Indonesia is preparing to make major investments to improve its infrastructure, which has been blamed for holding back growth and reducing the investment attractiveness of Asean’s largest economy.
President Susilo Bambang Yudhoyono recently told parliament that the country would increase spending on the country’s overburdened roads, airports and power plants and pare restrictions on businesses in order to encourage investments.
Indonesia’s infrastructure is strained on all fronts. It faces a lack of power and its ports and airports are sadly outdated, hardly in line with the country’s status as a G20 economy.
Mr Yudhoyono’s budget proposed lifting infrastructure spending to 194 trillion rupiah (640 billion baht) in 2013 from a target of 169 trillion rupiah this year. The funds will be used to improve 4,431 kilometres of road, add 380km of new rail lines, build 15 new airports and expand another 120.
Indonesia has massive economic potential but is struggling to position itself to take advantage of Asean integration in 2015. Reforms related to distribution and logistics networks are the most pressing needs.
Indonesia has the highest logistics cost in Asean, estimated at 25-30% of gross domestic product (GDP), according to Lukman Hakim, chairman of the Indonesia Institute of Sciences.
Even in Thailand, which is also considered to have unacceptably high logistics costs, the comparable figure is 17% of GDP.
In a country with Indonesia’s geographical conditions, said Mr Lukman, the logistics cost should not exceed 15% of GDP.
“Indonesia’s logistics system is not efficient as there is a price gap in logistics between eastern and western regions,” he said. “Thus, some imported commodities are more affordable than local commodities.”
Distribution of goods between regions and islands is a major challenge and this means the prices of many goods outside Java are too high.
“For example, the price of rice in one province can be 64% higher than in other provinces. Also, the price of a bag of cement in the territory of Papua can be about 20-fold higher than in Java,” he said.
National logistics costs in 2010 were 1,402 trillion rupiah (about 4.6 trillion baht), or 26% of GDP. The figure is made up of inventory carrying costs of 421 trillion rupiah, transport 841 trillion, and administrative costs totalling 140 trillion.
Armida Salsiah Alisjahbana, the minister for National Development Planning, said proper funding for infrastructure development would gradually encourage better connectivity.
The ratio of infrastructure spending to GDP in 2013 is expected to reach 4% and grow to 5% in the following year. “In terms of macro funding, we have set the infrastructure spending target at as much as 5% of GDP in 2014, and it will increase to 7% or 8% afterward,” she said.
With progressive infrastructure funding and an investment ratio of 5% of GDP, the country could achieve economic growth above 7% annually on an ongoing basis, the minister said.
In terms of soft infrastructure improvement, Ms Armida is pushing continuous reform of the bureaucracy with involvement from local governments, private companies and state enterprises.
She said she had already noted more responsive management and productivity from state enterprises in charge of ports, airports, and other means of connectivity.
The World Bank recently increased the performance index of logistics in Indonesia, from 75 in 2010 to 59, reflecting improved contributions of both the private sector and the government.
It recommends two steps to improve efficiency: reducing dwell times in port and developing “dry ports” or inland container depots.
Henry Sandee, senior trade economist with the World Bank, said the average dwell time of import containers in the Jakarta International Container Terminal was still increasing, which was not a good sign.
Over the past year, the port of Tanjung Priok handled one million containers with an average dwell time of 6.7 days, up from 4.8 days a year earlier. Port officials have been working with experts at the Technology Institute of Bandung to monitor dwell time changes every three months.
“The main issue is to improve logistics efficiency to reduce dwell time and develop a dry port. Surely this must be supported with the good coordination,” said Mr Sandee.
The dry port is urgently needed to handle extra demand until work is completed on the higher-capacity Kalibaru container terminal or Tanjung Priok New Port.
“We have Cikarang Dry Port. Let’s compare it with Lat Krabang in Bangkok, which has been optimised. Indonesia has to do the same thing. We estimate 62% of containers will be directed to Cikarang,” he said.
Mr Sandee said Indonesia could learn from its neighbor. He noted the logistics cost (transport, handling, customs and excise tariffs) between Tanjung Priok and Cikarang, a distance of 55.4km, is US$750 per container. In Malaysia between Pasir Gudang and Tanjung Pelepas, a distance of 56.4km, the cost is only $450.
The Indonesia Chamber of Commerce and Industry (Kadin) has set an ambitious target to reduce logistics costs by 10% in 2014 as part of preparations for the Asean Economic Community in 2015.
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