For an archipelago spread over 17,500 islands and spanning 5000 km from west to east, the need for Indonesia to have an efficient transport network that seamlessly integrates sea, land and air transport systems is manifestly evident. The transport sector is the backbone of the economy, accounting for more than 40% of overall infrastructure investment. Yet Indonesia fares poorly when it comes to the quality of its transport infrastructure. Failure to invest adequately in ports, airports and roads has made logistics difficult and raised the cost of doing business.
According to the World Bank the cost of logistics can constitute up to 27% of GDP, compared to 19-22% in other Asian economies. If Indonesia is to shift its economy from its dependence on extractive commodities to value-added manufacturing it will need to deal with the problem of connectivity. Foreign investors can play a role in bridging the infrastructural gap both as financiers and expert project contractors, but they will need a conducive business climate, a level playing field, and concession guarantees.
State-owned enterprises (SOEs) continue to dominate the transport sector in Indonesia. The country’s airports are built, run and maintained mostly by the state-owned Angkasa Pura; the seaports are the domain of Indonesia Port Corporation (Pelindo, IPC); Kereta Api runs the national railway; and the national toll roads are operated by the state-controlled Jasa Marga corporation. Since the end of the Suharto era there has been a tendency among civil servants to favour SOEs. This is partly due to a backlash against cronyism. The public sector manages 90% of the total transport infrastructure, while private sector involvement remains concentrated on a few tolled highway projects and private rail lines. Government officials see investors more as a “stop-gap” source of funding rather than as competitive service providers. Indonesia’s lack of institutional capacity and ambivalent attitude to the private sector have hampered efforts to boost investment.
The National Land Agency (Badan Pertanahan Nasional, BPN), Ministry of Forestry, Ministry of Public Works (MPW), Regional Development Planning Agency (Badan Perencana Pembangunan Daerah, BAPPEDA) and local governments are the most important stakeholders when it comes to the use of land. The Ministry of Finance is the main funding body for large transport infrastructure projects and the Ministry of Transportation (MoT) under the respective directorate general holds overall regulatory authority over the country’s major ports, railways and airports. As for the national road network, responsibility for its building and maintenance rests with the MPW. The Toll Road Regulatory Agency (Badan Pengatur Jalan Tol, BPJT) is the regulator of toll roads and it comes under the purview of the MPW. After the 2001 fiscal decentralisation, the role of regional governments has become ever more prominent in the provision of transport services.
Around 20% of the infrastructure investment used to come from local governments but their contribution has now jumped to 65%. The National Medium Term Development Plan 2010-14 (Rencana Pembangunan Jangka Menengah Nasional, RPJMN) has put the total infrastructure investment requirement at Rp1923trn ($192.3bn). The government (including SOEs) is only able to cover 65.26% of the cost. The remaining Rp668.34trn ($66.83bn) is expected to come from the private sector.
As the funding gap has become apparent, the government has looked increasingly to public-private partnerships (PPPs) as an alternative source of finance. But local commercial banks have traditionally avoided financing infrastructure projects. To overcome this problem the government established Sarana Multi Infrastruktur (SMI) with the explicit mandate to provide project financing and promote PPPs. Indonesia Infrastructure Finance (IIF), another financing firm, was established in August 2010 with contributions from SMI, the Asian Development Bank and the International Finance Corporation (IFC) as an alternative source of long-term finance. Following the Asian economic crisis in 1997-98, Indonesia had difficulty honouring its payments to investors. Many investors dragged the government to international arbitration for breach of contracts. They won and Indonesia had to pay hundreds of millions of dollars as compensation. The legal tussle raised the need for a mechanism that could manage risks. This led in 2009 to the establishment of the Indonesia Infrastructure Guarantee Fund (IIGF), which has a mandate to provide investors financial guarantees, has its own budget and can therefore act as an independent guarantor of risk. Badan Koordinasi Penanaman Modal (BKPM) is the Investment Coordinating Board of Indonesia, and is the primary interface between business and government, with a mandate to boost the amount of private investment in infrastructure. The agency packages projects that are ready to be offered to investors and helps facilitate their participation. In 2012, it helped BAPPENAS release a PPP guidebook showcasing $41bn worth of transport projects available or potentially available for investors to bid.
Roads carry 70% of freight and 82% of passengers in Indonesia. The total length of the road network was estimated to be 477,000 km in 2009 out of which 258,744 km is paved. Of all the roads, 8.1% are national, 11.5% are provincial, 80.7% are district roads, and only 0.2% are toll roads.
The first toll road in Indonesia was built in 1978, yet despite this early start the country has been slow to build expressways and additional toll roads. By 2010, only 742 km of toll roads had become operational. This is less than a third of the 2400 km of roads the MPW had envisaged.
Although progress has been made, the implementation of PPP road projects has continued to be constrained by a complex land acquisition process, weak project preparation and selection, and the absence of an efficient viability gap funding mechanism. Some 877 km of tolled expressways are planned for completion by 2015, but the spending has been well below the required average of Rp6.9trn ($690m) per year. Land acquisition costs range from 10-30% of the total investment costs. Average urban construction costs, inclusive of land acquisition, are in the order of Rp70bn-85bn ($7m-8.5m) per km, which can be as much as 10 times higher than the construction costs of a two-lane highway.
Meanwhile, the number of vehicles on the road continues to grow at an average of 10-15% a year. As of 2009 there were 70.7m registered motor vehicles on the roads of Indonesia – two-thirds of which were motorcycles. Poor public transport, easy credit and a massive fuel subsidy have all contributed to the growth of private vehicles.
The result of this is heavy congestion. In Jakarta traffic crawls at 8.3 km per hour. The Ministry of Public Works estimates that Indonesia needs around 1000 km of expressways and 10,000 km of arterial roads in the next five years. To meet that target, it will need $18bn. Bridging that financial gap without private investments is going to be difficult. Roads attract 40% of total infrastructure spending (Rp70trn, or $7bn, per year) and represent an asset value equivalent to more than 15% of GDP.
Indonesia still has a long way to go before it sees a revival of its railways. The total length of the country’s railway network is 8529 km, of which only 565 km is electrified. In 2013, the national rail operator, Kereta API, moved 203m passengers and 23m tonnes of freight (about 55% of which was coal) on three separate networks in north, west and south Sumatra. In Jakarta, suburban rail services carry 550,000 passengers a day, 60% of whom pay subsidised fares. The government reimburses only 30% of what Kereta API loses as a result. The burden on its $900m operations budget is made worse by having to pay for the maintenance of signalling equipment and upgrading of stations.
This shortage of railroads means that less than 3% of Indonesia’s coal (50% of which is found in Kalimantan) can be extracted and exported. Indonesia is therefore pushing for the construction of the $2.1bn Puruk-Cahu-Bangkuang-Lupak Dalam railway line in Kalimantan under a PPP scheme, which it hopes will allow the movement of coal year round. The government is also planning to develop 10 more railway projects in Kalimantan by 2020. These projects will form part of the Rp600trn ($60bn) Trans-Kalimantan Railway Master Plan that will cover 49 important sections, out of which 20 have the potential to be executed under the PPP model.
Others could be developed entirely by investors. One such railway connecting East and Central Kalimantan is being developed by Russian Railways. Another project, the Muara Wahau-Lubuk Tutung Port railway line in East Kalimantan, is being developed by the UAE’s Middle East Coal Holdings.
Indonesia also has plans to develop a railway network in Sumatra. The MoT completed a new master plan for the Trans-Sumatra rail project in July 2012, a $7bn, 2168-km railway line that will connect the southern Sumatran city of Bandar Lampung with Bandar Aceh. Construction of the $1bn, 727-km Northern Coastal Highway (Pantura) rail line has accelerated thanks to an additional injection of $150m. Some 17% of the project has been completed, with most work taking place along the 62-km Cirebon-Brebes section of the Trans-Sumatra Railway. There are also plans to develop a 2000-km rail network in Sulawesi. Another major railway project in Java is the retooling of the 780-km Jakarta-Surabaya line. The $1.1bn project is designed to support the development of the all-important North Java economic corridor, one of six corridors prioritised for economic development. The railway line will connect all of the major cities along the Northern Java coastline.
A key rail project is the commuter line between Soekarno-Hatta International Airport (SHIA) and the Manggarai district in South Jakarta. The airport train project was put on hold earlier after the central government decided to elevate sections of the railway in the central part of the city. The airport commuter line will pass through Manggarai-Sudirman (Central Jakarta), Tanah Abang-Duri-Grogol (West Jakarta), Bojong Indah (West Jakarta), Kalideres (West Jakarta), Tanah Tinggi (Tangerang), Soekarno Hatta. Kereta Api hopes to get the project up and running before the end of 2014. Once operational it will cut the travel time between the international airport and South Jakarta to 55 minutes.
Jakarta, whose greater metropolitan area has a population of 28m, remains one of the world’s few large cities without a rapid transit system, despite plans for one dating to the 1980s. The closest substitute, the TransJakarta Busway, can carry fewer than 400,000 people a day, and even a dedicated bus lane does not help reduce travel times at peak times.
According to the Jakarta Transportation Agency, about 9.9m cars, motorcycles, trucks and other vehicles take daily to the capital’s streets, of which 2m enter the city from neighbouring municipalities. But now, the central government, the Jakarta city administration and a consortium of investors have come together to launch a series of rail projects that could ease the city’s traffic woes.
These include the first stage of the Mass Rapid Transport (MRT) and above-ground rail system linking south and central Jakarta; two monorail projects; an express train to the airport from central Jakarta; and an elevated train circling the outskirts of central Jakarta that would connect to existing provincial commuter rail lines west, south and east of the city.
Collectively these projects are expected to cost about $4bn. When complete the Jakarta MRT is expected to carry some 173,000 passengers a day. The first phase of the MRT project will stretch 15.7 km from Lebak Bulus to Bundaran HI roundabout.
In June 2013, the Jakarta Monorail project, which had been stalled since 2008 due to financial problems, was finally given the green light by Governor Jokowi. The consortium, Jakarta Monorail (JM) which is led by Indonesia’s Ortus Holdings, confirmed that it had the necessary funding to start work on the Rp8.1trn ($810m) project.
It is proposing to build two lines: a green line, with 16 stations, extending 14.27 km from Komdak (the city police headquarters) to Satria Mandala Museum, both in South Jakarta; and a blue line stretching 9.72km from Kampung Melayu in East Jakarta to Roxy in West Jakarta, with 11 stations. JM plans to operate 10 trains comprising six cars each on the two lines by 2016, with each train capable of carrying 1220 passengers. The monorail is expected to transport 300,000-800,000 passengers per day.
Elsewhere, construction has also begun on a 30-km monorail system in Makassar, the capital of South Sulawesi. The 300-passenger-capacity monorail will connect Makassar International Airport and the cities of Maros, Makassar and Gowa.
Some argue, however, that rail is not in a position to replace road as the primary means of land transport. “While the incoming Trans-Java railroad will certainly compete with the road transport sector on certain levels, we believe that using trucks will still be more cost-effective, and that many areas will still not be directly accessible by train,” Daniel Budi Setiawan, the president director of Siba Surya, told OBG.
Indonesia currently has more than 684 operational airports. Of these, 233 are commercial airports, out of which 29 receive international flights. Angkasa Pura I operates 13 primary airports in eastern Indonesia, while Angkasa Pura II manages 12 primary airports in western Indonesia, including Soekarno-Hatta International Airport. Combined, the two operators handle 90% of the total air traffic in Indonesia. The mining firm Freeport Indonesia also operates one primary airport in Papua. The remainder of the financially unviable airports are operated and managed by the MoT.
Since the aviation sector was liberalised in 2001 the skies over Indonesia have become crowded with new air carriers. According to Djoko Murjatmodjo, director of air transport in the ministry of transport, there are 19 airlines operating in the country, but at one point there were as many as 30. Stiff competition has since resulted in a rapid growth of air travel within the country. Growing at an average of about 10% per year, air passenger traffic growth in Indonesia is already the third fastest in the world ( exceeded only by China and India).
With the ASEAN Open Skies agreement coming into play in 2015, this growth is expected to further accelerate. In 2012, Indonesian airports handled a total of 66m passengers (58.8m of which were domestic) and 970,000 tonnes of air cargo. Air freight volumes are forecast to expand at an average annual growth of 5.2% until 2017. Total volume had reached 1.16m tonnes by the end of 2013.
Airlines are therefore gearing themselves up to get a piece of the action. Garuda Indonesia, for instance, wants to make Kuala Namu International Airport in North Sumatra and Sultan Hasannudin Airport in South Sulawesi its new cargo hubs. It is preparing to expand its cargo terminals at both airports and plans to launch a independent cargo division in 2014. Low-cost carrier Lion Air is also set to expand its cargo business, having set up a new cargo division called Lion Express. To meet the increasing demand in air transport the Indonesian government has initiated ambitious development plans aimed at improving the air transport infrastructure. In 2012 it prepared the National Airport Master Plan, which called for the construction of 14 new airports, and the renovation and expansion of 118 existing airports. The MoT is planning to build 45 new airports by 2022, of which 24 are expected by 2017.
Up to 25 commercial airports will also be expanded during this first phase. The $500m Adisutjipto International Airport, in Yogyakarta Special Region (Central Java) is one of the biggest airport projects to go on-stream in the first phase, while the $1.1bn Karawang International Airport in West Java will be taken up in the second phase. The construction of eight airports is already on track.
According to the transportation minister E E Mangindaan, nine new airports in eastern Indonesia and three more in the west will start operations by 2015. They will include the long-overdue Kuala Namu International Airport in North Sumatra and the Waisai Raja Ampat airport in Papua.
However, existing airports are facing over-capacity. Soekarno-Hatta International, for instance, was designed for 22m people but currently handles more than 51m passengers a year. Medan’s Polonia Airport is said to be running at six times its capacity. Bandung sees 1.3m passengers a year, well above its capacity of 900,000. As growth in passenger numbers outstrips the capacity of state-owned firms to build and expand airports, the private sector is being actively courted to meet the rising demand.
At least four new airport facilities in Indonesia are being developed under the PPP model. These include the $214m South Banten Airport, Pandeglang, Banten; the $130m Kertajati International Airport, West Java; the $500m Kulonprogo International Airport, Yogyakarta; and a $510m airport in the northern coastal region of Buleleng, Bali.
In addition, the Indian conglomerate GVK received a contract in November 2012 to operate Bali’s Ngurah Rai International Airport as a joint venture partner with Angkasa Pura I. Almost 40% of all tourists visiting Indonesia pass through this airport. Operated by Angkasa Pura I, Selaparang Airport in Lombok has been moved to Mataram and redesignated as Lombok International Airport.
In addition to this, Surabaya’s Juanda Airport, also operated by Angkasa I, saw the completion of a new terminal in 2012, improving its capacity to handle passengers by another 5m a year, while development plans for Balikapapan’s Sepinggan International Airport include a new terminal which will allow the airport to handle 10m passengers annually. The main gateway, the Soekarno-Hatta International Airport, is also being expanded. In February 2013, a consortium that included Hyundai Engineering was awarded a Rp4.7trn ($470m) contract to construct a new terminal, a train station, a parking area and several roads. Once completed the expansion will be followed by the construction of a new cargo terminal and the integration of terminals 1 and 2.
Work on the $216m cargo terminal facility is scheduled to start in 2014. By then Soekarno-Hatta is expected to be able handle 64m passengers annually. However, this will only be sufficient to meet demand for the next decade as demand is expected to soar to 87m by 2025. The government is therefore exploring the possibility of building a new commercial airport 60 km from the capital. Estimated to cost Rp10trn ($1bn), the new airport will be built in Karawang, east of Jakarta, and will have an ultimate capacity of 70m passengers.
Ports play a major role in the export of Indonesia’s plentiful commodities, which include coal and oil. The country is also developing its role in the container shipping supply chain but is being held back by the generally poor condition of its infrastructure. Indonesia is served by over 700 ports but they have suffered from perennial underinvestment.
Indonesia’s ports ranked 104th out of 144 countries surveyed by the World Economic Forum in 2012/13. The dire state of its ports explains why the country has so far failed to emerge as an export hub. Delays at the country’s ports and roads mean it costs $600 to ship a container from Padang to Jakarta but only $185 from Jakarta to Singapore.
Meanwhile, ports are congested and the process of clearing goods takes too long. According to the World Bank, the average “dwell time” at Tanjung Priok had gone up from 4.8 days in 2010 to 6.4 days in 2012. Waiting times at ports like Pontianak in west Borneo can be as long as 10 days. The country’s main ports are Tanjung Priok and Palembang, and cater to Indonesia’s container, dry and liquid bulk trade. Tanjung Priok, which handles 65% of the country’s cargo trade, has made some attempts to enhance its productivity. Dwell time decreased from 8.7 to 7.7 days between June and July 2013. However, the government’s goal for reaching a dwell time of three days looks unlikely. Tanjung Priok can only process 170 containers a day. Many containers, particularly those destined for eastern Jakarta, have been directed to Marunda Logistics Park and the Cikarang dry port.
Indeed, the main challenges come from the lack of capacity. Therefore, the opening of Kalibaru Port, or New Priok Port, being developed by Pelindo II with an investment of $2.47bn is vital. The first phase of the project will include three terminals which will have a total container handling capacity of 13m twenty-foot equivalent units (TEUs).
The project will cover an area of 400 ha and would also eventually accommodate tank storage bulk transshipment and other port industries. The first container terminal is due to be completed by 2014, while the remaining two container terminals and two fuel terminals are expected to be completed by 2016 and 2017, respectively. The pressure on Tanjung Priok is also forcing operators to increase capacity at other ports. Pelindo III has allocated Rp460bn ($46m) for the expansion of berths and the addition of new cranes at Tanjung Perak Port in East Java and Banjarmasin Port in South Kalimantan.
Additional plans include increasing capacity at Tanjung Sauh, a deepwater port in Batam, by 4m TEUs; undergoing berth space expansion at Tenau Port in Kupang; and constructing a 500-metre wharf at Sorong West Pacific port.
For a country so dependent on commodities exports, Indonesia has surprisingly few ports capable of handling specialised products such as palm oil. Belwan Port in North Sumatra is one such gateway, but it is working at overcapacity and ships often have to wait for up to two weeks before loading. The Indonesian Vegetable Oil Refiners Association says that the country needs three more seaports equipped with special terminals to boost palm oil exports.
Despite the absence of a strong political push to instil more competition in the transport sector, there continue to be reasons for international investors to be optimistic about its future. The country’s economy is growing and the global commodity market will continue to exert pressure for change. Increasing demand for Indonesian coal, for instance, is driving foreign investment in the transport sector – especially in the building of the freight rail network. The fundamental challenge for Indonesia now in advancing its PPP agenda further is establishing and maintaining investor confidence.
While convening investor summits is necessary to promote investments, focusing on strategic projects and getting them implemented sends a more powerful signal to foreign investors. IFC participation in a 116-km build-own-operate-transfer toll road project on the north coast of West Java Province is therefore, symbolically important.
The signing of the land acquisition bill by President Susilo Bambang Yudhoyono in 2012 is an important step towards addressing a problem that has until now held back private sector participation in the sector. The new law clarifies roles, imposes time limits on each phase of acquisition, and ensures safeguards for land-right holders. Land can now be acquired within 260 days in cases where there is no dispute and 583 days if the takeover is challenged.
Most importantly, the law provides a clear mechanism for enforcing the principle of eminent domain, or revocation of land rights that can prevent small interest groups from blocking projects. But the crucial power of revoking land rights still rests with provincial governors and therefore their attitude will continue to bear on the pace of transport projects.
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