The Transport Policy Environment in Indonesia: Policy Framework and Regulatory Options from International Rail Reform Experience

Indonesia’s Pre-Reform Policy Framework State direction of rail transport; extensive State role in other sectors –Policy determined at senior levels supported by strong State planning authority –Transport Ministry both an implementing agency and policy determination body –Railways a department of a broader general directorate for land transport –Rail managers and workers employees of a governmental department (Perjan) –Technical regulation essentially internal departmental rules –Economic regulation unnecessary without multiple participants in rail sector

Prior to the 1990s many economies had a similar Transport Policy Environment to Indonesia, dominated by a single public rail carrier. Almost all, like Indonesia, have now entered a transition path to bring the benefits of private investment and market competition to the transport sector. This international experience is instructive…

International Experience in Railway Reform Transition Inevitable Controversies: –Liberalization of transport pricing –Income distribution effects –Corruption potential –Need for work force reduction vs. labor protection Changes in legal form alone insufficient to create market competitive rail service Private sector operation not certain success. May be undermined by: –Jurisdictional conflicts –Constraints on pricing or operating freedoms –Exaggerated promises to acquire franchise –Lost markets for original network

Transport Policy Transition for Rail Sector Positive Changes The Transport Ministry to rely more on SOEs, private sector and regional authorities to implement transport services Rail sector’s unique policy issues given greater recognition –Formation of DGR –Adoption of Law 23 (2007) on Railways Requirement for Railway Masterplan Vertical separation mandate Legally, railway given greater commercial independence –SOE conversion from Perjan to Perum to Persero under BUMN –Pricing freedom in freight and premium passenger services

Transport Policy Transition for Rail Sector Continuing Issues Role of DGR relative to rail operator(s) –Form and timing of establishing an Infrastructure Manager –Functions of Infrastructure Manager and DGR regarding access terms and charges –Form, functions and location of economic regulator (dispute resolution authority) Further steps toward rail sector privatization –Perjan to Perum to Persero under BUMN. Ordinary PT next? Exceptions to vertical separation

Regulatory Framework Status The DGR departmental structure provides a suitable structure for –Setting technical standards –Administering safety regulation –Certification of operators and similar functions Economic regulatory functions and structures remain wholly undeveloped –No decision on form of economic oversight/dispute resolution –Status of board or agency undetermined –Regulatory requirements for multiple operators on railway infrastructure largely unexplored

Regulatory Framework: International Experience Technical regulation and economic regulation must be separated –Necessary to avoid conflict of interest –Different expertise required Many organizational models for economic oversight: –Independent transport or railway-specific body (UK, other Europe, USA formerly) –Quasi-independent body under the transport ministry (USA currently, Greece, other Europe) –General public utility regulator (Germany, Latvia, other Europe) –Judicial body administrating competition law (Former Soviet Union, Canada, Mexico, much of Europe) Complaint-based, quasi-judicial systems are more efficient than interventionist and anticipatory economic oversight.

Rail Masterplan Options to Consider Focus DGR on –technical standards and regulation –government support to infrastructure –access charge approval Establish Economic Regulator as Dispute Resolution Agency within MOT –Functions too limited for wholly independent status –Model works well in US, some European countries –Absence of competition law judicial framework in Indonesia Adopt European Model of Access Regulation –Infrastructure manager responsible for annual network statement, access terms –DGR to approve access charge provisions –Dispute Resolution Agency to settle access disputes

Possible Structure in Indonesia? Transport Policy Economic regulation Accident Investigation Technical Regulation & Standards, PSO, Access Charges Access terms (Network Statement), capacity allocation

Cautions from International Experience Simpler models often most successful Multi-jurisdictional services at the regional-municipal level are challenging –National-regional-local jurisdictional conflicts can result in over- regulation –Conflicts in carrier priorities between inter-city and commuter- urban operations can adversely impact service In some cases, freight -passenger service separation is more productive than infrastructure-operations separation –Providers of both passenger and freight service typically under- support either passenger or freight –Transfer of commuter services to regional operators often successful

Cautions from International Experience Separation of rail infrastructure–operations rarely creates competition like highway transport model The former State railway typically remains dominant –Continues to carry majority of intercity rail traffic –While legally separate, remains closely affiliated with infrastructure manager The most successful third party operators are specialists serving narrowly defined markets –Freight haulers affiliated with major industries –Trans-national passenger services –Commuter services –Expedited trans-national freight

Cautions from International Experience Uniformity is the enemy of efficient solutions Multi-carrier access –Most appropriate for key multi-purpose rail corridors –Undermines value of franchise & discourages investment in new lines –Exclusive concessions are valid alternatives to open access as means of attracting private capital Municipal rail services –Must be adjusted to urban design, mix of public and private transport services –Municipalities may require different public-private partnership arrangements –Multiple rail operators generally not practical.

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