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Four keys to creating a world-class port environment
Indonesia is a maritime nation
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ndonesia is a maritime nation. The vast archipelago of 17,000 islands, by geography alone, naturally lends itself to shipping and maritime trade. But the country's huge potential is held back.
With the total amount of goods moved by sea accounting for only 4 percent of the total freight transported in Indonesia today, according to a recent study by the Indonesian Infrastructure Initiative, Indonesia's maritime sector is clearly under-utilized and needs to implement a number of key reforms to truly realize its economic potential.
Poor domestic port productivity, for example, is a key issue of concern; productivity at domestic ports is at best 50 percent of what international terminals, such as Jakarta International Container Terminal, are currently operating at.
Furthermore, the unpredictability and high costs of sea transportation is a major reason why key industries still rely heavily on road transportation, even when transporting goods over long distances, such as from Sumatra to Java.
On this journey, it can take anywhere between nine to 25 days by sea. The equivalent journey by road is more predictable and takes four to five days maximum.
When sea transportation is unavoidable, firms need to maintain excess inventory of inputs, e.g. raw materials, in order to meet demand for the goods they sell. This largely contributes to the country's huge logistics costs.
Indonesia aspires to grow by 7 percent per year until 2030. Achieving this will require a focus on reducing logistics costs, which currently stand at 25 percent of GDP in Indonesia compared to 18 percent on average across ASEAN. A focus on improving ports, domestic shipping and supporting infrastructure is key.
Realizing Indonesia's economic potential needs to start with fundamental improvements to domestic ports, which will then enable the country's maritime industry to grow and prosper. To create a world class port environment, McKinsey & Company believes Indonesia should consider a number of new initiatives.
First, improving domestic port operations and procedures is not only long overdue but also one of the simplest and most effective ways to encourage a maritime transformation across Indonesia.
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Indonesia could target Malaysia's current performance of three days, by accelerating the pre-customs process
Our analysis suggests that improvements could be started by introducing proper performance management across all ports to coordinate and monitor operations from arrival to departure, for instance via a terminal operating system.
Other operational gains could be made by imposing specific time schedules for each ship coming into the port, with fines and penalties for ships that do not keep to the schedule, and for the port if the pre-defined handling volume is not processed on schedule.
This would cut waiting times for ships at port and make a radical difference. Ships wait an average of three days before entering Jakarta's domestic terminals, and up to 15 days during Lebaran, due to berth congestion and vessels waiting for late cargoes.
Finally, improving the capability of personnel and upgrading equipment at the quayside, yard and gate areas should be considered.
This would further contribute towards huge productivity gains, allowing ports to handle more ships in shorter spaces of time and therefore have positive knock-on benefits across supply chains for business.
The second key is streamlining the variability in dwelling time. Dwell time, which refers to the time from cargo unloading to when cargoes physically exit the port, needs to be reduced.
Indonesia could target Malaysia's current performance of 3 days, by accelerating the pre-customs process through enforcing online document submission, for example through the National Single Window (INSW) for import documents, and the Transportation Ministry's Inaportnet platform for manifests and business transactions.
Another part of this is harmonizing priority levels among government agencies on shipping cargoes and focusing on set targets to bring down delays.
Finally, imposing penalties on delays could provide the incentive structure to discourage storing cargoes at ports.
Third, investing in Indonesia's domestic ports, especially in growing cities outside Java, such as Pontianak or Makassar, is also absolutely critical.
This would have a much larger impact on bringing down logistics costs than focusing on international gateways and global transshipment hubs alone.
There is a real, growing and urgent demand for this capacity, since domestic container traffic could increase from 3 million to up to 28 million TEUs (twenty-foot equivalent units) by 2030, particularly if the country adopts a balanced development approach across the various islands.
To serve this traffic efficiently, up to 23 domestic ports would need the depth to handle large container ships of 5,000 TEU by 2030.
This may require dredging channels or developing new ports, such as Kuala Tanjung, to handle Medan's domestic traffic. Increasing investment in domestic port infrastructure today is key to closing capacity gaps and avoiding even lower productivity in the future, as these ports face greater use and demand.
The final key is increasing regulatory support and clarity. Ensuring that the landlord port model (port authority owns the land and basic infrastructure, and leases to private operators) is effectively implemented at existing ports, and that provisions regulating the concession port model (private entity develops and operates port infrastructure, and provides a share of revenues to the port authority) are clearly established will ensure the country has all the tools in place to bolster performance and attract private investment as planned in the national port master plan (NPMP) and national logistics blueprint (Sislognas).
A concerted effort from all stakeholders is needed to overhaul Indonesia's port performance and unleash the country's vast economic potential.
Shipping lines and the businesses that benefit from improved logistics and the reduced costs of supply chains need to support and push for these reforms.
Improving supply chain flows with a focus on improving domestic port infrastructure and capacity, as part of wider improvements across the maritime sector, could result in up to 5 percent GDP savings for Indonesia.
A big loss or a big gain, depending on the policy choices made going forward.
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Hans Patuwo and Robert Carey are partners at McKinsey & Company, Jakarta. Alpesh Patel is engagement manager at McKinsey & Company, Singapore.
