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.