Jakarta taxis need peak pricing

I took a Kopaja bus from Polda Metro to Blok M during rush hour the other day because it was starting to rain and I couldn't find a cab. I got to Blok M and wandered over to SMAN 6, where taxi drivers often hang out. Like usual, there were 5-6 taxis parked there, all from good companies, but all seemed like they were eating or sleeping, so I wandered a bit further. 

As I walked, two available Blue Bird taxis drove past me before one stopped. He said he was actually on his way to take a rest, but he'd take me because I was close. 

I was confused: why would taxis be choosing to rest during peak times? Surely that's when it's easiest to get a passenger. 

The taxi driver said, yes, it is easiest to get a passenger during peak times, but you have to sit in traffic longer to get to them, the meter runs slow because of the heavy traffic, and, if you get someone that takes you to a really out of the way place, you can get stuck in traffic trying to get back to a place where you can get your next passenger.  In this sort of situation, as a taxi driver, you're better off waiting out the peak, and jumping back in your cab when the traffic dies down.  

If you work in Jakarta, you're familiar with the queues for taxis at peak times. At certain buildings like the Stock Exchange Building or Sampoerna Strategic Square, an hour's queue at 6pm is pretty standard, two hours is not unheard of. 

The taxi queue times have negative impacts on society. Massive amounts of time is wasted that citizens could put to better use, and some people will choose to buy private cars further adding to congestion. On the plus side, some people will choose to take buses, but the length of the taxi queues suggests that there's a significant population that won't*. 

Peak pricing, or allowing taxis to charge more during peak times, would have two major positive impacts. First, it would encourage drivers that currently sit out the peak to come back on to the road. Secondly, as drivers and taxi companies would be making more money, they would be willing to put even more taxis on the road. Both of these things would decrease queuing times, making riding a taxi relatively more attractive compared to private cars.

On the negative side, there would be people that wouldn't be able to afford the higher tariff, but those people could still ride buses, or choose to travel before or after the peak times.  

So, if all these good things follow from peak pricing, why haven't we got it already? My guess would be that it's because companies are scared to be the first one to do it. It might be more economically efficient, but it's usually not popular among your customers. Being the first company to do it would most likely mean you would lose customers to your competition.

It's also unclear what the provincial government of DKI Jakarta would have to say about this. My understanding of taxi fare regulation is that it is governed by Perda 12/2003, pasal 77 of which says that taxi companies are allowed to set their own tariffs, but they must be approved by the Governor**. It's not impossible that if a taxi company did try to implement peak pricing, someone within the Jakarta government might think they could score political points by opposing it. 

As I said earlier, I think there are benefits to broader society from peak pricing that would accrue in the form of less congestion. Unlike shorter waiting times for customers, and higher profits to the taxi companies, the lower congestion is a positive externality that accrues to society from these two parties undertaking the transaction. 

On the basis of this externality, I think there's a role for DKI to not just not oppose peak pricing, but to encourage taxi companies to take it up. If DKI Jakarta were to publicly encourage taxi companies to adopt peak pricing and to talk about the broader benefits to society, citizens would be less likely to react poorly. 

I, for one, hope they do soon!

*I've actually been in both the populations that buy cars in response to taxi queues and those that ride buses. I would be using my private car now, except for my own peak demand problem, where my wife and daughter want to use the car in the morning and evening. Lowest value users get sidelined... Buses and taxis for me. 

**Note that this is the same regulation under which various people are complaining that Uber is illegal, because it is charging "illegal" tariffs that haven't been approved by the governor.

Do the MNC Group not understand the infrastructure business, or do they understand it too well?

The MNC Group is one of Indonesia's largest media conglomerates. In 2013, they moved into infrastructure by, among other things, purchasing a few toll roads from the Bakrie Group. Over the past few weeks they seem to have been getting in trouble with their Kanci - Pejagan toll roads, and the comments they have been making in the media have been more than a little worrying for people that work in the field of infrastructure regulation.

The week before last, Detik Finance published two articles titled "Bakrie and MNC have been in default on the Kanci-Pejagan Toll Road" and "MNC: The Kanci-Pejagan Toll Road has been broken since we bought it from the Bakries."

The first article claims they are not meeting the minimum service standards and that they need to fix the toll road at their own cost, or try and sell it to someone who will. According to the head of Indonesia's Toll Road Regulatory Authority (BPJT), Achmad Gani Ghazali, they've got 90 days to rectify, of which about half has elapsed.

In the second article, the President Director of the operating company, PT Semesta Marga Raya, Irmawanto Soekamto, is quoted as saying "The tollway was in really bad condition when we received it. From the beginning, the tollway has had continual repair work conducted on it", and "we have been asking ourselves, the construction of this road should last decades, but why, as soon as we receive it, is it in such bad condition?"

In addition to blaming the Bakries, Detik's article also notes that Indonesian state-owned contractor PT Adhi Karya (Persero) constructed the road and that it was opened by former President Susilo Bambang Yudhoyono.

The article further notes that the concessionaire asks for forbearance from their users and that they are pursuing legal action to determine the cause of the poor road condition. It closes with a quote from Irmawanto: "I am certain, truth will come out. We all know that this toll road was heavily damaged from the start. So we just need to wait and see who is truly responsible for all of this damage."

I don't know who was responsible for the damage that has led to the current poor quality of the road, but I can tell you who is responsible for fixing it now: the MNC group as current concessionaire.

A CA, like any agreement, governs rights and responsibilities of the parties. In toll roads, the government concedes to allow a private party to charge a toll for the use of the road, but in return, they must build and maintain the road such that it meets the specified minimum standards. In Indonesia, there are only two parties to a toll road CA, the government and the concessionaire. As such, the only two parties with any rights or responsibilities under the CA are the government and the concessionaire.

As the MNC group currently own the operating company, then even if Adhi Karya built a poor quality road, and the Bakries maintained it badly, the users and the government should not care. As the current concessionaire, the MNC group alone have the responsibility to ensure the road is in good order and they alone must bear the cost of doing so.

It is possible that the MNC group can sue either the Bakries or Adhi Karya to recover or defray some of the cost of repairing the road and, if so, I wish them the best of luck in their endeavour, but I have never seen a clause in an Indonesian CA that allows the concessionaire to breach its minimum service standards while it has a fight with some other party. In fact, most CAs in all jurisdictions specifically note that the concessionaire is solely responsible sub-contractor non-performance, and that any change in ownership must be conducted in such a way as to ensure the continued fulfillment of the minimum service standards.

When MNC bought the toll road, they would have run a financial model projecting out all of the revenues they expect to get over the remaining life of the concession, and the costs they would incur in keeping their asset in the required condition to figure out how much they would be willing to pay for the asset. Their projected costs should have included, of course, any rehabilitation required to bring the road up to the required minimum standard.

If MNC did not accurately project the costs or rehabilitation or ongoing maintenance, or didn't read the CA to understand their minimum standards, then, quite frankly, they should lose money... They're a serious company paying serious money taking on some serious obligations. If they're not going to take it seriously, then they shouldn't be in this business.

This idea that a sub-contractor or previous owner non-performance is not the government's problem is not some arcane point of theory, this is beginner stuff. In giving an interview like the one Irmawanto gave to Detik, it seems like one of two scenarios is possible:

  1. MNC don't understand the simplest things about infrastructure investing
  2. MNC think that the government does not understand the simplest things about infrastructure regulation.

Unfortunately, private businesses making money by betting on the second scenario has some precedent, not just in Indonesia, but all over the world. When we get private contractors to invest in and operate our infrastructure, we want them to innovate on lowering cost, or raising revenue, but sometimes they choose to innovate in trying to renegotiate contracts or otherwise weasel out of their obligations. 

The reality is, especially in developing countries, regulators often don't understand contracts that well, and private companies can usually afford much more expensive and intimidating lawyers than the government can, so even a really well-designed contract* can result in a bad outcome.

CAs often have a clause that allows for the concessionaire to get compensation in the event that the government asks them to do something that might cause them to incur extra costs. Examples of reasonable requests a government might make that a concessionaire could reasonably request compensation for might include widening a road, changing the weight limit of a bridge, installing flood mitigation measures following a new national standard and so on. The concessionaire's compensation for the government's request could be cash, relief of paying a concession fee, an increase in tariff, an extension of the concession period, or something similar. MNC may be hoping that they can convince the government that this rehabilitation expense should be considered a government request that causes them to incur extra costs, rather than something that arose as a result of their own negligence.

In my experience, I have found BPJT to be staffed with pretty professional operators that wouldn't fall for things like this, but then, MNC have a reasonable track record of success in investments that indicate that they know what they are doing.

I don't know which of my scenarios accurately describes MNC's thinking, but I hope they're spending more on maintenance and rehabilitation than they are on their legal fight... Either way, they've only got half of their 90 day rectification period left, so we'll find out soon enough...

Note: all quotes are translated by the author, for the original wording, please refer to the linked articles.

*The regulatory capacity of the government is a critical thing to take into account when designing a contract, and aligning the regulatory responsibility with their capacity decreases your chances of getting a bad outcome.

Hello, world.

Hi there,

My name is John, and I'm an economist.

I've been working for about 10 years; mainly in infrastructure, but more generally around the interface between the public and private sectors in public service provision. I have worked most of my career in and around Indonesia, but have spent a reasonable amount of time working on these issues in Australia, New Zealand, Timor-Leste and a handful of other countries.

I have spent about equal amounts of time in private sector advisory and working for bilateral/multilateral donors. In private advisory, I have worked for the whole gamut of actors in the infrastructure space, governments, private parties, state-owned enterprises, regulators, think tanks, donors, industry associations, and so on.

The kinds of problems that I work on aren't new--governments have been thinking about how best to deliver services for their citizens for as long as there have been governments--but over the last half-century or so, there has been something of a convergence around the way that people think about some aspects of these problems. This definitely doesn't mean that there's an accepted "international best practice" way to develop infrastructure, but there is a shared vocabulary, and increasingly commonly understood models that actors can select between depending on the circumstances.

Great resources do exist for people trying to learn more about this body of knowledge, but the resources are diffuse, and most are targeted at people that are already expert in the field. Most of the people I know that work in the field learnt the same way that I learnt: by learning on the job at their bosses' knees, by casting about for resources when they come across novel problems, or by trying to muddle through by themselves.

This blog is intended to be a place for me to try and set out my understanding of this shared body of knowledge covering the economics of infrastructure, risk, public sector asset management, natural resources and that sort of thing. Where relevant, I plan to comment on particular projects, policies or events of the day that illustrate particular aspects of public sector economics. I'll be focusing mainly on Indonesia, because that's where I live, but I will be taking examples from all over the world, where I think they are interesting.

I'm planning on trying to write this blog in a way that would have been useful to an early-career me. I'll get technical now and then, but I'll still try to write about these subjects in a way that will be understandable to people with a non-technical background.

A very wise person once told me a maxim of blogging: no one likes a meta-blog. So, on that note, on to the real stuff!