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Sailing Indonesia’s maritime sector forward
In his inauguration speech President Joko “Jokowi” Widodo stated that Indonesia needs to reorient itself toward the seas and regain its position as a maritime nation
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n his inauguration speech President Joko “Jokowi” Widodo stated that Indonesia needs to reorient itself toward the seas and regain its position as a maritime nation. Jalesveva Jayamaye, in the seas we will triumph.
The Jokowi administration deserves praise for a list of achievements in the maritime sector.
The introduction of dedicated cattle carriers has improved the way in which live cattle is shipped across the archipelago. The organization of the pioneer shipping system, vital shipping to remote area, has been revamped and 50 pioneer vessels constructed. The Tol Laut (sea toll) has been implemented and currently consists of 13 routes whereby containerized goods are shipped to remote areas. On these routes, the Tol Laut is accelerating the containerization process in underserved regions to enhance linkages into domestic trade networks.
Finally, ports have been constructed and upgraded. New Priok was delivered and direct shipping services to the United States and Europe have been reestablished after two decades of absence. Many non-commercial ports have been upgraded rapidly.
In 2014 I stood in Tobelo, North Maluku looking at two uncompleted trestles in the sea, that had taken already 4 years to construct due to ineffective budget disbursement. In 2016 the port was completed and today fulfills a crucial role in the Tol Laut network.
In spite of a long list of achievements, it is vital to adjust course in some areas. Up till now the ambitious maritime infrastructure agenda has been largely driven by the state-owned enterprises (SOEs).
Also, more state budget (ABPN) has been used to finance the maritime infrastructure program. State port operator Pelindo 4 received a Rp 2 trillion (US$68.5 million) capital injection from the state to finance essential parts of its port upgrades to foster increasing port performance that should reduce logistics costs in the near term.
The Tol Laut initially weight heavy on the budget of the Transportation Ministry but by cooperating with the privately run domestic shipping lines it is estimated that in 2019 the budget will be Rp 222 billion, down from Rp 447 billion in 2018.
Expanding the Tol Laut should continue involve more private sector participation to avoid crowding out existing shipping lines. A 2015 World Bank analysis concludes that Indonesia has a competitive domestic shipping sector.
Alternative pricing policy in port dues is not uncommon but the gap in Indonesia is too large.
The urgency for port development will remain. International shipping has seen an unprecedented drive for scale in the last 20 years. Until recently the mega ships that serve routes to the US and Europe could not fit in the port of Tanjung Priok, which forced transshipment overseas.
The reestablishment of the direct call has been frequently reported as a success but the exponential growth of vessel sizes in the intra-Asia trade has been largely overlooked which poses the risk that ports such as Belawan, Tanjung Perak and Tanjung Emas are losing connectivity.
There is a strong interest of moving labor-intensive production to Central Java, but these companies will depend on the port of Tanjung Emas to facilitate movement of goods via sea.
The drive for scale also impacts domestic shipping as vessels available on the second-hand market are too big to be handled in most ports, including the old inner harbors of Tanjung Priok and Tanjung Perak where most domestic cargo handling activities take place.
The United Nations Conference on Trade and Development (UNCTAD) 2018 Maritime Review states that the average container ship size in Indonesia is 842 twenty-foot equivalent units (TEUs), lower than the global average of 4.249 TEUs. If no major interventions take place, Indonesia in spite of its efforts will see connectivity eroding. Due to budget limitations, major port infrastructure projects demand private sector participation. Now, why has private sector participation been so limited in the port sector?
The answer is tariffs, tariffs and tariffs. In contrast to global common practice, the government still applies onerous port tariff interventions.
In Vietnam such controls have already been removed with success. Port service providers are by law restricted from having profit margin above 25 percent. One could argue that this is to avoid excessive pricing, but the intervention is impractical to apply.
Even assuming that the regulator accurately estimates the cost of production, the tariffs need to be regularly revised to correct for inflation. The correction process is too complex and for example container handling tariffs in Tanjung Priok have not been revised since 2014.
Taking into consideration five years of inflation and the recent depreciation of the rupiah and one could argue that the 25 percent margin has evaporated.
There is also a tendency to set tariffs lower for domestic users over international users. The most striking example is port dues, which one could compare with parking fees for a car.
The port dues are set by Presidential Decree No. 15/2016 and are 16 times lower for domestic compared to international traffic, creating in practice a cross-subsidy. This cross-subsidy however is unsustainable over time because domestic trade flows are increasingly outgrowing international flows.
Alternative pricing policy in port dues is not uncommon but the gap in Indonesia is too large. Ports including Rotterdam apply a discount for regional feeder which can be compared to “domestic” but at a maximum of 40 percent of international dues, not 6 percent as applied in Indonesia.
Large gaps can also be found in other services such as pilotage, tugging and cargo handling.
The current port tariff regime does not make investing in domestic terminals and ports commercially attractive. Interestingly in domestic commercial shipping, since 1984, market-based freight rates are applied and as a result the industry thrived.
So why not loosen the reins on the port side as well?
Alternative pricing for domestic traffic, cabotage, separate terminals for domestic and international cargo handling and the ambition of developing Kuala Tanjung and Biting as international hub frontier ports all seem to argue that international and domestic trade can be and should be clearly separated.
On the other hand, integration demands the merger of these two perceived separate trades.
The ASEAN economic community and the shift of manufacturing from China into Southeast Asia on the back of the trade war provides opportunities to combine domestic and interregional maritime trade flows and enhance regional connectivity by connecting more Indonesian ports to interregional networks.
This will demand private sector participation in port capacity expansion urgently for which tariff reform is a must.
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The writer is the private sector specialist of the World Bank in Indonesia. The article was prepared in conjunction with the seminar on Indonesia’s global maritime fulcrum here on Thursday.
