Limits of Hard Infrastructure
The huge promise of the Jokowi Administration’s infrastructure efforts has not yet resulted in lower logistics costs. The rosy future predicted in glossy reports of McKinsey, Citibank, World Bank and others depends in large measure on solving the riddle of high local transportation costs, something that has plagued Indonesia for a long time. Just building a nice road, airport, or harbor is not enough.
According to reporting in this month’s “Tempo Magazine” (Indonesia’s leading news magazine), infrastructure costs in some cases are rising. Within the last six months air cargo tariffs have surged 300%. Even at Medan’s new airport cargo loading and unloading can take up to three hours. The same applies for harbors. Loading and unloading activities have continued to be slow. Even with the recent deregulation packages, there can be a long waiting time to process clarification and verification documents. Harbor “costs” are thought to be 40% of total freight costs. These statistics remind me of Indonesia in the 1980’s and 1990’s when ministers and local businessmen, would decry the bribes needed to clear cargoes. Recognizing the corruption in the ports the Suharto government –for a time- hired a Swiss company, SGS, to pre-inspect in their countries of origin most shipments to Indonesia. This is not to say Indonesia’s supply chain management hasn’t improved since then, it has. But more needs to be done.
President Jokowi has prioritized “sea tollways” to achieve more uniform shipping rates and lower the costs to ship to less developed regions in eastern Indonesia. But evidence demonstrates that although the number of routes has increased from 3 to 18 since 2015, the volume of cargo has not; the rates are not yet low enough, except on a few subsidized routes. On the new land-based toll roads some trucks are still using local roads to avoid the extra costs and because the new roads lack services (rest stops, restaurants). Online shopping platforms are shifting some deliveries from air to land to keep delivery costs as low as possible. The cost of delivery can exceed the price of the shipped item.
Clearly, much is at stake as Indonesia moves to radically transform its infrastructure. As we have heard from Indonesia’s economic brain trust it’s the consumer sector that has been the leading engine of economic growth for some time. Lower logistics costs are crucial to the marketing of consumer products, especially those sold via e-commerce. Getting infrastructure right is not just important to the value-added, “make-it-locally” economy that has been pushed by the last two administrations; its also key to Indonesia export market in general, especially Indonesia’s traditional exports (palm oil, rubber, coffee, minerals, oil/gas, garments and footwear), many of which have been affected by lower worldwide prices and slowdowns in important markets such as China. The factories that Indonesia wants relocated from China and other Asian exporters won’t come if the expense to import capital goods or shipping finished goods is too high.
Hard infrastructure obviously must be accompanied by efficient systems for cargo handling or it won’t fulfill its promise. AICC believes Indonesia’s private sector (working with their international partners) has solutions. Although port and airport management is theoretically open to the private sector, it really isn’t. State-owned companies dominate just about every tender. Opening the sector to true competition would be one way to strengthen the soft infrastructure. The laundry list of what is needed includes: better management skills for loading and off loading in airports and harbors; regulatory certainty; overhaul of warehouse systems, more use of advanced cargo sorting equipment, better training and oversight of customs officials, as well as benchmarking of clearing procedures.
The government needs to better trust market-based rather than their own top down solutions. This should include a full review of the ongoing monopoly in fuel sales (Pertamina) as well the duopoly in domestic air cargo (Garuda, Lion Air).
(The writer’s opinions do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members)