Special Railways Phase III Proposed approach to regulatory changes

Jakarta 16 May 2011

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Overview of IndII Special Railway Program

1. Identify need for changes in rail sector regulations to encourage private sector investment (Phase I – early 2010)

2. Identify specific policy and regulatory changes needed to achieve desired results (Phase II – late 2010)

3. Assist GoI to develop and implement regulatory reforms (Phase III – April to June 2011).

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Key Objectives of Phase III

1. Clarify and improve current Special Railway provisions through a draft Ministerial Regulation (Permen)

2. Expand railway investment opportunities through targeted amendments to existing Government Regulations (PP 56/2009 and PP 72/2009)

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Timing of Phase III

1. Initial term sheets submitted on 21 April 2011

2. Inception Report finalized on 26 April 2011

3. Draft regulatory proposals submitted on 13 May 2011

4. Final draft regulatory proposals to be submitted by 15 June 2011

5. Final Technical Report due by late June

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The Main Challenges

1. Lack of clarity over who can operate a special railway

2. Restrictions on the scope of special railways

3. Uncertainty over interconnection

4. Need for public tender under the PPP process

5. Complexity of licensing system

6. Lack of coordination between special railways and other regulatory licensing schemes

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The Main Constraints

1. Lack of clarity over who can operate a special railway

This affects both the willingness of investors to invest and the willingness of administrators to issue licenses

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The Main Constraints

2. Restrictions on the scope of special railways

The ‘point to point’ rule appears to restrict railways from serving intermediate customers or terminals

The ‘one customer’ rule appears to prevent a special railway from serving a group of similar industries

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The Main Constraints

3. Uncertainty over interconnection

There is concern that if a special railway connects to another special railway or to a public railway, the rights of the investor may be compromised. This discourages the creation of efficient railway networks.

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The Main Constraints

4. The need for tenders under the PPP process

Private sector interests are discouraged from promoting railways because they need to be tendered under the PPP provisions.

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The Main Constraints

5. Complexity of the licensing system

The process of getting all the required licences appears overly complex and time consuming

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The Main Constraints

6. Lack of coordination between special railways and other regulatory licensing schemes

Proper linkages between special railway licensing and other relevant licensing schemes (e.g., mining, agriculture) must be put in place to avoid delays or inconsistent results

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Proposed Solutions

A new Permen will clarify the Railway Law and the existing Government Regulations (PP 56 and PP 72)

Some minor changes to existing government regulations are also desirable but not strictly necessary to implement the proposed Permen

No changes to the Railway Law are needed – all of the proposed regulations are consistent with the Railway Law

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We propose that the Permen describe more precisely the permitted relationship between the operator and the business it serves

It is suggested that the Permen require the main business to have a controlling interest in, or be under common control with, the operator

Control can be defined to include ownership of a majority of the voting shares or the ability to appoint or remove a majority of the directors of a company

1. Lack of clarity as to who can operate a Special Railway

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2. Restrictions to the scope of the railway

We propose three solutions to this issue

defining client to permit a consortium of users

defining rules for interconnection

relaxing the point-to-point rule

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Definition of Client

Define Special Railway client to include a consortium of businesses, essentially allowing them to form and operate a common special railway serving their respective businesses.

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Defining the interconnect rules

Define interconnection rules under Article 374 of PP 56 to enable several special railway operators (each serving their respective client) to share infrastructure and rolling stock without losing the status of special railway

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Amending the point to point rule

Amend article 350 of PP 56/2009 to relax existing ‘point-to-point’ restrictions so that several terminal points can be served (so long as such service remains related to the client’s main business)

This would require an amendment to PP 56/2009

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3. What happens if railways interconnect

For the most part, we can define what happens in a Permen.

Interconnection should not affect the status of a special railway (see previous comments on Article 374 of PP 56/2009). However, an amendment to Article 161(3) of PP 72/2009 would also be useful to eliminate any confusion on this point.

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What happens if railways interconnect

We propose that an interconnection agreement should allow the first operator to:

– access the infrastructure of the other operator for the purpose of providing services in support of the first operator’s client

– arrange for the other operator (if it is a public operator) to provide services in support of the first operator’s client

– grant the other operator access to the first operator’s infrastructure for any purpose consistent with the other operator’s business

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4. The need for tender under the PPP process

Concern about the need to use a PPP process (with its requirement for the rail concession to be tendered) arises because this is seen as the only way of serving multiple customers

This restriction can be loosened by allowing special railways to interconnect and by allowing a single special railway to serve a consortium of businesses

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5. Complexity of the licensing system

The procedures for obtaining licences are overly complex

We think they can be simplified and streamlined without reducing their effectiveness or limiting regional autonomy

Much of this simplification can be done through a Permen, though minor amendments to PP 56/2009 would also be desirable.

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Proposals to Simplify the licensing system

Planning issues should be addressed and resolved at in-principle approval stage (not later)

Reviews by various levels of government should be coordinated and conducted simultaneously to avoid delays and inconsistent decisions

Operator should be able to ‘pre-qualify’ itself during construction stage to ensure that operating permit will be issued later, subject only to meeting clear conditions

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6. Coordination between special railways and other regulatory licensing schemes

Proposed reforms includes option for special railway client to use an affiliate as operator (to facilitate financing)

Restrictions on affiliated transactions in certain industries (e.g., mining) must be taken into account

If special railway licensee must also obtain other licenses, proper coordination among relevant agencies must be ensured to avoid delays and inconsistent results

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Conclusions

The objective of increased private sector involvement is not being achieved because of a number of constraints

We believe these constraints can effectively be addressed through regulatory provisions within the current Railway Law

Most can be achieved through a new Permen, though targeted amendments of the existing PP 56/2009 and PP 72/2009 would also be desirable.

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The way forward

Term sheets – set out the broad principles for drafting the Permen and amendments to PP 56/2009 and PP 72/2009

Draft Permen and Amendments to PPs – the consultant team’s initial proposal for reform, based on the term sheets and initial discussions with MoT

Working group – established to coordinate government input to the process and achieve broad consensus

Close liaison – between our legal team and the MoT