As infrastructure improvements race to keep track with economic growth, the developments in transportation and logistics are providing an exceptional investment opportunity all of their own.
There are many different factors that will ultimately decide if Indonesia is capable of maintaining its robust economic growth and ambitious targets. A holistic approach would seem to be the most prudent approach and the Indonesian government certainly appears to be working along this line of reasoning. However, transportation and logistics may yet hold the largest piece of the puzzle.
If infrastructure is a recurring theme in Indonesia’s present day story it’s with good reason. It is closely tied into everything that surrounds the country’s development and represents all that is simultaneously frustrating, challenging and hopeful about its immediate future. A comprehensive understanding of the obstacles that must be overcome, as well as the potential that is locked inside this fascinating country, isn’t possible without a closer look at the traffic and logistics sector of Indonesia.
Much of Indonesia’s road network needs replacement or renovation but this is a minor problem compared with the more pressing concern over congestion. Appreciation of the scale of the problem is best served by considering Jakarta, which serves as a microcosm for the dilemma and provides a glimpse of what other parts of the country could soon be facing.
A report in 2010 indicated that there were over 11 million vehicles in the greater Jakarta area with around 1.5 million of those within the capital city. The problem is exacerbated by the relatively low number of roads; compared to other similar-sized cities, at least in terms of percentage; Tokyo and New York have almost three times as many roads. How serious is the problem? Jakarta, despite being one of the largest cities in the world, is predicted to experience total gridlock sometime during 2014.
The cause of the problem is fairly straightforward–the rate at which Indonesians are reaching income levels sufficient to purchase a private vehicle is outstripping road network growth by a factor of ten-the solution less so. Private vehicles account for transport is dropping despite efforts to reverse this trend.
In 2011, vice President Boediono announced a 17-point plan designed to reduce traffic in Jakarta, combining a mixture of short-term, intermediate and long-term initiatives that include a crackdown on illegal buses, a master plan for revising the public transportation system and the creation of six inner city toll roads. In the same year a new Transport Authority was set up, exclusively designed to implement the necessary changes in the capital city. This move has been welcomed by the private sector who perhaps most of all feel the pain of the congestion.
As with much of Indonesia’s plans, the proposed solutions are multifaceted and attack the problem from a number of different angles. If proven to be successful in the capital, this could prove to be an effective template for tackling the road transportation probelem across the rest of the country.
Indonesia’s rail network is, admittedly, somewhat limited, with less than 7000km of fragmented track – of which only around 4800km is currently useable. However, the pressing need to improve transportation options has stimulated huge levels of investment in this sector.
In 2009 the rail monopoly enjoyed by Kereta Api Indonesia (KAI) came to an end. Perhaps motivated by the need to embrace a more commercial strategy, KAI has since established plans for a Bali Ring Railway that will run a full circuit of the island. This $2 billion USD project is targeted for completion in 2016. No less significant is the Ministry of Transport’s plans for a high-speed railway system connecting Jakarta with Surabaya with a travel time of as little as four hours. Planned in conjunction with the Japanese chamber of commerce and Industry, development is expected to begin in 2014.
But even more intriguing is the interest from private investors in developing rail travel in other more remote areas of the country. Aimed at supporting mining development, especially in coal, networks of ports and railways are receiving significant investment and a variety of projects are expected to begin during the next five years with a combined price tag running into billions of dollars.
Railway travel may seem like an unlikely candidate for contributing towards Indonesia’s transportation development but its potential for reducing road congestion and linking crucial ports is making it a key area of development for both the government and private investors.
The proposed solutions are multifaceted and attack the problem from a number of different angles.
In the world’s largest archipelago it comes as no surprise to learn that water transportation is as crucial to domestic business as it is to international trade. What may seem curious is the fact that many of the existing ports are insufficient to cater for the rapidly growing requirements of the country. In 2011 the Ministry of Transport set up a port authority that could act independently of the four existing state-owned port operators. The aim is to allow local governments and private sector businesses to enter the port management sector but the underlying purpose appears to be to create a more competitive environment that will bring down the unnaturally high cost of domestic marine transportation. There are more than a few political hurdles to overcome to make this venture a success but it underlines the government’s commitment to the long-term growth of the sector.
Perhaps the most fascinating development in this area in recent times is the 2011 introduction of cabotage rules requiring all sea vessels in Indonesian waters to be owned by domestic companies (with some exceptions for shipping related to oil and gas production). This has provided a significant boost to Indonesia’s shipping companies, which have seen an increased demand for boat purchases and hire. And in an interesting twist, many global shipping businesses who purchased new vessels prior to the economic downturn have since found the need to sell, driving down the costs. This development has proved to be a welcome one for Indonesian shippers who have suddenly found themselves in need of purchasing new vessels to cope with the increased demand for their business.
The unpredictable global economy notwithstanding, water transportation in Indonesia looks to have a bright future, particularly as the oil, coal and gas sectors continues to grow. There is still much work to be done in bringing the major ports up to international standards but there appears to be every reason to believe that development will soon catch up with demand.
The air transportation industry has, in many ways, been an unexpected success. You’d be forgiven for assuming that the cost of air travel would dissuade domestic passengers in a developing country and yet many Indonesian airports are desperately overcapacity and crying out for development and expansion.
There are two reasons for the popularity of this mode of transportation, the first of which is linked to overcrowded roads and ports; air travel is currently the fastest way to travel domestically. The second cause relates to the deregulation of the air transportation industry over ten years ago. With more airline operators in competition, free to set their own rates, prices have been driven down and overlapped nicely with recent increases in disposable income.
Domestic passengers in 2011 numbered around 60 million, making up almost 90% of the total and representing a 15% increase over the previous year. This number is expected to increase by a further 50% by 2015 with a projected 90 million domestic passengers and 30 million international flyers. Little wonder then that the government is scrambling to build new international airports and expand the existing ones. Development of 20 new airports is planned over the next 15 years and almost half a billion USD has already been pledged to improve the current facilities.
Additional challenges are also still to be faced with the implementation of the ASEAN Open Skies agreement which is due to take full effect by 2015. Services and standards among private airlines still needs to improve and, while other ASEAN countries each have only one airport that will be affected by the Open Skies agreement, Indonesia has five airports (Jakarta, Bali, Medan, Surabaya and Makassar) that will need to adapt.
In the current economic climate many industries would be only too happy to be in a situation where demand is massively outstripping supply. Air travel, as with all of Indonesia’s current transportation sectors, may be overcrowded but once the expansive plans have been completed it would seem that the opportunities for further growth know no limits.
One of the strongest indications that the infrastructure callenges Indonesia faces will not be able to hinder economic growth is the scale of the logistics market; there are currently more than 300 courier and logistic providers, including a number of significant multinational corporations. Although some consolidation is expected there can be doubt that some of the largest players in this sector are banking on the long-term growth of this market.
Aside from working on the aforementioned transportation challenges the government is also seeking to tackle some of the constraints in the Indonesian supply chain. Asosiasi Logistik Indonesia (ALI), a non-profit organisation for the supply chain and logistics industry in Indonesia, is working with the Coordinating Ministry for the Economy on a plan that looks as far ahead as 2020. Targets include streamlining cargo handling and speeding up the transfer of goods out of Customs. An indication of the progress that has been made can be found in the movement towards outsourcing supply chain management to third-party service providers; a positive indication of a maturing market that is confident of continued expansion.
If transportation congestion and facility inadequacies are a cloud on the horizon of economic growth, then the silver lining is the level of interest from investors recognising the potential for profit in the developments. The infrastructure requirements of Indonesia’s blossoming economy offer a vast array of investment prospects in themselves and it is little wonder that domestic and international firms are queuing up to involve themselves in projects on land, air and sea. As long as the government continues to provide the required investment framework and private funding continues to flow, the transportation sectors of this country will be virtually unrecognisable in just a few short years.