquisition. and legislative reforms, including: 2 Making the most of Indonesia's new opportunities: Indonesia Public 1 Making the New Indonesia Work for the Poor; World Bank; 2007 Expenditure Review, 2007, World Bank 2 | INDONESIA RISING The separation of the regulatory and service delivery Figure 1. Total investment in infrastructure as a share of GDP functions of toll roads through the restructuring of % of GDP Jasa Marga and the creation of a new regulatory body 8 (Badan Pengatur Jalan Tol (BPJT), 2005). Resolving the land acquisition issue remains high on the 6 government's agenda. Transport Irrigation WSS Energy Telecom Strengthened of procurement procedures at the 4 Ministry of Public Works through improved electronic-procurement systems. The devolution of the responsibility for managing 2 provincial and district roads to local government, to encourage responsiveness to citizens' needs. 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Despite these advances, a number of challenges specific to Sources: Government statistics for national and sub-national governments; Annual reports for state-owned enterprises; World Bank's PPI database the roads sector must be addressed for Indonesia to realize for private investment, excluding cancelled projects. its full socio-economic potential: Congested arterial roads and under-investment in Table 1: Road Network Conditions expressways need to be addressed. At the national level, a lack of high standard arterial connections ­ Length Good & Fair Bad Road Status along major trade and commercial corridors ­ and (km) (percent) (percent) congested arterial roads increase travel time and National 34629 83.0 17.0 transport costs. While some progress has been made in Provincial 46499 63.0 37.0 the legislation of the toll road sub-sector, progress to Regency 240946 43.0 57.0 date in the implementation of PPP projects has been poor. Only 650 km of toll roads are in place, mainly in City 25518 96.0 4.0 urban areas, compared with an estimated need of about Toll 649 100.0 0.0 2,000 km3 Total 348241 54.0 46.0 The overall quality of regional roads is deteriorating, and the condition of national roads has yet to recover Source: PJM 2005 and KMPU 2006 and DGH 2008 to the level in 2000. Despite funding increases and a renewed emphasis on maintenance, roads have not returned to pre-1997/98 situation. The percentage of Road management capacity and performance is national roads in good and fair condition has improved weak. Typically programs and budget allocations from 81.6 percent in 2006 to 83.3 percent in 2008, but are insufficiently based on objective criteria, are not has not returned to 87 percent observed in 2000. More transparent and lack public consultation. These than a third of the provincial roads and more than half shortcomings have been exacerbated by very lengthy of the district-level road network are in bad condition procurement procedures and the poor control and (Table 1). The low level of all-season access inhibits supervision of the quality of road works. The cost of poverty reduction and limits access to services for the poor road service delivery is high, the works are often poor, particularly in eastern Indonesia. of low quality, and collusion between contractors There is a lack of sustainable financing mechanisms remains a problem. The Director General of Highways for road maintenance. The preservation of road assets (DGH) operates at a very high staff/network length should be financially sustainable, but recent spending ratio suggesting room for improved road management patterns reflect an overdependence on public budgets. practices. DGH staff/network level is 12.5 staff/100 Revenues raised through vehicle ownership and license km. This is more than six times higher that the fees, fuel levies and various road-user charges at the recommended efficiency level of 2 staff/100kms. local and national level exceed road preservation Poor road safety is a serious and increasing problem. expenditures. However, these revenues are considered as Approximately 50 people die on Indonesian roads general taxation and legislation prevented the creation every day. Motorized traffic, including motorcycles, are of a sustainable financing mechanism for roads. expected to continue to increase significantly, which will exacerbate the situation, unless urgent action is taken (see Figure 2). 3 Source: Strategic Plan: Ministry of Public Works 2005-2009, published March 2005 . Policy Priorities for 2010 and Beyond | 3 Figure 2. Indonesia: Trends in Road Traffic Deaths 1997-2007 Separate policy formulation from service delivery 118,000 and strengthen the overall institutional framework, to 160,000 clearly differentiate the roles played by key road sector Number of road traffic deaths 140,000 stakeholders in terms of policy formulation, policy 12,000 delivery and works execution. 10,000 Set up a Road Preservation Fund to provide the 8,000 sustainable financing needed to preserve road assets. 6,000 The cost to the economy of a deteriorating road network 4,000 is three times higher than the cost of maintaining road 2,000 assets. Developing a sustainable funding mechanism for 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 road maintenance is the key. Any mechanism should be designed and operated based on the "user pays" principle Source: National Police and secured by levying road user charges, including fuel levies and vehicle license fees. The amended traffic and transportation law explicitly mentions the creation Policy Priorities of a Rising of a Road Preservation Fund. Such a Fund should be Indonesia established in line with Second Generation principles, characterized by clear rules and regulations regarding In view of its size and socio-economic development roles and responsibilities, strong oversight by a joint aspirations, there is a need to develop a safe and efficient public-private board, sound financial systems, and a transport sector, in which roads play a major role. To achieve lean and efficient administrative structure. The agency this goal, decisive action is needed in a number of key areas: managing the fund should act as a purchaser, rather than a provider of road maintenance services. Develop the Trans-Java Highway. A highlight of the Introduce more efficient and business-like Government Program for the years ahead could include management practices. Every effort should be made a push to complete the Trans-Java as a critical element to increase road management efficiency. Efficiencies of the backbone road infrastructure for Indonesia. and cost reductions can be gained and passed on to The traffic congestion along main traffic corridors road users by improving financial and managerial and approaches to major cities on Java is particularly accountability, addressing the shortage of technical staff serious. Providing a high quality, limited access and providing a competitive remuneration structure. expressway system across Java, linking the key cities of Another way to attain efficiency is by mainstreaming the Jakarta and Surabaya, will have important economic use of Output and Performance-Based Road Contracts and social benefits. This would require the strategic (OPRC) into road projects.4OPRC contracts are decision to pre-fund land acquisition and consolidate awarded through competitive bidding. Potential service concessionaires into a single holding company with providers propose a monthly lump-sum fee per kilometre open capital and the ability to raise additional financing of road to be managed and maintained, and contractors from private investors (shareholders). are paid not for "inputs" or physical work executed, but Address the broader investment backlog in for the final `'outputs'' or outcome, based on the quality expressway development. Greater attention has been of work. This type of contract can significantly improve paid in recent years to diversifying the sources of road conditions (Box 1) and expand the role of the financing for toll road investment. Experience suggests, private sector, from the simple executor of works to the however, that there are limits to the extent that public management and preservation of road assets. financing can be replaced. One way to meet the Build road management and financing capacity at financing challenges is to overcome current constraints the regional level to improve the quality of provincial, around PPP projects' preparation and implementation kota and kabupaten roads and the rural transport by: (i) investing more time and financial resources in infrastructure to increase access to services and markets. project preparation, (ii) improving project selection, This will need improved management and technical and (iii) enhancing the dialogue with investors and capacity building programs for provincial, kabupaten lenders. This last will require a champion for PPP and kota level institutions using national associations projects and a commitment to implement a minimum or technical institutes a system to transfer knowledge number of adequate toll road projects through PPPs. As an intermediate step, technical assistance for 4 A pilot 100 km road project using the OPRC approach is one project preparation (e.g. transaction advisor) should be of the components of the World Bank Strategic Roads Infra- provided to BPJT. structure Project currently being implemented in Indonesia . 4 | INDONESIA RISING and capacity from the national to the regional level that Infrastructure Development Policy Loans and does not undermine local decision-making authority. A Investment Programs medium-term strategy encouraging the establishment of semi-autonomous road agencies to strategically plan Through the Infrastructure Development Policy Loan and manage the extended provincial road networks is (IDPL) series, the World Bank is engaging with the another step. government in a dialogue, focusing on the most critical Increase road safety by preparing a national road policy bottlenecks. The IDPL series proceeds in parallel safety strategy and plan of action. Such a strategy with analytical work and investment loans to improve the must cover the safety requirements of road users and standards of non-toll roads and to preserve national road engage all stakeholders across government, the private assets. sector, non-governmental organizations, media and the general public. It should also be linked to strategies Two roads projects are being implemented, with World in other sectors (e.g. health) and set ambitious safety Bank support. The Second Eastern Indonesia Region targets, complemented by a national action plan setting Transport Project focuses on improving links in the out specific interventions to achieve within specified road network of 16 provinces and approximately 190 timeframes. kabupatens and kotas in eastern Indonesia. The Strategic Roads Infrastructure Project is improving the capacity and quality of national roads on Java and Sumatra, Box 1 - Output-based Contracts: Provincial road improving road safety and increasing the efficiency, quality maintenance in Argentina and transparency of works and procurement. The impact of performance-based road maintenance Two additional road projects are being prepared. The contracts in Argentina (piloted in 1996­1997) led Western Indonesia Road Improvement Project to increase to the share of roads in poor condition falling from the capacity of major arterial roads along the Western 41 percent to 6 percent, and in unit costs dropping road corridor in Sumatra. The Road Preservation Project is between 12 percent and 18 percent. The economic designed to improve the maintenance of the national road rate of return was estimated to be 60 percent network through performance based financing. because of the savings in vehicle operating costs. Analytical Advice and Technical Assistance. An assessment of the road construction industry in Indonesia How The World Bank Can Help is being undertaken to gain a better understanding of the constraints and issues, while identifying opportunities to improve the investment climate. A Public Expenditure The fiscal and legislative reforms undertaken by the Review (PER) of the transport sector is also being Government of Indonesia provide a sound basis for the prepared. The PER will help the government make development of a sustainable road sector. The World Bank informed decisions about the optimal allocation of is currently providing selective support through a program public resources improving prioritization, efficiency and of policy advice, institutional reform and investment effectiveness in the transport sector. In the future a road financing in the road sector. The World Bank's support safety management capacity review, with the objective builds on its considerable global knowledge and experience of achieving a consensus on capacity weaknesses and the helping many countries engaged in ambitious road measures needed to address them is under consideration. management and financing reform programs. The World Bank Office Jakarta for more information, please contact: Indonesia Stock Exchange Building Tower 2, 12th floor Mr. Mustapha Benmaamar Jl. Jenderal Sudirman Kav. 52-53, Jakarta 12190, Indonesia Senior Transport Specialist ph. + 62 21 5299 3000 | fax. + 62 21 5299 3111 mbenmaamar@worldbank.org http://www.worldbank.org/id Investing in Indonesia's Institutiond for Inclusive and Sustainable Development