Road Map for National Railway Institutional Development - 2007

8/7/2019 Road Map for National Railway Institutional Development - 2007

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ROAD MAP FOR NATIONAL RAILWAY

INSTITUTIONAL DEVELOPMENTT*)

Harun al-Rasyid S. LUBISAssociate ProfessorTransportation Research Group,Faculty of Civil and Environmental Engineering,

Insitut Teknologi BandungJl. Ganesha 10, Bandung 40132Tel./Facs +62-22-250 23 50, e-mail: [email protected]

Abstract: New features of institutional set up wereintroduced under the new Law number 23 / 2007 on

Railway. They are the involvements of local

government and the private sector participation (PPP)

in developing railway industry in the country.

Although Indonesian railway policy reform had been

initiated since 1991, where several stages of

improvement took place, nevertheless train servicesdecline, length of track in operation decline too. The

sector simply did not function as expected by the old

Law number 13 / 1992 on Railway. There has been a

slowdown in the policy implementations especially

since the Asian financial crisis in 1997 hit the country.

Governments policy reform as well as the state-

owned enterprise PT Kereta Api (Persero)s

restructuring agenda were failed and some key

elements halted.

This paper reports the recent developments of

Indonesian railway institutional development and its

underlying problems. As the practice of multi-operators is envisaged in the future, the necessary

changes in the institutional set up for Indonesian

railway will be discussed and potential PPP model

projects and modalities in rail sector are outlined.

It is argued that leaving the institutional and

governance matter unresolved, while carrying out a

business as usual rail infrastructure investment and

maintenance program, it will jeopardize the value for

money of every single investment made through the

state budget. In other words institutional resolution is

a pre-cursor to any rehabilitation or revitalization

agenda, if government wishes to pursue.

Key Words: public private partnerships, railway

restructuring, institutional development

1. SETTING THE SCENE

Although Indonesian railway reforms formally begunin 1996, they were in fact a part of a long history. Theeffort had been started since the early history of thecolonial era where private entities initiated to buildrailway lines to support trade and commerce

*) Similar articles were published in Journal of EasternAsia Society for Transportation Studies , 2007 and inInstitut Perkeretaapian Review, 1, 2008. This is animproved version.

development at that time. Later on, tightcompetition with road transportation andautomotive industry led the railway infrastructureand services decline significantly. Public policiesto maintain and improve the railway network andits service provisions had become a governmentagenda.

The railway restructuring has gone through variousstages, started with Djawatan Kereta Api (DKA),short after the Independence Day in 1945. Lateryears, changed to several names of publiccorporations, such as Perusahaan Negara KeretaApi (PNKA) and Perusahaan Jawatan (PJKA),which practiced as public services. In 1991, theorganization changed to a state-owned enterprise,Perusahaan Umum Kereta Api (PERUMKA)which aimed for commercial purposes, whilemaintained the obligation to provide publicservices.

The transformation from PJKA into PERUMKAwhich was conducted on January 2nd, 1991 wasknown as the first major step in Indonesian railwayrestructuring. The implementation of Law Number13/1992 on Railway influenced the efforts of therestructuring of the State Owned Companies(BUMN) which had functions as the provider andoperator of rail infrastructure as well as trainservices. As stated in Chapter 6 of the law, theimplementation of railway transport by thegovernment was delegated to a corporation, which

was established for the purpose according to theregulation.

With the implementation of Law Number 13/1992,part of the regulatory function was then indirectlyconducted by PERUMKA even though formallywas the duty and responsibility of the governmentin this case Ministry of Transportation -Directorate General of Land Transportation.

The second stage of the railway restructuring wasthe transformation of PERUMKA into PT. KeretaApi (Persero), a state owned enterprise, throughGovernment Regulation No. 19/1998. By this latest

conversion therefore full extent of limitedcompany principle was then exercised by PT.Kereta Api (Persero), as regulated in Law No. 1 /1995 on Limited Company and GovernmentRegulation No. 12 / 1998 on Persero Company.The objective of PT. Kereta Api (Persero) was toprovide high quality services that were competitiveand profitable to increase companys value (Article4 item (1) sub B. Government Regulation No. 12 /1998). This was supported by Article 1 Item (2)Government Regulation No. 12 / 1998 whichstated that all or at least 51% of the companysshares was owned by the State through direct

capital investment.

Now the policy reforms key componentsimplementation is underway, but at a very slow
mailto:[email protected]:[email protected]


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pace. This leave some fundamental problems to beresolved urgently, to mention a few, a desiredorganizational changes of PT. Kereta Api (Persero) inaccord with restructuring agenda halted and manystaffs resisted, under a limited state budget an agreedfinancing mechanism i.e. PSO, IMO and TAC1 hasnever been fully implemented according to the

regulation. These financial instruments hadspecifically been designed to contrast the ownerand/or regulatory role of government with themanagement and operations role of service providers.Problems often occur in the infrastructure investmentand or maintenance as governments programs clashedwith the maintenance tasks entrusted to PT. KeretaApi (Persero).

Under the old railway law government can functionboth as infrastructure operator as well as regulator.Under the new law, the government was supposed toplay regulatory functions including overseeing,

supervising and facilitating service providers througha strategy and policy making in order to guarantee fairbusinesses are exercised by all stakeholders.Government, however, may be appointed a duty to bea service provider when no private providers inexistence2. But to do so only through a temporarybusiness entity purposely created until the serviceeconomically can be commercialized3.

2. PRESENT CONDITION OF INDONESIAN

RAILWAY

Table 1 depicts the current operational data of PT.

Kereta Api (Persero). There are currently four regionaloperations i.e. Java, South Sumatera, West Sumateraand North Sumatera consisting 6,700 kms track. 4,000kms is in operation, while the rest 2,700 kms wereclosed due to the tight competition with roadtransport. This has attracted the attention of localgovernments to revitalize them in accordance with thenew Law Number 23 / 2007 on Railway. Table 1 alsoshows the traffic loads as well as revenue gained fromeach region.

The recent enactment of Law Number 23 / 2007 onRailway supersedes the Law Number. 13 / 1992 on

Railway. Two significant changes were made, thoseare the monopoly of PT Kereta Api (Persero)as the sole service provider has been abandoned andthe local governments may get involved in railwaydevelopment within their jurisdictions. As themonopoly privilege of PT Kereta Api (Persero) has

1PSO (public service obligation) is a compensation provided by thegovernment to service providers, the amount of which is defined bythe difference between the production cost and non commercialtariffs set by the government. IMO (infrastructure maintenance andoperation cost) is a compensation for the cost of maintaining andoperating the main infrastructure on behalf of the government. TAC

(track access charge) is a cost charged to the company for the use oftrack owned by the government.2Article 23 and 31, Law number 23/ 2007 on Railway.3Explanation of Article 23 and 31, Law number 23/ 2007 onRailway.

been discarded, other business entities includingprivate sectors are then welcomed to be involved inthe railway sector in the country. However, thismay not abruptly succeeded as the foundation forinviting private sector in railway is not ready yete.g. the institutional framework is still beingdeveloped, especially how private sectors can

participate in the existing main railway lines.

Under the new law, Government should championthe restructuring of the sole railway company (PTKereta Api). Given unfinished or haltedrestructuring agenda of PT. Kereta Api (Persero),this may lead to a dilemma in resolving its futureinstitutional set up. Moreover, as stated in theTransitional Chapter XVIII, Article 214 of Law 13/2007 at the latest three years after the law enactedthe future or a new entity of PT Kereta Api shouldcomply with the law, but before then Government

should take the lead in rehabilitating or improvingthe condition of the existing PT Kereta Api i.e. byconducting total audit, asset inventory, findingresolution to PSO, IMO & TAC and Past ServiceLiabilities of ex-civil servant during thePJKA/DoT era, finally setting an initial balancesheet of a new entity of PT. Kereta Api4. Thedilemma will occur especially in Javas 3000 kmrail operation, because the previous PT. KeretaApis restructuring agenda was decided to follow asoft unbundling through business units creation ordivisions. Some have been created such as rollingstock, training and property divisions; others are to

follow including passenger and freight transportdivisions as well as IMO division for trackmaintenance. But on the other hand it was publiclyimpressed that government intends to adopt a hardunbundling by institutionally separated theinfrastructure and rolling stocks management andoperations at least in Java island, as its networkcoverage was possible to do so.

The remaining rail networks located in Sumatra aregeographically separated in the north, west andsouth Sumatra. They are limited in coverage andmainly for freight transport. Under therestructuring agenda the three were alreadymanaged by regional divisions. Recently an effortto establish a special purpose vehicle to coaltransport in South Sumatra is envisagedparticularly directed by State Ministry of State-owned Enterprises. This aims at establishing a anew subsidiary company belong to state-ownedenterprises directly concerned to coal resourceutilization i.e. PT Bukit Asam as coal miner, PTKereta Api the freight transporter and PT.Perusahaan Listrik Negara state-owned electricitycompany as coal consumer. Given its

4Explanation of Article 214 of Law 23 / 2007 on Railway

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Figure 1 shows the previous Indonesian railwayinstitutional arrangement according to Law Number 13 /1992 on Railway. The role of government was toprovide strategy and policy. Two ministers wereappointed to supervise the railway activities in thecountry, Ministry of State-owned Enterprises as thefinancial and business auditor and Ministry of Transportmainly responsible for the technical matter and rules ofconduct. The state appointed a state-owned company,PT. Kereta Api (Persero) to become services providerand conduct rail infrastructure operation andmaintenance. Private companies could be part of thisstructure through a direct cooperation with PT Kereta

Api (Persero), although no core railway businesses hadever been cooperated so far.

The role of PT. Kereta Api (Persero) as the provider ofpublic services, which at the same time has to be able toaccumulate profit was very difficult in reality. Basically,it was quite contrary if one to make profit as well asprovide public services tasks at the same time. However,PT. Kereta Api (Persero) should play these two tasks.Therefore the basis for funding mechanism hadeventually been prepared, the IMO, PSO and TAC, see

Table 1 Track Length, traffic and

footnote 1) for their definitions. Although thefinancing concept is perfect with the intention toestablish clear roles and responsibilities betweenpublic (government) and corporation, however, havingimplemented this financial scheme for six years,practically it does not work as expected, as will beexplained later.

Figure 1 Railway institutional framework underLaw Number 13 / 1992 on Railway

JavaSouth

SumateraWest

SumateraNorth

Sumatera

Route-km 2944 649 202 463(16 km inoperation)

Track-km 3362 649 202 463

Traffic 2005 (milions) 14540 3650 0.036 0.498

(Pass-kms + tonne-kms)

% Freight 6 90 100 29Traffic density / route kms(thousand) 4938.9 5624.0 2.250 1.076

%Revenue 74 22 1 3

Indonesia Government (Strategy and Policy Maker)

Ministry of State-ownedEnterprises

(Financial Audit)

Ministry of Transport(Technical Audit)

PT Kereta Api (Persero)Services provider andInfrastructure operator

Private Companies ( onlythrough cooperationwith PT. Kereta Api )

TAC

IMO, PSO

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3. NATIONAL RAILWAY INSTITUTIONAL

DEVELOPMENT

3.1 What had been done? What are the

problems?

Figure 2 illustrates the mental map of causal effect of

rail policy making between two actors i.e. governmentand the corporation, PT. Kereta Api (Persero).Previous goals and policy reform at government levelas well as organizational changes program at thecorporate level were not succeeded to boost therailway industry in the country. Cash lacking at thecorporate level led production declined, inconsequence this made infrastructure and rolling stockobsolete too, revenue drops, staffs frustrated, and soon. Governments funding commitment was notdirectly resolved these problems, sometimes evenadded a burden to PT. Kereta Api (Persero). Board ofDirectors commitment to lead changes was resisted

by overburdened staffs. This vicious circle draggedthe industry close to a state of collapsing.

The governments roles previously were the owner,regulator and operator. This causes problems in thedetermination and policy implementation. Often attimes, the problems cannot be resolved thoroughly dueto conflict of interest. The financial schemeformulated in the form of PSO, IMO and TAC is notyet effective. This is because the formulation onlypaper-based theories. In practice, the fund provided bythe government is not enough. The lack of fund is thesubject of many factors such as the governmentslimited resource, organization conflict of interest andso on. In 2007 the policy on IMO was offset by TAC

i.e balance on the amount of more or less Rp 700billions or equivalent to US $ 70 millions. Thepolicy left problematic and accumulatedinfrastructure maintenance backlog, approximatelyamounting to Rp 6.5 billions or equivalent to US $650 thousands and US $ 500 thousands for rollingstock backlog.

However, under the new Law no 23/2007government cannot directly operate the railinfrastructure and/or services any longer, unless inthe absence of private operators. The governmentcan temporarily do so through a special purposevehicle or separate corporation. In this matter, thephrase of Law no 23 / 2007 is dilemmatic. PT.Kereta Api (Persero) is acknowledged as theincumbent rail infrastructure operator and/orservice provider, but for new institutionaldevelopment in the transitional period thegovernment can form a new or special purpose

company.

Re piastrukturisasi perkeretaaIndonesia Railway Restructuring

PemerintahKomitmen

This led to controversy as publicly impressed thatthe government wish to vertically or institutionallyseparated (hard unbundling) the existing railinfrastructure and services particularly in Java,while under the previous restructuring agenda ofthe incumbent operator i.e. PT Kereta Api(Persero) was decided to follow anorganizationally separated (soft unbundling)through a creation of business units (SBU).

Until recently, as stated in the Blue Print ofNational Railway, a Public Service Board (BLU)

Net

((PSO )

+IMO)-TAC

Pin

emeliharaanfrastruktur&

sarana

++

--

Cash flow

PT. Kereta Api(Persero)+ cost

+

-+

+

+

GovernmentsCommitment

+

+

Policy Reform

Company OrganizationChange

Production

Pressure

Layer 1Public InstitutionRestructuringNet

PSO, IMO, TAC

Government

PT KA (persero)

BoD sCommitment

Infrastructure &Rolling StockMaintenance

Layer 2RailwayCorporateRestructuring

Figure 2 The mental map of Indonesian railway problem

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which is integrated with the government or ministerialunit was thought and envisaged as an alternativetemporary body for the existing rail infrastructuremanagement and operations. But this is in conflictwith the Law no. 23/2007 as the body is supposed tobe a separate and dedicated corporation or companyspecially created for the purposes. As institutional and

governance matter is very crucial in managing the railbusinesses, this issue remains a political choice for thegovernment to decide in the near future. Leaving thisunclear, while carrying out a business as usual railinfrastructure investment and maintenance can surelyjeopardize the value for money of investment madethrough the state budget. In other words institutionalresolution should first be found as a pre-cursor to anyrehabilitation or revitalization agenda that governmentwishes to carry out, otherwise the program will neverbe accountable.

At the moment PT. Kereta Api (Persero) as the sole

railway operator has a full control in its arm length tomanage the entire rail transport matter, though not anauthority, as it is incumbent, surely still is in thetransition period. Such authority is shown in Figure 2,as PT. Kereta Api is the sole PSO and IMO receiverand TAC payer. Until recently problems repeatedlyoccur as the funds transfer is made in one accounting,this leads to complication in its allocation. Althoughthe contracts were separated, funds that are supposedto be utilized for infrastructure maintenance (IMO) orsubsidies to the economy class train (PSO), wereactually used by PT Kereta Api to pay wages, or forlocomotive and other rolling stocks procurement.

Surely, the governments or public side institutionaldevelopment is an important step to enhancegovernments role as the railway administrator. Twoyears ago the government had formed a DirectorateGeneral of Railway (DGR), upgraded from previouslyDirectorate of Railway. DGR consists of threedirectorates i.e. rolling stock and safety, infrastructureand operations. In its infancy, DGR still needs acompetent staffs to carry out its administrator andregulatory functions. To be more effective inmanaging the railway reform in the country, moreefficient resource management and capacity building

activities are bound to be necessary to support DGRsroles and responsibilities in the near future.

As illustrated in Figure 2, the restructuring is aimed attwo layers i.e. the government in policy reform layerand PT. Kereta Api (Persero) in operational layer. Thedevelopment in layer 1 is meant for the publicinstitutional development, this includes the RailwayDirectorate General organization development, andlater the Local Governments rail development unitsare subject to be developed and enhanced in thefuture.

The other goals of the restructuring are to open upparticipation from private sectors and localgovernments in nation-wide rail transport

development. The development in layer 2 is meantto develop the railway business institution. Now,the public only recognizes PT. Kereta Api(Persero) as the sole operator or service provider.This is traditionally acceptable because thecharacteristic of railway transportation typicallyimplicates on the emergence of a natural

monopoly. But introducing some degree ofcompetition to service providers are also crucial inorder to deliver more alternatives and betterservices to customers, at least in rail marketknown as competition for market, not in themarket.

Having mentioned those two layers one can readilyextend or pose question on how and when publicinstitution should function and structured, giventhe light of competition and investment climate inthe rail sector yet. Surely in the future, if newcomer for service providers grow in number, new

roles and institutional setting are need to bespecified in order to guarantee a good governanceconduct in rail business. This can be pursued bydelegating roles traditionally accumulated togovernmental institution or office to moreprofessional agencies, such as the creation ofgovernmental task or technical supporting unit(UPT) for a specific governments task andregulatory function, the regulatory body and/orcontracting agency, while keeping the strategy andpolicy maker role at the Directorate General.

3.2 Road Map for National RailwayInstitutional Development

Figure 3 depicts the current government policysuggestion under the Coordinating Ministry ofEconomics and Industry. Other sectors such oil andgas, toll road, telecommunication, electricity in away have adapted such institutional developmentaccordingly. The state-owned companies involvedin transport activities are still remote to adapt suchinstitutional scheme. Four entities are suggested toinclude strategy and policy maker i.e. thegovernment, independent regulatory body,

contracting authority that provide concessions tooperators, and the service provider or companiesright at the bottom box. Companies expect fair andimpartial treatment from the regulators inconducting the business. Within the railway sectorthe adaptation can be explained as follows.

Contracting Agency is required when the railwayoperation is open for the private sectors or LocalGovernments initiatives. The involvement of theprivate sector requires a contract admissionprocedures or concession awards from thegovernment. In order to avoid a complicationbetween the governments role with the other roleas regulator and policy maker, therefore the role of

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concession/contract provider must be performed by aseparate institution which is in this case a contractingagency. This agency is dependent as well asindependent from the Directorate General. Postconcession issues mainly the economic regulationsmatters during the operation period such as tariffs,competing environment, etc. are managed andsupervised by the independent regulatory body,explained later.

Contracting Agency will also regulate the joint

operation in the passenger/freight transport businessoperation. To attract private sector as well as LocalGovernments involved in rail transport development, afeasibility study needs to be conducted as well as thelikely business scheme arrangement towards risks andreturns of the investment to each party. The railwayinstitutional development should be formulated toenable the public sector to draw funds from a thirdparty to complement the limitation of governmentfunding.

Table 2. Roles and function of the Regulators

Policy and Strategy Facilitator/Overseer

(Directorate General)

Independent RegulatoryBody

(Economic Regulator)

ContractingAgency

(Concession Awarder)

Service Providers (State/Local Owned

Companies, Private

Figure 3Rail Sectors four institutional Functions

The tasks of the regulators are detailed in Table 2.Directorate General of Railway as the primeregulator focuses on strategy and policy setting,and develops and enforces the safety, health andenvironment regulations. The remaining roles andresponsibilities appointed to the DirectorateGeneral of Railway are listed in Table 2. Theregulatory body functions as post-concessioneconomic regulator after contracting agencyawarded the concession to service providers. Theregulatory body is dependent as well as

independent from the Directorate General. None ofthese issues is accommodated in the new law.

Different types of regulatory institution havevarying advantages and disadvantages. The mainproblem of central government department is thatthere will be a perceived lack of independence,dynamism and expertise. Particularly, it is likelythat party politics will become involved whenregulatory decisions are taken.

Directorate General of Railway Independent Regulatory Body

1. Develop strategy and policy and stands asquality, safety and environment regulator.

2. Develop railway system operation andprocedures, guidance and criteria, norms andstandards.

1. As the economic regulator IRB supervises businesspractices of service providers according to theconcession agreement made with contracting agency.

2. Regulate services according to procedures andtechnical standards.

3. Issue licenses for service providers(accreditations) and register assessors and certificateof competencies for individuals.(Note: Standards of competencies for accreditations

and certifications were delegated to professional

associations comprising board of certification andaccreditations)

3. Monitor and resolve conflict or dispute amongstservice providers and apply rewards and punishmentsmechanism accordingly.

4. Develop tariff setting procedure and mechanism

5. Supervise competitive behavior of service providersaccording to the law.

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It is for this reasons that the creation of independentregulatory agencies is generally regarded as essential(UNESCAP, 2001)

In attracting private sectors to be involved in the railindustry development, government or state functionshould be clearly defined. Two options are available

for government in order to be more focus onmanaging the PPP development i.e. by appointing anad-hoc task force or by assigning a special directorateto carry out the tasks. Idea to establish a PPP Nodewithin the Ministry of Transport (MoT) is part of anad-hoc basis that can be exercised temporarily.

Table 3 listed options of PPP institutional setting andallocation of responsibilities amongst parties. Threeprime tasks or responsibilities will govern activitiesfor each party i.e ownership, investment andmanagement/operation of services. Options A and Dare the most extreme cases. Option A, government

takes all responsibilities is no longer relevant at themoment and the future, except government intends toso on strategic grounds.

Option D, the other extreme, private entities take allthe responsibilities, again this is a very rare cases onlypossible if the rail market so promising and customersor demand is abundant.

For options B and C where governments to retain theownership role are common, and it is up to thegovernments to position or delegate other

responsibilities to private entities. In rail transport, ifthe market is to be differentiated in two categories i.e.economic (PSO) and commercial basis, for the PSOoption B is more appropriate option wheregovernments also take role in the investment andfinancing, while delegating management andoperation of the services to private entities5. PPPmodalities are also highlighted in Table 3, such asBOT is the most common on Option C, where marketis potential. In Option C, at least government caninvolve in the provision of the right of way of theinfrastructure. More options on modalities and railbusiness activities potential to be a PPP subject will be

elaborated in Section 4.

3.2.1 Directorate General of Railway

The governments role and function as railwayadministrator is appointed to the Ministry ofTransportation, in this case the Directorate General ofRailway (DGR). The institution has the role toformulate and implement the policy and technicalstandards in rail sector and stands as quality, safetyand environment regulator.

Recent evaluation on tasks, functions andorganizational structure of DGR led to a point of

5State-owned enterprises were here considered as private entities.

necessity to be more focus on resolving the safetyissue and establish a dedicated directorate ofRailway Safety, while keeping Directorate ofRolling Stocks in the structure (MoT, 2006). Plansand efforts to improve rail safety and the level ofservices were not new issue; it had been exercisedeven before the establishment of DGR. Normally

after every train accident, there always been a postaudit and came up with measures and procedure toimprove rail safety. Nevertheless, typical accidentssuch as derailments are repeatedly occurred again.It is expected the establishment of Railway SafetyDirectorate, DGR can focus on more strategicoriented policy to resolve rail safety issues whiledeveloping foundation and procedure for permitsand license requirements.

Some of the governments responsibilities as therailway administrator cannot be directly managedon desk, though still in the authority of DGR, such

as to guarantee a safety regulation safety inspectorsare bound to be required. The inspectors can beplaced regionally in terminals or stations and/or atworkshops or laboratories that will release thecertificates of inspections.

3.2.2 Independent Regulatory Body andContracting Authority

The administrative roles performed by governmentare stated in Law number 23 /2007, these includeregulation role, control and supervision. In realitythe implementation of the governments role as the

railway administrator has not yet been optimized; itis because the law does not describe specificallythe institutions responsibility for each of theadministration role. It leads to complicationsregarding the indistinctness of role of theinstitutions responsibility for the execution ofeach railway administration role. In the new LawNumber 23 / 2007 such regulatory and contractingauthorities still rest in the DGR, and noindependent regulatory function and separatecontracting agency or authorities were introducedin the new law. If it is kept unclear, these will leadto some problems in the future, include:

a. Government can have multiple roles of owner,regulator as well as operator.b. Higher level conflict of interestc. Bureaucracy hindrances in the railwaydevelopment or investment.

Therefore there is a necessity for policies toseparate the roles of the government as owner,regulator and operator. This responsibility divisioncan be made by re-allocating authorities performedby government organizations. This is particularlytrue for some immediate roles perceived to beurgently required to speed up the sector reform.The role of such organization can be an embryo or

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Table 3. Allocation of responsibilities of Public Private Partnership in rail sector


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the basis in establishing more permanent publicinstitutions for rail sector in the future.

Figure 4 depicts the road map that can be followed bygovernment in establishing the separation of railway

administration role onto specific or dedicatedorganizations or institutions.

The separation process will through several stages;Stage 1 is the integration among the roles of policymaker, regulator, assigned contractor/ agency andoperator, which is performed by one institution andPT. Kereta Api (Persero) as operator has the role asthe policy maker by setting objectives and direction tothe railway system development policy.

Contract qualification process to become railwayoperator has never been performed by PT. Kereta Api(Persero) which is the only railway operator in thecountry and established by the government. Thisbusiness mechanism had been abandoned.

Stage 2 is a more advanced stage. With theestablishment of Railway Directorate General, thepolicy maker is clearly performed by the government.The Directorate General has the role to set goals anddirection in railway development policy, producesnorms, procedure and standards. However, PT. KeretaApi (Persero) as the operator still has the role in

setting the direction of railway industry developmentand officials competence assignment is stillconducted by the operator. There still an overlappingtasks or areas exist amongst operators and regulator.This is undesirable in the railway sector reform.

Stage 3, as expected by Law 23/2007 on Railway, isan effort to separate the role of operator fromadministrator, which should have been carried out bythe government. The operator or service provider hasto manage and operate directly the services. Operatorcan also perform the role as the infrastructuremaintenance contractor, where at present is still under

the monopoly of one operator i.e. PT. Kereta Api(Persero). The task performed by Directorate General

of Railway (DGR) is to carry out the entireadministration role stated in the law. In the futurerole of DGR as the regulator and policy maker mustbe improved and focus on quality, safety andenvironment regulator or assurance. PT. Kereta Api(Persero) as the operator

only performs the management and operationsappointed by MoT, through DGR.

Stage 4 is the condition when multi-operator exists.Time will tell when this may happen. It is necessaryat this stage business processes are conducted byseparate institutions, as above explained anddiscussed. For example, a contracting agency isresponsible in signing a contract and concession toservice providers.

Operator

PolicyMakerPolicy Maker;

Regulator;Contracting Agency;

Operator

Policy Maker Regulator;Contracting

Agency

Operators

PolicyMaker

Operators

IndependentRegulator

Regulator;Contracting

Agency

Before Law 23/2007 on Railway enacted

ContractingAgency

Stage 1 Stage 2 Stage 3 Stage 4

As expected by Law 23/2007 on Railway

Figure 4 Road Map for Railway

If multi-operator exists then competition betweenoperators should be mediated and controlled, it is anecessity to establish an independent regulatorinstitution, standing as a economics or businessregulator. Meanwhile the Directorate General ofRailway stands as the institution that sets the norm,standards and procedures that enforce and supervisethe compliance of norms, standards and proceduresby the operators.

3.3 Options for Indonesia Railway

Restructuring

Under Law no 23/2007 on Railway, there are twooptions available for managing the existing railnetwork operation. First is to disclose opportunitiesfor private entities including and local government-owned company to operate railway transport (multioperators) is described in Figure 5. But PT. KeretaApi (Persero) remains conducting management andoperations of rail infrastructure, the so calleddominant integral operator, while other serviceproviders can cooperate with PT Kereta Api(Persero) to conduct potential business activities inrail sector. This option seems not preferred by the

government any longer, and in fact this was thesetting under the previous law.

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The second option is the separation of infrastructuremanagement and operations with the train operator,the so called hard unbundling. The new infrastructureinstitution may be in the form of Perum or Persero,while the incumbent PT Kereta Api becomes the trainoperator only. This is depicted in Figure 6. In thisoption the principal of negotiation or open access isintroduced to train operators or infrastructure users

through a TAC. PT. Kereta Api (Persero) only acts asthe transport or train operator just like intercitycoaches or buses. The new infrastructure institutionwill receive and manage TAC collection from thetransport or train operators. There is an expectationfrom the incumbent PT Kereta Api, if this option isopted by the government, then the existing staff,workers and labour in the infrastructure organizationthat left in PT Kereta Api should be in priority berecruited by the government and employed in the newinfrastructure institution.

Indonesia Government (Policy Maker)

Ministry of State-Owned

Company

Ministry of Transport

(or Local GovernmentDishub)

PT Kereta Api (Persero)Operator, Infrastructure

Contractor/Operator

TACIMO

Private Companies,Local Government-Owned Companies

Multi Operators

PSO

Figure 5Option 1 Multi operators

Indonesia Government (Policy Maker)

State Owned CompanyMinistry (Owner)

Ministry of Transport(or Local Government

Dishub)

PT Kereta Api (Persero)As Train operator only

TAC

IMO

Private Companies &Local Government-Owned Companies

Multi Operators

PSO

New InfrastructureOperator/Institution;

Train Schedule Setter

Nego, OpenAccess

Figure 6.Option 2 Multi operator and open access

Each option has its own advantages and drawbacks.Until recently, PT. Kereta Api (Persero) is stillcarrying out the corporate restructuring. Severalimportant business lines have been formed intodivisions; there are Jabodetabek Division, RollingStock Division, Property Division and TrainingDivision. It was planned in 2008 that PT. Kereta Api(Persero) is preparing the establishment of Passenger

Transport Division, Freight Division and IMODivision (infrastructure). However, with theenactment of Law 23 /2007 on Railway PT. KeretaApi (Persero) is now subject to be audited in totalityby the government, at the latest in three years afterthe law enacted. Such a complication anduncertainty of reform agenda must be settled andharmonized in the immediate future.

3.4 Degree of competition and private

ownership

Figure 7 illustrates the railway institutional set up

showing the spectrum of private ownership in therailway businesses and the degree of competition

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is suitable to offer a service to cope with the local intratrip demands. Sometimes this segmentation involvingthe separation of passenger and freight transport intoseveral sub-networks or the freight transport provideror company may pay an infrastructure charges whileusing tracks that belong to different companies. Such

a regionalization may be chosen for area having amassive and connected rail infrastructure such as inJava.

With regards to PPP in rail sub-sector, it is widelyknown that the role of government is vital at theplanning stage such as preparing the initial feasibilitystudy; by then type of governments supports can bespecified more precisely to be fruitful in the projectimplementation. All the above mentioned optionsfor Indonesian railway restructuring, when comes to afinal choice the decisions should be based oncomprehensive analyses, regarding the cost and

benefits of each option.

4. Future Agenda for Public Private Partnership

in Rail Sector

Involvement of private sector in railway operation indeveloping countries was initially started in Argentinasince private operator took over freight transport onArgentinas Rosario to Bahia Blanca railway line in1991, private participation has grown significantly. Bythe end of 1997, the government of fourteendeveloping countries had transferred varying degrees

of responsibility for railway operation to the privatesector. Concessions have been the most common formof private participation in rail sector. License forprivate sector access to the existing track withmanagement and operation responsibilities expectedto improve the efficiency of railway network andmanagement so the railways would be moreprofitable10.

Recently, in Indonesia there have been discussions inprivate involvement in railway industry. There will bea wide possibility for interested private sector to get into the market after the arrival of new legislation in

railway that abandoned governments monopoly in theindustry. By completing set procedures, a privatecompany can use the existing railway tracks.However, this issue was not totally new, privateparticipation had been provided possibility to enter themarket even before the new legislation passed. Yet, upuntil now, there have not been any form of directinvestment by private sector nor partnership betweenpublic and private sectors. The fact that railwaybusiness is designed to be more on public servicesthen profit-making business has kept private sector tostay out the market.

10Private Participation in the Rail Sector Recent Trends : The

World Bank Group

One of the causes for PT Kereta Api had experienceddifficult times was the social roles which they havebeen playing all these years. High installment,maintenance and operation costs, added by pressuresfrom road and air transportations make railway

industry to be not so promising business for profitseeker such as private sectors. The finishing ofCipularang toll road connecting Bandung to Jakartaand the lower air transportation fares (which givesexceptional advantage on travel time) for longdistance travels are examples of tight competitionfaced by railway business, not to mention once theJakarta Surabaya toll road is ready. Such burdenswould be one of the reasons for private sector to keepavoiding the market even though the door is alreadyopen for them to enter the market. Moreover, privatesectors need a predictability as well as stability of therail markets. Any effective partnerships between

Public and Private sectors to exploit resourcesavailable in providing public services whileoptimizing any possible profitable areas (upper classservices) have to be studied and explored.

The foregoing discussions lead us to select potentialprojects to be targeted as model projects for publicand private partnership. Participation of private sectorin railway restructuring can be in a form ofpartnership with the related government body. Table 5shows various potential types of PublicPrivatePartnership that can be formed in relation to therailway sub-sector. Project types below are detailed

with their each characteristic and structure optionsavailable. These various project types come from theones with highly investment requirement such asUrban Mass Transit and Track Right of Way to thosewhich required lower investment cost such as Light Rail System and Bus ways and Urban Rail.

Inter-City Rail Links, Specific Links to airport orports and High Speed Inter-City Trains would providepotential benefits, especially in freight transport.However, government subsidy on train services maybe required and in the development stages,government can take role in land acquisition and

station redevelopment, for examples.

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Table 4 Options for Indonesian Railway Restructuring

Market / areaType of

RestructuringInstitutions

Funding and

modalitiesNote

Commuter &

urban Railway;

Spin-off

(subsidiary

companies)

Integration ofInfrastructure andRolling Stockmanagement andoperations (IR)

PT / PerumEntitle toreceive subsidy;ROT ; BOT

Local Governments involves inmanaging commuter-urbantrains and establish new serviceprovider and/or BUMD.

Spin-off Existing lines, andLocal Governments maydevelop new rail track andestablish new service providerand/or BUMD throughconcessions.

Sumatra

Railway;

SeparatedIR PT/Perum ROT ; BOT

PT forcommercialpassengertransport

Pay TAC toPerumInfrastructure

Perum for

economypassengertransport

Receive PSOand pay TAC

PT for freightPay TAC toPerumInfrastructure

Open market and more directcompetition

I R (directcompetition/Multi operators)

ReceiveTAC from trainserviceproviders

ReceiveGovernmentobligation

Responsible for therailway infrastructuremaintenance and operation

Government obligation =(1-f) *(depreciation + IMO)

Perum forInfrastrucutemanagement andoperation unit

Java Railway

Central and Local Governmentestablishes railway companiesand cooperated with privatesector develops non-coreactivities.

1 or 2 up to 3 IRs(regionalization /indirectcompetition)

PT / Perum forEast, Central andWest JavaExploitation, ORJava North andSouth Region

ReceiveGovernmentobligation

Track not in

operation

(new companies)

IR PT / Perum BOT

Local Government may re-opens the abandoned rail track,and form a new companyunder BUMDs and cooperatedwith private sector developsnon-core activities

PT for freight andcommercial

passengertransport

BOTGreenfield

projects(new companies)

In Kalimantan,

Sulawesi and

Papua

IR

Perum foreconomypassengertransport

Receive PSOand Pay TAC

With the central government

supports, Local Governmentsmay involve in managing theprojects and establish newservice provider and/or BUMD.

Note: PT : Perusahaan Terbatas (Limited Corporation) ; Perum : Perusahaan Umum (Public Services Company)IR: Integration of Infrastructure and Rolling Stock management/operations under one institution.I-R: Institutional Separation of Infrastructure and rolling stock management/operations.

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Table 5 Potential Forms of PPP in Relation to the Railway Sub-Sector

Project Type CharacteristicsPSP Structure

Options

1. Inter-City Rail

Links/SpecificLinks

- In concept, could be developed as PSP ventures,

but often magnitude of costs, particularly for track andstations undermines commercial and financialviability.- Needs significant passenger and (fast) freight trackto generate sufficient revenues to be viable.- Few successful precedents internationally.- Elements of rail-link can be undertaken as PSP.- Airport Rail link

(i) Concession

(ii) BOT(iii)Governme

nt

Specific projects will

have good potentialespecially freight.. Intercity possibly withsubsidy and/or stationredevelopment

2. High SpeedInter-City Trains

- Provided demand from passengers and freight(fast) sufficient could be developed as PSP.- Access and availability of high-speed track andtrain control required.- Some regulation of service required.

- Some successful international precedents.

(i) BOT(ii) Concession

As above

3. Urban MassTransit

- High capital investment, particularly in track,stations, and tunnels.- High passenger demand required to achieveeconomic viability.- Invariably financially non-viable: public subsidyneeded.- Project approval based on economic / socialbenefits.- Construction usually complex.- Revenue forecasts speculative at best.

(i) Government(ii) BOT ofparts

If part subsidized orthere are commercialopportunities

- Some characteristics of commercial viability cansometimes be achieved if project has to meet

equipment cost recovery, but not infrastructure.

4. Light-RailSystem and Bus-

(i)Governme

nt(ii) Concession(iii) BOT

Potential

ways and UrbanRail

- Lower investment costs than mass transit: fundingcommitment less onerous.- Lower passenger throughput possible than masstransit.- Property potential lower than for mass transit.- Many international precedents recently, althoughBOT viability often in doubt.- Could be better implemented as concessions.- Urban rail needs system approach and often toodiffuse for PSP except as a system.

5. Freight

Terminals, InlandTerminals, and

MultimodalTerminals

- PSP potentially feasible, it traffic / revenues can be

assured.- Supporting infrastructure links essential, e.g. road /rail.- Primarily property development in concept.

(i)

Government(ii) Concession(iii) BOT

- Potential for developing associated industries andindustrial generation;- Free-zone potential.- Operators often net financially strong enough toprovide equity for essential infrastructure.- Needs to be large enough investment to justifyBOT / concession.

Potential

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Table 5 (Continued)

6. FreightOperations

(i) Government Only in conjunctionwith infrastructure.

- Often Government operated initially, but witheffective commercialization and responsive railsystem to match a degree, if not total,privatization can ensue once the business base has

been established.

(ii) Concession

7. Passenger: Private/PPP/Government

Those with volumeof traffic andcommercialopportunities willhave potential

- Primarily real estate projects supportinginfrastructure developments.- Terminals

- Stations - Free access normal: any potential revenuestream diffuse.- PSP could only apply if a significant numberof passengers were dedicated to particular route,e.g. a High-Speed Rail Link.- Some retail and restaurant services can befranchised.

8. Rolling stock: (i) BOT Only in conjunctionwith infrastructure

- If a significant dedicated passenger or freightdemand can be established, PSP can be applied toeither passenger or freight rolling stock andengines, e.g. High-Speed Rail Link or iron ore /coal / cement trains.

- Passenger (ii) Concession- Freight and

Engines(iii) Government

- Access to track needs to be assured.

9. Track Right ofWay

Government Low- High investment cost with long paybackperiod.- Availability and quality/safety needs closeregulation.- Environmental issues need to be addressed.- On high density routes could be subsequently

operated and maintained under PSP or fullprivatization.

10. Train ControlSignaling

Government Conventionally lowpotential

- Usually closely associated with track and itsinstitutional structures.

11. TrackMaintenance and

Government Conventionally lowpotential

- Often Government initially, but potential forPSP if the service and its specifications can bedefined.Equipment

Maintenance - International precedent recently for KPS.- Regulatory Body required.

12. Training Private/Government Could be contractedout- Initially Government - sponsored, but withgrowth of experienced PSP operators this activitycould be assumed by the private sector.

13. Ticketing (i) Government Possible potential- As for rail equipment, there is potential forPSP on high-density routes. (ii) BOT- The more sophisticated the service in terms ofquality, the greater the need for hi-tech ticketingsystem.- Inter-modal ticketing system could be ownedand operated under PSP, provided service andregulatory regime defined.

Sources: PPITA-MOT Consultants (2006) & Private Sector Participation in the Transport Sector Project, GIBB Asia in association with PT Deserco

Development Services (Indonesia) and Coudert Brothers (USA), Ministry of Communications, ADB TA No. 2527-INO, 199

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Obermauer, A (2001). National Railway Reform inJapan and EU, Evaluation of Institusioanl Changes,Japan Railway & Transport Review 29, December2001

UN Economic and Social Commission for Asia and

The Pacific (2003).The Restructuring of Railways.United Nations, New York

UN Economic and Social Commission for Asia andPacific (2001). The Economic Regulation ofTransport Infrastructure and Facilities and

Services: Principles and Issue. United Nations, NewYork.

The Government of Indonesia (1992). Law Number13 / 1992 on Railway

The Government of Indonesia (2007). Law Number

23 / 2007 on Railway

PT. LAPI ITB (2005) Masterplan of IndonesiaRailway Development, Final Report., PT Kereta Api(Persero)

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Road Map for National Railway Institutional Development - 2007

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