Airport development in Indonesia: the prospects and the obstacles (Part I)
Julian Smith, Director at PT PricewaterhouseCoopers Indonesia Advisory, summarises the current status and plans for Indonesia’s airports and identifies the actions the Government needs to take to secure significant foreign investment to upgrade the facilities in line with the needs of the economy.
Civil aviation has been growing fast in Indonesia in line with the economy. From 2012-2016, the number of domestic flights grew on average by 5.2% per annum and the number of international flights by 4.4%. The number of aircraft operated by the five biggest Indonesian airlines grew from 331 in 2013 to 539 in 2017. Consequently, almost all of Indonesia’s major airports are operating in excess of their design capacity.
Current plans
The Government has plans to boost investment in tourism by creating “Ten new Balis”, which will generate further demand in addition to the needs of the underlying economy and the growing disposable income of a growing and more affluent middle class. The Government has built new airports in Silangit (North Sumatera), Letung (Anambas), Tojo Una-Una (Central Sulawesi) and Maratua (Derawan) in the last five years and also plans to build five more new airports across the country (which will increase demand on the existing hubs at Jakarta, Surabaya and Denpasar). There are plans in place to expand most of the major airports operated by Angkasa Pura (AP) I and II but funds have not been identified to enable all of these plans to be implemented. The National Mid-Term Development Plan 2015-2019 also targets massive investment in other sectors and assumes that 36.5% of the total will be financed by the private sector. Since airports are much more suitable for private finance than many other areas such as sanitation or education, and many of the projects are revenue generating and financially viable, it is essential that they be financed by private sector investors where possible. The application of the profit motive can at the same time bring about a significant improvement in the quality of passenger service and the level of safety.
Current industry structure
Almost all airports in Indonesia are owned by the Government. 26 of the 27 busiest are operated by state-owned enterprises (“SOEs”), AP I and II, under concessions from the Ministry of Transport (MOT). Batam Airport, a major domestic regional hub, is an exception, being operated by the Batam International Free Zone Authority (BIFZA), which is a unit of the Ministry of Finance. The 211 other public airports in Indonesia are mainly operated by units of the Ministry of Transport, though the MOT recently announced that management of some of these would be transferred to AP I and II to release funds for its construction programme.
Options for financing new airports
So far all new airports and expansions, including Terminal 3 at Soekarno-Hatta, have been funded directly by public money, mainly through MoT, API or APII. The construction of Kertajati airport in West Java has been funded by the Provincial Government (but so far has only one scheduled daily flight). The main exceptions have been in Denpasar, Bali, where the landside facilities are operated under a management arrangement with GVK of India, and Bintan, where a private group, Salim Group, is financing and building a new tourist airport which will be operated by AP II.
The current Minister of Transport has expressed a desire to attract international private investment to reduce the burden on the state budget, but so far this has not occurred. The National Mid-Term Development Plan 2015-2019 identifies ten new airports to be developed through Public-Private Partnerships (“PPPs”) and the MOT recently increased that to 15, though the details have not been announced. AP I and II have said they will involve the private sector in management of some of their airports under a “Joint Operation” or “B2B” scheme and announcements from AP I and II are not always aligned with those from the MOT The MOT carried out a market sounding in 2015 and concluded that the private sector was not interested in the PPPs but it now seems correctly to have reconsidered this conclusion.
Currently the Final Business Case for a PPP for the expansion of Komodo Airport is being developed by Indonesia Infrastructure Guarantee Fund (“IIGF”). The Government expects to tender the project in 2018.
At the same time, BIFZA has completed a Pre-feasibility Study for a PPP for the expansion of Batam Airport as part of its plans to develop the free zone as an international and domestic logistics hub and this project is expected to come to the market soon.
PT Gudang Garam Tbk has expressed interest to build a new airport in Kediri, Central Java under a PPP scheme. MoT is currently reviewing the proposal and KPPIP has proposed to include Kediri Airport in the list of National Strategic Projects.
In parallel, the Government’s Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) has developed a new approach, called “Limited Concession Scheme” (LCS) as a method for procuring new private investment in the expansion of existing airports and also releasing cash for recycling into other projects. It is planned to apply this scheme to the airports at Medan and Lombok currently operated by AP I and AP II respectively, but the requisite Presidential Decree has not yet been issued.
However, given the great need for new airport capacity, progress seems slow and piecemeal with many announcements but no actual tenders being launched. In contrast, the Philippines, with a similar economic profile and market need signed a PPP for the development of Mactan-Cebu International Airport in 2015, with four more PPP projects in the pipeline.