Economic Update

Published 23 Jun 2017

Investment in maritime infrastructure and greater support for the shipbuilding industry look set to raise Indonesia’s freight-handling capacity, moving the country closer towards its goal of becoming a top global maritime player.

In March the government passed new regulations expanding on the global maritime fulcrum (GMF) doctrine laid out by President Joko Widodo in 2014. The new policy – known as Presidential Regulation No. 16 of 2017 – sets out a range of measures to strengthen the maritime and logistics sectors, with an emphasis on developing port infrastructure and connectivity.

The GMF vision called for investments of $55.4bn to develop 24 major seaports and up to 1000 smaller freight-handling centres, though it was scaled back after a reassessment of needs and now calls for development of five ports according to international standards.

The president has acknowledged that the country’s maritime sector lags behind its rivals in terms of research and development, and that it may have to look to other countries for advice and input.

“If we can’t work on it alone, then we should work with another country so there would be a transfer of knowledge,” he said in early May. “Without doing so, we would never make the leap.”

Long voyage

While investors have shown interest in Indonesia’s maritime projects, creating hubs to compete with the likes of Singapore will take time. To do so, Indonesia will first need to develop local trade and infrastructure, according to Sofie Tolk, senior commercial consultant at the Port of Rotterdam Authority.

“Initially, you should be focusing on domestic demand and serving the local market; then you can develop other services and trade lines,” Tolk told OBG.

As part of Indonesia’s efforts to upgrade its freight-handling capacity, last November the government signed preliminary agreements with the Port of Rotterdam Authority – which is pushing to expand in Asia more broadly – to develop two ports: a new deepwater facility at Kuala Tanjung, on the Strait of Malacca in North Sumatra, and an upgrade of the port of Jakarta.

Authorities have already taken steps to improve inter-island logistics by launching the Sea Toll Strategy in November 2015. With the aim of cutting transport costs and curbing price disparities throughout the country, the programme will connect six major seaports and make them the main centres for national maritime trade, managing their operations under an integrated system.

The six ports selected for development are: Belawan, in Medan on Sumatra; Batam near the border of Singapore; Tanjung Priok; Tanjung Perak; South Sulawesi’s Makassar; and Papua’s Sorong port.

Supporting the shipbuilding industry

Other policies aim to expand Indonesia’s shipbuilding capabilities. Proposed support mechanisms for this include a ban on state-owned enterprises buying vessels from overseas, in place since 2015.

Supporting this are state incentives announced at the end of 2015 that exempt shipbuilders from paying value-added tax (VAT) on imported components.

Together, these measures are likely to encourage investment in the sector, though up-scaling Indonesia’s shipyards will also take time, especially when it comes to building large blue-water vessels, which will require significant knowledge transfer; most of the country’s more than 200 shipyards are geared towards building smaller vessels, or undertaking repair and maintenance.

Opportunities and obstacles

While efforts to expand the maritime sector are supported by low labour costs and strong growth potential – given the large number of islands that need to be served – obstacles also exist.

High materials costs, along with taxes on goods and services, limit investment in shipbuilding and hamper its competitiveness with overseas suppliers, according to Yance Gunawan, president-director of Dumas Tanjung Perak Shipyard.

“The main issue for the shipbuilding industry in Indonesia is a limited supply of components and equipment that can be produced domestically; they are too expensive and have to be imported, mainly from other Asian countries,” he told OBG. “The VAT law is also more beneficial for foreign companies than Indonesian ones. Why order a ship in Indonesia and pay a lot of taxes when you can get a ship directly from abroad with 0% VAT?”

As of late 2016 VAT and import duties were been abolished for shipbuilding companies operating at Batam free zone, Indonesia’s first special economic zone, leading to an increase in activity, according to local media.

Steady expansion of capacity could help reduce Indonesia’s reliance on foreign shipyards, and should see a fall in costs as production increases and economies of scale develop. Given its location, straddling some of the world’s busiest waterways, the country also holds potential to expand vessel exports, as well as develop maintenance and repair services.