Indonesia Looks to Infrastructure to Give Logistics Boost

I wrote previously on this blog about how Singapore’s superior infrastructure has helped to make it a stand-out performer in logistics in the Asia region and, indeed, globally. But you don’t have to go very away from the Lion City to find a country that is conversely hampered by inadequate infrastructure and poor logistics performance.

I am talking about Indonesia, the fourth largest country in the world by population (250 million), the biggest economy in Southeast Asia ($888 billion GDP in 2014), and comprising 17,000 islands stretching across almost two million square miles (although less than 10 of those islands have significant populations).

The flight time to Jakarta’s Soekarno-Hatta International Airport from Singapore in just one and half hours. But it can often take double that time for your taxi to travel the 18 miles into the city because of the severe congestion on the Indonesian capital’s highways. Frequent heavy rains and inadequate drainage often lead to flooded roads across the city, worsening the already bad conditions for drivers and truckers.

While these traffic woes are perhaps the most visible symptom of Indonesia’s lack of modern infrastructure, the deficiencies also extend to railways, ports and airports, and not surprisingly, result in the low quality and unsophisticated nature of logistics in Indonesia.

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Jakarta Traffic Jams: A Symptom of Indonesia’s Infrastructure Woes

The World Bank’s latest Logistics Performance Index (2014) has Indonesia in 53rd place (out of 160 countries), well below Southeast Asian neighbors Singapore (5), Malaysia (25), Thailand (35). At 24 percent of GDP, Indonesia’s logistics costs are significantly higher than most other countries in the region. Bringing this down to 16 percent of GDP, the same as Thailand, would realize huge savings of some $80 billion a year, according to World Bank calculations

Increasing urbanization – by 2025, the urban population is projected to reach 65 percent, compared to 53 percent in 2010 – as well as a burgeoning car population and higher volumes of transported goods as the consumer class grows, makes it even more important for the country to develop a solid level of infrastructure, one that promotes rather than inhibits business activities and facilitates rather than puts a drag on economic growth.

The good news is that Indonesia finally appears to be taking steps in the right direction in terms of improving the landscape for logistics. Since taking office in late 2014, new leader President Joko Widodo has repeatedly stressed the importance of infrastructure development and outlined ambitious expenditure plans to the tune of tens of billions of dollars for the construction of 3,600 km of new roads, 15 new airports, 24 new seaports, railway network expansion by 3,258 km, and the improvement of public transportation in 29 cities.

Given Indonesia’s island geography, it makes sense to boost the quality of sea transportation and improve the connection between the main islands as well as to trading partners in the region. While the main container port of Tanjung Priok, which handles two-thirds of the country’s trade, on the main island of Java is Indonesia’s most developed in terms of technology, the dwell time (the interval between container unloading and exit from the port), of six days is still five times longer than in Singapore and twice as long as in Malaysia. And it’s not surprising to learn that it takes ports in less developed areas of the country even longer to move containers in and out.

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Given Indonesia’s Island Geography, It Makes Sense to Improve the Quality of Sea Transportation

Included among the 24 planned new ports is New Priok, which lies east of Tanjung Priok and will have an annual capacity of three times that of the existing port’s six million containers when fully operational with nine terminals in 2023. Elsewhere, construction work has commenced on ports in Kuala Tanjung in Sumatra and in Makassar in Sulawesi.

Back on dry land, the groundbreaking ceremony for the Trans-Sumatra toll road took place on April 30. The $23 billion, 2,700 km highway, which will connect major cities on Sumatra, from Banda Aceh in the north to Lampung in the south, is set for completion in 2018 and will greatly boost connectivity and reduce shipping costs on Indonesia’s largest and second most populous island. On Java, the main economic center, the Trans-Java mega toll road project is underway and will eventually connect its western and eastern ends.

While there is no doubting President Joko Widodo’s determination to improve Indonesia’s anemic level of infrastructure, the country’s notorious bureaucracy and onerous regulations remain a threat to proper and timely realization of grand plans. For instance, a much needed $2-billion city-to-airport railway line project in Jakarta has been delayed because of disputes on its route, and poor coordination between government ministries is preventing other “priority” infrastructure projects from getting off the ground.

The sheer scale of the planned infrastructure investments over the next few years means there is indeed a real opportunity to bring Indonesia’s lagging logistics competiveness closer to that of neighbors like Malaysia, Singapore and Thailand.

If the issues around mega infrastructure project start-up can be resolved, Indonesia can expect a payoff in the form of transformed and improved logistics, which will in turn drive economic growth and help the country conform to the rosy expectations of the IMF: a tenfold increase in GDP, to over $9 billion, and the fifth largest economy in the world (currently 16th) by 2030.

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