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Asia Insight

Indonesia sneaks up on Singapore with flurry of port projects

Widodo envisions a new global shipping hub on China's Belt and Road

Port in Indonesia
(© Nikkei montage/Source photos by Reuters)

GRESIK, Indonesia -- It may not look like much right now, but an 1,800-hectare tract of land on the eastern edge of Java symbolizes Indonesia's future.

The site, at the entrance to the busy Madura Strait, is to host the largest industrial park in East Java -- the Java Integrated Industrial and Ports Estate. It is still mostly deserted, but construction is gaining steam. And it is just one of dozens of port projects sprouting up around the country, as President Joko Widodo pushes to turn the archipelago into a fulcrum of maritime trade.

"Why do I like this area? Because it is an integrated area -- it has a port and an industrial zone," Widodo said at the opening ceremony for the first phase of the Java estate in March. "By being integrated with a deep-sea port, this park will have direct access to domestic and international markets."

After taking office in October 2014, Widodo endorsed a five-year, 700 trillion rupiah ($50.6 billion) plan to build up the maritime sector. This included 243 trillion rupiah for developing 24 "strategic ports."

Progress in the first half of his presidency was sluggish, but infrastructure development began to gather pace last year. Now, old ports are being revamped and new ones are being built as Indonesia strives to tackle its notoriously high logistics costs and become a transshipment hub capable of challenging Singapore's dominance.

The port at the Java estate will have a total berth length of 6.4km. Some sections will be deep enough to accommodate large cargo vessels with capacities up to 100,000 deadweight tons. This is expected to reduce loads at nearby Tanjung Perak, Indonesia's second-busiest port and the main logistics gateway to the nation's eastern provinces.

"At Tanjung Perak now, eight ships at a time have to queue to dock [at one spot]," a director of the estate project said in May. "Ships often have to wait for a week outside [the port] before docking. We should have [developed the new port] three or five years ago."

The integrated estate currently hosts seven small manufacturers, serving their logistics needs with a 200-meter jetty. The goal is to complete the estate by 2030, by which time the developers -- state-owned port operator Pelindo III and private partner AKR Corporindo -- expect to play host to nearly 200 companies.

Freeport Indonesia, the local unit of U.S. miner Freeport-McMoRan, is reportedly looking at the site as a potential location for its second smelter in the country.

Widodo said he wants more estates that link plants and ports, since this will bring down the logistics costs that run to the equivalent of 24% of Indonesia's gross domestic product. That is significantly higher than the figures for most other countries in the region.

The Widodo government wants to lower the number to 19% next year.

Logistics are particularly expensive in the eastern provinces, where infrastructure lags far behind other parts of the country. Port projects in remote cities like Makassar and Sorong are meant to tackle this challenge. Upgrades are needed to make room for cargo vessels, including ships operated under the president's signature Sea Highways program, which regularly sends goods to designated ports nationwide at subsidized cost.

Indonesia's 17,000 islands are home to more than 1,200 ports -- including around 110 cargo bases run by four state-owned companies, Pelindo I through IV. But past infrastructure development focused heavily on roads, leaving many aging ports with insufficient capacity. Sea transport currently accounts for just 6% of Indonesia's freight traffic, versus 45% by land and 30% by air.

The World Bank studied 18 Indonesian ports and, in a note issued in January, said they suffer from a "critical infrastructure gap."

"The quality of ports' infrastructure across the country is a weak factor in the overall country's competitiveness," the bank wrote.

Indonesia's port quality ranks 72nd in the latest Global Competitiveness Index issued by the World Economic Forum -- below neighbors Singapore, Malaysia and Thailand.

There are signs Indonesia is moving in the right direction. Transportation Minister Budi Sumadi said Tanjung Priok, the country's busiest port in Jakarta, has seen a throughput increase of 1 million 20-foot equivalent units a year following the completion of its first expansion phase.

"And after Kuala Tanjung starts operating, my target is to increase [Indonesia's] throughput by 3 million TEUs this year," Sumadi said last month, referring to another port in north Sumatra. He added that some of the extra volume is expected to come over from Singapore and Malaysia.

Over the past two years, Indonesia also has been developing bonded logistics centers across the country -- offering to waive import duties for goods stored in the centers. The head of the customs and excise office said in April that the new policy has drawn $606 million worth of inventory away from Singapore.

The Teluk Lamong Terminal, a project by state operator Pelindo III, is billed as the country's first green and automated port. (Photo by Erwida Maulia)

Zaldy Masita, chairman of the Indonesian Logistics Association, said the centers are prompting a growing number of companies to move warehouses from the city-state. "We've received information from our partners that they've been offered discounts to [keep their cargo] in Singapore," Masita told reporters in April. "[The policy] is starting to change the logistics landscape in Southeast Asia."

Funding is an issue, however.

The government has said the state budget can cover only a third of the 4,800 trillion rupiah worth of infrastructure needed in the 2015 to 2019 period. Officials in Jakarta have been actively inviting other countries to invest in ports.

The Netherlands' Port of Rotterdam Authority provided consulting to Pelindo I on the first development phase of Kuala Tanjung, and is reportedly planning to invest in the next phase. Last November, the Japanese government signed a 118.9 billion yen ($1 billion) loan for the construction of the Patimban deep-sea port, with a consortium of Japanese and Indonesian companies landing the construction contract. Singaporean port operator PSA International has been involved in one project and may soon join another.

But China's Belt and Road infrastructure initiative is perhaps Indonesia's biggest hope. 

Widodo has repeatedly said his maritime vision can complement the Belt and Road. Beijing has expressed some interest in port investment: Ningbo Zhoushan Port and China Communications Construction Engineering Indonesia have signed memorandums of understanding with Indonesian port operators to jointly develop New Priok and Kendal International Port, respectively.

Yet no actual investments are known to have been made. Indonesia's Chief Maritime Minister Luhut Panjaitan was dispatched to Beijing in April to reiterate calls to invest in the Kuala Tanjung and Bitung international hub ports. He said he brought home $23.3 billion worth of deals -- but none for the port projects.

Some analysts think Indonesia is not a priority on the Belt and Road. "China has more immediate incentives to strengthen its trade routes in its neighboring countries first that are not separated by seas," brokerage Reliance Sekuritas Indonesia said in a note.

Nevertheless, Massimiliano Cali, senior economist for macro trade and investment at the World Bank, said financing may not be the key issue for major projects like Kuala Tanjung and Patimban.

"While it is true that these are big projects, their financing should not be a key constraint to the extent that they are commercially viable," Cali told the Nikkei Asian Review. "And both projects appear to have the potential to receive substantial traffic, which can eventually allow the repayment of the development costs."

President Joko Widodo inspects a ship at Tanjung Priok Port in Jakarta in May. Indonesia is keen to advertise its growing ability to accommodate large containerships. (Photo courtesy of Indonesia’s presidential office)

Financing issues aside, Teuku Rezasyah, an international relations lecturer at Indonesia's Padjadjaran University, said the country must be cautious about allowing access to its ports. He specifically pointed to projects offered to China for Belt and Road investment that are located in areas with direct access to the disputed South China Sea.

The Belt and Road "can't be merely about infrastructure development; it has more strategic goals related directly to the South China Sea," Rezasyah said. "The Indonesian government is now being too hungry for investment ... but it must be extra careful."

Experts also stress Indonesia has a long way to go before it can expect to snatch significant chunks of the transshipment market from Singapore. And given the number of ongoing and planned port projects, there is concern about counterproductive competition.

"Ports in the region need to [take] a collaborative view and not a competitive one to gain collective advantages," said Gopal R, global vice president for transportation and logistics practice at Frost & Sullivan. "If the ports pitch one against another in the region, the advantage will only be incremental growth and not sustainable growth."

Despite the various worries, Widodo has another reason to push the port projects: the presidential election in April 2019.

The government is eager to show tangible progress before voters go to the polls. Despite delays in starting construction, a portion of the $3 billion Patimban project, which lies 120km east of Jakarta, is supposed to open next March.  

Haste is the name of the game. Other infrastructure projects on densely populated Java have been rushed to meet deadlines and show voters that Widodo delivers results. 

A new international airport in West Java, Indonesia's most populous province, and much of a new Trans-Java toll road are expected to be ready for the Islamic holiday of Idul Fitri later this week, when millions of people will travel to their hometowns.

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