Indonesia’s Costly Connection

By Ebi Junaidi and Alannah Perry

Sometimes, the biggest hindrances to development are not ones that are easily seen. Indonesia is currently facing a logistical crisis worsened by world events such as COVID-19 and global supply chain issues. This issue has become a highly recognised economic issue, with President Joko Widodo asserting that the government will invest in the logistics industry to help address this problem. But what are the issues that need to be addressed? When discussing handling this logistics issue, it is important first to outline what this means for the everyday Indonesian.

The Issue

Logistics and logistics costs have indeed risen to prominence in domestic politics and the economy in Indonesia. As the world´s largest archipelagic country, the distribution and transport of goods has become one of the major factors in the ability to develop different regions and outreach every area.

Coordinating Minister for the Economy and Finance in Indonesia, Prof. Dorodjatun Kuntjoro-Jakti, back in 2002, stated that “the oceans are roads that we don’t need asphalt to build. God has set it ready to allow us to connect over 17,000 islands that we have.” Indeed, transportation via ocean is the cheapest way compared to air or land transportation. Yet, it is widely quoted that the national logistics cost in Indonesia is around 24.6%. For everyday Indonesians, this means that almost a quarter of the price of goods consumed is paid for delivering it to their table. It is indeed very expensive!

To further this discussion, it is important to define what logistics means. In the simplest terms, logistics refers to the coordination and moving of resources to a desired location. These resources can refer to anything from manufactured goods to people. Such resources have a range of ways to be moved, by land movement, maritime services or air travel. In the case of Indonesia, around 70% of the logistics transport, despite its archipelagic nature, uses land transportation.

Logistics also involve the storage and management of these resources. All these have an especially high cost in Indonesia, which, as mentioned above, accounts for 24% of the Gross Domestic Product (GDP), with some of the highest logistics costs in Asia. In comparison, logistics costs account for only 13% of the GDP in Malaysia. These logistics costs are being passed on to the consumer with the price of goods increasing. There is a strong relationship between GDP growth and the growth of the logistics industry, with a 1.259% increase in GDP for every 1% increase in Freight volume.¹

The high cost of logistics cannot be attributed to a higher quality, with Indonesia’s lack of critical logistical infrastructure to account for the unequal distribution of resources across the country. The lack of infrastructure, such as roads and shipping ports, has made it difficult to connect Indonesia and has meant that some regions have been left worse off due to the uneven distribution of resources.

The high logistics costs of vital goods such as rice and oil to the eastern regions, combined with the lower incomes of those areas compared to Java have contributed to the lower living standards of Eastern Indonesia in comparison to Western Indonesia. The inefficiency of logistics contributes to the growing inequality within Indonesia, which has concerning social implications for the future of such a diverse and disconnected country. To create stable and long-lasting development, equality in development is vital. However, this can be difficult to achieve with growing levels of inequality. Improving the logistics industry is critical to the development of regions beyond Java, the main island where Jakarta, the capital of Indonesia is. Recent studies have shown that access to seaports has a statistically significant impact on the economic development of non-Java regions.² This is due to the creation of employment and economic activity due to the maritime recruitment in areas and the ability to reduce the logistical cost of transporting resources needed for development.

Barriers to Logistics

Why has logistics become such a problem in Indonesia? There is not only one answer to that question, as many factors have created barriers to improving the logistics industry. One of the main issues that are being faced is the rural logistics system. Indonesia faces unique challenges due to its dispersed population and lack of rural infrastructure.³ That lack of easy connectivity to the maritime port for inland communities has led to an increase in the cost of the transportation of vital goods for these areas. Not only is there an added logistical cost from inland transport, but also maritime transport. Therefore, the infrastructure around maritime ports has become a key issue contributing to these logistical costs. In regions such as Tidore, Sula and East Halmahera, studies found that a lack of port infrastructure has resulted in both a decrease in efficiency and an increase in cost.⁴ Without the equipment to assist with the loading and unloading process of shipments, more labourers are needed for longer hours and more strenuous work. The lack of technical efficiency at these maritime ports is one of the reasons the Eastern Indonesia regions face higher logistic costs than more developed areas of Indonesia. The lack of trading goods to be transported from the east to the west has contributed to the imbalanced cargo. These added logistics costs have decreased the competitiveness of Indonesian logistics industries, putting them at a disadvantage in the global trade sectors.

The government has put effort into easing the problem. Infrastructure development has been indeed the priority for the last nine years of Joko’s government. The “tol laut” or “ocean toll-road” project is also being introduced. In this project, the government provides ships that sail regularly to connect many parts of Indonesia. This, indeed, has helped many Indonesians and enabled price equalisations as well as a connection between West and East Indonesia.

Logistics costs is not only an infrastructure issue, as legislative barriers have added to the cost of moving goods. In addition, maritime shipping faces problems with the requirements placed on getting the licensing for vessel owners. The current port protections, such as national standard compliance, pre-shipment inspections and import approvals, have been seen as “excessive” and have made shipments five times more expensive in comparison to countries like Singapore.⁵ This has deterred competition from entering the markets, which has stalled innovation in the sector in the long run.

The Organisation for Economic Co-operation and Development (OECD) has noted the excessive requirements as one of the reasons for logistics inefficiency and has recommended that they be removed. These changes should be geared towards increasing diversity in the industry and technical development. Regarding land transportation costs, the OECD recommends increasing vehicle inspection to reduce operation costs.

As a middle-income state, Indonesia also faces human capital shortages. The latest Logistics Performance Index, issued by the World Bank, confirmed this finding. The Logistics Competence and Quality of Logistics Service indicator decreased in score from 3.1 to 2.9 (out of 5) and made Indonesia’s world rank for this indicator fall by 21 points, from rank 65 to 44. The lack of well-orchestrated logistics human capital planning has indeed created a challenge. Even in ports with the necessary equipment, there is often a lack of qualified personnel to run it.

With only 29% of the workforce comprised of vocational school graduates, and even less (9.4%) as university graduates, there is a shortage of the human capital needed to develop the logistics industries through research and development.⁶ This is reflected in Indonesia’s Total Factor Productivity (TFP) growth which has remained below 1%. Without the necessary qualified people to operate the equipment needed to improve the efficiency of loading and unloading the resources, improvement to the industry will be stalled. The low level of human capital combined with restrictions through legislation and low levels of infrastructure has continued to contribute to the logistics issue. Due to the problem’s high impact, both the private and public sectors are responding to the issue.

Responses from the Public and Private Sectors

Joko Widodo’s government has acknowledged this issue, with the president commenting, making it a government priority since 2014. In 2021, 47% of the national budget was dedicated to infrastructure projects, including roads and ports.⁷ The government is also looking for ways to address the inefficiencies in the legal system. There is currently an effort to revitalise the National Logistics Eco-system (NLE). NLE is expected to play the role of the platform that bridges the interests of the government and the logistics players. It aims to simplify the logistic business process and increase the industry’s competition. This reform is projected to save the government 1.5 trillion Rp per year as it will remove much of the red tape that hinders vessel and business ownership and operation (Akhla, 2020). Other reforms include investment in a national single window system to consolidate trade information, making route and processing information more accessible. This system is still under development and not quite to international standards, but it has led to improved information sharing and access of logistic companies to needed data.

The government has also been trying to work with the private sector to improve research and development in the industry (how it has worked with the private sector). Those working in the industry note that there have been positive changes in the ship operations process. One executive noted that although extremely slow, the industry is changing for the better. This, in the end, will create a better and more equitable development in Indonesia. We hope.

About the Authors

Ebi Junaidi is an economist at Samudera Indonesia Research Initiative (SIRI), a think tank arm of Samudera Indonesia. He covers macro and logistics. Ebi earned his degree from the University of Indonesia and Melbourne University and currently finishing his PhD at Durham University. He teaches economics at Fakultas Ekonomi dan Bisnis, Universitas Indonesia.

Alannah Perry is an intern at Samudera Indonesia´s head office, Jakarta. She is currently an undergraduate student pursuing a Bachelor’s in International Relations and Arts, specialising in Development Studies and minoring in Economic Studies at Australian National University.

References

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   OECD (2021), OECD Competition Assessment Reviews: Logistics Sector in Indonesia oe.cd/comp-asean
8. Akhla, Adrian Wail (2020). “Govt to Proceed with Logistics System Reform amid High Costs.” The Jakarta Post. September 29, 2020. https://www.thejakartapost.com/news/2020/09/28/govt-to-proceed-with-logistics-system-reform-amid-high-costs.html.
9. Anissa, Indira, and Kusumasari Bevaola. “Boosting Logistics in Indonesia and Vietnam through Staged Development of the Single Window System: A Government Innovation.” Viešoji politika ir administravimas 19, no. 4 (2020). https://doi.org/10.13165/VPA-20-19-4-07.
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