Changing Trains

Every year, millions return home to celebrate Ied Mubarak. The Ministry of Transportation estimates those traveling this year for the holiday will rise 4% to 14.8 million. Those going by road, sea and air are expected to climb, but those who take the train will fall 5% from 3.1 million to 2.9 million. Year after year, the number keeps falling.

Ignatius Jonan. Photo by Ahmad Zamroni

“Take it or leave it, that’s how the company used to regard its customers. With or without passengers, the company will still be there,” says President Director Ignasius Jonan, who wants to change the way PT Kereta Api Indonesia (KAI) sees itself and its customers. “It’s not them who needs us but we need them. We have to change the company’s soul from product-oriented to customer-oriented.”

Although he’s made great progress since starting on the job in February 2009, there’s still much to be done. The challenges are enormous. For one, KAI is a sprawling organization—a 4,836 km rail network across Java and Sumatra, with 200 million passengers a year, 28,000 employees, more than 5,000 pieces of rolling stock, and 26,400 hectares of land under management. Its first tracks were laid by the Dutch authorities 147 years ago before it became a state-owned firm in 1998, separate from the Ministry of Transportation. Unlike many other railway systems, KAI is responsible for both passenger and freight traffic.

Jonan, 48, is attempting to fulfill multiple agendas, such as reforming the railway but maintaining its public service obligation (PSO) to provide affordable public transportation. While the government provides subsidies, they do not cover the operational costs of this PSO. In 2009, KAI received Rp 504 billion in subsidies, only 59% of the actual cost, while in 2010 it got Rp 535 billion, only 84%. In effect, KAI has to subsidize the subsidies. At the same time it is bleeding money on its PSO, KAI must pay all costs to build, operate and maintain the tracks that it uses, a cost of Rp 1.2 trillion last year, 23% of revenue. Yet raising investment funds may be difficult. Last year, the government spent Rp 28 trillion on roads but only Rp 4 trillion to support the railways.

One simply way to bring in more funds would be to raise ticket prices, fixed since 2002 (and actually cut in 2008 by 8%). This January, with the blessing of the Transportation Ministry, KAI did that, raising prices on the subsidized economy-class fares by anywhere from Rp 500 to Rp 8,500 per ticket. A wave of protests forced the government and KAI to revert to old prices just 24 hours after launching the new prices.

“The raise is unacceptable if the reason for it is that the government is paying less than it should. You cannot simply transfer the burden to the public,” says Danang Parikesit, chairman of Indonesian Transportation Society (ITS), a non government organization focused on public transportation issues. ITS wants the KAI to improve its services first, including increasing capacity by adding more trains and routes, before raising its rates.

If anyone can tackle these challenges and improve train travel, Jonan has a good shot. He was the president director of the government-owned financial firm Bahana Pembinaan Usaha Indonesia from 2001 to 2006, where he transformed it from losses to profits, then heading up investment banking at Citicorp in Indonesia before taking the KAI job. Steve Kosasih, 40, a former Bahana staffer during Jonan’s tenure, says a key to his success was his communication skills. “He always communicates his vision to his subordinates in emails and meetings. He banned the use of Friendster during working hours but kept corporate communications lines open wide, meeting anyone who wanted to meet him. He gets to know employee’s backgrounds, their education and families,” says Steve, who is now the chief financial officer for state-owned forest manager Perum Perhutani.

Jonan’s management style is also one of consensus rather than top-down direction. An executive committee, which consists of 13 operational heads in Java and Sumatra and six heads of business units, conduct regular monthly meetings to discuss issues and evaluate progress made. Jonan wants everyone to see that the company is not run by one man. In such a huge organization, his style also helps get a better buy-in from the bureaucracy. When Forbes Indonesia interviewed him in the KAI headquarters in Bandung, he asked other directors to join in. “I don’t want this organization dependent on a handful of great men. It must be built on a system,” he says.

He’s going to need all the system he can get to improve quality levels at KAI. Jonan has set four pillars for the company—also written on his business card—as safety, punctuality, service and comfort. “Its easier said than done,” Jonan says. To get customer service right, he sends staffers for hospitality training at the Société Nationale des Chemins de Fer Français (French National Railway Corporation) and technical training in Japan and India. He also benchmarks against other train operators, such as Malaysia’s Keretapi Tanah Melayu.

Jonan is also raising compensation levels. Basic salaries are now roughly 15% bigger than other civil servants, according to Sugeng Priyono, KAI’s head of public relations. “Compared to other president directors we had, I think Jonan is more passionate when it comes to the employees salaries,” says Sugeng. Jonan believes safety is closely tied to having well-paid, satisfied employees. They will be better motivated, and work harder, if they see a link between their effort and compensation.

All of which comes back to the vexing problem of raising revenues and profits. So far, Jonan has done a great job with the numbers. After years of losses, KAI in 2009 made Rp 154 billion profit on Rp 4.7 trillion revenues, rising last year to Rp 216 billion net profits on Rp 5.1 trillion revenues. This year he is targeting profits of Rp 300 billion on Rp 5.9 trillion revenues.

To keep growth rolling, Jonan plans to beef up the freight side of the business. KAI is aiming to grow its freight revenues at 31% per annum until 2015, bringing the contribution from freight from 38% of income last year to 64%, thus flipping KAI’s dependence on passenger income, with all its issues, to one on freight, which in theory should be less of political. Among the ways Jonan can do that is to haul more crude palm oil in North Sumatra, after he beefs up his track’s axle-load from 13 tons to 15 tons this year to sustain the added weight in the cars. In South Sumatra, KAI plans to increase its coal transport from miner PT Tambang Batubara Bukit Asam from 10.5 million to 22.7 million tonnes per annum, and 5 million tonnes of coal per annum from private companies, both by 2014.

The company also plans to increase container freight on the Jakarta-Surabaya line from 2,000 to 5,000 container per week and double the capacity for commodities such as cement, quartz sands, and fuel (where it also wants to upgrade the track). To support these initiatives, the company needs massive investments. It would like to buy 144 electric-diesel locomotives worth Rp 4 trillion ($450 million) to replace outdated rolling stock—some of its trains reportedly date from the 1950s.

For passenger transport, even though the contribution of revenue is expected to decrease from 53% to 30%, the company wants to boost its income through selling more non subsidized tickets. It will increase the number of seats in some trains, and increase the frequency of service in stages to 2014 with the hope that passenger traffic will rise 16% on average per annum. The company also want to optimize income from other sources, such as renting the land adjacent to railways for telecom cables. “We are in the process of reviewing all the contracts done over the years. We think we set the price too cheap back then,” says Jonan.

Danang, a professor at Gadjah Mada University, raises another major issue facing KAI. One big step he recommends is for the government to clarify the rules regarding asset ownership in the railways, as well as separating the regulatory, maintenance and operational sides of KAI. Danang says that KAI has the right to clarify these issues so it can make its own financial calculations and set its own prices. Another factor for KAI is the rise of low-cost airlines, which are making the cost of flying a more affordable alternative to slow rail travel. The increased sale of cars, motorbikes and minibuses also cuts down on the need for rail travel.

Yet Jonan believes trains will become more important, not less, in the years ahead. As the economy grows and Java becomes more urbanized, demand will be created for improved logistics and travel options. Jonan argues that rail remains one of the most efficient means of transport, despite its current unpopularity, and is particularly well suited in dense urban environments such as Java, one of the most densely populated places in the world. “Even with more roads, they can’t catch up with growing transportation needs. KAI has a major opportunity to grow,” says Jonan.

* This story appears in June 2011 issue of Forbes Indonesia magazine.

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