Indonesia Launches Massive Port Expansion

February 28, 2015, Finance Asia

Indonesia, the world’s largest archipelago with more than 15.000 islands, is in the midst of a sea change.

Southeast Asia’s largest economy has an unprecedented plan to upgrade its ports network, which is buckling under the weight of increased traffic, bureaucracy, and infrastructure issues.

The scheme, which involves modernising existing ports and building a raft of new ones, is being led by the government but the private sector and foreign investors are being courted too.

“The expansion of Indonesia’s ports is extremely important, not just for the connectivity of Indonesia’s islands but also to bring down logistical costs and raise competitiveness, “Sarvesh Suri, Indonesia country head for International Finance Corp, the private equity arm of the World Bank, told FinanceAsia.

Bigger ports mean bigger ships and a greater amount of cargo that can pass through them, which attracts more manufacturers to coastal hubs and further develops industry and the economy.

Indonesia ranks a lowly 53rd on the World Bank’s logistics performance index, behind Thailand and Vietnam, which is perhaps surprising considering it is Southeast Asia’s largest economy by GDP.

“Ports in Indonesia are behind [other Southeast Asian countries] by a long distance,” Edimon Ginting, deputy country at the Asian Development Bank in Indonesia, told FinanceAsia.

To improve this, President Joko “Jokowi” Widodo said the government will spend Rp 5.519,4 trillion ($ 429 billion) on infrastructure upgrades over the next five years.

This will be party met by the savings made from the fuel subsidy cut but, in December, the government said it would need $7 billion from foreign investors for ports in particular.

“Port infrastructure needs to be upgraded progressively across the board in order to support the shipping network,” Jason Chiang, director of Dwery Maritime Research, told FinanceAsia. “This will allow the shipping lines to upsize their vessels in order to realize economies of scales.”

This is no small issue for Widodo, who was sworn-in in October last year and faces a plethora of problems, including a stalling economy and the end of the commodities supercycle.

According to the government, water transportation accounts for only 4% of all transport in Indonesia, which seems tiny for an island nation.

Widodo has labelled his plan the “Sea Toll Road” or “Ocean Highway”; a co-ordinated network of ports designed to better handle international traffic and streamline more local trade.

“The new government has been focusing on developing new ports in rural areas, especially in the eastern part of Indonesia, and they have been actively promoting the idea to foreign investors in a bid to get this started, “Jakob Friis Sorensen, president director of Maersk Indonesia, told FinanceAsia.

Bottlenecks

The funding is well timed because, right now, things aren’t great. The problems are common to other areas of the economy; namely infrastructure, geography, and bureaucracy.

Broadly, increased shipping congestion is adding to already poor dwell times – an industry term that measures the time between a container being unloaded from a vessel to leaving the port.

The longer the dwell time, the greater the congestion, which restricts the number of containers that can be processed and increases the costs for those depending on the port for movement of goods.

Compounding the problem, international cargo is currently restricted to Jakarta and Surabaya, Indonesia’s two largest cities, with Jakarta’s Tanjung Priok port handling two-thirds of Indonesia’s trade, according to the World Bank.

The average import container dwell time at Tanjung Priok port increased from 4,8 days in 2010 to 6,4 days in 2013, according to the World Bank.

Tanjung Port hasn’t been expanded for 130 years even though container traffic has been growing at a 24% annual clip, according to Richard Joost Lino, president director of Indonesian Port Corporation.

Container shipping companies are required to use trans-shipment facilities in Singapore and Malaysia to feed the second-tier ports in Indonesia, which adds to time and costs.

These second-tier ports are further stymied by a lack of size and secondary infrastructure such as roads and other forms of access. Often it is cheaper to import from China rather than from within Indonesia, according to the World Bank.

“Infrastructure access in and out of ports is one of the main problems. Channel and road access in some ports are still inadequate and create difficulties for exporters/importers as well as shipping lines,” Sorensen said.

The need is pressing because a stalling economy – GDP growth has slipped from 5,78% in 2013 to 5,02% last year – coupled with the end of the commodities supercycle has left the new administration scrambling to re-position the country.

Rather than rely on the export of commodities such as iron ore and coal, Indonesia now wants to be a high-end manufacturer of cars and other machinery.

How the country’s factories get these to and from it shores to overseas markets will be key to whether this is ultimately a success.

“What the port expansion is going to do is hopefully to attract more manufacturing industries to establish both in Jakarta and outer ports, which will lead to higher volume growth,”Maersk’s Sorensen said.

Expansion

Indonesia’s four state-owned port operators – known as Pelindos 1,2,3, and 4 – are tasked with much of this work and have begun courting foreign investors and the capital markets for funding.

“The Pelindo are working to Jokowi’s vision of the Sea Toll. Efforts are being made to raise funds for the port infrastructure upgrades,” Drewy’s Chiang said. “There could be private sector involvement on the funding and operational side.”

Major capacity expansions for the most strategic ports are likely to be financed either in special purpose vehicles or in the balance sheets of the respective state-owned port company, Gavin Munro, head of infrastructure finance for Asia Pacific, Societe General Corporate & Investment Banking, told FinanceAsia

The letter is similar to how Pelindo II leveraged its existing operations at the Port of Tanjung Priok to fund the New Priok Port project last year, Munro said.

Opportunities will be widespread for foreign companies and investors, and investment banks are expecting a ramp up in project finance deals as a result.

“There will be strong appetite for well-structured US dollar-denominated funding for essential infrastructure assets from the major international project finance banks and key regional players, as was demonstrated with the pathfinder Pelindo II transaction last year,” Munro said.

Pelindo II, which controls Tanjung Priok Port is adding three new terminals there in an extension called Kalibaru Port – one will open this year and two next year – with the aim to bring down dwell times from 6,4 dats to 3 days.

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