Increased public spending and private investment driving expansion in Indonesia transport

Indonesia’s transport sector is in the midst of a major overhaul, with government investment in infrastructure set to hit an all-time high, driven by new projects. All segments in the sector are set to benefit from a far-reaching infrastructure development agenda, with plans to construct 2500 km of new highway to complement ongoing upgrades across Indonesia’s vast network of ports and airports. Perhaps most promisingly, 2015 saw significant progress towards the delivery of a national rail network, with the signing of a new agreement for a high-speed link on Java, although land acquisition continues to pose a problem, raising doubts as to whether the project will be completed on time and within budget.

At the same time, government funding is still insufficient to meet its long-term infrastructure goals, opening a host of opportunities to foreign investors, with the government moving to revise its negative investment list to permit increased foreign participation. Although development of public-private partnerships (PPPs) has been limited, the PPP model offers the best opportunity for the government to move forward on expanding the country’s congested transport network, which should see foreign direct investment in the sector rise considerably in the coming years.

Challenging Terrain 

Although Indonesia is strategically located between the Indian and Pacific Oceans – sharing maritime borders with Australia, the Philippines, Singapore and Malaysia, and centrally located along the Chinese government’s planned Maritime Silk Road – its vast, diverse and challenging geography has led to some of the highest transport costs in ASEAN.

The country is an immense archipelago spanning over 17,500 islands, many of which are mountainous, covered in jungle, and characterised by under-developed highway and aviation infrastructure, making maritime the most vital transport mode in the country. The majority of Indonesia’s population is concentrated in Java, which was home to 58% of the population in 2015, while other major population centres are located in Sumatra and Kalimantan in western Indonesia.

The eastern half of the country, which includes Papua, Nusa Tenggara and Maluku, is generally poorer and sparsely populated, and this exacerbates existing transportation challenges. Freighters making calls in eastern ports will charge for backhaul, as the vessels are usually empty on the return journey. Congestion at ports and surrounding highway networks has driven shipping costs to comprise 15% of the final price of goods, and drove transport costs to reach 27% of GDP in 2013, according to the World Bank.

Oversight & Vision 

Indonesia’s Ministry of Transportation (MoT) is the chief government agency responsible for sector policy development and regulatory oversight. It is divided into four directorates responsible for land, marine, aviation and rail transport development, as well as an inspectorate general. Improving and expanding the country’s transport network has been a government priority for years, with the previous administration outlining plans to bolster investment in the sector under its Masterplan for Acceleration and Expansion of Indonesia’s Economic Development, unveiled in 2005 and running to 2025, which emphasised infrastructure development through PPPs. Progress on many planned PPPs was delayed under the previous Yudhoyono administration, and infrastructure spending was below 4% of GDP in 2012. President Joko Widodo, who came to power during the July 2014 presidential elections, has worked to greatly intensify the government’s efforts to improve private sector participation in the country’s transport development agenda.

Government Agenda 

Widodo released a nine-pillar economic development strategy, Nawa Cita, in 2014, which lists gains in productivity and competitiveness as one its pillars, and targets infrastructure upgrades as one way to improve the country’s macroeconomic fundamentals. Under this long-term plan, the Widodo administration launched the National Medium-Term Development Plan (2015-19), which highlights specific transport upgrades to be carried out before 2020.

The plan envisions the construction of 2650 km of road (including 1000 km of toll roads), upgrades and refurbishment of 46,770 km of existing roads, construction of 15 new airports and 24 seaports, upgrades at existing ports and airports, and the establishment of a 3258-km rail network connecting Java, Sumatra, Sulawesi and Kalimantan, including 2159 km of intercity rail and 1099 km of urban rail lines. The 2016 state budget reflects a rising focus on transport, and the Ministry of Finance has announced the government will allocate Rp313.5trn ($22.9bn) to infrastructure development this year, the sector’s highest allocation in history, with the 2009 infrastructure budget set at Rp75trn ($5.5bn). Priority projects for 2016 include over 750 km of national roads, while ongoing work at the country’s largest airports and within its vast port network also indicates measurable improvements to the national transport network.

Recent Growth

According to data from Statistics Indonesia (BPS), the transport sector’s contribution to real GDP nearly doubled between 2010 and 2014, rising from Rp245.38trn ($17.9bn) in 2010 to Rp450.6trn ($32.9bn) at the end of 2014. The air and land transport segments are the largest by value, with land boosting its GDP contribution by 61.1% between 2010 and 2014, from Rp135.49trn ($9.9bn) to Rp218.3trn ($15.9bn). Air transport has been one of the fastest-growing segments, rising from Rp38.3trn ($2.8bn) of real GDP contribution in 2010, to Rp108.79trn ($7.9bn) in 2014, a 184% increase. The railway segment has also expanded considerably in recent years, from just Rp2.37trn ($173m) in 2010, to hit Rp3.2trn ($233.6m) in 2013 and grow by 38.4% in 2014 to end that year at Rp4.43trn ($323.4m).

In addition, maritime trade has recorded a significant amount of growth in recent years, rising from Rp21.72trn ($1.6bn) in 2010 to hit Rp24.1trn ($1.8bn) in 2011, Rp26.61trn ($1.9bn) in 2012, Rp30.1trn ($2.18bn) in 2013, and Rp36.1trn ($2.6bn) in 2014, yielding a compound annual growth rate of 10.7% over the four year period.

Ports

A road infrastructure system in need of investment and a heavy reliance on maritime trade have made port upgrades a critical government priority, as evidenced by recent investment in the maritime transport sector. Indonesia is home to 1700 ports, the majority of which are small ports spread over the archipelago, which spreads across 5000 km east to west. Of these, 111 are commercial ports and 11 are container ports. The country does not have a large-scale port capable of receiving trans-oceanic vessels, meaning almost all of its non-bulk trade, including containers, is transshipped through Singapore or Malaysia.

Indonesia’s largest port, Tanjung Priok, handles 70% of total imports and exports, and has exceeded its maximum capacity of 5m twenty-foot equivalent units (TEUs) maximum capacity every year since 2011, with FinanceAsia reporting the port was handling 7.2m TEUs annually as of 2012, while Investor Daily reported its annual capacity was 6.4m TEUs in 2016. Tanjung Perak in Surabaya is the primary hub for eastern Indonesia, from Kalimantan to Papua, and offers annual capacity of 3.2m TEUs, followed by Belawan, on North Sumatra, with 1.2m TEUs annually, and Tanjung Emas on Central Java, with 600,000 TEUs per year.

Pelindo & JICT 

Pelabuhan Indonesia II (Pelindo II), which operates 12 of Indonesia’s largest ports across 10 provinces, is one of four state-owned enterprises (SOEs), Pelindos I-IV, that operate the nation’s port networks. Responsible for the governance, regulation, maintenance and operation of national ports, the Pelindo numbers correspond to the respective regional coverage of ports and are numbered I through IV from west (Sumatra) to east (Papua). Pelindo II’s portfolio includes the country’s largest port, Tanjung Priok in Jakarta, and its subsidiaries include Jakarta International Container Terminal (JICT), Terminal Petikemas Koja, and Multi-Terminal Indonesia. The company’s port network handled 95m tonnes of cargo and more than 57,000 vessels in 2015.

Pelindo II is the majority shareholder of Indonesia’s largest container terminal, JICT (part of the Tanjung Priok complex), which spans a total of 100 ha, handles over 2.2m TEUs annually, offers maximum capacity of 2.5m TEUs, and has undergone a number of expansion projects since 2008, including the addition of a quay and yard equipment, as well as the country’s first automated gate system and an advanced terminal operating system.

Pelindo II holds a 51% stake in the terminal, after signing a 25-year concession with Hutchison Port Holdings in 2014. However, MoT officials have since called for the contract to be reviewed, after the MoT moved in November 2015 to restructure Pelindo II’s role as both a ports operator and regulator on shipping, removing its regulatory responsibilities. This is part of an ongoing effort to restructure the country’s vast and complex network of SOEs. Although the Ministry of State-Owned Enterprises did not mention the Pelindos in an April 2016 announcement that it will consolidate dozens of SOEs under six new holding companies, stakeholders anticipate that consolidation of ports operators will be forthcoming over the medium term, with falling trade volumes allowing port authorities the opportunity to consider how best to rationalise expenditure and consolidate operations. “From 2014 traffic has declined by 20% for general cargo, and for containers this year it has fallen by 2% so far, although our budget was increased by 6% on the anticipation of rising cargo volumes in 2016,” Kiki Mohammad Hikmat, corporate secretary at Pelindo II, told OBG. “We expect further improvements to efficiency when the Pelindos are amalgamated, which should return Tanjung Priok to double-digit growth.”

Port Upgrades 

The government and related port SOEs are in the midst of a major upgrade, an expansion programme that will involve the construction or modernisation of 24 ports. The government is embarking on projects including the new Priok Port, which will bolster capacity at Jakarta’s existing facility by 18m TEUs when its third phase of construction is complete, as well as new deepwater ports in Kijing and Subang, reducing the need for trans-shipment in Malaysia and Singapore, with plans to finance massive new investment through private finance.

Bilateral agreements are also helping to boost port development. In May 2016 Japanese Prime Minister Shinzo Abe announced Japan would be involved in the Kijing, or Subang deepwater port project, which is expected to cost $3bn. Under an earlier proposal, the Indonesian government had planned to construct a major new seaport in Cliamaya, Karawang on West Java, although the potential location was deemed too close to an oil and gas exploration project, leading to its cancellation. Patimban was selected because of its close proximity to Jakarta – just 70 km away – which will enable easy access to various industrial estates in areas such as Karawang and Cikarang. The completion of the 117-km Cipali toll road in late 2015, connecting Cikopo to Palimanan, further bolstered multi-modal connectivity in the surrounding area.

Roads & Urban Transit 

Roads construction will be the most critical near-term improvement for the government, with the MoT reporting that just 140 km of new toll roads were constructed between 2012 and 2014. Although the country’s road network extended across 508,000 km as of 2013, just 287,926 km of this was paved, while investment in new roads projects has been somewhat limited due to the long delay for returns for investors and government restrictions on foreign involvement in the sector.

Recognising the need to improve its road network, the government has announced plans to develop a 1000-km network of toll roads, offering considerable new investment opportunities to the private sector after a February 2016 revision of the country’s “negative investment list” opened toll roads to 100% foreign ownership. In May 2016 the government announced it will launch 10 toll road projects worth a total of Rp109.58trn ($8bn) to private sector investment in 2016, spanning 521 km, and connecting population centres in Serang, Panimbang, Cileunyi, Kemal, Teluk Baga Bakraja, Jakarta and Cikampek.

With congestion standing as one of the most significant impediments to land transportation, particularly in the urban centres of Jakarta and Surabaya, the government is also moving to establish new mass transit systems including a bus rapid transit (BRT) system slated for establishment in 29 cities, as well as urban mass rapid transit (MRT) systems in six metropolitan areas and 17 cities.

One of the largest of these proposed projects is the Jakarta MRT system, which is expected to significantly relieve costly congestion. The project’s north-south line is currently under construction after a groundbreaking ceremony was held in October 2013, with drilling commencing in September 2015. It will connect Kampung Bandan in North Jakarta to Lebak Bulus in South Jakarta along a 23.3-km track to be constructed in two phases. The first phase was funded through a loan from the Japan Bank for International Cooperation, and is expected to open to the public in 2018, with the project’s budget estimated to be at least $1.7bn. Authorities are currently studying plans for an east-west line, with the project expected to be fully finished in 2027.

Rail 

These urban rail links are part of a broader plan to further improve rail connectivity through the construction of a national rail network, although recent project delays indicate more work must be done on land acquisition challenges if these plans are to succeed.

The most significant link in the government’s national rail plan is a 150-km high-speed line connecting Jakarta to Bandung. After months of competitive bidding between Japan and China, Indonesia announced in September 2015 that it had awarded the $5.5bn project to a Chinese-led consortium, Kereta Cepat Indonesia China (KCIC), a joint venture between China Railway International and an Indonesian consortium of four SOEs.

Unfortunately, just days after the consortium hosted a ground-breaking ceremony for the project in January 2016, the MoT halted the project, citing the company’s failure to obtain the necessary approvals for construction, including land acquisition, with KCIC having only received a permit for 5 km of construction.

Although authorities told media the project was set to resume shortly in March 2016, as of May it was still stalled, raising doubts as to whether such an ambitious project covering so many diverse regions can be completed before 2020, and increasing pressure on authorities to improve the land acquisition process, which has also delayed expansion at the country’s largest airport.

Air 

With road infrastructure remaining limited and ports still very congested, aviation development has become another critical government priority, particularly as air transport has recorded some of the strongest recent growth across all segments, expanding its contribution to real GDP from just Rp38.4trn ($2.8bn) in 2010 to Rp108.79trn ($7.9bn) in 2014.

Tourism arrivals have been on the rise in Indonesia, lending an optimistic outlook to near- and long-term aviation growth. Foreign visitor arrivals rose by 7.3% in 2014 to hit 9.4m, and under a revised statistics system, gained an additional 10.7% to reach 10.41m in 2015, meeting the government target of 10m arrivals. By 2020 the country hopes to welcome an estimated 20m arrivals annually, although its network of 296 airports will require significant investment if they are to keep pace with passenger growth.

Congestion is becoming a major problem at Jakarta’s Soekarno-Hatta International Airport (SHIA), the country’s largest, which has been operating at or above its current maximum capacity of 26m passengers per annum since a wave of deregulation began in 2004. According to BPS statistics, the airport’s international passenger volumes rose from 3.83m in 2009 to hit 4.76m in 2010, a 24.3% increase, before rising to 5.4m, 5.9m, and 6.32m in 2011, 2012, and 2013, respectively.

SHIA’s international passenger volumes rose by 2.85% in 2014 to reach an estimated 6.5m, according to BPS data, although domestic passenger volumes easily outpace international passengers, with Bloomberg reporting the airport handled nearly 60m passengers in total in 2013, making it one of the world’s 10 busiest airports.

Although BPS does not record domestic passenger volumes by airports, the bureau reports that total domestic air passenger volumes have grown tremendously with deregulation and the proliferation of new low-cost carriers (LCCs): domestic passenger arrivals rose by 16.9% in 2011 to hit 59.04m, before jumping to 69.5m in 2012 and 77.57m in 2013. Although domestic arrivals levelled off to 73.27m in 2014, low-cost fares and ongoing regional integration are expected to keep domestic passenger volumes on a strong growth path, creating a variety of new opportunities for private investment.

AEC Integration 

Aviation markets and airports are also slated to benefit from a surge of new business arrivals in the wake of ASEAN Economic Community (AEC) integration. Indonesia is the largest ASEAN aviation market, and is set to take advantage of ongoing integration, after joining the ASEAN open skies agreement in April 2016, a multilateral agreement between all ASEAN member countries under which a single aviation market will be created. The country is set to open five of its international airports – in Jakarta, Medan, Bali, Surabaya, and Makassar – to ASEAN competition.

In an August 2015 report on Indonesia’s aviation sector, DBS Vickers Securities wrote that the outlook for ASEAN’s aviation market is extremely positive, with rising affluence and an anticipated doubling of its middle-class population expected to drive regional travel growth, while the ASEAN open skies agreement will remove aviation barriers and increase intra-regional competition among carriers, weighing on fares and opening up increasing numbers of travel destinations.

Airport Expansion 

In anticipation of rising air traffic and new market entrants, the government has included an airport expansion agenda in its five-year development plan, announcing plans to construct 15 new airports, as well as nine new air cargo service facilities. The new airports will be built in Letung, Kertajati, Tambelan, Teblian, Muara Teweh, Samarinda Baru, Maratua, Miangas, Siau, Morowali, Buntu Kunik, Namniwei and Kabir-Patar. New cargo centres will be established at SHIA and in Kualanamu, Syansuddin Noor, Banjarmasin, Juanda, Hasanuddin and Sam Ratulangi. The government also hopes to redevelop and refurbish 100 existing airports, and upgrade 26 to handle more passengers, according to a November 2015 report published by the MoT.

Angkasa Pura II, operator of SHIA, is also in the midst of upgrading Jakarta’s primary aviation hub, announcing in February 2015 that it plans to sell up to Rp6trn ($438m) of bonds to fund renovations. Although Terminals I and II have been renovated to boost capacity to 18m and 19m passengers, respectively, from 9m each previously, new terminals are still needed to keep up with rising domestic and international demand.

New Terminal 

The airport’s new third terminal will offer significant capacity upgrades for the overburdened airport. The Rp5.7trn ($416.1m) terminal spans 422,804 sq metres, making it slightly larger than Singapore’s Changi Airport’s Terminal 3, and offers 10 gates for international flights, 18 for domestic flights, two hotels, and a host of retail options, as well as sky trains to transfer passengers in between terminals.

The new terminal, known widely as Terminal 3 Ultimate, will handle up to 25m passengers annually on completion, with the first phase offering capacity for 12m passengers, during which time only Indonesia’s national carrier, Garuda Indonesia, will operate from it. In March 2017 new airlines will be permitted to establish operations in the new terminal, after which authorities expect it will eventually challenge Kuala Lumpur International Airport for regional dominance.

In April 2016, Angkasa Pura II said construction of the third terminal was nearly complete, with the Straits Times reporting in late May that the terminal would begin preliminary operations in summer 2016. A fourth terminal is also planned, and expected to begin operations in 2021, while a third runway is also slated for construction at a cost of Rp4trn ($292m), with Angkasa Pura II reporting in March 2016 that it expects to break ground on the project early next year, although delays due to land acquisition challenges could extend this timeline longer than anticipated.

Garuda Indonesia 

Although it is facing intense competition from domestic LCCs including Lion Air and Indonesia AirAsia, Garuda Indonesia is also slated for significant growth over the next several years, with fleet upgrades expected to expand its reach and routes further into Europe, as well as regionally.

Garuda Indonesia currently flies to South-east and East Asia, the Middle East and Australia, and resumed its service to Europe in 2009, after the European Commission banned all Indonesian airlines from EU airspace in 2007. The commission also lifted a ban from Airfast Indonesia and Premiair. As of February 2016 a number of Indonesian carriers save for Garuda Indonesia, Airfast Indonesia, Premiair and Indonesia AirAsia were still on the EU blacklist. Lion Air, Indonesia’s largest LCC, was removed from this EU list in June 2016, as were Batik Air and Citilink.

Fleet Expansion 

Garuda’s widebody fleet consisted of 28 aircraft in 2015, including 11 A330-200s, 11 A330-300s, and six 777-300ERs, with three more 777-300ERs on order, as well as 11 additional A330-300s, according to a report by the Centre for Aviation. However, in March 2015 the company’s CEO, Arif Wibowo, announced plans to acquire 250 aircraft over the next 10 years, increasing the fleet of its LCC unit Citilink Indonesia fourfold, to a total of 120 planes by 2022.

In June 2015 the company announced plans to acquire 30 Boeing 787-9s for delivery by 2020, as well as 30 Airbus A350s. The new deal with Boeing also includes 30 new 737 MAX 8s, bringing the airline’s 737 MAX 8 commitments to 80 after it ordered 50 in 2014. The Centre for Aviation reported that its commitments for new widebody aircraft stood at 77 in June 2015, an impressive figure given that its current widebody fleet is relatively small, and the fact that Garuda has traditionally been a narrow-body operator. However, the company is focusing on new opportunities in the medium- and long-haul markets, following a restructuring in 2014, with a focus on launching new services to the Middle East, Germany and France in 2015 and 2016.

In a bid to mitigate challenges from LCC competition, particularly in the wake of AEC integration, Garuda has opted not to include a first-class cabin in its new 777s, and plans to remove the business class cabin on six A330s, enabling it to offer an economy product similar to the A330s operated by LCCs AirAsia X and Lion Air. Fleet upgrades are ongoing, and in April 2016 Garuda Indonesia signed agreements with Airbus and Rolls-Royce for a £4bn deal to upgrade the airline’s 14 A330s to the newer A330neo. Rolls-Royce simultaneously signed an agreement for the provision and aftercare of its engines in the upgraded aircraft.

LCC Growth 

AEC integration and the new ASEAN open skies agreement is expected to have the most profound impact on LCCs, which are well-positioned to capitalise on soaring regional passenger volumes in coming years, and have announced their own expansion plans in Indonesia. Lion Group, Indonesia’s biggest carrier and largest LCC, plans to boost its fleet to 1000 planes, after its founder Rusdi Kirana announced plans to buy 230 Boeing 737 planes in 2012, and an additional 234 Airbus jets in 2013.

Opportunities for private investment are on the rise as a result, and in April 2016, LCC Indonesia AirAsia announced plans to conduct an initial public offering on the Indonesia Stock Exchange by late 2017, with the move expected to improve transparency and corporate management, in addition to enabling new investment in the company.

Outlook 

Although a great deal of work remains to be done in modernising and upgrading Indonesia’s port, airport, road and rail networks, 2016 should be a watershed year for the transport sector, as rising public spending adds to ongoing efforts to bolster private investment, through both debt markets and investment under PPP models. Land acquisition challenges will continue to drag on the sector’s forward momentum (see Construction chapter), but ongoing regional integration, rising domestic demand, and double-digit growth in the logistics and aviation sectors should help to keep the sector on a steady upwards trajectory.

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The Report: Indonesia 2017

Transport & Logistics chapter from The Report: Indonesia 2017

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