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Railways play a significant role in daily life, offering speed, safety and massive capacity for delivering people from one place to another. However, developing countries such as Indonesia are currently encountering problems related to Operation and Maintenance (OM) contracts. Railway operators are mostly experiencing a negative rate of return when operations depend only on farebox revenue. Thus, an alternative approach that includes government involvement should be instigated to improve project performance. This research aims to evaluate the contract agreement between the state, in the form of the Ministry of Transportation, and business entities in the operation and maintenance phase. The Makassar-Parepare railway section on Sulawesi Island is used as a case study. The study uses a combination of qualitative and quantitative approaches that follow three stages: assessing the initial design; generating an alternative OM scheme; and propose a suitable OM scheme. The results indicate five components that should be considered when developing an OM contract, namely the tariff, risk, feasibility, subsidy and period of the contract. The study recommends a five-year contract for operation and maintenance, and the government should assign a business entity to manage available assets in the project.

Public–private partnership (PPP) has been extensively used in many sectors worldwide to provide alternative funding for public infrastructure. However, limited evidence found that this scheme was successfully adopted in railway transport particularly in the later stage of the project life cycle. Private participation during operation and maintenance stages are worthy of comprehensive research to cope with recovery of public investment and institutionalization problems. This research aims to analyze the potential of unbundling scenarios based on railway components by taking into account the Light Rail Transit (LRT) project in developing countries as the case study. A life cycle cost evaluation and sensitivity analysis were used to formulate a practical and regulatory framework for the macro-level of decision-making modeling. The findings indicate a possible scenario by considering the passenger demand, ticket price, and government support to generate the best option based on net present value (NPV) and internal rate of return (IRR). The proposed alternative recommends an attractive investment return for private interest, encourages lower support for government subsidy, and offers a reasonable tariff for the users. The study also suggests future implications from the adoption of research findings which may affect policy formulation and railway industry as a whole.

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