Step by step: Infrastructure and logistics improved to satisfy a growing economy

Transportation and logistics in Indonesia are sectors of great opportunity, but also pose immense challenges. As the economy booms and travel increases, related businesses grow and relevant infrastructure is built. Industries that are directly and indirectly involved in any of these activities, from airlines to construction companies, will benefit. At the same time, the transportation networks and systems are put under stress as the economy expands rapidly. This is especially a problem in Indonesia, where existing infrastructure is poor and the adding of capacity can be slow and inconsistent. Over the next few years, transportation and logistics promise to develop quickly, although not always in a balanced way. Connectivity will improve and some corridors will become international standard, though gaps may remain.

OPENING WINDOWS: Indonesia’s so-called National Single Window programme highlights some of the challenges. Introduced in 2010 in five locations – Jakarta’s Tanjung Priok, Surabaya’s Tanjung Perak, Tanjung Emas in Semarang, Medan’s Belawan Port and at Soekarno-Hatta International Airport — it should have automated and simplified procedures for goods entering the country. The National Single Window promised to allow for the seamless movement of cargo from other ASEAN countries as the region integrates economically. Using an information technology platform, shippers were supposed to be able to submit their data once for dissemination to all the decision makers in the Customs process, such as the Customs, health, and security authorities and the port itself. The goal was to reduce clearance time to 30 minutes, improve transparency and eliminate corruption. But two years after the formal opening of the service, it still takes one to two days for the clearance of items moving through the Green Channel and a week through the Red Channel; shippers still have to print out a hard copy of their paperwork – paperwork that was supposed to be in an electronic format. It also appears that Customs procedures are still used to protect the domestic market, with goods being held up in order to discourage imports. “It is still very slow,” said Zaldy Ilham Masita, the head of the Indonesian Logistics Association (ALI), of the Customs process overall.

MANY MOVING PARTS: A number of similar reforms, projects and initiatives in transportation and logistics are in the works, but most have been suffering from the same sort of problems. Good ideas have been poorly and inconsistently implemented, so that while some impressive progress has been made in individual areas, the whole itself does not function very efficiently. But while many aspects of the transportation system are less than ideal, some areas are excellent, and elsewhere the government and private industry are working to transform the sector.

Airlines are becoming highly competitive and the archipelago is dotted with new airports. However, the major hubs are still choked with passenger traffic. A comprehensive shipping network exists, with an estimated 700 ports, but many of the ports are substandard and some of the routes are not very competitive. Imbalances exist throughout the network, in that boats will often return empty from certain ports. While mass transit systems have been built, they have not been well integrated with the cities they are in, and tend to pick up and deposit people in inconvenient places. As with Customs clearance, many efforts relating to transportation are finished late, and tend to fail to work as planned.

The statistics reveal the problems. According to a recent study by the Indonesian Chamber of Commerce and Industry’s (KADIN) Economic Research and Development Studies Institute (LP3EI), logistics costs in Indonesia are equal to 24% of GDP — or Rp1820trn ($182bn) annually — compared with 15% in Malaysia, and 10% in both Japan and the US. The institute found that storage costs were Rp546trn ($54.6bn), transportation costs totalled Rp1092trn ($109bn) and administrative costs came in at Rp182trn ($18bn). In the World Bank’s Logistics Performance Index, the country fell from 43 in 2007, ahead of Vietnam and the Philippines, to 75 in 2010, dropping below the two neighbours and countries like Uzbekistan and the Dominican Republic. According to the World Bank, it costs around $600 to ship a container from Padang to Jakarta, but only $185 from Jakarta to Singapore.

The TransJakarta Bus Rapid Transit (BRT) system is one plan that is a success in many respects, although it has some gaps. Inaugurated in 2004, the system has 11 routes, runs 172 km and operates a fleet of 545 buses. In 2011 it carried 114.1m passengers and daily ridership was up 31.3% for the year. Buses come every few minutes to the stations, which are elevated for easy access and connected to the sidewalks by ramps and staircases, and passengers ride the system for Rp3500 ($0.35). The 11.76-km Corridor 11 was put into service in January 2012 and has 16 stations. Three more routes are planned, the next of which will be put into service in 2013. The TransJakarta BRT has been identified as a model system, reducing carbon emissions by 54,000 tonnes a year, the equivalent of taking 10,000 cars off the roads.

CONNECTING THE DOTS: The system also has many critics, and overall TransJakarta may not have improved much in the capital city. Commuters and experts in transportation say that the bus routes are not integrated efficiently with other modes of travel, and in the end may help just a few while inconveniencing others. They take a full lane of road that would otherwise go to cars, and in many areas seem to make the congestion worse. Because the network is not completely independent of the road system, the buses often get caught in traffic; traffic police have to be on duty to prevent this from happening. In addition, the stations are situated such that passengers need to take other forms of transportation — such as motorcycle taxis — to get to them. While the concept is broadly sound, it was put into place without considering the larger picture and taking care of many of the vital issues of management and coordination. Experts say that between now and the building of longer-term solutions, such as the Jakarta Mass Rapid Transit (MRT) system, the priority should be to work with what exists to ensure proper functioning rather than waiting for mega-projects to be completed.

“I believe the MRT should be a mid-term goal. But what should be done in the short term?” said Eka Sari Lorena Soerbakti, chairwoman of the Organisation of Land Transportation Owners. “We need to improve and optimise the routing and feeder systems. What can we do now as we prepare for other things?”

Interim solutions are important because the MRT and the monorail, the two major infrastructure solutions for Jakarta’s traffic, remain stalled. While the MRT – in the planning stage since 1985 and set to be 110 km in length once completed – has received a JPY50bn ($565m) funding commitment from the Japan International Cooperation Agency (JICA) for the first 14.5-km section, Jakarta Governor Joko Widodo has expressed concern over the project. He has said that the price tag of Rp1trn ($100m) per km is too expensive and that the central government ought to pay more. The Ministry of Finance has also called for Jakarta to take on 58% of the cost; the governor wants the city to pay for just 40%.

ONE TRACK MIND: The governor is also interested in continuing with the Rp12trn ($1.25bn) Jakarta Monorail (JM) project, which has been on hold since March 2008 due to financing and legal troubles. State construction firm Adhi Karya, which owned 7.5% of the company and has been involved in JM since it was formed in 2004, wants to withdraw from the project and be compensated for the capital it invested for the construction of supporting pillars, now abandoned. The system would have been 27.8 km in length, with two lines (one 14.3 km and one 13.5 km). Feasibility was the main stumbling block. Investors wanted a guarantee from the government to cover losses in case ridership was too low, but pricing the ticket high enough to make the line profitable would have been too expensive for most citizens.

AIR TRAVEL: The situation is similar in air transportation. The decision to open the airline market in 2001 and allow more carriers to be formed (only two planes were needed to start an airline) was wise. At one point, about 30 carriers had air operators’ certificates and many were run on the discount model. The result has been a strong air travel market, with a compounded annual growth rate in domestic passengers carried at about 21% from 2004 to 2009, according to Garuda Indonesia calculations. Domestic passenger numbers were up 12% in 2011 (58.84m vs. 51.7m in 2010). Of the trips made in the country in 2011, around 40.3m of those were by budget travellers, according to Garuda. The airline expects the total number of domestic passengers to reach 90.6m by 2015 and growth to average 11% a year in 2011-15, with budget travel growing 13%.

But the underlying infrastructure has not kept pace with the growth of the carriers. The country’s main airport, Soekarno-Hatta International Airport, currently handles 51m passengers a year, even though it was designed for 22m. Medan’s Polonia Airport is said to be running at six times its designed capacity. Bandung sees 1.3m passengers a year, above its capacity of 900,000, and Denpasar is also said to be taking more passengers than its limit. Air traffic control systems are reported to have failed. In total, the country has 140 airports with International Civil Aviation Organisation (ICAO) codes and 13 international airports. They are: Soekarno-Hatta, Juanda, Ngurah Rai, Polonia, Hang Nadim, Minangkabau, Pattimura, Adisutjipto, Adisumarmo, Sepinggan, Syamsudin Noor, Sultan Hasanuddin and Sam Ratulangi.

FLIGHT DELAYS: The airlines themselves have had their share of troubles. In 2007 all Indonesian airlines (51 in total) were on the EU blacklist, meaning that these airlines could not fly to the EU and that citizens of EU countries were recommended not to fly on these carriers. The US Federal Aviation Authority currently rates Indonesia as a Category 2 country; its carriers do not meet ICAO standards, and they cannot fly their own aircraft to the US. The industry suffered a number of high-profile crashes in 2007 and a series of other incidents. Reports indicate that some of the smaller carriers do not properly maintain their planes and in some cases make the pilots fly without their electronic navigation working.

According to reports from the Ministry of Transportation, Lion Air’s on-time performance (OTP) was 66.78% in the 11 months through November 2011. The ministry also reported Merpati Air’s OTP at 68.43% and Sriwijaya Air’s at 69.87%. Merpati cancels almost 10% of its flights, the highest rate in the country. According to the Aviation Safety Network, Indonesia has suffered 121 crashes in its aviation history and has recorded 2367 fatalities.

THE BIG BOTTLENECK: But the transportation of goods may pose the greatest threat to the economy, corruption playing a major role in the high costs of logistics. The ports are under several different authorities with overlapping jurisdictions and at each level the possibility exists to demand fees or informal payments. The Customs office, the Marine Police, the Ministry of Marine Affairs and Fisheries, the Ministry of Transportation as well as local authorities all oversee a certain element of shipping and extract tolls along the way, making Indonesia one of the most expensive places in the region for the domestic transportation of goods. The Indonesian National Shipowners’ Association (INSA) estimates that the industry paid about Rp5.5trn ($550m) in 2011 in illegal fees, and perhaps double that if time lost on inspections is included.

Ports are congested and the process of clearing goods simply takes too long. In July 2012 C. Alleson, the chairman of INSA Jaya, said that ships were waiting in line for five or six days at Tanjung Priok because of ongoing repairs at the port, which handles about 65% of the country’s international traffic. Reports indicate that the wait times at Pontianak Port in west Borneo are often about 10 days. One marine operator complained in 2012 that a container of spare parts coming from China costs a total of $1200 to ship to Pontianak – $300 from China to Tanjung Priok and $900 from Tanjung Priok to Pontianak.

“There is too little in terms of capacity to handle the growth,” said Edimon Ginting, the senior economist for Indonesia at the Asian Development Bank. “Goods are in the port longer than travelling.”

“Dwell time” can also be an issue. Containers spend an average of six days in port, up from 4.9 days in 2010, according to the World Bank. The system is full of minor flaws that add up to major delays. Storage charges are low, creating an incentive to leave containers in port for long periods of time. Duties and taxes must be paid before paperwork is submitted for a shipment, leading to a delay of about a day as funds clear. Some shippers just give up altogether and unload their goods in Singapore or Malaysia, allowing someone else to move the goods to Jakarta. As it stands now, no major international shipping service stops at any Indonesian port as these services run on tight schedules and cannot afford the long and unpredictable unloading times.

Some solutions to problems related to costs and the issue of delay are being presented by domestic firms. “Local conglomerates see logistics as a ‘backroom’ cost centre and not as a strategic unit. Their focus is generally placed on increasing sales and improving manufacturing efficiency,” said Hans Leo, the president director of Linc Group, an Indonesian firm offering supply chain solutions. “However, I believe that slowly they are coming to realise the benefits of improving their supply chain and logistics structures. Companies could, for instance, keep inventory levels low and cover more areas of the country – and all that faster and cheaper than they are doing today.”

FIX THAT TRUCK: Other small problems affect the transportation network and add to overall costs. Most domestic operators, shippers and truckers are under-capitalised and generally not well trained. Domestic interest rates are too high – 12.4% in 2011, according to the World Bank’s statistics – to buy new equipment. The margins cannot cover the interest payments, so they often cannot afford new equipment. This in turn leads to breakdowns and spoilage, which adds to the overall cost of transportation. The average age of a truck is placed at 10 years by ALI. The cost of a bag of cement is so steep in Papua not only because of inefficiencies and corruption, but also because so much of the goods delivered to Papua from Jakarta arrive unusable.

“Domestic distribution is our biggest bottleneck because of the quality of trucks and labour,” said Hanns Hauptmann, the chairman of EuroCham’s Transport and Logistics Working Group. “Productivity could be increased with education and knowledge. If you are conscious of your equipment, it will not break down. There is no magic bullet. We need to build in buffers, which cost money.”

Traffic and the state of the roads affect all aspects of society, including people and goods. In 2011 the Ministry of Transportation estimated that Jakarta was losing about Rp28.1trn ($2.8bn) a year because of the congested roads, Rp10.7trn ($1.07bn) because of wasted fuel, Rp9.7trn ($970m) because of lost productivity and Rp5.8trn ($580m) because of the toll that traffic takes on health, with the owners of public transportation services facing a further Rp1.9trn ($190m) in losses. In a global survey of commuter satisfaction that was published by Frost & Sullivan in 2011, Jakarta came in last out of 23 cities; the average speed of a vehicle travelling in Jakarta has been estimated at 8.3km to 20km per hour in recent years.

THE WRONG SUBSIDY: While the Indonesian government is actively trying to fix transportation, some of its polices only serve to make it worse. The fuel subsidy is the most notable. It is estimated that in 2012 Indonesia spent around Rp222.8trn ($22.2bn) subsidising 45.27m kl of fuel. The amount spent is almost equal to the nation’s current account deficit and it is more than the country spends on infrastructure investment. According to the Institute for Transportation and Development Policy, the subsidy also leads to more traffic.

Many see numerous benefits in eliminating the subsidy. Daniel Podiman, the president director of Express Taxi – which completed its initial public offering in November 2012 – told OBG, “The removal of government fuel subsidies would provide an opportunity for this sector to grow, as it would help reduce the usage of private transportation. With higher fuel tariffs, people will prefer to use public transportation to save money. Thus, taking taxis can be a great solution for the booming middle-class.”

It will not be easy to get rid of the subsidy. While unpopular as it is seen as benefitting the rich far more than the poor, it is still difficult to do away with. According to a 2011 World Bank study, the top half of households in terms of income used 84% of the subsidised fuel, but the lowest 10% only used 1%. When the government proposed to drop fuel subsidies in 2012, thus allowing the price of fuel to rise by a third, thousands of citizens protested. With the country holding elections (for both parliament and president) in 2014, any changes will be especially difficult.

Added to the fuel subsidy is the government’s plan to support the development of a low-cost green car (LCGC). It has been proposed that people buying an LCGC, which is defined as a vehicle with an engine with a displacement of less than 1200 cc and a fuel efficiency of 20 km to 22 km per litre, will receive a tax break. The hope is to get the total price below Rp100m (about $10,000), making them affordable to middle-class drivers that are hoping to upgrade from a motorcycle. While the programme might reduce pollution and help promote the local auto industry, it is also seen as exacerbating the traffic problems. The plan does not adequately take into account how the product will fit into an already crowded system, one lacking in roads, parking spaces and expressways. “The government allows cheap cars to enter the market, and for me that is not where we should be going,” said Soerbakti. “They are giving incentives to small, green cars.”

Others agree with Soerbakti. “One of Indonesia’s most prominent challenges at the moment continues to be transportation infrastructure. Many industries rely heavily on the improvement of roads, ports and trains,” said I Ketut Mardjana, the president director of state postal firm Pos Indonesia, “At this point, the government should focus on channelling domestic and foreign investment to solve this issue, so that the transport of goods, workers and materials can match up to a booming economy like Indonesia’s.”

UP THE RANKINGS: While transportation and logistics certainly face many problems, the situation is beginning to improve. In the UN’s Logistics Performance Index, the country jumped from 75th in 2010 to 59th in 2012. Its scores rose almost across the board. Customs went 2.43 to 2.53. Timeliness went from 3.46 to 3.61. Logistics competence went from 2.47 to 2.85. Only infrastructure failed to rise; it was flat at 2.54. Some changes, especially those related to infrastructure, have been and will be incremental. It will take time to build new roads and bridges. Other areas, such as air travel, are growing fast and will lead to noticeable differences right away. While the country has its bottlenecks, it also has great potential. And this is being noticed by more and more local and international investors.

Critical or clearly bankable infrastructure is also drawing a fair bit of attention and seems to be facing much less resistance. The 65-km Soekarno-Hatta airport link is a good example. Financial close for the project is scheduled for 2014 and it is expected that construction will begin that year. The plan is to have two lines. One will be a Rp1.7trn ($170m) commuter line and that will be built by state airport company Angkasa Pura II and state railway operator Kereta Api Indonesia. The other will be an elevated express line that will cost about $1.1bn and be open to private participation. Companies from at least four countries have expressed interest.

The expansion of Soekarno-Hatta airport is also important. Groundbreaking was in 2012 and the project, which will increase passenger capacity from 22m to 62m, will be completed in 2014. The project will cost Rp11.7trn ($1.17bn) and take capacity to 18m a year at Terminal 1, 19m at Terminal 2 and 25m at Terminal 3. In addition, the country is constructing an international airport at Karawang, which is about 50 km east of Jakarta, with the hope that it will become an alternative gateway for the capital and relieve pressure at Soekarno-Hatta. Construction will begin in 2015 and the Rp10trn ($1bn), 900-ha airport with a capacity to handle 20m passengers a year is scheduled for completion in 2019.

NEW AIRPORTS: More airports are planned for elsewhere in the archipelago. According to Herry Bakti S Gumay, the director-general of air transportation at the Ministry of Transportation, the country hopes to build 45 airports over the next decade, 24 of which to be completed by 2017. The largest of these is Kuala Namu International Airport, which started operating in soft-launch mode in early 2013. It will replace 70-year-old Polonia Airport and become the hub for Sumatra and western Indonesia. When fully operational, it will handle 8m passengers a year, compared with the old airport’s capacity of 1m. Its capacity could eventually be expanded to 50m.

Improvements are also being undertaken at the ports. In 2012 Pelindo II (also known as Indonesia Port Corporation) embarked on a $4bn expansion of Tanjung Priok. The company’s plan is to build New Priok 7 km from the current port. The project includes three container terminals, an oil and gas terminal, and a 7-km road extending to the old port. It will boost total capacity from the current 5m twenty-foot equivalent units (TEUs) to 18m TEUs when completed, which is set for 2023. It has been estimated that about half of the investment will go to building the container terminals, a third to a petroleum production terminal, and an eighth tow related infrastructure, a power station and an industrial area.

OUTLOOK: Transportation and logistics problems in Indonesia cannot be fixed overnight. There is simply too much to do. But over time, incremental progress will be made, and investor confidence will increase and more money will be available for infrastructure. If a few projects can be finished, or even if some real progress can be achieved beyond the planning stages, momentum will be created that could significantly improve transportation systems in the country. Indonesia does not have to do everything at once. All of the government’s expansion plans do not need to be finished immediately – the country simply needs to follow through on its plans, and the rest should fall into place.

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The Report: Indonesia 2013

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