Forward planning: New projects and increased investment have the logistics sector posting double-digit growth in 2016

Businesses in Indonesia have long faced comparatively high transport costs. The country’s diverse, challenging geography, scattered population and overburdened infrastructure have driven transport costs to some of the highest levels within ASEAN.

As part of the government’s infrastructure development plan, the administration of President Joko Widodo is planning to establish 11 new bonded logistics zones, which should reduce shipping costs by moving storage services into the country from neighbouring Singapore and Malaysia, in addition to offering tax incentives to investors and cutting down on Customs clearance times. Although the country’s long-term goal of competing with Malaysia and Singapore as a regional logistics hub will be quite challenging, strong domestic demand and ongoing infrastructure upgrades are nonetheless expected to keep the logistics sector on a double-digit growth path over the medium term.

Infrastructure Deficit 

Indonesia’s infrastructure development has not kept pace with economic and population growth; almost all non-bulk sea traffic, which represents 90% of total shipping volumes in the country, must pass through trans-shipment hubs in Singapore and Malaysia before being delivered to a port in the country. Exacerbating this problem, the country’s underdeveloped road networks are characterised by chronic congestion, with the World Bank noting in a 2013 research report that it is often cheaper for businesses to import goods from China than from within Indonesia. According to the World Bank, transport costs in Indonesia stood at an estimated 27% of GDP in 2013, against 8% in Singapore, 13% in Malaysia and 20% in Thailand. Industrial developers cite high transport costs as one of the biggest challenges to growth, along with long port dwell times and complex Customs clearing procedures. The country fell one spot in the “trading across borders” category in the World Bank’s “Doing Business 2016” report, to 105th out of 189 economies surveyed. The average time to export stood at 36 hours in Jakarta and cost an average of $250 per container, while documentary compliance took 72 hours and cost $170. Import procedures were worse, with the World Bank reporting the time to import took 80 hours for border compliance, compared to the East Asia average of 59 hours, while documentary compliance took 144 hours, compared to the East Asia average of 70 hours. Import costs were $384 for border compliance and $160 for documentary compliance.

Indonesia’s vast, scattered geography is also a major challenge – the archipelago’s 17,000 islands are spread over 5000 km from east to west. The problem was highlighted in the March 2016 edition of the Nikkei Asian Review, which found that a shipment from Jakarta to Tobelo, a city in the North Maluku province, must fly 2500 km to Ternate, a city on a nearby island, before being shipped by boat to the nearby city of Sofifi, then driven five hours through mountainous terrain to Tobelo, with a transit time of five days. “In order to be able to tackle the transport and logistics costs that hamper Indonesia’s competitiveness, it is essential first to reform institutions and to solve the structural issue of bureaucracy,” Jaka Sinngih, managing director of Bumi Laut Group, an Indonesia-based shipping company, told OBG. “Foreign capital and foreign expertise can play a crucial role in developing the country’s infrastructure, but for this, we need to offer the appropriate assurances and guarantees that will allow us to attract investment.”

Government Response 

The country has actively sought to provide supporting infrastructure for traders, industrial producers and potential foreign investors in recent years, and its current network of special development zones includes four free trade zones, 79 industrial parks and eight special economic zones, according to the Indonesia Investment Coordinating Board. Under the government’s National Medium Term Development Plan (2015-19), 24 ports are set to be built or upgraded, bringing total cargo capacity from 8.8m twenty-foot equivalent units (TEUs) in 2009 to an estimated30m TEUs by 2020 and up to 48m TEUs by 2030.

The country is also moving to implement Widodo’s “Sea Toll Road” plan, a logistics strategy that emphasises three pillars, including shipping and ship-building services, infrastructure and logistics, and the development of ICT and human capital. More recent efforts to reduce logistics costs, capture a greater share of global shipping, and improve Customs clearance in the country led the government to unveil plans to establish over a dozen new bonded logistics zones, with the long-term goal of challenging Singapore for regional logistics dominance. Although this goal is unlikely to be realised before 2020 – total shipping volumes in Singapore stood at 30.92m TEUs in 2015 – two major projects in Merak and Cikarang should offer a near-term solution for stakeholders, while the launch of 11 new zones in early 2016 demonstrate the government’s intention to significantly reduce shipping costs. At the same time, Indonesia’s strong domestic consumption could be enough to sustain the industry without competing internationally, according to Julian Smith, an adviser at PwC in Jakarta. “There is a massive need for improved logistics capability in the domestic Indonesian market, so this might be a more attractive opportunity for Indonesian logistics players than trying to compete with Singapore for regional business,” Smith told OBG.

First Zones 

In September 2015 Widodo told the media that Indonesia was set to challenge Singapore as a regional logistics hub, with plans to develop two bonded logistics zones located in Cikarang on West Java and Merak on Banten, with the goal of developing South-east Asia’s largest logistics zones. Within these zones, certain exported goods, which will be subject to tax exemptions, are to be stored before being distributed to industries, with the bulk of goods imported to Indonesia currently stored in Singapore and Malaysia, driving up transport costs.

The zone in Merak will serve as a storage facility for fuel logistics, and the one in Cikarang will support manufacturing logistics, including intermediary imported goods. Under current design plans, companies establishing operations in these zones will enjoy tax incentives including a grace period for import duty payments, and exemptions from value-added tax and sales tax on imported intermediary goods. Although further details on the zones’ budgets and investment needs were not unveiled, the government revised regulation No. 32.2009 on bonded warehouse areas in order to launch the new zones, a positive legal step for the logistics industry.

11 New Zones 

The logistics sector welcomed another positive development in March 2016, when Widodo launched 11 new logistics centres at a ceremony in Cakung, North Jakarta. The centres will be located in Cakung and Sunter in Jakarta; Merak in Benten; Balikpapan on East Kalimantan; Cibitung, Karawang, Cikarang, Suband on West Java; and Benoa and Denpasar on Bali. Widodo told the media these logistics centres will be operated by companies including Toyota Motor Manufacturing Indonesia, explosives services provider Dahana, and the oil and gas facilities company Petrosea. Under the new logistics regulations, goods can be stored at these centres for up to three years, in addition to benefitting from tax and import duty incentives. In a speech at the ceremony, the president announced his intention to establish bonded logistics zones on every island and in every province in Indonesia.

Logistics Growth 

As a result of these reforms and ongoing investment in the shipping segment, the logistics industry is expected to record double-digit growth this year, with the Indonesian Logistics Association reporting that the sector will expand by 10-12% in 2016, after recording 18.8% annual growth in 2015. Although imports of raw materials and exports of finished goods have fallen – the country’s total trade volumes fell for the 19th straight month in April 2016 – domestic consumption is keeping the sector on a strong growth path. In 2015, Indonesia’s domestic logistics industry was valued at Rp2150trn ($157bn) up from Rp1810trn ($132.1bn) in 2014, according to a study conducted by research consultancy Frost & Sullivan. The study also found that total freight volumes will rise by 4.9% to hit 1.18bn tonnes in 2016, with sea freight, which accounts for 97% of the country’s freight traffic, forecast to rise by 4.9% as well.

Long-term forecasts are also positive; Frost & Sullivan reports that Indonesia’s logistics industry is forecast to grow by 15.4% in 2020, with its long-term positive outlook expected to drive investment in project cargo and the breakbulk sector. Anticipated growth in exports and domestic consumption, combined with ongoing infrastructure investment to boost maritime trade connectivity (see analysis), should drive the logistics industry to new heights.