Indonesia's transport sector poised for overhaul

Road, port, airport and rail upgrades are a critical priority for the government of President Joko Widodo, with his administration having overseen an infrastructure and transport spending surge since taking office in 2014. The main aims of this increased resource allotment is to lower transportation costs across the board – which are among the highest in South-east Asia – reduce congestion, and improve the sector’s business and investment climate.

Progress is being made on all fronts, and infrastructure spending is forecast to hit a record high in 2017. Recent transport-related activities include the launch of two trans-island toll road projects, the completion of the first phase of a major upgrade at Jakarta’s Tanjung Priok Port and the opening of a new terminal at the Soekarno-Hatta International Airport, which recently has been over-stretched.

These transport developments should significantly improve international and intra-island connectivity, while supporting rising trade and tourism growth. Although financing and land acquisition continue to represent hurdles in several projects – most notably new high-speed and commuter rail lines – government actors have successfully sought alternative finance channels to access the necessary capital, helping the sector maintain strong momentum as the country moves into 2018.

ECONOMIC CONTRIBUTION: Located in the middle of China’s planned Maritime Silk Road, Indonesia benefits from its geographic position. Spanning the Indian and Pacific oceans, the country shares maritime borders with the Philippines, Singapore, Malaysia and Australia. Transportation is set to play a major role in future economic growth.

According to Statistics Indonesia (BPS), the transport sector’s contribution to GDP has grown significantly in the years since 2011. In its 2016 Statistical Yearbook, BPS reported that the total value of the transportation and storage industry at current market prices rose by 13.4%, from Rp276.1trn ($20.8bn) in 2011 to Rp313.2trn ($23.6bn) in 2012, increasing by a further 19.8% in 2013 to hit Rp375.3trn ($28.3bn). Transport industry growth was 24.4% in 2014, with the sector’s GDP contribution reaching Rp467trn ($35.2bn). The share rose by a further 24% in 2015, the most recent year for which statistics are available, to Rp579trn ($43.6bn).

STATE BODIES: Established in 1945, Indonesia’s Ministry of Transportation (MoT) is the central agency responsible for transport policymaking and sector oversight. It comprises separate directorates responsible for land transportation, marine transportation, civil aviation and railways, and an inspectorate general. Budi Karya Sumadi was appointed minister of transportation in July 2016, replacing Ignasius Jonan, who had held the office since October 2014.

The Ministry of Public Works and Housing (MPWH) maintains primary responsibility for highway development through its Directorate General of Highways, while the Coordinating Ministry for Maritime Affairs was established in October 2014 with the responsibility of creating, coordinating and synchronising maritime transport sector policy.

Indonesia’s transportation sector is vast and diverse, with dozens of state-owned enterprises (SOEs) also holding responsibility for land, air, maritime and rail network management under the supervision of the Ministry of SOEs.

PORTS: There are four SOEs – Pelabuhan Indonesia (Pelindo) I-IV – responsible for managing the country’s many ports. Pelindo II, also known as Indonesian Port Corporation, is the largest operator, managing 12 facilities across 10 provinces in western Java, Sumatra and Kalimantan. It operates Jakarta’s Tanjung Priok Port, the busiest container port in Indonesia, which handled 5.1m twenty-foot equivalent units (TEUs) in 2015. Pelindo III is the second-largest operator, with 43 ports spanning seven provinces in central and eastern Indonesia. Pelindo III operates Indonesia’s second-busiest container port, Tanjung Perak, which moved 3.1m TEUs in 2015.

TOLL ROADS: State-controlled Jasa Marga was established in 1978, and is responsible for constructing and operating toll roads. The company directly managed 13 toll road concessions and nine more through various subsidiaries, covering a total 576 km of toll roads as of 2015. An additional 244 km were operated privately under toll road concession agreements awarded and supervised by the Toll Road Regulatory Agency (BPJT).

In April 2016 government authorities announced that Jasa Marga planned to acquire four toll road projects with a total length of 262.3 km and valued at Rp18.4trn ($1.4bn), which would raise the entity’s market share of toll road operations in the country to 64%. In addition, state-owned construction firm Waskita Karya planned to take on seven toll road projects valued at Rp35.1trn ($2.7bn).

AIR & RAIL: Angkasa Pura I and Angkasa Pura II are responsible for airport management in Indonesia under the umbrella of Angkasa Pura, which was established in 1962. Angkasa Pura I operates 13 airports in the central and eastern regions, including Surabaya’s Juanda International Airport and Ngurah Rai International Airport in Denpasar, Bali. Angkasa Pura II oversees airport operations at 14 facilities in western Indonesia, including Soekarno-Hatta in Jakarta, the country’s primary aviation hub. Kereta Api Indonesia is the country’s state-owned railway operator that has recently been active in developing a light rail transit project in Jakarta (see analysis).

RECENT GROWTH: Land transportation accounts for the largest portion of the sector’s contribution to GDP, with BPS reporting that the segment’s total offering at current prices jumped by 91.3% between 2011 and 2015, hitting Rp283.2trn ($21.4bn) against the Rp148.06trn ($11.2bn) recorded in 2011.

Air transport was the second-largest contributor, increasing by 203% between 2011 and 2015 to supply Rp142.54trn ($10.7bn), compared to Rp47.03trn ($3.6bn) in 2011. This made air the fastest-growing segment in the industry (see analysis).

Warehousing and delivery services rose by 106% over the same period, from Rp45.3trn ($3.4bn) in 2011 to Rp93.37trn ($7bn) in 2015, while sea transport’s share rose by 63.2% to record Rp39.3trn ($3bn) in 2015, against Rp24.1trn ($1.8bn) in 2011.

The rail segment, as well as river, lake and ferry transport, has also recorded robust growth: rail’s contribution to GDP at current prices rose by 160%, from Rp2.41trn ($181.7m) in 2011 to Rp6.26trn ($471.9m) in 2015, while river, lake and ferry transport increased by 55% to reach Rp14.27trn ($1.1bn), against Rp9.2trn ($693.5m) in 2011.

HIGH COSTS: Indonesia’s transportation costs are very high for the region, owing to the country’s disparate geography and underinvestment in infrastructure. One of the world’s largest archipelagos, the country spans 17,500 islands characterised by a rugged mountainous terrain and dense jungle, with limited road, rail and aviation connectivity outside of urban Java, Sumatra and Kalimantan. Its less developed eastern islands, such as Papua, Nusa Tenggara and Maluku, are sparsely populated and have significant infrastructure gaps, with intra-island transportation costs significantly higher in these areas than in the rest of the country.

Substantial investment is needed to close the infrastructure gap and the country has struggled to rein in rising transport costs over the decades. Global consultancy firm Roland Berger reported in August 2016 that logistics costs in Indonesia stood at 26% of GDP. The Asian Development Bank (ADB) reported in the same month that Indonesia’s logistics costs are the highest in South-east Asia.

UNDERINVESTMENT: Much of the problem is driven by decades of underinvestment in major transport networks. Indeed, the ADB reports that the country’s slow pace of infrastructure development and poor-quality transport networks are both caused by low investment from the public and private sectors. According to the ADB, the situation has deteriorated since the 1997-98 Asian financial crisis, with current investment levels standing at about 3.5% of GDP, versus pre-1997 levels of 8% of GDP.

Indonesia’s urban infrastructure gap is also widening, with finance availability unable to match growing demand for city transport. The ADB reports that urban infrastructure investment as a share of GDP is 3%, but estimates that the country’s urban areas require approximately 7.5% of GDP in investment.

GLOBAL RANKINGS: Indonesia ranked 63rd on the World Bank’s 2016 Logistics Performance Index, a global transportation survey of 160 economies, with a score of 2.98 out of a possible five. The country scored lowest in the Customs and infrastructure categories, at 2.69 and 2.65, respectively, and highest on the tracking and tracing (3.19) and timeliness (3.49) categories. This ranking represented a significant decline from the 2014 survey, when Indonesia ranked 53rd globally with a score of 3.08, and from 2012, when it ranked 59th with a score of 2.94.

However, the country rose five spots in the “trading across borders” category in the World Bank’s Doing Business Survey 2017, reaching 108th place out of 189 economies surveyed. The organisation reported that the time required to export from Jakarta stands at 48 hours, against the East Asia and Pacific average of 57 hours and OECD average of 12 hours. Border compliance times average 80 hours for imports, against the East Asia and Pacific and OECD averages of 71 and nine hours, respectively.

STRATEGIC VISION: President Widodo was elected in 2014 with a mandate to crack down on corruption and accelerate infrastructure development – two campaign promises with considerable implications for the transport industry.

The administration’s nine-pillar economic development strategy, Nawa Cita, has targeted infrastructure upgrades as a way to improve competitiveness and inclusive economic growth. At the same time, the government’s Medium-Term Development Plan (MTDP), running 2015-19, details specific transportation and infrastructure upgrades to be carried out under the auspices of Nawa Cita. These plans include the construction of 2650 km of new roads, including 1000 km of toll roads, as well as upgrades and maintenance works on 46,770 km of existing roads.

In 2015 it was reported that the government plans to develop 4621 km of additional toll roads, of which 60% will be located on Sumatra as part of its Trans-Sumatra Toll Road project. The MTDP also includes a strategy to build and upgrade 3258 km of rail lines to improve land connections in Java, Sumatra, Sulawesi and Kalimantan. These plans will include 2159 km of inter-city rail and 1099 km of urban rail lines (see analysis).

SPENDING: Although the government has significantly increased infrastructure allocations in recent years, budgetary shortfalls will see the MoT’s spending curtailed in FY 2017/18. The ADB reports that the MoT’s budget allocation rose by 30% during FY 2015/16 to hit $5.2bn, with the ministry forecasting it would earn $230m in revenue during that year. The MPWH’s transportation directorate was also slated to receive $9.6bn in FY 2015/16.

In the second edition of its Indonesian infrastructure report, titled “Stable Foundations for Growth”, consultancy PwC reported that total government infrastructure spending in the country rose by 51% in 2015, reaching Rp209trn ($15.8bn).

This figure was less than the state’s planned increase of 63%, however, and spending realisation came in below target as well – falling from 78% in 2014 to 72% in 2015. The firm’s report also noted that not all government spending immediately flowed into construction activities.

BUDGET MOVEMENTS: Infrastructure spending surged again in 2016 and 2017, with PwC reporting that the 2017 draft budget forecast infrastructure outlays of Rp346.6trn ($15.8bn). In January 2017 revised budget estimates projected infrastructure spending would see a high of Rp387.4trn ($29.2bn) that year, compared to Rp317trn ($23.9bn) in the revised 2016 budget outline.

However, in April 2017 local media reported that the MoT’s budget was expected to be reduced by Rp1trn ($75.4m) for the year, following instructions from the Ministry of Finance to increase efficiency. The MoT has reportedly identified Rp5trn ($376.9m) of funding that has been allocated to “unproductive” projects, with the minister of transportation telling media that funds will be allocated to projects that are already being implemented.

Overall spending in the FY 2017/18 budget was reduced by 0.12% from 2016 levels, to Rp2082.9trn ($157bn), following similar revisions to the 2016 budget, which cut spending by 0.61%, or Rp12trn ($904.5m), due to a revenue collection shortfall (see Economy chapter). Although the state allocated Rp48.2trn ($3.6bn) of capital injections to 24 SOEs in the 2016 draft budget – with the infrastructure and maritime sectors receiving the largest portion of funding – capital injections fell to Rp36.2trn ($2.7bn) in the revised 2016 budget, and dropped further to Rp7.2trn ($542.7m) in the 2017 draft budget. Many SOEs now face financing challenges as they move forward in building new infrastructure.

ROADS: It is estimated that 90% of all domestic passenger movement and 50% of all cargo transport in the country is done by road. Indonesia’s best-developed road networks are located on Java, Sumatra and Bali, which combined are home to some 80% of the population. Kalimantan, too, has developed mining-related road infrastructure.

Although road construction and upgrades have been a priority for decades, BPS reports that the total road network experienced limited expansion between 2013 and 2015. In 2013 the country had 508,000 km of roads, including 38,570 km of state roads, 53,642 km of provincial roads and 415,788 km of municipal roads. This total rose to 517,753 km in 2014, and increased slightly to 518,153 km (excluding toll roads) in 2015. That year Indonesia had 46,432 km of state roads, 53,528 km of provincial roads and 418,193 km of municipal roads.

Toll road growth has been slow as well, with only an estimated 135 km developed between 1998 and 2015. However, BPS noted that an additional 934.6 km were under development as of 2015, with Indonesia Investments reporting in March 2016 that the total toll road network stood at 950 km.

TRAFFIC RISING: Indonesia’s rapid socio-economic development has seen vehicle ownership and traffic volumes surge, exacerbating congestion on strained highway and urban road networks. While expansion of new highways and roads was just 2% between 2013 and 2015, vehicle ownership grew dramatically over the same period. BPS reports that the number of registered passenger cars in the country rose by 16.8% in that period, reaching 13.42m, with the total number of registered vehicles – including buses, trucks and motorcycles – rising by 17.2% between 2013 and 2015 to hit 122m.

Jasa Marga reports that traffic volume on its roads rose by 7% between 2008 and 2015, and although the government made an effort to remove foreign ownership restrictions on toll road investment in November 2015, new projects remain constrained by land acquisition and other related challenges (see Infrastructure chapter).

TRANS-SUMATRA TOLL ROAD: The Trans-Sumatra Toll Road is one of the largest road projects currently under development in Indonesia. It broke ground in October 2014 and was officially launched in April 2015. The project entails the construction of a 2800-km highway network connecting Lampung to Aceh, divided into 24 sections spanning 10 provinces. The toll road facilitates faster and more cost-effective transportation of the abundant natural resources on the country’s second-largest island.

Considered a key infrastructure project, the Rp331trn ($25bn) road was initially delayed for a decade due to financing and land acquisition issues. Construction was originally scheduled to wrap up in 2019, but Taufik Widjoyo, the former secretary-general of the MPWH, reported in December 2016 that the project continues to face substantial challenges in terms of funding and securing land.

According to Widjoyo, only Rp5trn ($376.9m) of the project’s budget had been collected by stakeholders before the end of 2016, including a Rp3.6trn ($271.4m) capital injection for the SOEs constructing the highway, as well as two loans for the Medan-Binjai and Palembang-Indralaya sections. Widjoyo also reported that land acquisition on Sumatra has been much more cumbersome than for the 498-km Trans-Java Toll Road – scheduled to wrap up in 2018 – because the Sumatra project is over five times larger and more complicated.

Recent developments have been more promising, however, with the project’s dedicated acceleration team reporting in February 2017 that three-quarters of land acquisition processes had been completed, with the rest of the negotiations expected to be finalised shortly thereafter. In January 2017 the MPWH reported that several sections of the road are set to come on-line in 2018, including links between Medan and Binjai, Helvetia and Semayang, Semayang and Binjai, Palembang and Indralaya, Palembang and Pamulutan, KTM and Simpang, and a 62-km route from Medan via Kualanamu to Tebing Tinggi.

NEW FINANCE MODELS: Work on the Trans-Java Toll Road has progressed more smoothly, and the project was the first to reach financial close under the government’s pilot non-state budget infrastructure (PINA) funding model, which channels finances such as pension funds to an intermediary for bond issuance. Proceeds from the bond sale are used to buy equity in an infrastructure developer.

The PINA model was successfully deployed for the first time to finance the initial phases of nine toll road sections, five of which form the Trans-Java Highway, valued at Rp70trn ($5.3bn). In February 2017 Bambang Brodjonegoro, head of the National Development Planning Board (BAPPENAS), announced that the model is expected to extend to additional transport projects in the future.

Bond issuance is also becoming an increasingly critical component of transport funding in Indonesia, with SOEs including Pelindo II, Angkasa Pura I and II, and state-owned construction firm Adhi Karya recently issuing bonds to finance major upgrades. To further support bond-financed transportation projects, Indonesia recently partnered with the World Bank to develop a government risk and debt management programme. The programme should help the state improve risk management for government guarantees issued to SOEs that are borrowing to finance new builds, and reduce future budgetary pressures (see Infrastructure chapter).

PRIVATE SECTOR PARTICIPATION: Although the government has targeted developing billions of dollars worth of new projects under a public-private partnership (PPP) model, PPP implementation in the transport sector has been limited to date. BAPPENAS reports that out of seven projects under construction (and one at financial close) at the beginning of 2017, four are transport projects, and all are toll roads: Serpong-Balaraja, Manado-Bitung, Balikpapan-Samarinda and Pandaan-Malang routes. Out of 22 upcoming PPP projects in the country, BAPPENAS designated only one – the Bandar Lampung Water Supply project – as “ready to offer in 2017”. The remaining were classified as “under preparation”.

Recent legal reforms could help expedite PPP development in the transport sector. Presidential Regulation No. 38/2015 established a cross-sector regulatory framework for PPP implementation, which should help facilitate usage.

Presidential Regulation No. 78/2010 established a government guarantee for certain private sector-led infrastructure projects, which has been applied to programmes such as the Palapa Ring, Umbulan Water Supply and Central Java Power Plant projects.

MARITIME: Given Indonesia’s disparate island geography, sea transport plays an increasingly critical role in the sector. Maritime shipping volumes have expanded rapidly in recent years, leading the Widodo administration to unveil plans for the Sea Toll Road port development programme in November 2015. Five hub ports are slated for development under the programme: Belawan on Sumatra, Jakarta’s Tanjung Priok and Surabaya’s Tanjung Perak on Java, and South Sulawesi’s Makasar and Bitung ports. The strategy also envisions upgrading 19 large feeder ports spread across the archipelago.

Successful implementation of the Sea Toll Road programme will be critical for meeting rising freight demand. The World Bank reports that container traffic volumes have spiked in Indonesia since 2006, rising from 4.32m TEUs that year to 8.48m in 2010, 9.63m in 2012 and a high of 11.9m in 2014, the most recent year for which statistics are available. According to global credit ratings agency Moody’s, Pelindo II ports handled 45% of Indonesia’s container throughput in 2015 – 5.9m TEUs – while Pelindo III facilities handled 33%, or 4.4m TEUs.

NEW PRIOK PORT: Tanjung Priok, situated in North Jakarta, has been operating well above its installed capacity of 5m TEUs for a number of years. Dwell times at the port reached 6.5 days in 2012, making capacity upgrades an urgent priority. Congestion is exacerbated by the port’s limited handling capacity; its draught is 11.5 metres – too shallow for larger ships – and it is unable to accommodate vessels more than 250 metres in length with a maximum capacity of 5000 TEUs, making it dependent on trans-shipment cargo passing through Singapore.

One of the largest projects under the Sea Toll Road programme is the New Priok, or Kalibaru Port, project, which will expand Tanjung Priok’s existing facilities to reduce congestion and travel costs, and support the port’s transformation into a regional shipping hub. The project is split into three phases, with construction on the first having commenced in March 2013. The initial phase included building a new container terminal, dredging works for a new sea channel with a 16-metre draught, and installation of container-handling infrastructure and equipment on a 32-ha site in North Jakarta. Two additional terminals will be built during the second and third phases, boosting the port’s total annual capacity from 5m TEUs to 18m, allowing it to welcome 18,000-TEU triple-E-class container ships on a two-lane seaway of 300 metres and having 4000-metre piers.

The budget for the first phase was estimated at $2.47bn in 2012, when Pelindo II was officially mandated to develop and operate the port under Presidential Decree No. 36/2012, with the second phase expected to cost $1.5bn.

BOND ISSUANCE: None of the project’s funding is set to be sourced from the Indonesian state budget, prompting Pelindo II to seek outside financing for the new port. In May 2015 Pelindo II issued international bonds worth $1.6bn, divided into a $1.1bn tranche maturing in 2025 and a $500m issuance maturing in 2045, to be used for the Kalibaru Port project and various other maritime upgrades.

Pelindo II was the first Indonesian SOE to tap bond markets for project financing. Others, including Adhi Karya – which is building a light rail transit system in Jakarta – Angkasa Pura II and Medco Energi Internasional, a private company, have since followed suit, tapping global bond markets to raise funds for major infrastructure projects (see Economy chapter).

In September 2016 President Widodo officially inaugurated the new Kalibaru Port terminal, marking the completion of the project’s first phase. The Rp12trn ($904.5m) terminal will boost handling capacity by 1.5m TEUs annually and allow for much larger ships. As of that month dwell times at Tanjung Priok had been reduced to around three days from 4.7 days in 2015, with the state targeting dwell times of no longer than 2.5 days.

NEXT PHASES: Questions linger about the next stages of Kalibaru Port. The second and third phases are slated for completion by 2025, although the government has not publicly announced when ground will break on phase two. Pelindo II formed a joint venture with a consortium of firms from Japan and Singapore to complete the first phase, but tenders for phase two have not yet been awarded.

“Terminal 1 of the new Tanjung Priok Port is open now, but what about terminals 2 and 3? They raised Rp1trn ($75.4m) from the global bond issuance, but almost all of the money was spent on developing terminal 1,” Damas Jati, an editor at the Jakarta-based shipping publication Cargo Times, told OBG.

PATIMBAN PORT: Outside of Tanjung Priok, work is also progressing on the Patimban Port project in Subang, about 50 km east of Karawang on West Java. After the facility was revived in February 2016, Patimban Port was put under joint development by Pelindo II and the Japanese government, when Japanese Prime Minister Shinzo Abe announced support for the project in May 2016.

The $3bn deepsea port project will offer total handling capacity of 7.5m TEUs annually when construction completes, further mitigating congestion and lengthy dwell times in Jakarta.

“Tanjung Priok is Indonesia’s primary port, which doesn’t make much sense because it is located in the heart of Jakarta, which creates significant gridlock in a city that is already experiencing extreme congestion,” Tirza Reinata, director of Tusk Advisory, a local consulting firm, told OBG. “Dwell times directly affect GDP, so there should be a separation between logistics, and economic and government centres.” In June 2017 Masafumi Ishii, Japan’s ambassador to Indonesia, told media that Patimban Port is expected to begin early operations by the first quarter of 2019, offering initial capacity of 1.5m TEUs annually. It is expected to reach full capacity by 2027.

KIJING: Work on a new deepsea port at Kijing in West Kalimantan is also well under way, as part of a Rp1.2trn ($90.5m) project to improve access to Kalimantan’s abundant natural resources.

Under development by Pelindo II as well, the facility is set to significantly augment the capacity of the existing Pontianak Port nearby, which stood at 217,000 TEUs as of 2017. The new port would offer 500,000 TEUs of capacity, and the additional benefit of a 15-metre low-water spring draught, negating the need for difficult dredging work.

In January 2017 Pelindo II announced that the project will be developed in three stages. The first phase will include construction of a container and multipurpose terminal, the second will comprise construction of a container and liquid bulk terminal, and the third will build a dry and liquid bulk cargo terminal. The project’s total budget is estimated at Rp5trn ($376.9m). Pelindo II expects the port to begin partial operations in 2019.

OUTLOOK: As the country approaches its next round of presidential elections, hard infrastructure spending is unlikely to rise, with the government more likely to focus on health and education in 2019 and beyond. Nonetheless, the Widodo administration has made considerable progress in closing Indonesia’s infrastructure gaps, supported by development of alternative finance channels, rising bilateral investment and strong demand for land, maritime and aviation transport services.

Many major projects made admirable headway in 2016-17, and although transportation costs will continue to challenge businesses and investors, the mid-term outlook for the sector remains positive.