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Services | Indonesia’s Maritime Infrastructure: Key Challenges Remain

Soon after his election in 2014, President Joko Widodo announced major policies that focused on infrastructure development (See High Stakes for Indonesia's New Infrastructure Push) including turning Indonesia into the epicentre of Indo-Pacific maritime activity. Under the Global Maritime Fulcrum (GMF) master plan, the new President hoped that the maritime sector could contribute up to 25% of GDP compared to the present figure of just 11%. The sector, however, continues to face many obstacles as the Indonesian government’s centrepiece policy comes under greater scrutiny leading up to the next presidential elections in 2019.

Indonesia’s Maritime Infrastructure: Key Challenges Remain
Unless the Indonesian government boosts economic growth outside of Java and Sumatra, maritime infrastructure will have limited impact in the areas it is trying to connect
 

The lack of development in Indonesia’s maritime infrastructure has been a crucial factor in the country’s high logistics costs (See Indonesia’s Logistics Sector; Making Connections). Dwelling times in the country’s ports, specifically the Tanjung Priok port in Jakarta — Indonesia’s largest, handling some two-thirds of all shipments — stood at seven days in 2014. This reduced the competitiveness of export-orientated industries throughout Indonesia, and the resulting bottlenecks at the port affected the costs for domestic businesses and in turn, the prices paid by consumers. Additionally, worsening traffic surrounding the port added to the already dire traffic conditions in the Greater Jakarta region. As such, compared to that of neighbouring countries, logistics costs in Indonesia constitute some 30% of GDP; significantly higher than that of Malaysia (17%), Thailand (16%), and Singapore (15%).

The inadequate performance of Indonesia’s logistics system is preventing the country from fully participating in the global production network. As a country with an uneven population distribution, developing much-needed infrastructure is therefore vital in tackling regional disparities and making the country far more cohesive; thus realising its economic potentials. 

The latest developments

West Java stronghold

Major maritime infrastructure developments have been dominant in western Indonesia, specifically western Java (See BKPM Regional Offices to Encourage Investment in Indonesia Outside of Java), since close to 80% of national economic growth is attributed to this region. The Tanjung Priok port had customs handling processes that were six times longer than that of Singapore and coupled with limited capacity, the port became notorious for being the least efficient in Southeast Asia.

To combat these constraints, the Indonesian government initiated the New Priok Development Project in 2014 which aimed to extend the existing port and increase its cargo handling capacity. Developed and operated by state-owned enterprise PT Pelindo II in consortium with Singapore’s PSA International and Tokyo-listed Mitsui, Phase 1 — a newly built container terminal— was completed in 2016 and is the first of five expansion phases at the port. In less than two years, the new terminal recorded a throughput of 1 million TEUs (Twenty Feet Equivalent Units) with the completion of the project set to increase the port’s capacity to 11.5 million TEUs per year, a major increase from its current 7 million TEU capacity.

Furthermore, port authorities have simplified permit procedures through its online one-stop integrated service. This has contributed to the reduction in dwelling times from seven days to almost three, and the government aims to lower this further to 2.2-2.5 days. This highlights the importance of soft infrastructure to complement the hard infrastructure developments as issues surrounding bureaucracy and customs clearance hinder the advancement of Indonesia's maritime sector.

Foreign investor interest

In moving towards its goal of becoming a global maritime player, the Indonesian government has sought to encourage the involvement of foreign investors. Japanese companies Penta-Ocean Construction, Toa Corporation, and Rinkai Nissan Construction are partnering with local construction companies Wijaya Karya and Pembangunan Perumahan to build the Patimban port in Subang, West Java province. The $1.2 billion-USD deep sea port is set to be partially operational in 2019, with a capacity of 1.5 million TEUs. The new port will support the transportation of cargo to and from the province which was previously served by Tanjung Priok. This shows how foreign investor interest continues to remain where industrial production areas — such as in the provinces of West Java, Greater Jakarta, and Banten — are, compared to more pioneering projects in the eastern regions of the country where large industrial productivity is low.

Further policies were later introduced that aimed at expanding the country’s shipbuilding industry (See Indonesia’s Shipping & Shipyard Industry). State-owned enterprises in this segment were banned from buying vessels from abroad and tax incentives on imported components were provided. These measures aimed to encourage investment, however, the sector is not yet equipped to build large-scale vessels as most of the country’s shipyards are catered towards smaller vessels.

Given its location in one of the world’s busiest waterways, Indonesia holds potential for the export of vessels in addition to developing its own ship repair and maintenance services industry. The main problem for this industry is the limited supply of equipment and components as those that are produced domestically are too expensive and thus have to be imported, hampering the industry’s competitiveness with overseas suppliers.

Sea tolls; The flagship program

The flagship program of the Indonesian government’s maritime infrastructure objectives has been the implementation of sea tolls that connect the Tanjung Priok port in Jakarta and the Tanjung Perak port in Surabaya with 41 new ports throughout Indonesia, namely in Maluku, Riau, and Papua. Initially starting with six routes in 2015, 15 routes have been established up to 2018. The program has resulted in 212,000 tonnes of cargo being shipped from western Indonesia (mainly western Java) into eastern Indonesia out of a total target of 517,000 tonnes. However, conversely, only 20,000 tonnes of cargo out of a targeted 517,000 tonnes were shipped from eastern Indonesia into the western regions.

This has been attributed to factors such as poor supporting infrastructure, from the shortage of warehousing to inadequate road capacity in the historically-less developed eastern regions of the country. Furthermore, the lacklustre impact of the new infrastructure has also been due to the insufficient investment made in human capital in addition to weak governance, culminating in the development of disparate economies and low industrial development.

Confronting Indonesia’s maritime challenge

Maritime infrastructure will play an integral role in the success of the government’s GMF vision. The announcement of the GMF plan focused on several pillars: rebuilding the maritime culture, managing marine resources, developing maritime infrastructure and connectivity, boosting maritime defences, and advancing maritime diplomacy (See Indonesia’s New Maritime Law; A Big Catch for Investors). The vision called for investments of $55 billion USD to develop 24 seaports and up to 1000 freight handling centres across the country. The intention behind this has been to tackle the myriad of threats that Indonesia is constantly facing such as illegal fishing, pollution, and illicit trafficking (arms, drugs & humans).

So far, the GMF has achieved little real substance, largely due to a lack of resources and bureaucracy as up to 12 national agencies play overlapping roles in the development of the maritime sector. Additionally, the GMF has been unable to leverage China’s One Belt, One Road initiative with cooperation being impeded by continuous intrusions by Chinese trawlers around the Natuna Islands. Without a resolution to these territorial disputes, the cost of failure will be far greater for the GMF as the various projects it has proposed — particularly those related to infrastructure — will be looking for support from Chinese investors (See What China’s Slowdown Means for Indonesia: An Investment Perspective).

To further complicate the problem, many of the country’s 17,000 islands benefit from only loose or intermittent contact, especially those located in the outer-islands of eastern Indonesia. As a result, these islands such as those in the Moluccas archipelago, have become self-sufficient economies not benefiting nor contributing to the wider national economic development. To provide basic coverage of its 6 million square kilometres of water, Indonesia would require some 300 vessels; illustrating the huge task facing the government. 

Time running out?

With upcoming presidential elections in 2019, President Joko Widodo is under scrutiny to deliver on his election promises. According to the World Bank, Indonesia’s Logistics Performance Index ranking has improved from 63rd to 43rd place amongst 160 nations. The absence of a comprehensive blueprint, however, could affect this as ongoing infrastructure projects are vulnerable to bureaucratic roadblocks and corruption as well as the current state of sluggish economic growth, (See Indonesia’s New Credit Rating: What Does This Mean for Investors?) which could all hamper their realisation.

Furthermore, unless the Indonesian government boosts economic growth outside of Java and Sumatra — the two regions that contribute 60% and 20% respectively to total GDP — maritime infrastructure will have limited impact in the areas it is trying to connect. As such, despite the country’s strategic location, work is still needed to be done for Indonesia to capture the 40% of world sea traffic that passes through its waters.

The government’s plans to upgrade Indonesia’s maritime infrastructure, therefore rest on whether they can attract significant foreign as well as domestic private investment. While investors have shown interest in such projects, creating diverse hubs to compete with the likes of Singapore will require time, additionally, foreign investors are also wary of Indonesia’s challenging climate to do business. Yet, the success of these projects is necessary for the country to achieve greater connectivity through which remote communities are no longer isolated from economic, political and social centres; thus transforming the country’s oceanic realm into a strategic asset.

Global Business Guide Indonesia - 2018

Indonesia Services Snapshot

Contribution to GDP: 42% (2016)
Sector Growth: ICT 17%, Hospitality 4.53% (yoy, 2016)
Number Employed in the Sector: 54.9 million (February 2015)
Main Areas: Retail, Transportation, Media, Telecommunications, Finance, Hospitality, Tourism.
Government Bodies: Ministry of Trade, Ministry of Tourism, Ministry of Transportation, Ministry of Manpower.