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Analysis: Reducing deficit in ocean freight services
The current account deficit widened from US$16
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he current account deficit widened from US$16.2 billion in 2017 to $31.1 billion in 2018, partly as a result of the relatively large services deficit, especially in freight transportation.
According to Bank Indonesia and the National Development Planning Agency, about 95 percent of the freight transportation deficit came from sea transportation services as the shipment of imports and exports is still dominated by foreign shipping companies.
Data from the Transportation Ministry shows that in 2017, 96 percent of imports and exports was shipped by foreign ships, with Indonesian-flagged vessels only shipping 4 percent.
Foreign ships dominate the shipment of the country’s imports and exports because the national fleet has so few ocean-going ships. The competitiveness and capacity of the national shipping industry remain relatively weak.
Most of the vessels owned by national shipping companies are relatively small-sized, being mainly Handysize with capacities of between 10,000 and 30,000 deadweight tonnage (DWT), while the ideal ships to handle import and export shipments are Panamax with capacities of more than 60,000 DWT.
The majority of container vessels owned by national shipping companies are small-sized (250-800 twenty-foot equivalent units or TEUs). Meanwhile, the capacity of most container vessels owned by China, India, and Malaysia are more than 1,000 TEUs.
In addition, the majority of national vessels are aged over 15 years. The small size of national vessels causes transportation costs to be higher so that they are unable to compete with foreign ships.
Foreign ships, being bigger and more efficient, charge lower fees than those charged by national ships. In addition, national shipping companies do not have extensive networks, especially on international routes. As a consequence, their operational costs are higher, which in turn makes their services more expensive than those of foreign companies.
The Indonesian government has attempted to overcome the problem by issuing the 15th economic policy package in June 2017 to improve the competitiveness of logistics in the country. The policy package was followed up with the issuance of Trade Ministerial Regulation No. 80/2018 in August 2018.
The trade ministerial regulation states that coal and crude palm oil (CPO) exports and rice imports and government procurement goods must use national sea transportation and national insurance. The regulation will be implemented in May 2020.
The policy will have a positive impact on national shipping, the shipyard industry and marine insurance. The regulation provides market opportunities for national shipping companies to transport coal and CPO exports. On the other hand, it has the potential to hamper coal and CPO exports because the use of national ships will be more expensive.
Therefore, the regulation should be carefully implemented so as not to hamper the competitiveness of national coal and CPO exports. To be effective, the implementation of the trade ministerial regulation should be in stages. There should be road maps and technical guidelines on the implementation of the regulation.
The road map should arrange destination countries for coal and CPO exports, which can be prioritized. The road map should also stipulate the number of vessels and the minimum capacity needed for coal and CPO exports and technical guidelines on the use of national insurance for CPO and coal export transportation.
Furthermore, increasing the national shipyard industry’s capacity and productivity is also important to support the regulation. The national shipyard industry is relatively weak. The capacity of most shipyards in the country is less than 500 DWT. National shipping needs a large and modern shipyard industry to reduce maintenance costs so the national fleet will be more competitive.
Nevertheless, improving national shipping and shipyard capacity requires huge funding. Meanwhile, the financing capacity for the domestic sea transportation sector and national shipbuilding industry is also still weak. Bank lending to the transportation sector is lower than any other sector.
The bank loans channeled to the domestic sea transportation sector in 2018 totaled only Rp 42.1 trillion ($2.99 billion), only 0.8 percent of the country’s total loans. Similarly, bank loans channeled to the shipyard industry amounted to only Rp. 6.96 trillion, 0.13 percent of total loans.
The low financing by national banks of sea transportation is because both sea transportation and the shipyard industry sector have a high risk. Nonperforming loans in the domestic sea transportation sector in 2018 reached 4.6 percent, higher than most other sectors.
Therefore, the government needs to encourage financing and investment in sea transportation and the shipyard industry by offering financial incentives both in terms of tax holidays and tax reduction and in terms of legal certainty. Besides that, the government could also provide alternative financing to the sea transportation sector and national shipyard industry such as financing through capital markets. Incentives and financial support in the domestic sea transportation sector would increase the competitiveness of a sector that requires huge financing so that Indonesia can have enough ocean-going ships to meet international standards.
The national shipping and shipyard sectors should play an important role in the future in reducing the transportation services account deficit.
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The writer is an industry analyst at Bank Mandiri.
