The Indonesian government announced last week that they will be cutting toll road tariffs by 25% on private toll roads, and 35% on Jasa Marga run toll roads, effective from the 7th of July until 5 days after Lebaran.
The government instructed toll road operators to make the cut to help out people during their long trip home.
In this post, I’m going to argue that, yes, this does save some of Indonesia's citizens money, but that it is inefficient, poorly targeted, and will cost the government (at least) a hundred million dollars over the next few years.
First off, how much does it save people?
I don’t have numbers on the amount of money this could cost toll road operators (which is the same as the aggregate amount that it saves users), but we can try to estimate a ballpark figure.
The tariff cut is in effect for 16 days, being 16/365 = 4.4% of a year. How much money the companies will lose will depend on the traffic flows. If traffic flows are heavier over that period than over the year as a whole, we’ll lose 25%/35% on more than 4.4% of a year, if they’re light then they will lose less than that.
To me, it seems plausible that they’d be heavy, because a large chunk of the country will be travelling over this period. But then, most toll roads are in Jakarta, and people leave the city during this period, and the flows might be heavy only for a few travelling days, while they’ll be light for a few days in the middle; this could mean that the flows are on average lighter. For this sort of analysis, it’s probably not too far wrong to just assume that traffic flows are, over the whole 16 day period, pretty much in line with the average flows over the year. In that case, we can just multiply the discount by 4.4% of the year, and find that private toll road operators should expect to lose around about 1.1% of their annual revenues over this period, while Jasa Marga will lose 1.5%.
I haven’t got data on the total fare revenue collections on all toll roads in Indonesia, but, in 2014, Jasa Marga’s receipts were around IDR 6.6 trillion and they control a bit under 60% of Indonesia’s toll road network. Assuming revenues roughly split that way too, we can estimate around IDR 4.8 trillion of non-Jasa Marga toll revenues. With a bit of growth and rounding, I’ll assume IDR 7 trillion for Jasa Marga and IDR 5 trillion for non-Jasa Marga toll operators.
So, as a result of this tariff cut, Jasa Marga will lose around IDR 105 billion (USD 8 million), and private companies will lose around IDR 55 billion (USD 4 million) in revenues. Toll road users will be better off by around IDR 160 billion (USD 12 million); the sum of those two amounts.
Just to reiterate again, this is a ballpark figure. It might be twice, it might be half, but it’s probably not 10 times, or 10% of that amount.
And who are the beneficiaries of this transfer?
The beneficiaries of this cut will obviously be the people that use the toll roads. So, who are they, and how much benefit will they actually get each?
Poor people will get some of the transfer, but not much. Poor people either ride motorbikes or the train, so avoid toll roads, or ride buses or “travels”, where their share of the toll is between one fifth and one fiftieth of the fee, depending on the number of people that are in the vehicle. If you have packed full a Toyota Avanza driving from Jakarta to Surabaya, taking every toll road on the way, both ways, your toll fees are about IDR 500,000. So, assuming 5 passengers with bags, the cost per passenger is about IDR 100,000. So, the saving to each poor person is about IDR 30,000 (USD 2.25). If the trip is shorter, or the vehicle is bigger, the savings will be smaller.
Even to a poor person, this is not much. A bus ticket to Surabaya around this time of year is around IDR 500,000, so you might be saving them 6% of their fare. This probably doesn’t even cover their food costs for the journey.
And, this is assuming that bus and travel companies adjust their prices at all. There is a lot of research that says that prices are sticky, so most likely the transportation companies are the ones that will get the windfall profit.
So, other than some poor people and transportation companies that serve them, you’ll have middle-class and rich people, who care even less about a savings of IDR 100,000 on their carload than poor people do about their IDR 30,000.
So, with this policy, the government extracted around USD 12 million from toll road operators, and spread it around a bunch of people that didn't really need it and won't even really notice it.
So why is this such a bad thing?
So, why am I making such a big fuss about this? How does costing toll road operators USD 12 million, most of which is borne by an SOE anyway, cost the government so much money? I’m going to deal with three reasons, as follows:
- It’s not fair;
- It’s operationally disruptive; and
- It sets (or reinforces) terrible regulatory expectations.
It’s not fair
There will be a certain group of people that will scoff at this: “Billion dollar companies can’t afford to give the average citizens a measly tariff cut for a few weeks?”
It’s true, the amounts are relatively small for a billion dollar company, but the point isn’t the amount, the point is that the government made a deal, and signed a contract, now they are unilaterally renegotiating it.
If we imagine a toll road which, in present value terms, will cost USD 1 billion, where the revenues will cover USD 900 million of that. To get it done, the government will have to pay a USD 100 million subsidy and the cashflows will look like the below, in present value terms.
When bidders bid on infrastructure projects in open tenders, they are bidding pretty close to the subsidy (tariff, concession fee, whatever the bid factor/balancing item is) that will exactly cover their costs and no more. They have to work as hard as they can to push down their capital and operational costs, put together the best financing package, convince their lenders to lend at the lowest rate possible, design the best/cheapest systems, and generally do everything they can to bid as cheaply as possible while meeting the minimum service standards. To win, you’re really cutting close to the bone.
So, any tariff cut or unexpected increase in costs, even a small one, means the investors will have lost money.
Imagine you are having lunch with some friends, then the President turns up and says “Surprise! Everyone’s lunch today is free!” then walks out, leaving the restaurants to bear the cost of your free lunch. This is pretty much what is happening here.
The concessionaire agreed to provide a service and bid their tariff according to a particular revenue projection, and all of a sudden, they’re being told that they aren’t allowed to charge what it says they are allowed to in the contract. That’s just not fair.
It’s operationally disruptive
The government has instructed an operator to cut tariffs; how much cash have they got in the bank?
If they have optimised their system, they’ll have as much as they need for that month and not a rupiah more. If they have any excess cash, they should use it to pay off their debts or dividends to their shareholders. All of a sudden, they’re being told that they’re going to lose 25% of their revenues for two weeks with no notice, and the banks are all about to go on holiday.
If a particular toll road operator loses USD 1 million, that means they need to scramble around to find this extra USD 1 million so that they can pay their employees’ salaries and keep the lights on. It’s not a massive amount of money for them, but it’s not easy to mobilise at short notice.
Toll road operators will also need to figure out how to implement a tariff cut with no notice. Tariff adjustments are things that they only expect every 2 years according to a schedule, so they have time to print up new signs, update their computer systems, figure out how much of every denomination of cash they stick in each toll booth, and so on. They, most likely, aren’t set up to change tariffs at a moment’s notice for a 16 day period.
Finding cash and implementing a no-notice tariff cut are not insignificant operational disruptions. Dealing with them will take significant time from the senior management, and probably the lenders as well. The cost of these disruptions is not included in the USD 12 million figure I estimated above.
It sets (or reinforces) terrible regulatory precedent
By cutting tariffs like this for one year in Lebaran, Indonesia has now created an expectation on the part of bidders that they will do the same in future. In Indonesia, for the next couple of years, faced with the same projections of cost and revenues, bidders will bid, discounting their revenues by 1.1%, accounting for the expectation that the government will force them to cut their revenues. For our billion dollar toll road above, going forward in Indonesia, the cashflows in present value terms will now look like the below.
The government will have to pay another USD 10 million in subsidy to cover the cost of the expectation that they created by cutting tariffs like this.
So how much will this cost the government in the long-run?
The government has 5 toll road projects in the “prospective” category of BAPPENAS’s priority project list, with capital costs as follows:
Manado – Bitung – USD 353 million
Tanjung Priok Access – USD 612.50 million
Balikpapan – Samarinda – USD 1.2 billion
Cileunyi – Sumedang – Dawuan – USD 1015.8 million
Pandaan – Malang – USD 420 million
The total capital cost of these toll roads is USD 3.6 billion. Assuming a capex/opex split of 60/40 and that land acquisition cost will be borne by the government, the total net present cost of these toll roads to the private sector will be on the order of USD 6 billion. Assuming no VGF, 1.1% of revenues needed to cover these toll roads represents USD 66 million.
So, future bidders in the toll road sector will “price in” the expectation that the government will force them to cut their tariffs during Lebaran. This price will be passed through to government through requesting a higher subsidy, or paying a lower concession fee; or through to users by charging a higher tariff.
In addition to the USD 66 million, investors will look at a government that is willing to surprise them with multi-million dollar losses not envisioned in their contracts, and expect that there will be a few more surprises as well. To cover this expectation, they will need to build an even larger margin of safety. It is eminently plausible that the margin the investors will assign to this uncertainty will be on the order of USD 100 million dollars.
The broader impacts
The expectation of regulatory intervention applies outside the toll-road sector as well. A government that is happy to force toll road companies to cut their tariffs might force private water operators to freeze their tariffs, apply arcane leverage constraints to airlines, or dramatically change the venues through which they can sell their product.
A government that acts erratically in its regulation is a significant driver of the country risk premium that investors and lenders will apply when deciding how to value their products in Indonesia. This flows through to the cost of finance, which is a component of almost every good in the country pushing up costs to all consumers, and harming the competitiveness of Indonesia's firms, relative to those in countries where the government does not take actions like this.
So, what can they do?
The damage isn’t necessarily completely done. If the government compensates the toll road operators for the gap between the tariff they normally charge and the one they’re being forced to charge, that would mitigate a lot of the impact of the expectations of regulatory meddling.
Even if they don’t do that, they can still mitigate some of the poor expectations by the way they design their concession agreements going forward. All they need to do is build in the right to cut tariffs whenever they want, but make it clear that they must give reasonable notice, and that the government will meet the gap between their agreed tariff, and the tariff that the government may choose to impose.
It will be interesting to see how the next round of tenders proceeds following this announcement.