With more than 17,500 islands spread across three time zones, Indonesia’s geography inevitably presents certain logistical challenges. The country, which lies on either side of the equator and whose islands are separated by the Java Sea, is noted for its rugged terrain, active volcanoes, tropical storms and mudslides, as well as its congested streets and poor infrastructure. Given these obstacles, one could even say that the local logistics sector performs daily miracles in delivering goods and services. However, there are also hopeful signs that government and private sector action could lead to improvements, with a large infrastructure development programme on the cards.

Even so, investing in hard infrastructure will only address some of the sector’s needs. Legislative and regulatory changes will be just as important in enabling the sector to meet the country’s logistical challenges.

Counting the Cost

Indonesia has some of the highest logistics costs in the world. The World Bank’s “State of Logistics 2013” report for Indonesia – its most recent on the country – stated that logistics costs ran to around 27% of GDP, higher than regional peers Vietnam (25%), Thailand, (20%) and Malaysia (13%). The figures for Singapore and the US were far lower, at 8% and 9.9% of GDP, respectively. This was one of the main factors behind Indonesia’s ranking of 53rd out of 134 countries surveyed in the 2014 World Bank Logistics Performance Index (LPI). Its ranking fell to 59th when averaged over the previous four reports.

On the ground, this has translated into some remarkable costings. According to Edelman Insights, the cost of sending a tonne of cargo from Jakarta, on the island of Java, to the neighbouring island of Sumatra can be four to five times the cost of sending it to Singapore – a longer distance away. A hub and spoke system for the internal marine cargo system also means that produce from many islands must first go to the hub – incurring a cost – before it can then be shipped overseas. Imports too must follow a strict pattern, with ships obliged to call at particular ports – all agricultural imports, for example, must go to Surabaya – meaning that added costs are then incurred shipping these goods to the other markets where they are needed.

Much of this transportation is carried out over land, with the World Bank report stating land transport accounted for an average 72.21% of all logistics costs during the period 2004-11. Sea transport accounted for a further 19.66%, with air at 1.44% and rail at 0.51%. Services such as administrative and Customs charges accounted for the remaining 6.19%. In terms of actual cargo volumes, however, sea continues to dominate. Frost & Sullivan reported in 2015 that sea freight accounted for 97.1% of the total in 2014, with an expected growth rate of 5.1% by the end of 2015.

Time is money in logistics, and holding times at ports remain stubbornly high. The World Bank’s 2013 report stated that average imported container holding times at Tanjung Priok, Jakarta’s main port, were 6.4 days in November 2012, up from 4.8 days in October 2010. Press reports in March 2015 suggested average holding times of around 6 days at Tanjung Priok, compared to 1.5 in Singapore and 3 in Malaysia.

Lengthy holding Times

The lengthy holding times – which can be particularly damaging for perishable goods – have prompted government action, with the Ministry of Transport ordering the seizure of any containers staying longer than seven days in July 2014 under an existing but neglected law. The ministry also ordered state-owned port operator Pelindo II to provide more parking for trucks at Tanjung Priok, the site of much of the container bottleneck. The administration of President Joko Widodo, in office since October 2014, has also since set a target of 4.7 days, which the new transport minister, Ignasius Jonas, said would be reached within the first half of 2015.

However, such moves may not address more fundamental issues that continue to confront the sector. Customs procedures can often be lengthy, as can pre-Customs measures. Edible products, for example, must receive approval from the Ministry of Trade, the Ministry of Agriculture, the Ministry of Environment, and the National Agency for Food and Drugs Control before getting final clearance from the Ministry of Finance’s Directorate-General of Customs and Excise.

Cabotage & Bunkering

At the same time, a number of other regulations remain contentious. For example, the domestic cabotage system reserves shipping within Indonesian waters for Indonesian-flagged vessels, full or empty. This latter point means that foreign shipping firms with a surplus, for example, of empty containers at Tanjung Priok cannot move them to Surabaya or to another port with their own vessels. Instead, they must take them out of the country and then back again, or pay a local competitor to shift them. Bunkering costs for these Indonesian-flagged ships are also sometimes high too, because they are obliged to buy bunkering only from national petroleum major Pertamina. This can boost feeder route costs and increase the overall price for logistics.

Roads

With so much of the logistics sector dependent on land transport too, the state of the nation’s roads is a major concern to logistics operators. An estimated 58% of the population lives on Java, and over 10m of these live in the Jakarta area, the country’s richest district, with Tanjung Priok, the capital’s historic main port, located right in the heart of the city.

While the former colonial rulers, the Dutch, built a system of canals from the port and around the city to distribute goods, these are now derelict and unused, with roads to and from the main hub often clogged. Indeed, according to a recent survey, Jakarta is now the world’s most congested city. Elsewhere, road and rail infrastructure is often inadequate, with a recent report by the State Ministry of National Development Planning suggesting that some Rp6500trn ($537.29bn) of investment would be required to fully address the country’s infrastructure needs.

Putting it Right

While the challenges facing the sector are acute, the government has taken steps to address many of the most significant issues. In doing so, the authorities are building on existing programmes and plans, principally the National Logistics System Development Blueprint and the Master Plan for the Acceleration and Expansion of the Economic Development of Indonesia. They are also able to work with a range of sector bodies, including the Indonesian Logistic and Forwarders Association, Asosiasi Logistik Indonesia, the Association of Indonesian National Pick Up and Delivery Companies, and others.

The government is also now able draw on considerable financial resources from the reduction in fuel subsidies, with the Ministries of Public Works and Transport both receiving budget increases, and the central government allocation for infrastructure up nearly 50%, at Rp290trn ($23.97bn).

Public-private partnerships are also expected to play a more central role in infrastructure development, creating opportunities for private sector investment (see Infrastructure chapter). The government has also said it will prioritise the expansion and modernisation of ports (see overview).

Logistics firms are thus cautiously hopeful that many of the hard infrastructure issues that have plagued them in the past are being addressed. Toll roads and rail links in particular should assist land transport, while port development should also help to bring down costs in areas such as warehousing and holding. Despite the bottlenecks, growth is still expected to continue as the country’s middle classes expand in line with the economy. Frost & Sullivan, for example, expects the transport and logistics market to grow by a compound annual growth rate (CAGR) of 15.2% in 2015, with total freight showing a CAGR of 5.4% between 2010 and 2015.

Move to Multi-Modal

Even so, regulatory issues are in need of a similarly robust approach. This issue becomes more acute still as the ASEAN Economic Community is put into place, starting at the end of 2015, with multi-modal transport networks, rather than individual ports and companies, competing more openly across the region. Integrating these with each other and the global logistics chain as a whole will be a priority from 2015 onwards.

Contract Logistics & E-Commerce

At the same time, the opportunities within Indonesia for logistics providers continue to expand. As retail becomes more organised, the possibilities for contract logistics will grow, while e-commerce is also developing rapidly as per capita incomes rise and lifestyles change. Logistics companies such as JNE now earn more than 60% of their revenue from e-commerce, despite the challenges inherent in this model.

“There is great room for growth on e-commerce in Indonesia, with the middle class demanding more year after year. They are enthusiast buyers looking for better products and services online,” Johari Zein, president director of JNE, told OBG.

Local knowledge and networks are key here, especially covering the last mile. The clear commitment of the government to address the bureaucratic obstacles faced by firms will also be watched closely.