In mid-November 2013 Ibu Emma Sri Martini, the Chief Executive Officer of PT Sarana Multi Infrastruktur (SMI), provided some additional information on the SHIA Rail Link project. SMI is the Indonesian state-owned company that has been charged with retaining the experts to prepare the feasibility study. SMI will also conduct the project tender. Ibu Emma's comments suggest that the SHIA Rail Link project is still in its pre-feasibility study stage, but that SMI believes that study will be completed in Q1 2014 and that SMI will offer the project through competitive tender to be held in Q1 2014. If correct, this would suggest that potential consortium members may now be seeking to establish relationships with one another.
However, for several reasons we believe the schedule described by SMI may be ambitious.
We note that public statements from a senior Transport Ministry official made at the end of October 2013 indicated that the pre-feasibility study is being finalized. A news report from early September 2013 quoted Ibu Emma as saying that the pre-feasibility study had been completed, but was under review at the Transport Ministry. This review process is of uncertain duration and may lead to additions or changes suggested to SMI, which may then require additional time for the expert team to prepare and for the Transport Ministry to review the revised pre-feasibility study. Further, the timeline set out in the 2013 PPP Book (just published by the National Development Planning Agency on the 18th of November) indicates that the pre-qualification phase of the competitive tender may not take place until the second half of 2014, with bidding and evaluation taking place in the first half of 2015.
Moreover, we believe it will be difficult, although not impossible, for the Transport Ministry and SMI to execute several essential steps in project preparation between now and the end of Q1 2014. These steps relate to viability gap funding (VGF), land acquisition, route selection and fare levels.
We expect that the capital expenditure budget of the SHIA Rail Link project is likely to require material government support by way of the Government's VGF. The VGF regulation is relatively new and untested, but is generally understood to limit VGF funding to no more than 50% of capex, and not allow for any operating subsidy. We expect that the VGF proposal will be considered very carefully by both the Transport Ministry and the Finance Ministry, and may require approval as part of the state budget process. (We hope to confirm information on this approval process shortly.)
In theory the SHIA Rail Link project, like all other Indonesian PPP infrastructure projects, should not be offered until at least 75% of the land required for it has been obtained and paid for, and should be eligible to utilize funding provided by the Government's land acquisition fund and/or land revolving fund for this purpose. Like the VGF funding, these land funds are relatively untested.
In late October 2013 a SMI representative advised that the Transport Ministry had not yet determined the final route for the SHIA Rail Link project. Naturally this important question must be answered before land acquisition can proceed.
Finally, an SMI representative further stated in late October 2013 that SMI was currently working out the appropriate fares to be charged to SHIA Rail Link users. This crucial question directly impacts on the attractiveness of the project's operating model to operators, owners and financiers, as does the related question of the regime for tariff adjustment over the life of the project. Tariff levels and adjustment mechanisms will also directly impact the level of operating subsidy, if any, to be offered to the project by local or national government.
In addition to considering the pre-feasibility study and the related issues mentioned above, prior to the project tender the Transport Ministry and any funding support providers will need to carefully review, and in our experience can be expected to extensively comment on, project documentation offered in the tender.
Most importantly, these documents would include the form of concession grant agreement, the project's fundamental asset for funding purposes. This agreement is the source of owner's rights to a long-term revenue stream on which financiers will rely. Additionally, these documents may include the form of tripartite agreement, a document that is central to bankability. In this agreement the project company will provide, and the government concession grantor will permit, financier step-in and other protective rights lenders need to assure they can act to save the concession and the revenues under it to be used to repay them if the project encounters troubles during its long life.