Major investment earmarked for Indonesia's maritime sector

Investment and development in maritime infrastructure and greater support for the shipbuilding industry look set to raise Indonesia’s freight-handling capacity, moving the country closer towards its goal of becoming a top global maritime player.

In March the government passed new regulations expanding on the global maritime fulcrum (GMF) doctrine laid out by President Joko Widodo in 2014. The new policy – known as Presidential Regulation No. 16 of 2017 – sets out a range of measures to strengthen the maritime and logistics sectors, with an emphasis on developing port infrastructure and connectivity. The GMF vision called for investments of $55.4bn to develop 24 major seaports and up to 1000 smaller freight-handling centres, though it was subsequently scaled back after a reassessment of needs and now calls for development of five ports according to international standards.

The president has acknowledged that the country’s maritime sector lags behind its rivals in terms of research and development, and that it may have to look to other countries for advice and input. “If we can’t work on it alone, then we should work with another country so there would be a transfer of knowledge,” he said in early May. “Without doing so, we would never make the leap.”

LONG VOYAGE: While investors have shown interest in Indonesia’s maritime projects, creating hubs to compete with the likes of Singapore will take time.

The first step of the process will be for Indonesia to develop local trade and infrastructure, according to Sofie Tolk, senior commercial consultant at the Port of Rotterdam Authority. “Initially, you should be focusing on domestic demand and serving the local market; then you can develop other services and trade lines,” Tolk told OBG.

As part of the country’s efforts to upgrade its freight-handling capacity, in November 2016 the government signed preliminary agreements with the Port of Rotterdam Authority – which is pushing to expand in Asia more broadly – to develop two ports: a new deepwater facility at Kuala Tanjung, on the Strait of Malacca in North Sumatra, and an upgrade to the Port of Tanjung Priok in Jakarta.

Authorities have also taken steps to improve inter-island logistics by launching the Sea Toll Road strategy in November 2015. With the aim of cutting transport costs and curbing price disparities throughout the country, the programme will connect six major seaports and make them the main centres for national maritime trade, managing their operations under an integrated system.

The six ports selected for development are: Belawan, in Medan on Sumatra; Batam near the border of Singapore; Tanjung Priok; Tanjung Perak; South Sulawesi’s Makassar; and Papua’s Sorong port.

SUPPORTING SHIPBUILDING: Other policies are aimed at expanding Indonesia’s shipbuilding capabilities. Proposed support mechanisms for this include a ban on state-owned enterprises buying vessels from overseas, in place since 2015.

Several state incentives announced at the end of 2015 further this initiative, including an exception for shipbuilders from paying value-added tax (VAT) on imported components. Together, these measures are likely to encourage investment in the sector, though up-scaling and refurbishing Indonesia’s shipyards will also take time, especially when it comes to building large blue-water vessels, which will require knowledge transfer. Most of the country’s 200-plus shipyards are geared towards building smaller vessels or undertaking repair and maintenance.

Most of the country’s 200 shipyards are geared towards building smaller vessels, or undertaking repair and maintenance OPPORTUNITIES & OBSTACLES: Efforts to expand the maritime sector are supported by low labour costs and strong growth potential due to the large number of islands that need to be served; however, the sector is not without its obstacles.

High materials costs, along with taxes on goods and services, limit investment in shipbuilding and hamper its competitiveness with overseas suppliers, according to Yance Gunawan, president-director of Dumas Tanjung Perak Shipyard.

“The main issue for the shipbuilding industry in Indonesia is a limited supply of components and equipment that can be produced domestically; they are too expensive and have to be imported, mainly from other Asian countries,” he told OBG. “The VAT law is also more beneficial for foreign companies than Indonesian firms. Why order a ship in Indonesia and pay a lot of taxes when you can get a ship directly from abroad with 0% VAT?”

As of late 2016 VAT and import duties had been abolished for shipbuilding companies operating at the Batam free zone – the country’s first special economic zone – leading to a noticeable increase in activity, according to local media reports.

FINANCING: The administration of President Widodo has invested significantly in infrastructure in recent years, earmarking a record Rp346.6trn ($26.1bn) for infrastructure spending in the 2017 draft budget, and later revising infrastructure allocations upwards to Rp387.4trn ($29.2bn). State-owned enterprises (SOEs), however, have not been the main beneficiaries of these increases. In August 2015 authorities announced that Rp48.2trn ($3.6bn) had been allocated to 24 SOEs across five priority sectors in the 2016 budget, including infrastructure and maritime transport, which received 48% of the total. SOE capital injections for 2016 were later revised to Rp36.2trn ($2.7bn), and cut to just Rp7.2trn ($542.7m) in the 2017 draft budget, with many SOEs now facing financing challenges as they move to carry out major maritime infrastructure projects, including port enhancement.

BONDS TO THE RESCUE: As a result of public spending constraints, an increasing number of SOEs have been turning to global bond markets in recent years to raise the capital they need.

Ports operator Pelabuhan Indonesia II was the first SOE in the country to issue a global bond, raising $1.6bn in two separate, unsecured tranches in May 2015, which were used for upgrades at Jakarta’s Tanjung Priok port (see Transport chapter).

SOE bond issuance is forecast to accelerate in the coming years offering financing options for port development. Supported by Standard & Poor’s (S&P) April 2017 decision to upgrade Indonesia’s sovereign credit rating to investment grade. S&P was the last of the big three global credit ratings agencies to upgrade Indonesia’s sovereign credit rating (see Economy chapter).

Future bond issuance could also benefit from state-backed guarantees, with recent reforms to the government guarantee process further strengthening the outlook for SOE borrowing and debt issues.

PROSPECTS: Steady funding could help reduce Indonesia’s reliance on foreign shipyards, and should see a fall in costs as production increases and economies of scale develop. Given its location straddling some of the world’s busiest waterways, the country also holds potential to expand vessel exports, as well as develop maintenance and repair services.