Finance Minister Sri Mulyani Indrawati has said the government will work to reduce the logistics costs to as low as 17 percent of GDP. It then begs the question; what have been keeping the costs of logistics stubbornly higher than our peers?

First, it would be prudent to recognize our archipelagic geography as a source of additional costs. The domestic movement of goods typically involves several modes of transportation, with loading and unloading from between modes.

For example, sending containerized cargo from the Cikarang industrial estate in West Java to  

Balikpapan in East Kalimantan will involve several main cost components: land transportation cost from Cikarang to the port of Tanjung Priok (17 percent of total costs), terminal handling charge (THC) at the port of origin (14 percent), ocean freight (17 percent), THC in the port of destination (10 percent), and in-land transportation in the final destination (18 percent). 

There are also double charges for lift-on/lift-off (Lolo) expenses in both ports of departure and destination. Additionally, as part of the implementation of International Maritime Organization (IMO) regulation on low sulfur consumption to reduce Sulphur Oxide emission, it is being translated into an additional low sulfur surcharge amounting to about 12 percent of total cost. On top of that, logistics forwarders will still have to charge additional costs for warehousing, document processing and insurance. 

In short, the distance between Cikarang and Balikpapan is equivalent to that of Lisbon and Luxembourg. While the first might consume a whopping 10 days for point-to-point delivery, the latter might take two to three days as the cities are well connected by freeways, making logistics costs much cheaper on a per-kilometer basis.

Therefore, assessment of logistic performance should also focus on year-to-year improvement to complement the typical country comparison reports. 

Second, there are legitimate concerns about market concentration in logistics, especially in the maritime sector. Based on Bloomberg data, we can observe that maritime transportation is oligopolistic, where a handful of sellers dominate the markets. Thus, interdependency in pricing decisions exists when one seller takes into account the probable actions of every other seller in this market. While in the short run incumbent logistic operators may price their service very low to deter entrants on new routes, in the long run consumers may face higher prices than they would have under an efficient market structure.

A textbook example of this oligopolistic behavior can be observed on routes connecting Jakarta and Belawan in North Sumatra. In 2017-2018, incumbent operators set as low as around Rp 1.8 million (US$123.25)/container against the market rate at about Rp 3-4 million just to discourage competition from new entrants. As soon as it became clear that would-be competitors had been successfully deterred, prices returned to previous levels or even higher.

Several blue ocean routes are showing similar behaviors where a limited number of operators are exercising their market powers by marking-up prices at the expense of consumers. Sending goods on the route connecting Surabaya to Jayapura could face an exorbitant price at Rp 16-20 million/container against the normal market rate at Rp 12 million. As such, regulators might want to consider policies to keep prices at reasonable levels to help the overall economy and to justify the real cost of transportation.

Finally, the cost component might also relate to port efficiency. A 2014 Organization for Economic Cooperation and Development report found that investing in port infrastructure might help reduce logistics costs, dwell time and help facilitate trade processes in general. Furthermore, transport economists have identified discernable spillover effects of port activities. 

At home, a 2014 World Bank report indicates that ocean freights account for roughly 2 to 3 percent of the final price of goods. In stark contrast, the cost of waiting at the port due to long dwell time accounts for 6 to 15 percent of the price of goods. This shows that port efficiency, as indicated by shorter dwell time, plays an important role in our economy. It is therefore reasonable to accelerate the construction of port infrastructure in the regions as a national development priority, especially in the eastern part of the country. 

The construction of Palaran container terminal might well exemplify how port efficiency plays an important role to boost economic performance in Samarinda, East Kalimatan. Once operational in 2010, the additional capacity reduced dwell time from 10 days to just three and the Jakarta-Samarinda-Jakarta roundtrip voyage time from 19 days to just 11. Moreover, the freight rate from Jakarta-Samarinda dropped considerably from Rp 9 million/box to only Rp 4 million. As a result, food prices inflation in Samarinda dropped from an average of 10.63 percent in 2004-2010 before the terminal operation to 4.86 percent after 2010. 

In conclusion, slashing the costs of logistics in Indonesia is no easy task. Our archipelagic geography and the need for multimodal logistics adds to the cost of loading and unloading. At any rate, regulators may still want to keep track on the market structures in logistics to ensure that overall economic efficiency can be achieved. 

Finally, there is no close substitute for port efficiency in streamlining costly dwell time and other excessive costs.

***

Ibrahim Kholilul Rohman is head of Samudera Indonesia Research Initiatives and Harya Dillon is secretary-general of the Indonesian Transportation Society. The views expressed are their own.

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