Prioritising ports: The modernisation of ports is a prerequisite for economic expansion

Sea transport is vitally important to Indonesia. The archipelago nation’s maritime zone covers 7.9m sq km, almost four times its land area. While coastal shipping accounts for about 7% of total national freight and passenger movements, 90% of Indonesia’s external trade is conducted through seaports. Between 2005 and 2010 container throughput increased by 11%. Despite this double-digit growth, Indonesia’s ports handle no more than 10m twenty-foot equivalent units (TEUs) of cargo annually – far below most of its Asian peers. Indonesia’s geographical position places it at the centre of some of the world’s major shipping routes. Major shipping lines such as Maersk Line, CMA CGM, Hamburg Sud and Evergreen have operations in Indonesia. Given its geography, population, size and sheer dependence on waterborne transport, the development of port infrastructure acquires critical importance for Indonesia.

Lagging Behind

Indonesia is served by over 700 ports. Of these, 111 are commercial ports operated by state-owned companies Pelindo I, II, III and IV, and only 11 are container ports. The bulk of the container traffic is processed through three main container terminals: Tanjung Priok in Jakarta, Tanjung Emas in Semarang, and Tanjung Perak in Surabaya. Tanjung Priok is the country’s largest international container terminal and handles 65% of its entire cargo trade. It is extremely congested and is working well beyond its peak capacity. Tanjung Priok’s performance lags behind that of most other major ports in South-east Asia. Measured by container volume handled, the port ranked 24th in a list of 50 major ports in the 2005 World Port Rankings (Containerisation International 2008). Tanjung Priok also falls behind in Customs clearance, ship turn around time and port efficiency. The performance of smaller ports is little better. Cargo movement productivity at almost all Indonesian ports is slow. The average turnaround time for ships is anything between three and five days, with loading and unloading activity taking up to 35% of the time at the port. Therefore, despite its many advantages Indonesia has not yet emerged as a logistics hub. The single most important factor inhibiting Indonesia’s emergence as a major supply chain centre is the relatively dilapidated condition of its port infrastructure.

According to the World Economic Forum’s “Global Competitiveness Report 2013-14”, the country’s ports scored a 3.9 out of 7.0 and ranked 89th in a list of 148 countries. They are not expanding or modernising quickly enough to keep pace with the country’s macroeconomic growth. Indonesia has few natural deepwater harbours, and its river system is prone to serious siltation, which restricts port depth.

Therefore, the country’s ports are only able to accommodate ships that are carrying up to 4000 containers. Although this is adequate for intra-Asian trade, it has made servicing markets further afield highly uncompetitive. As a result, Indonesian ports have been left behind by neighbouring Asian rivals such as Vietnam, which have become ports of call for direct services to the US and Europe owing to their ability to handle larger vessels. Similarly, connections between ports require further improvement.

“Intra-port connectivity in the form of road and rail infrastructure is absolutely vital and more taxation should be placed upon road users so to reduce usage of these particular roads or at least improve their current quality and durability,” Danang S Baskoro, president director of ASDP Ferry, told OBG.

Congestion

Since the ASEAN-China Free Trade Agreement came into effect in January 2010, Tanjung Priok, the country’s main trade gateway, has seen constant congestion. Tanjung Priok was designed to handle 5m TEUs, but it handled 5.6m TEUs in 2011 and 6.2m TEUs in 2012. Container throughput at the facility is projected to expand by 65.5% in the next four years to reach 10.3m TEUs in 2017. However, without significant investments in port capacity expansion as well as an overhaul of its infrastructure, it is hard to see how Tanjung Priok could manage such an increase.

New Developments

But the outlook is not all gloomy. Investments are being made in port development. The most exciting case is the development of a new facility, 7 km along the coast from Tanjung Priok, known as the New Priok, or Kalibaru Port. It will cost $2.5bn and is expected to be completed by 2018. Pelindo II officially started construction in March 2013. The first phase of New Priok, a 1.5m-TEU-capacity container terminal, is due to open in the second half of 2014. With a 16-metre draught, the facility will be able to handle large ships with capacity of up to 8000 TEUs. Plans are afoot for the port to ultimately accommodate to very large container vessels with a capacity of 18,000 TEUs or more. The first two phases will cost up to $4bn. Medium-term developments at the new port, which include plans to add two more container terminals with a total capacity of 3m TEUs by the end of 2016, will ensure the facility remains ahead of demand and problems of congestion can be overcome. The New Priok port signals lucrative opportunities for the investors in Indonesia’s port infrastructure sector. Once completed it will have a total capacity of 13m TEUs, making it by far the single largest port in Indonesia. However, the port is not the only one in the pipeline. Indonesia also has plans to develop a diverse number of container ports.

Pelindo III is to build a new terminal at the Teluk Lamong Port in Surabaya, East Java that will begin operations in 2014. The port will have a 600,000-TEU capacity, with a 950-metre-long quay and maximum basin depth of 14 metres. Pelindo IV will also start work on the Makassar New Port in 2014. It will have an annual cargo handling capacity of almost 300,000 TEUs in its first phase of development and will feature a draft of 14 metres and a dockyard of 320 metres. The new port is expected to be operational by the end of 2016. Two other container facilities – Kuala Tanjung Port and Tanjung Sauh Port – will add a further 1m TEUs and 4m TEUs, respectively, to Indonesia’s container port’s capacity. Kuala Tanjung Port will be able to handle the new class of mega vessels with a draught of 17m. A total of eight port projects worth $15.8bn were envisioned in 2012. This includes construction work of $4.14bn at the Cilamaya Port in Karawang, West Java (scheduled to begin in 2017) and $3.2bn for the Bitung International Port in North Sulawesi.

Private Sector Participation

Investors have mostly shied away from port infrastructure due to the lack of a clear regulatory framework, few bankable projects and low returns on investment. PPPs started in 1995 with a concession to Hutchison Whampoa to rehabilitate and operate Koja Container Terminal for 20 years. Desperate to raise capital during the Asian financial crisis, the government carried out a partial privatisation of the Jakarta International Container Terminal, selling a 52% stake to Hutchison Whampoa. It also sold 49% of Tanjung Perak Container Terminal to P&O (DP World). Subsequent efforts to offer Bojonegara Port in West Java and Lamong Bay Port in East Java to private investors have not been successful.

Before the new maritime law (Law 17 of 2008) came into force, Pelindos acted both as landlords and an operator under PPP contracts. This has deterred private investment. There are simply too few PPP projects to go around. Then there is the question of tariffs. Investors expect port tariffs to be determined through a competitive bidding process, but tariffs, in accordance with law, are set by the port authority after consultation with the Ministry of Transportation and are often too low to generate interest from investors.

Big Players Show Interest

Indonesia’s most pressing challenge will be to improve the efficiency of its ports. In 2014 the country’s four major port operators – Pelindo I, II, III and IV – will come together to form a new container terminal company, Petikemas Indonesia. The new company will operate terminals at Belawan (North Sumatra), Batu Ampar (Batam), Tanjung Priok, Tanjung Perak (Surabaya), Makassar (South Sulawesi) and Sorong (Papua). It is hoped that by pooling resources and sharing expertise the operator will cut down on the cost of logistics and integrate terminal operations across the island.

International terminal operators are slowly expanding their footprints and getting more involved in running facilities and developing ports in Indonesia. The development and operation of the first New Priok container terminal was awarded to Japan’s Mitsui & Co in February 2013. This Japanese investment is set to attract the Japanese shipping lines Mitsui OSK and NYK to the terminal as well as Evergreen, Hanjin Shipping and APL. Singapore-based international ports operator PSA International is reportedly keen to participate in a bidding process for the main contract to develop the New Priok Container Terminal. A total of 18 international firms including Hutchison Port Holdings (HPH), DP World and APM Terminals have shown an interest in operating the other two terminals at the new facility. Meanwhile, CMA CGM is set to take part in developing the planned port of Tanjung Sauh. Developments such as these should go a long way in improving investor confidence in the transport sector.