With the new administration of President Joko Widodo committed to spending a greater share of the budget on improving the nation’s transport infrastructure and moves under way to provide an enhanced organisational and administrative framework for the sector, there is a new sense of energy with regards to transport in Indonesia. Indeed, with logistics costs equivalent to around 27% of GDP, any efforts to reduce this by boosting the efficiency of the transport sector could make a real difference to the country’s economic growth, in turn translating into increases in per capita incomes.
The government also sees a major role for the private sector in transport infrastructure development. Changes to the way public-private partnerships (PPPs) are handled are planned to boost confidence, as will a more widespread acknowledgment that government funding will often have to take centre stage. In addition, recent administrative reforms have created a much more positive atmosphere among investors, government officials and transport sector professionals, with the years ahead likely to see further initiatives get under way.
Facts & Figures
According to figures from Statistics Indonesia, the transport sector accounted for Rp112.5trn ($9.3bn) of GDP in 2014, up from Rp104.8trn ($8.66bn) in 2013 and Rp97.9trn ($8.09bn) in 2012. As a proportion of total GDP, the respective annual figures were 3.9% for 2014, 3.8% for 2013 and 3.7% for 2012. Broken down by transport type, roads took the largest share, at Rp47.7trn ($3.94bn) in 2014; while air was assessed at Rp24.2trn ($2bn); sea, Rp10.8trn ($892.73m); rail, Rp926.5bn ($76.58m); river, lake and ferry transport, Rp3.76trn ($310.8m); and allied services, Rp25.1trn ($2.07bn). The proportions were roughly the same in previous years.
Road transport also accounts for the largest share of transport costs in the country, according to a 2013 World Bank report, which looked at data from 2011. That year, the World Bank put road costs at 72.21% of the total for transport, followed by water at 19.66%, air at 1.44% and rail at 0.51%. A further study, by the Indonesian Chamber of Commerce and Industry, suggested that firms spend an average of 17% of their total expenditure on transport, while their regional peers generally spend less than 10%.
Geography
In terms of actual volumes moved, however, sea has taken by far the largest share of freight traffic. This is no great surprise when considering that Indonesia encompasses more than 17,500 islands. These islands spread on either side of the equator and have a wide stretch of water, divided into the western, Java Sea and the eastern, Banda Sea, running between them. The population is heavily concentrated on Java – the most densely populated island in the world – which was home to 143m people in 2014, or 57% of the country’s total. Other major population and economic centres are Sumatra and Kalimantan in the western half of the country, which spreads out over three time zones, and Sulawesi in the centre. The eastern half of the country, which includes Papua, Nusa Tenggara and Maluku, is generally poorer and more sparsely populated. Indonesia occupies a strategic location between the Indian and Pacific Oceans; shares maritime borders with Australia, the Philippines, Singapore, Malaysia; and, through the Riau Islands, also has a toehold in the South China Sea. Its only land borders are with Malaysia and Papua New Guinea.
Freight Volumes
According to figures from Frost & Sullivan for 2014, an estimated 1.04bn tonnes of freight was moved by sea in the country, up 4.3% year-on-year, while 25.5m tonnes went by rail (up 8.5%) and 1.34m tonnes by air (up 15.3%). With so much depending on sea traffic, the new government has given special priority to ports in its transport infrastructure development plans.
Ruling Bodies
The main dedicated government institution in the sector is the Ministry of Transport, currently headed by Ignasius Jonan. The ministry is divided into four directorates general covering land, marine, aviation and rail transport, as well as an inspectorate general. Many other government ministries are involved in various aspects of transport, from the Ministries of Trade, Public Works, Agriculture, Environment and Industry to the Directorate General of Customs and Excise, the National Agency for Food and Drug Control, the animal and fish quarantine authorities, police and defence authorities.
Strategy
Coordinating all these agencies to develop a national transport and logistics network and strategy has involved the State Ministry of National Development Planning (BAPPENAS) and the Coordinating Ministry for Economic Affairs. All these agencies played a role in the creation of the National Logistics System Development Blueprint and the Master Plan for the Acceleration and Expansion of the Economic Development of Indonesia (MP3EI). The latter is the country’s long-term development plan, issued in 2011 under the previous president, Susilo Bambang Yudhoyono, and scheduled to run until 2025. It aims to transform Indonesia into one of the world’s top 10 economies by that year, via real annual growth of 7-9%. The total investment needed to implement the plan is Rp4000trn ($330.64bn).
This investment is targeted at transport infrastructure, and the plan explicitly references the goal of increasing connectivity between the country’s regions, both in terms of hard transport infrastructure and ICT. As a result, the MP3EI has set aside some 45% of its budget for infrastructure, including power and water, as well as transport. In the original plan too, the financing for this would also come through PPPs, which account for some 70% of all funding.
However, infrastructure projects are frequently high on long-term capital expenditure and low on internal rates of return (IRRs), a combination that few private sector companies find attractive. As a result, infrastructure investment plans in Indonesia have often not been implemented, and the level of investment in infrastructure remains low. Total infrastructure investment as a share of GDP was less in 2014 than in 2013, according to BAPPENAS figures, falling from 5.07% to 5.04%. Both figures were higher than when the MP3EI was launched – 4.13% in 2011 – but still lower than the average 8.5% of GDP in China, for example, that was spent annually on infrastructure between 1992 and 2011, according to figures from the McKinsey Global Institute.
Looking Forward
The public-private balance is, however, beginning to change. The new government has indicated its awareness of the challenges with PPPs and has begun to take measures to address them. A new National Medium-Term Development Plan (RPJMN) for 2015-19 has been prepared. The new government has also substantially increased budget funds available for infrastructure, with a renewed commitment to transport in particular.
In February 2015 the Indonesian parliament approved a revised annual budget for the year, boosting state spending to an historic high of Rp1980trn ($163.66bn). Capital expenditure was almost doubled, with two of the main beneficiaries being the Ministries of Public Works and Transport. These both received budget increases. The central government allocation for infrastructure was up nearly 50%, at Rp290trn ($23.97bn). The state has taken on an increasing role in funding infrastructure projects in recent years, with the share of financing coming from the private sector falling from around 30% seven or eight years ago to about 10% now.
The revised budget also allows for a reduction in dividend payments by state-owned enterprises (SOEs), strengthening their financial position and ability to fund projects. SOEs are crucial locally as they dominate the construction sector and many other areas central to infrastructure development.
Fuel Subsidies
The increase in funding is being financed by the phasing out of fuel subsidies, which began in November 2014. With the exception of a small subsidy on diesel for fishermen and the very poor, the ending of this growing fiscal burden has freed up some $18bn for fresh government investment. Additional financing has also come from large soft loans from both Japan and China that are helping to facilitate work on infrastructure projects.
Administrative Changes
At the same time, the government has made some significant administrative changes. The Committee of Infrastructure Priorities Development Acceleration (KPPIP) has been established, under the aegis of the Ministry of Economic Affairs. KPPIP specifically targets PPP social and physical infrastructure projects and the regulations surrounding them. The Ministry of Finance (MoF) is also forging ahead with its PPP Centre, tasked with handling PPP project preparation and auction. A PPP Book is being finalised, with Sarana Multi Infrastruktur (SMI) and Indonesia Infrastructure Finance (IIF) established to facilitate project financing, Penjamin Infrastruktur Indonesia (PII) set up to boost project credit worthiness and the Government Investment Centre created to facilitate the financing of land acquisition.
Land has long been a particular challenge for transport infrastructure projects. Land disputes have sometimes left projects idle for years, or led to their abandonment. A new land acquisition law was approved by parliament in 2012, but shortly afterwards ran into difficulties with implementation. In 2015, however, Presidential Decree No. 30/2015 was signed, putting in place better compensation packages and timetables. The process will remain lengthy at up to 500 days, but the new regulations mark a major improvement on previous practices.
Maritime Sector
President Widodo has also announced a major maritime vision – declaring in 2014 that he would work to transform Indonesia into a “global maritime axis”. This would entail a big boost to inter-island connectivity, a substantial upgrade to port infrastructure and a security element in terms of enlarging Indonesia’s naval capabilities. All of this forms part of the “Sea Toll Road” strategy, which aims to address the fact that many large international vessels head for other regional ports, such as Singapore or Port Klang, to offload or transship cargo bound for Indonesia. The strategy seeks to make Indonesian ports more attractive to this international traffic, eventually turning appropriate local ports into international and national hubs.
The government also aims to develop 24 of Indonesia’s 100-plus seaports, including renovation of 11 major and feeder ports to enable them to handle more passenger traffic between western and eastern Indonesia. The remaining 13 ports will be targeted for cargo enhancement, with industrial estate development around these ports also planned.
Sea Toll Road
The Sea Toll Road, which is similar to the previous administration’s East-West Pendulum programme, aims to connect six large seaports as the main centres for maritime trade and manage them all under an integrated system. These are Belawan, the port for Medan in Sumatra; Batam, which borders Singapore; Tanjung Priok in Jakarta; Tanjung Perak, the port for Surabaya in East Java; Makassar in South Sulawesi; and Sorong in Papua.
Four of these are already among the busiest ports in the country. Of these, Tanjung Priok handled the most cargo – some 813,071 tonnes in January 2015 – followed by Tanjung Perak (558,982 tonnes), Makassar (348,481 tonnes) and Belawan (37,185 tonnes). However, in terms of cargo handled, the busiest port in the country was Balikpapan in Kalimantan, which handled 903,654 tonnes that month, according to Statistics Indonesia figures. Much of this is coal, with the country now the world’s largest exporter of coal, most of which is destined for China.
Batam
The logic behind Batam as a key port is its proximity to Singapore, with which it would come into competition for many international shippers. The older container port at Batam, Batu Ampar, is being complemented by a new trans-shipment hub at nearby Tanjung Sauh. The development is being undertaken by the state port operator Indonesian Port Corporation (Pelindo II) in collaboration with the Chinese Merchants Group, and will enable vessels to undertake trans-shipment in the Straits of Malacca without calling at Singapore. The first phase of Tanjung Sauh is expected to be complete by the end of 2015, and will establish a port with a capacity of 4m twenty-foot equivalent units (TEUs).
Pelindo II is one of four such state entities that no longer have a legal monopoly on port services since shipping legislation was passed in 2008. Plans for a potential merger of the four state entities into a single holding company are under consideration.
Sorong
The logic for Sorong in Papua is more political in nature. Eastern Indonesia has the lowest incomes and the least developed infrastructure in the country. In many ways, these are mutually reinforcing factors, and so the development of one is likely to lead to the acceleration of the other. Pelindo II has also been working on Sorong’s expansion, reporting in mid-2014 that difficulties with land acquisition had delayed the project. Ultimately, it aims to have a 0.5m-TEU capacity, cutting freight costs from Tanjung Priok from $2000 per TEU at present to just $375, according to local reports. Pelindo II is working with Pelindo IV and five shipping lines to complete the Rp1trn ($82.7m) project.
Makassar
Pelindo IV is also behind Makassar’s Rp1.5trn ($124m) New Port project. This will start construction in 2015 and is scheduled to be completed in three years’ time. Details in the local press indicate it will have a 320-metre quay and a 16-ha container park. The location of the new project, however, had still to be determined as of early 2015.
Tanjung Priok
Tanjung Priok, meanwhile, is undergoing a three-phase expansion. Phase one, which is well under way, will add $1.38bn of container terminal infrastructure, along with a $730m petroleum product terminal, while the pier length is extended to 4000 metres. The groundbreaking was in March 2013, with Pelindo II announcing it would hold a soft launch of this phase by the end of 2015. The second and third phases of the project are expected to begin construction in 2016 and will see the port expand capacity from 5m TEUs to 18m TEUs, with a 300-metre-wide, two-lane seaway put in place that is capable of handling triple-E class container ships.
Tanjung Perak
Tanjung Perak, operated by Pelindo III, has already made improvements. These include opening a new passenger terminal, Gapura Surya Nusantara, with this enabling a 300% jump in cruise ship passengers in 2014, up from 1762 to 7218. Pelindo III is also set to boost the port’s dry bulk capacity with a new terminal, adding capacity of 5m tonnes a year, as well as warehousing for 200,000 tonnes. A 250-metre dock and two Grab Ship Unloaders are also featured in this $87m investment.
Belawan
Finally, Pelindo I is developing Belawan, with reserves of Rp3.7trn ($305.84m) and loans being invested in a three-stage project that began in 2012. A new 100-metre jetty, 10 cranes in two batches of five, a 700-metre dock extension and, in its final phase, a new port at Kuala Tanjung are all included in the programme, which runs until 2016.
Private Participation
PPPs and private sector participation are being encouraged in these projects. Foreign investment is similarly being encouraged, with PPPs to be allowed a higher level of ownership under new reserved list rules (see Construction chapter). Similarly, there is also increasing pressure to change the rules on cabotage – all vessels operating in Indonesian waters must be Indonesian flagged, except for some in oil and gas – and in the many administrative regulations surrounding maritime trade, although these issues are expected to become less important following the introduction of the ASEAN Economic Community at the end of 2015.
Road & Rail
Indonesia’s roads are increasingly clogged as economic and population growth has outstripped infrastructure expansion. To address this issue, the 2015-19 RPJMN envisages some 2650 km of new roads, 1000 km of new toll roads, and the maintenance and upgrading of a further 46,770 km of roads. In addition, 29 major conurbations are to get funding support for Bus Rapid Transit (BRT) systems, which should help to address major shortfalls in public transport (see analysis).
The RPJMN sets a target of 100% road serviceability (up from 91% at present) and a 32% market share for public transport (up from 23% in 2014). A 2015 BAPPENAS report suggested that this would require Rp1274trn ($105.31bn) of investment in roads during the plan period, if full targets were to be met – an admittedly unlikely scenario given the current bureaucratic constraints. This would be provided by a combination of private sector, SOE, national and regional budgets, as well as other sources.
Toll Roads
Several toll road schemes are already under way too, offered by the Ministry of Public Works, with one of the longest being the 2700-km Trans-Sumatra, which will connect Banda Aceh in the north to Bandar Lampung in the south.
Construction of the Trans-Sumatra toll road began at the end of April 2015, with 24 sections crossing 10 provinces at an estimated total cost of Rp300trn ($24.8bn). Land acquisition has been an obstacle to the project, as have the low IRR and high cost, factors that may be alleviated by the specific reservation in the amended 2015 budget of Rp3trn ($247.98m) for land acquisition for the highway. Hutama Kaya, a construction SOE, has the contract for the project. It welcomes private sector participation, although at which stage of the development process this will occur has yet to be determined.
Two other toll road schemes are also up for PPP tendering – the 94-km, Rp11.4trn ($942.32m) Balikpapan-Samarinda toll road in Kalimantan, and the 39-km, Rp4.3trn ($355.44m) Manado-Bitung road in North Sulawesi. On the latter, the regional government has stepped up, funding the first, Rp800bn ($66.13m) section from its own coffers. A toll road corporation will fund the second section of the project, although its identity has yet to be announced.
Some 73% of all existing toll roads in Indonesia are operated by SOE Jasa Marga (Persero), which has 13 toll road concessions and nine others in the name of its subsidiaries. Also in the field is Citra Marga Nusaphala Persada, which, together with its subsidiaries, has three toll concessions, including one it operates with other private sector players such as Nusantara Infrastructure.
Recently, major SOE construction outfits have also begun to take stakes in toll road projects, with Waskita Karya now holding majority stakes in three toll roads as well as minority positions in two other projects. New toll road concessions typically have a two-year cycle of tariff adjustments.
Take the Train
Another major part of land transport development under the MP3EI and the RPJMN concerns the expansion of the national rail network. Currently under way in this regard is the Jakarta Mass Rapid Transit (MRT) system. Seven aboveground and six underground stations are being constructed in phase one of the MRT project, with eight further stations to be built in phase two. As of late March 2015, the phase one underground stations were reported as being 22% complete and the aboveground stations as 15% complete.
The MRT, which has both a north-south and an east-west line, has been affected by land acquisition and funding issues. MRT officials said that on the former, land acquisition required for foundation work should be completed by November 2015. The 15. 2-km phase one is expected to be open to the public in 2019 at the earliest, and the entire $1.7bn project should be open by 2027.
Backing this up further out from central Jakarta is the Jabodetabek railway network, which combines existing track with the MRT and, originally, with the Jakarta Monorail. The latter scheme has run into trouble, however, and the government has put plans on hold in order to reassess the project. The city was reported to be studying whether to proceed with a new tendering process or focus on Light Rail Transit and BRT alternatives instead.
Further out, there are also plans to build some 3258 km of railway lines on several islands, including Java, Sumatra, Sulawesi and Kalimantan. Currently, Indonesia has a very low railway density in comparison to its peers: 0.25 km per sq km compared to 0.79 km per sq km in Thailand, for example. The existing network comprises some 3464 km of active line on Java and 1352 km on Sumatra, with 2860 km of inactive line on the former and 483 km on the latter. Passenger numbers are 196.68m per year on Java and 5.25m per year on Sumatra, while freight averages 3.9m tonnes per year on the former and 15.25m tonnes per year on the latter.
The government-owned railway operator is Kereta Api Indonesia (KAI). According to the BAPPENAS study, a total of around Rp278trn ($22.98bn) would need to be invested in the network to meet the planned goal, with this achievement radically reducing logistics costs, as well as greenhouse gas (GHG) emissions, as rail is generally more efficient for carrying commodities than road.
As a result, the $3.24bn Trans-Sumatra railway, stretching through the island’s main cities from north to south, has been prioritised, with a feasibility study expected to be completed by the end of 2015. A $2.76bn Trans-Kalimantan railway has also been proposed, which would begin from scratch in 2016, while work on a Trans-Sulawesi line, with an estimated cost of $2.76bn, is set to start in July 2015.
Another major project in the works aims to establish rail links to 13 airports nationwide by end-2019. These will include links to be built at Padang, Batam and Palembang Sumatra; Makassar in Sulawesi; Banjarmasin in Kalimantan; and Jakarta, Yogjakarta, Surabaya and to Kertajati Majalengka airport on Java.
Taking to the Skies
Indonesia’s air transport sector has seen a major increase in passenger volumes in recent years. Two SOEs, Angkasa Pura I and Angkasa Pura II, currently oversee 25 airports – with the latter running the country’s major gateway, Soekarno-Hatta International (CGK) in Jakarta – while the Directorate General of Civil Aviation runs over 120 others. CGK saw 62.4m international passenger departures in 2014, up from 63.7m in 2013. The second-busiest airport is Ngurah Rai on Bali, which handled 41.5m international departures in 2014, up from 34.6m in 2013. The other main international airports are Polonia at Medan and Juanda at Surabaya.
Passenger numbers have also been on an upward trajectory for some time, with domestic traffic rising in tandem with economic and population growth (see analysis). CGK, for example, saw three times as many domestic passenger departures (16.3m) in January 2015 as international departures (5.3m).
To cater to growing passenger traffic and greater cargo volumes, 10 second-tier airports have been selected for development. Eight of these are so-called priority airports: Sentani in Jayapura; Juwata in Tarakan; Fatmawati Soerkano in Bengkulu; S. Baballah in Ternate; Radin Inten II in Lampung; Tjilik Riwut in Palangkaraya; Mutiara in Palu; and H.A.S. Hananjoeddin, in Tanjung Pandan.
Two more airports – Matahora in Wakatobi and Labuan Bajo on the island of Komodo – are also on the list as well. These airports have all been selected for their potential to rapidly generate benefits for their local economies, and a total of Rp182trn ($15.04bn) worth of investment is estimated to be needed to finance their development.
Outlook
With an impressive list of transport projects now on the national agenda, and a swathe of new administrative and legislative moves planned for the near future, Indonesia could see a radical shift in its transport and logistics industry in the years ahead. Progress may not be rapid – there are still many land acquisition and funding issues to overcome – but this time, the political commitment and framework do seem to be in place.
By making government funding a more central part of the process, along with bolstering the SOEs’ ability to invest, it may well be that road, rail, air and sea transport become increasingly fluid, cutting logistics costs – and in the process boosting economic growth and national integration, as island interconnectivity improves. Much remains to be done and greater private involvement will be needed, with many investors playing wait and see, but there is significant optimism about current sector plans.
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