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The government finally implemented an average 20 percent toll
increase on 13 turnpikes Tuesday. This is consistent with a 2004
regulation that requires toll adjustments to be carried out every two
years based on the average inflation rate in the relevant region.
Despite criticism, the government has little choice but to hike tolls
in order to assuage turnpike investors and attract new investors. The
development of tollways has been an integral part of the government's
agenda in recent years. But only a few investment deals have been
clinched so far.
The complexity of land acquisition problems and the failure to
integrate expressways with the existing public road network represent
major challenges, and have resulted in delays in the construction of
many proposed tollways.
There is currently no government masterplan for integrating the
national highway network with the tollway network.
Given all these complexities, the government would do well to look at
the available transportation alternatives.
Let's take a look abroad. For the third time this year, billionaire
investor Warren Buffett's Berkshire Hathaway holding company has
reportedly boosted its stake in railroad stocks. Buffett once said that
the railroad business would never be sensational, yet its prospects
have improved immensely.
Why is Warren Buffett so interested in the railroad industry?
Despite the large amounts of capital needed for the maintenance and
expansion of railroads, Buffet sees the railroad industry as having a
competitive advantage, as the U.S. has huge quantities of freight that
need to be sent across the country.
The prevailing consensus says that the favorable uptrends in the
transportation of people, major commodities (coal, oil, cement),
containers and finished goods from producers to consumers will continue.
Furthermore, rising fuel prices will affect bus and truck operators
more than the railroads. Hence, rail travel will increase in importance
as it becomes a more efficient method of transporting people and
freight across the country.
In this regard, investing in railroads and related stocks is worth
considering. But do Buffett's actions indicate that investing in
Indonesian railroads is worth considering?
The railroads in Java and Sumatra currently have a total length of
6,529 km, but only 4,692 km (around 72 percent) were in operation as of
the end of June 2007.
In Java, passenger traffic is much more important than freight traffic.
But in West and South Sumatra, trains are primarily used to haul coal
to the ports or cement factories.
The current legislation stipulates that the Indonesian railroads be
managed by state-owned operator PT Kereta Api Indonesia. The barriers
to entry in the railroad industry in Indonesia are incredibly high, as
it is highly regulated and requires massive capital expenditure,
although less than the construction of expressways.
Railroads also require less land compared to expressways.
Although the safety record of Indonesian railroads in recent years
leaves a lot to be desired, rail travel provides many advantages
compared to expressways. As a mass transportation mode, trains can be
used by all segments of society.
Meanwhile, commuter services could be expanded so as to ease traffic
and pollution in major urban areas where the roads are clogged by cars,
motorcycles and ageing, smoke-belching buses.
Indonesia's growing economy, particularly in Java and Sumatra, results
in the need to transport large quantities of goods from the ports to
locations throughout these islands.
Due to the government's budgetary constraints, new lines are unlikely
to be laid anytime soon. Hence, the government needs to open the doors
to private and overseas investors to start developing the Indonesian
railroad network.
New investment could be used to reopen abandoned lines, double-tracking
projects (which may not necessarily require land acquisition), the
procurement of more locomotives and rolling stock, and the construction
of new lines.
Regardless of what Buffett sees in the railroads, it will be somewhat
surprising if the Indonesian railroad industry, which for so many years
has been viewed as tired and uninspiring, actually becomes an appealing
investment target.
However, if investors can be convinced that substantial improvements in
the Indonesian railroad industry are forthcoming, then the outlook for
the industry, as well as the sectors that directly benefit from it,
such as coal, cement and oil, would become more appetizing.
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