Reforming the Shipping Sector
From the Q4 Edition of The Executive Exchange MagazineThese are evolving times for the shipping sector in Indonesia. A new shipping law aims to put the country’s seaports on par internationally. Expansion plans at Indonesia’s biggest seaport in Jakarta are underway. But protectionist policies are adding headaches for shippers and consignees and hurting foreign shipping companies’ inbound businesses. Dennis Bras, President Director of APL and APL Logistics Indonesia, discussed these and other current issues affecting the industry.
To understand the issues of the shipping sector in Indonesia requires a basic understanding of the logistics chain. Foreign carriers like APL handle over 98 percent of the country’s international container business and are primarily responsible for ocean transport. Even with market dominance for international cargo, foreign shipping companies in Indonesia are at the mercy of port operators and regulatory authorities, much like international airlines are with local airports and aviation boards.
Once cargo arrives at a seaport, an operator moves it, usually in the form of containers, to/from ships and ground transportation. As such, port operators are extremely vital cogs in the import/export transport chain. This is where the story of Indonesia’s shipping sector begins.
In most modern ports, private operators do not actually own the port. Instead, they engage in long-term contracts with a port authority or local government to operate a piece of the port – a terminal, like that at an airport. These contracts stipulate that the port operator must maintain a certain level of productivity, measured by how much cargo in “TEUs”, or “twenty foot equivalents”, is moved over a period of time. In Indonesia, this business model does not apply because all of its port operators are partly or fully state-owned enterprises (SOE).This begs an important question: does having state-owned port operators lead to inefficiencies? Not always. In some cases, they have flourished to become well-run, international operators. Dubai Ports (DP) World is a state-owned operator that has expanded globally. As, too, has PSA International of Singapore, owned by its sovereign wealth fund, Temasek Holdings. However, these cases are unique. Both benefit from being autonomous, investment-driven holding companies and having competition at the port. In addition, they have reaped the rewards of operating important relay hubs. Handling decades and volumes of traffic has raised know-how to levels where, today, both export their services and compete for acquisitions.
From the point of view of an emerging market where its ports are small nodes in the global hub-and-spoke model, keeping port operations “in house” has certain appeal. There is the financial windfall – in the case of Indonesia, for the Ministry of State-Owned Enterprises. As well, it can be necessary politically to appease national security concerns, whether legitimate or as veiled acts of protectionism. The controversy in the U.S. in 2006 when Dubai Ports World sought to acquire British operator P&O and, thus, enlarge its U.S. port operations is the most prominent and recent example. Further, an operator must coordinate with the national coast guard via the maritime and port authority for security issues. An operator that is a SOE can make this coordination smoother, especially in the absence of a formal port regulatory body.
In Indonesia, this setup is necessary because the port operator is the port authority. PT Pelabuhan Indonesia (Pelindo) I, II, III and IV are SOEs created to manage ports -- each with a portfolio of at least one large, profitable port mixed with unprofitable, regional ones. In total, there are over 100 ports in Indonesia with international links. That number will shrink, as the Ministry of Transport (MOT) is expected to consolidate links by revoking the international operating permits for smaller seaports.
Pelindo has, to its detriment, played a dual role as both regulatory body and operator, creating a conflict of interest and a void in long-term planning. At the world’s largest ports like Singapore and Bras’s native Rotterdam, there is a legal separation of roles. “There are no companies that can do both,” Bras says.
2008 Shipping Law is a Step Forward
In April 2008, a new Shipping Law was passed in an attempt to reform the port sector. It amends the 1992 Shipping Law and will not be fully implemented until 2011. One of its major reform efforts is the creation of a new regulatory regime. Pelindo will be removed from its regulatory role, and new port authorities will be formed under the MOT. Bras calls this development “quite positive” and explains, “It was not always clear [about the dual responsibility]. Now, it will be clear.” Building port authorities from the ground up will not be easy. Bras add that it will require outside expertise that the local sector is lacking. The opportunity and need for training and education by a bilateral development agency such as USAID is there.
A major benefit of having dedicated port authorities under the auspices of the MOT will be the opportunity to develop more comprehensive infrastructure strategies in which multiple transportation projects are vetted against and complement one another. Port investment projects will have better oversight, prioritization and flexibility. For example, new ports and terminals could be structured as a Build-Operate-Transfer (BOT) project as opposed to riskier public sector investments.
For existing ports, a port authority can concentrate on basic infrastructure, shared services, long-term growth, security and environmental sustainability. Port regulations and policy across the archipelago can be more liberally enforced without concerns of how reforms might cause commercial conflict of interests, as exists today.
Even with the regulatory-operator lines clarified, there are still lingering problems in the port operator market. At the top of the list: There is not enough competition.
At the Tanjung Priok (TP) in North Jakarta, Pelindo II has attempted to mitigate this by creating two subsidiaries, the Jakarta International Container Terminal (JICT), a joint venture between Pelindo II and Hong Kong’s Hutchinson Port Holding (HPH), and KOJA Container Terminal, another joint venture between Pelindo II and a local private investor. A smaller terminal also operates at TP but cannot handle larger container ships.
With HPH as part-owner of JICT, there are opportunities for foreign knowledge spillover and better efficiency. But as Bras sees it, because shipping companies must choose between two terminals that are operated by the same parent company, it is a monopoly. “There is no competition like with trucking companies,” he comments. Recent developments indicate that a merger between JICT and KOJA is in discussions, thereby making the monopoly unmistakable.
Bras believes that experienced, private operators like APM and APL Terminals, DP World and HPH should be able to come into TP and setup their own terminals. This would “drive towards more professionalism” and better productivity. According to a 2003 report by David Ray of SENADA, JICT is the least efficient terminal in Southeast Asia, in terms of productivity and unit costs.
Further, opening up the port sector to foreign investment is a second major reform of the new shipping law. Foreign investors who wish to operate a port terminal will no longer need to partner with Pelindo. Its monopoly will end beginning in 2011.
Still, there is ambiguity because of the inconsistency of the new shipping law, which aims to open up foreign investment, alongside the negative investment list, which, in its current form, limits foreign ownership to 49 percent for all port activities. If the latter overrules, what viable local partner would a foreign investor choose to develop a joint venture with other than Pelindo? Few, if any. This would land things back to where they started.
Additionally, under the new shipping law, a major investment hurdle will be the MOT’s final authority over port tariffs. For private sector operators who invest in new facilities at seaports, they will still not be able to set tariffs individually and must get final approval by the MOT. This contrasts to more open policy in Vietnam and Thailand – another reason why container terminal infrastructure investors may turn its backs Indonesia.
Bottlenecks of Ground Access at Tanjung Priok
Even with a new shipping law and a recently MOT-drafted blueprint for logistics reform, the sector still faces major infrastructure constraints. The best evidence of this is at Indonesia’s largest port, Tanjung Priok.
According to Bras, TP handles more than 55 percent of the country’s international containers. A recent government report indicates that 60 percent of imports and exports (in value terms) flow through TP. Current expansion of its car terminal will increase capacity by 70 percent and will open in mid-2009. An expansion of the container terminal is on the drawing board for 2011. TP could become a more widely used domestic relay hub for international cargo. Thus, the importance of a more productive TP cannot be understated.
The most pressing issue at TP may not be what goes on inside but outside – namely, the highly congested access roads. For container trucks, the last few kilometers outside the port is where the real bottleneck lies. The root cause is simple: TP lacks a “fly-over” access road that would allow the over 5,000 trucks that frequent the port daily to bypass local public roads and connect directly to larger toll roads like the Jakarta Outer Ring Road (JORR). This, as Bras points out, is how ground access around major ports like in Oakland and Singapore is supposed to be designed.
On busy days, the 12.1 kilometer trip from Cakung, where the toll road ends, to TP along Jl. Cilincing Raya, a two-lane public road, can take up to a full day. Road damage and flooding are partly to blame, but the reality is that the 10-meter wide roads were not designed for container trucks. Bras adds that these local roads cut through residential neighborhoods with children playing in the streets.
With financial assistance from the Japan Bank for International Development, plans are finally in motion to complete the six-lane access road (toll-based) from TP to the JORR. After land acquisition is finished, construction should begin within a year, with a completion target of 2011. Overall, JICT has earmarked US$30 million for port infrastructure investments, with a total of US$150 million for the period of 2008-2012.
Another vital choke point is the Marunda Bridge, which links Tanjung Priok to the Kawasan Berikat Nusantara (KBN) industrial zone in Marunda. Frequent closures of the bridge due to safety concerns and restoration have added to the bottleneck on Cakung-Cilincing. As Bras points out, the bridge is 60 plus years old and predates container trucks. Its ongoing restoration is a stop-gap solution; the long-term solution is a new bridge which is slated for completion this year.
Other projects aim to boost the port’s efficiency. As part of the road infrastructure upgrades, JICT will also increase the number of entrance gates at TP from 4 to 28 and exit gates from 4 to 8. In addition, by mid-2009, JICT will have installed four Super Post Panamax Quay Cranes, each of which has double the normal crane’s rate of unloading/loading containers. It accomplishes this by lifting two twenty-foot containers at the same time.
When many of these infrastructure expansion plans were drawn up, TP was operating at peak capacity, thus giving the impetus for port investment. With a global economic downturn and a sharp drop in shipping, capacity problems have gone by the wayside. Oddly, the downturn may turn out to be a blessing in disguise, as TP can more quickly execute its expansion plans amidst less traffic, leaving it prepared to handle the demand of the next boom cycle.
Long-term, ground access may not be the sustainable answer to relay international cargo from TP to cities across Java. Complimentary solutions like increasing the relay of intra-island cargo by sea and rail will need to be developed. Rail networks on Central and West Java are currently limited in use to passenger trains. However, existing and unused commercial rail lines between dense corridors like Jakarta-Bandung could be refurbished to support container service trains and extended to TP port.
Policies Matter: Import Regulations, VAT & THC
The challenges for foreign shipping companies extend beyond infrastructure constraints. They include frequent unilateral policy changes by the government of Indonesia that often reduce customer demand and raise costs. One current example is a recent import regulation decree.
In October 2008, the Ministry of Trade issued a two-year decree (No. 44/M-DAG/PER/10/2008) that regulates the imports of goods in five categories: electronics, ready-to-wear clothes, children’s toys, footwear, and food and beverages. Specifically, the decree limits imports of these products only to registered importers and to five seaports. Inspection requirements upon arrival are now mandatory, and costs are charged to the importer. In addition, certain goods from the U.S., Europe and China now require sanitary and phytosanitary pre-certification (such as SGS) before entering the country. The decree was made in response to the tainted product scare coming out of China but is increasingly perceived as protectionist.
Bras believes that the decree has had a significant role in APL Indonesia’s huge decline on inbound volume. With added costs and delays for inspection and domestic transportation, uncertainties about the rules and regulations, weak demand and a weaker Rupiah, importers are taking the high road.
“It has pretty much destroyed our inbound business. The inbound volumes have dropped off – in November and December – by 40 to 60 percent,” he admits, acknowledging that the economic downturn has had a large but not singular role.
This particular anecdote reveals an on-going complaint of foreign businesses: There should be inclusion of more stakeholders, including industry players like APL and Maersk, in the discussion of economic policy. “It’s probably a bit rare [to get a productive dialogue in shipping policy],” he reveals. Bras adds that when it does occur, it is often through efforts by the World Bank or USAID.
In addition, two on-going disagreements between the shipping lines, INSA (The Indonesian National Shipowners’ Association) and the government have been 1) the application of a 10% Value-Added Tax (VAT) for international forwarders in Indonesia and 2) government intervention on the pricing of transportation handling charges (THC), which are normally determined by negotiations between shipping companies and customers.
Modernizing Indonesian Seaports
Bras acknowledges that TP will never become an international seaport hub, even as Vice President Jusuf Kalla recently stated that TP could become one through modernization efforts, during a visit to Rotterdan Port. The constraint is not that TP is not modern enough; it is geography. The distance from TP to the Straight of Malacca by Singapore, Malaysia, and northern Sumatra is simply too far off inter-continental shipping routes to ever make the port an economically-viable hub alternative, just as Soekarno-Hatta International Airport will never become a air hub due to its location.
However, in the long-term, Bras suggests that Indonesia ought to develop an international seaport close to Singapore on Sumatra or the Riau Archipelago. The port could be modeled much in the same way Malaysia built two ports in the 1990s, Tanjung Pelepas and Tanjnug Langsat in Johor, close to the Port of Singapore. Given the immense shipping traffic through the Straight of Malacca, the two new ports have grown rapidly to become profitable, alternative relay hubs, thanks to geography, strong government backing and operational excellence. Indonesia, however, would have enormous obstacles to overcome including site selection, land acquisition, local-national government coordination, and the development of the aforementioned port authority bodies. Yet the benefits could be far-reaching, as it would create a seaport that would have to adhere to international standards to survive and, thus, push up standards for other domestic seaports.
Correlation between Indonesia’s Shipping Sector and Economic Growth
In many ways, Indonesia will grow economically only as quickly as its shipping sector progresses. Trade is a root driver of economic growth for most developing countries. Export sectors offer manufacturing jobs for the unskilled, knowledge transfer from foreign firms to local workers and foreign revenues for the Central Bank. Imports yield much needed competition, consumer choices and products in “gap” areas. Shipping is as central to trade as anything. And Indonesia is at a severe competitive disadvantage in this sector relative to its neighbors in the region. The shipping transport chain in Indonesia must move from being a liability to a non-issue in order to increase foreign investors’ confidence. Meanwhile, shipping companies like APL will continue to be central players not only in its industry but also in Indonesia’s growth story.
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The Executive Exchange thanks Dennis Bras for input into this article.
Dennis Bras, a native of the Netherlands, is President Director of PT APL and APL Logistics Indonesia and is its corporate member representative to AmCham Indonesia. As one of the top global container transportation companies, APL provides more than 60 weekly shipping services reaching over 25,000 locations in 140 countries. APL’s sister company APL Logistics provides end-to-end, global supply chain solutions and integrated transportation services. APL and APL logistics are wholly -owned subsidiaries of the Singapore-based Neptune Orient Lines (NOL) group. APL is a member of AmCham Indonesia.
(Select photos courtesy of and copyright APL Indonesia)
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