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Services | Indonesia's Maritime Ambitions Require Massive Upgrade of Seaports

Months before he assumed office as President of Indonesia in October 2014, Joko Widodo had laid out his vision to turn the archipelago into a major shipping power. Located in a quickly industrializing part of the world and taking advantage of its direct access to vital sea routes such as the Straits of Malacca and Makassar, Indonesia should become a major hub in global maritime trade. At the same time, a programme the president termed “sea highways” aims to improve domestic shipping capacity in a bid to meet growing demand for passenger and freight transportation.

Indonesia's Maritime Ambitions Require Massive Upgrade of Seaports
Improving shipping in Indonesia also necessitates dredging, clearing of shipwrecks in shipping lanes and installing marine telecommunication systems
 

Spread out over some 6,000 inhabited islands, Indonesia is dependent on maritime links for most of its domestic and international trade. Bulk cargo, general and particularly container cargo are expected to see continued strong growth as the country's economy matures. The new maritime policy is set to provide additional demand for both domestic and international shipping services (See Indonesia’s Shipping & Shipyard Industry), but its success hinges on the rapid improvement of seaports and auxiliary infrastructure in terms of both capacity and performance. This spells significant business opportunities in port construction and management; a business field that has recently become more inviting to foreign investors.

Costly logistics weighing on local business

Good maritime connectivity is key to Indonesia's further economic development, for unless the country's high logistics costs can be brought down, local companies will have a hard time taking on overseas competition in the ASEAN Economic Community (AEC), an integrated market for goods and services, labour and investment that is to be fully implemented across the ASEAN region by 2016. High logistics costs in Indonesia, chiefly transportation costs, impede stronger economic growth, according to a September 2013 report supported by the World Bank. Examining inefficiencies at the country's most important seaport, Tanjung Priok in Jakarta, the report states that the costs of logistics across Indonesia account for around 25% of GDP, much higher than in neighbouring countries.

Government representatives have vowed to simplify permit procedures and expedite cargo inspections to support shipping and reduce dwelling times. Yet the most important task is to expand and upgrade maritime infrastructure, which includes sea lanes, ports and supporting facilities.

Twenty-four new or upgraded ports over five years

One way to reduce the burden of overland transportation in rugged terrain is to improve ports in the country's far flung regions as alternative import and export terminals, thereby relieving the pressure on Tanjung Priok, which currently handles around two-thirds of international trade. National and international container traffic is concentrated in just a handful of ports, led by Tanjung Priok and Surabaya's Tanjung Perak. President Widodo in November 2014 unveiled government plans to build or upgrade 24 seaports within five years to enhance inter-island transportation. Construction of these ports would be financed by state budget funds and private investors in public-private partnership (PPP) schemes. As part of that plan, the government needs 70 trillion RP to expand five major ports in North Sumatra, Jakarta, East Java, South Sulawesi and Papua to serve large vessels and build feeder lines for smaller ports, Bloomberg reported in November 2014, citing Minister Indroyono Soesilo, who heads the newly created Coordinating Ministry for Maritime Affairs.

Improving shipping in Indonesia also necessitates dredging, clearing of shipwrecks in shipping lanes and installing marine telecommunication systems. Indonesian companies' capacity in these business fields is still limited in terms of know-how, human resources and equipment, which provides inroads for experienced foreign companies. The government generally encourages cooperation between foreign and local businesses with a view to strengthening domestic industries. Port construction itself needs to be complemented by supporting infrastructure, such as power stations, rail and road access links and other facilities, providing additional opportunities for private sector engagement.

Private investors welcome

Law No. 17/2008 on Shipping has increased the scope for competition between ports by removing the monopolies of the four state-owned Indonesian Port Corporations (IPC I, IPC II, IPC III and IPC IV), each of which in the past would operate all commercial ports in its designated region of the country. The law opens up the industry by allowing private port facility operators and port services providers.

Based on the same law, the National Ports Master Plan establishes the regulatory framework and sets goals for Indonesian port development until 2030, envisioning the construction of dozens of national ports and hundreds of smaller feeder ports. Overall cargo volume is expected to more than double to 2,144 million tons in 2030 from their 2009 level of 976.7 million tonnes. To accomplish the tremendous infrastructure upgrade needed for this task, the plan envisions strong competition and significant investment in PPPs, with the overall investment need until 2030 estimated at more than $46 billion USD. The private sector is expected to fund 70% of port development, according to Ministry of Transportation Decree No. 414/2013. The need for private investment may be greater yet, since critics have pointed out that in their assessment the government is not spending enough on infrastructure. Commenting on the 2015 state budget, the chairman of the Indonesian Chamber of Commerce and Industry (KADIN), Suryo Bambang Sulisto, said the government needed to seek foreign funds to settle its infrastructure funding problems.

Port construction and management – calling foreign investors

Aware of the need for more private investment, the administration opened up port operations to greater foreign participation by Presidential Decree No. 39/2014. The revised version of the so-called Negative Investment List allows for foreign capital ownership in the supply of port facilities – formerly capped at 49% – to reach a maximum of 95% within PPP schemes during the concession period. This includes the supply of piers, buildings, container and bulk terminals and Ro-Ro terminals. Outside of the PPP structure, the 49% cap on foreign direct investment remains in place. The government's overall investment framework for PPP projects has also improved in recent years through greater legal clarity and government guarantees as well as other measures (See Indonesian Infrastructure: Tremendous PPP Opportunities).

While certain regulations on infrastructure investment in Indonesia are still not sufficiently precise and land acquisition as well as permit procedures can be cumbersome in some cases, opening the sector to more foreign participation and easing regulations should help to boost construction and improve the management of seaports around the country. Aside from direct investment, this should also yield business opportunities for advisory roles by project and legal consultants. Given Indonesia's growing population and growing prosperity as well as increasing regional and global trade, the country's seaports and maritime infrastructure definitely offer intriguing business and investment opportunities.

Global Business Guide Indonesia - 2015

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Indonesia Services Snapshot - Transport

Contribution to GDP: 4.19% (Q3 2015)
Existing Road Network: Paved 287,926 km, Total 508,000 km (2013)
Existing Toll Road Network: 949 km (June 2015)
Active Railway Network: 4,069.4 km (September 2015)
Number of Airports: 295; 27 with runway length >2,000 metres (2015)
Active Commercial Sea Ports: 78 (2015)
Main Government Bodies: Ministry of Transportation, BAPPENAS, Ministry of Public Works and Housing, Indonesia Toll Road Authority (BPJT).