Stepping up to the task: The government speeds up the development of land, sea and air connections

Faced with ever-growing congestion in the movement of people and goods across the archipelago, the government is clear that improving and diversifying Indonesia’s logistics network stands at the heart of its efforts to boost economic growth above 7%. Air passenger traffic has continued to grow, with the large domestic market flocking to the growing pool of low-cost airlines (see analysis). As travellers take to the air, rail and sea modes have dropped, with passenger transport falling some 0.1% and 10.4%, respectively, in 2010. Land transport continues to be the primary method for the movement of goods, however. Some 90% of all domestically transported goods go by land, and cargo volumes grew 10-20% annually by rail, 5-10% by air and 10-15% by sea between 1980 and 2010. Long-term investment in infrastructure has not kept up with these increases.

“Our logistics costs are among the highest in ASEAN, at around 25-30% of GDP,” Zaldy Masita, president of the Indonesian Logistics Association (ALI), told OBG. Given the archipelago’s geography, it is likely that costs could only be brought down to 15% of GDP in the long term, compared to Singapore’s 10%, for instance. But its current rankings in global indexes such as the World Bank’s Logistics Performance Index lag far behind regional competitors – it placed 75th of 155 in 2010, compared to Malaysia’s 29th, Thailand’s 35th, the Philippines’ 44th or Vietnam’s 53rd. Under President Susilo Bambang Yudhoyono (SBY), the country has made a strong push to attract private investment – both local and foreign – and the initial response has been favourable, especially for transport and power (see analysis).

PRESSING NEED: Indonesia’s road network of close to 372,000 km (including 264,326 km of district roads and 34,629 km of national roads) is too limited to meet the huge domestic market’s logistical needs, and many existing routes are in need of modernisation. Nationwide, the Ministry of Public Works conservatively estimates that 11.1% of the national road system (3843 km) is severely damaged. The needs of Jakarta are particularly pressing. The capital’s road network is growing at a rate of only 0.9% a year, while its pool of vehicles is growing at 9%. A record 720,000 new cars crowded onto the country’s roads in 2010, with car ownership and road use growing at more than 10% annually. This growth was maintained during the first nine months of 2011, at a rate of 22% to 657,886 units, up from 540,600 units in the same period in 2010, according to the Association of Indonesia Automotive Industries.

IN THE PIPELINE: The Regional Long-Term Development Plan, (Rencana Pembangunan Jangka Menengah, RPJM), which began in 2005 and runs to 2024, is divided into five-year sections, with the 2010-14 period, known as RPJM2, now under way. The aim under RPJM2 is to increase total roadwork from 4400 km a year in 2010 to 8666 km by 2015. In addition, the government is speeding up road development to ease congestion along key axes in West Java, as well as in industrial areas such as Cikarang, Jababeka and Cibitung, in particular.

The Directorate General of Highways and the Indonesian Toll Road Authority (Badan Pengatur Jalan Tol, BPJT) – both under the Ministry of Public Works – are forging ahead with these plans, while Jasa Marga, the 70% state-owned toll road operator, is also investing heavily in expanding its network. Donors have supported the upgrades of key axes, through programmes such as the World Bank’s Strategic Roads Infrastructure project with the Ministry of Public Works. China agreed a significant soft loan programme in November 2010, including an Rp100bn ($12m) loan for the construction of the SurabayaMadura bridge, Rp66bn ($7.9m) for building the Kendari bridge, Rp95.7bn ($11.5m) for the Tayan bridge and Rp151.8bn ($18.2m) for the construction of the Medan-Kualanamu toll road.

WORTH THE TOLL: One priority measure to improve traffic flows is to expand the country’s existing 758 km of toll roads (which include 697 km in Java, 43 km in Sumatra and 18 km in Sulawesi). These toll roads are 35- to 40-year concessions to private operators and majority state-owned operator Jasa Marga. The first SBY administration invested in just 125 km of new toll roads up to 2009, although this is set to rise dramatically under RPJM2. The pace of toll road network expansion was just 52 km in 2010, meaning there will need to be a steep increase to meet BPJT’s targets for 700 km of new toll roads by 2014 ( mainly the Trans-Java toll road and the Jabodetabek Expressway). These works are expected to cost Rp12bn ($1.4m) a km, including land costs.

The need is pressing as toll road traffic grew by 11.7% in 2010 and 8.9% in first-quarter 2011, partly as a result of the change in toll gate structures which improved traffic flows. BPJT is proposing concessions to the private sector guaranteed by the state; crucially BPJT takes care of land acquisition before tendering, improving the viability of the projects. The authority, which took over Jasa Marga’s regulatory functions in 2004, revises tariffs every two years to account for inflation – the latest rise of 8-12% was implemented on 28 September 2011.

NETWORK EXPANSION: Jasa Marga, which operates 72%, or 531 km, of all toll roads, intended to invest Rp6.2trn ($744m) in 2011 on new roads, a four-fold increase on the budget of Rp1.5trn ($180m) in 2010. The operator offers subsidiaries for each of its 14 concessions, mostly in West Java, in line with government regulations. It is developing another eight concessions, which will add 250 km to its existing network by 2014. After delays linked to difficulties in land acquisition, two of these projects are now completed: the 11.3-km Semarang-Ungarang section of the Semarang-Solo road and the 2.3-km WaruSepanjang section of the Surabaya-Mojokerto road, have been operational since June 2011. Jasa Marga is also negotiating terms on three new concessions in 2011 for the 18.6-km Waru-Tanjung Perak road in Surabaya, the 14.5-km Cinere-Jagorawi road in Jakarta and the 11.5-km Sarangan-Tanjung Benoa road in Bali. The operator forecast revenue growth of 9.8% to Rp4.8trn ($576m) in 2011.

Given such profitability, it is unlikely that the operator will be privatised in the medium term, beyond its stock listing in 2007. Such profits are attracting private investors to the market. The second-largest operator, Citra Marga Nusaphala Persada, runs the Cawang-Tanjung Priok and Pluit-Ancol-Jembatan Tiga toll roads in Jakarta as well as the Waru-Juanda road in Surabaya. The operator has run into some trouble in its new developments, with its Depok-Antasari project stalled due to lack of funds and challenges in land acquisition. The government has reviewed a list of 24 stalled toll road projects in 2010-11 and is expected to sign new concession agreements for these later in 2011.

Another private sector player, Bakrie Toll, owned by Aburizal Bakrie, the Golkar Party chairman, already runs one road and is building two more in the TransJava network. It plans for aggressive growth, publicly stating its ambition of securing five new toll road projects in the Trans-Java network by 2015. Smaller operators like Thiess Contractor Indonesia and Meta Nusantara also run individual concessions.

LINKING UP: The country’s railway system is also due to be completely upgraded. Historically, Indonesia’s rail network has been unable to meet the demands of either passenger travel or the needs of industries, such as mining. However, a total of seven regional railway plans are now in place for the construction of some 1800 km of new track. To meet the high costs of the various projects, the government is courting private interest. Indeed, several foreign groups have already signed up for involvement in public-private partnerships (PPPs) (see analysis).

RIDING THE WAVES: Container traffic rebounded strongly after the global financial crisis on the back of stronger exports and a buoyant domestic demand. The country’s largest container port, Tanjung Priok, which handles up to 70% of Indonesia’s international container trade, saw record growth in 2010 with a 21% year-on-year (y-o-y) rise in volumes carried to 4.61m twenty-foot equivalent units (TEUs).

This was a strong recovery on the sharp 15% drop in throughput in 2009, and growth is expected to continue in 2011 (up to 30%) on the back of rising imports. Given Indonesia’s trade deficit, up to a third of all imported containers remain empty at the port. This only exacerbates congestion at the already busy facility. “For the national economy, Tanjung Priok is very important, as around 65% of Indonesian exports and imports flow through the seaport. Disruption in loading and unloading will surely influence export and import activities. Tanjung Priok is important for distribution, and long waiting times increase logistical costs for shipping companies,” Richard Lino, the president-director of state-owned port operator Pelindo II, told OBG. “We are now trying to achieve a zero waiting time target, a rarity in this country and much awaited by business players.”

PORT ACTIVITY: Indonesia hopes to add six new ports to its existing 26 by 2030, offering the first PPP development projects in April 2011. While port efficiency remains relatively low by regional standards, at between 16 and 20 crane moves per hour (mph) on average, the hope is that private management will raise this rate (see analysis). Indeed, the Jakarta International Container Terminal (JICT) already functioned at an average of 28 mph in 2010.

Container handling charges, set at $95 in mid-2011, are average by ASEAN standards, higher than Singapore’s but lower than Vietnam’s, according to industry players. However, while terminal operators have been pushing for an increase, the ministry is unlikely to bring this about in 2011.

TANJUNG PRIOK: The two terminals at JICT handle roughly 60% of containers into Tanjung Priok, while Koja Container Terminal at the eastern end processes the rest. JICT and Koja are both joint ventures between Hong Kong-based Hutchison Port Holdings (HPH) and Pelabuhan Indonesia (Pelindo) II under 20-year lease agreements, the former established in 1999 and the latter in 2000. Hutchison controls the management of JICT with 51% stake, while Pelindo II holds the majority stake and management of Koja. JICT serves the widest clientele with 20 shipping lines serving 25 direct routes.

Koja Container Terminal spans 29.3 ha of land with quay length of 650 metres, while JICT’s two terminals cover 130 ha and over 2 km of quay length. Terminal 1, dredged to 14 metres, handles the majority of the international cargo while Terminal 2 is relatively shallow at 9 metres, restricting its ability to accommodate international vessels, the largest of which carry more than 10,000 TEUs. Terminal 2 began handling traffic in 2009, after Pelindo II threatened to revoke the concession if the capacity remained un-used. It handles mostly domestic cargo and feeder ships from Singapore carrying 1000 TEUs or less. In an effort to boost capacity utilisation at the terminal, JICT management has thus proposed that the government allow for Terminal 2 to cater to both domestic and international traffic. The Indonesian National Shipowners’ Association has called for the dredging of JICT to 16 metres to allow the terminals to cater to 6000-TEU ships.

INVESTMENT: Pelindo II has announced investment of Rp2.7trn ($324m) in equipment for the existing facilities, including four quay cranes, 18 gantry cranes, and 46 trucks and trailers. This is set to boost capacity to 3m TEUs a year in the short term, co-financed by a $70m loan from the International Finance Corporation at the World Bank. Moreover, the operator will also add an extra 12 ha in container yards once the expansion is completed in 2012. “With the new equipment we can speed up our loading and unloading capacity by two to three times and cut a ship’s waiting time by 60%,” Cipto Pramono, the manager of Tanjung Priok, said at the announcement in March 2011. The expansion plans have been welcomed by the shipping lines, who have long called for such investments. “We believe that if the government is able to realise its stated ambitions of improving the supporting infrastructure leading in and out of the port this should have a positive impact in improving the overall efficiency and productivity of the port,” Helman Sembirin, JICT’s president director, told OBG. A mooted rail link extension to Tanjung Priok to the existing one, which stops 3 km short of the port gates and Jasa Marga’s proposed toll road, which ends 5 km away from the gates, would prove a great boost to efficiency. West Java’s second dry port opened in 2011 and will facilitate onward transport.

TANJUNG PERAK: The UAE’s DP World holds a 49% stake in Terminal Petikemas Surabaya (TPS) in Tanjung Perak, which manages the Tanjung Perak Port (which it inherited during its global acquisition of P&O), in partnership with Pelindo III.

Traffic growth has remained steady at TPS, averaging around 5% annually. Although shipping operators would like to see more domestic container traffic rather than bulk cargo on the shipping lines, capacity remains limited. “Improving the supporting infrastructure for domestic container shipping would encourage more usage and take some of the strain off the road network, which would reduce congestion,” Jakob Friis Sorensen, the president director of Maersk Indonesia, told OBG.

REGIONAL PORTS: Pelindo I is moving ahead with upgrades of secondary ports in Riau and Sumatra. Belawan Port in North Sumatra is Indonesia’s busiest port outside of Java, catering to the region’s thriving rubber and palm oil trades.

The Islamic Development Bank (IDB), Japan Bank for International Cooperation (JBIC) and state oil company, Pertamina, are funding a $500m scheme to expand ports in the Sumatra region (Aceh, Batam, Belawan and Riau) to raise container shipping capacity. The programme, which is set to run to 2014, allocates $83m for Belawan Port, $100m for Batam and $125m to transform Dumai Port in Riau province into a crude palm oil (CPO) trading hub capable of handling CPO from Sumatra and Kalimantan.

THE SKY IS THE LIMIT: The country’s air industry is also experiencing a boom (see analysis). With a number of Indonesian airports operating at near or full capacity, the government has drawn up new plans for airport expansions. Some $450m has been set aside for infrastructure renovations, including the new terminal building planned for Bali’s Ngurah Rai airport, which will have a capacity for 20m passengers. Indeed, the Ministry of Transport is aiming to develop 20 new international airports in the next 15 years, which would raise the national total to 65.

These projects are widely expected to present major opportunities for private sector involvement. Over the last 10 years, the government’s policy of liberalisation has led to the emergence of a large number of new private air companies. While Garuda Indonesia remains the country’s only premium carrier, the low-cost segment has been the strongest driver of growth. Low-cost carriers include Batavia Air, Garuda’s low-cost sister CitiLink, Lion Air and Malaysia-based Air Asia’s local subsidiary. The latter two, however, have been by far the most successful in the market.

OUTLOOK: The government in Jakarta has long made efforts to keep up with sustained and rapid rise in domestic transport demand. However, the sheer rate of growth on recent times has made improvements in the country’s infrastructure even more urgent.

Progress is now expected at a quickened pace as a result of the administration’s efforts to court private investment in the archipelago’s fragmented transport infrastructure development. More consistency in the liberalisation effort, along with closer scrutiny of projects’ implementation, could yet resolve some of the system’s more pressing needs.