Photo by Transportaion Ministry

JAKARTA (TheInsiderStories) – Over the last three years, the government, under President Joko Widodo has expressed its efforts to tackle the issue of stubborn inefficiency in logistics, long haunting the country. That includes the establishment of an Indonesia National Single Window (INSW) system to deal with dwelling time issues, logistic bounded areas to reduce tariffs as well as continuing massive infrastructure on toll roads, ports and other connectivity infrastructure.

In term of sea connectivity, the government has established Kuala Tanjung and Bitung ports as international hubs and begun to run scheduled ocean freighters on six routes operated by state shipping firm PT Pelayaran Nasional Indonesia (Pelni), connecting major cities to remote areas, under the ‘maritime highway’ program.

The Government also pledged to reduce the dwelling time at major ports such as the Tanjung Priok Port in Jakarta and Tanjung Perak Port in East Java, to three days maximum.

In terms of land connectivity, the government has added 609 kilometers of toll roads in the last three years, including 399 kilometers of the projected Trans-Java toll road and 210 kilometers of toll roads outside Java. The Government also aims to integrate all Trans-Java toll road sections by 2018 and will operate total 1,854.6 kilometers of toll roads under state-owned toll agency BPJT. That’s more than double compared to the 2014 figure of 171 kilometers of toll road development.

Despite all the government’s effort to tackle logistics bottlenecks, Indonesia ranked only 63rd out of 160 countries, based on the 2016 World Bank’s Logistics Performance Index. While logistic costs remain high, at around 24.6 per cent of GDP (compared to its peers Malaysia and Philippines at 19 per cent of GDP), at present, domestic logistics firms only account for 43 per cent of logistics activities in Indonesia, with the rest dominated by foreign firms.

Such foreign dominance in the logistics sector along with other sectors in the service business is reflected within the balance of payments with a US$6.5 billion deficit in the service trade balance in 2016.

Edy Putra Irawady, the Deputy of Trade and Industry at the Office of the Coordinating Economic Minister, sees overlapping regulations as having contributed to high logistic inefficiency. Other than that, lack of infrastructure, the absence of distribution centers, lack of a national cargo transportation map as well as lack of human resources. Thus, the government launched its ‘Economy Policy Package XV’ in June to address the issue.

Indonesia currently uses the 10,826 HS commodity codes (for international trade). Of these, 5,299 HS codes or 49 per cent are restriction permits which take a longer time to be processed. For comparison, other peer countries like Malaysia and Philippines only have 19 per cent of restriction permits.

The Government has already abolished some restriction permit through de-regulation, yet somehow they just pop up again and again. Thus, the government will strengthen INSW system to limit existing restriction permits.

“The package will improve the competitiveness of logistics players, the management of strategic commodities and the operations of logistics infrastructure, information and technology. We want to lift the burden of regulations and costs [for the players]. For example, we gave fiscal incentives, including tax relief as well as the revision of logistics-related non-tax revenues, and the reduction of the minimum capital needed to establish transportation businesses,” he told TheInsiderStories.

The package is believed to “enable” local logistics companies, including the domestic shipping industry, to serve international trade transportation valued at US$ 600 million per year, creating 70 up to 100 units of new ship investment valued at $ 700 million, achieving 1 to 2 percent transportation insurance benefit along with a $ 560 million loan from domestic banks, as well as opening 2,000 new jobs for shipboard workers.

The package set a zero import tariff for 115 oceangoing ship components, as well as reducing goods logistic costs through air transportation. For example, some regulated agents affix costs for several short domestic routes (Jakarta-Semarang/Jakarta-Surabaya) that can reach 30 per cent of total transportation costs. The package will reduce these by half. On the other hand, local government is expected to be more active in developing local logistic systems to reduce post-production damage by up to 30 percent, through establishment of regional distribution centers and goods transportation standards.

Indonesian Logistics and Forwarders Association (ALFI) chairman Yukki Nugrahawan Hanafi argues that while the government keeps issuing policy packages, their implementation is not intelligently evaluated.

“We never evaluate the implementation of the three policy packages that also address logistics issues. It [the government] also says that there are 3,800 regional regulations that hamper [logistics competitiveness], but what have they done about it?” he complained to TheInsiderStories.

The Association recommends that the next policy package should thoroughly address the dwell time issue, instead of just focusing on quickly getting goods out of ports when the required paperwork is not even completed. At the same time, the government’s INSW, which streamlines export-import procedures, should also tackle backlogs in bulk cargo that still dominate the country’s exports.

Future Logistics Trend

In its “Urban Commercial Transport and The Future of Mobility” report McKinsey states that while cities are still the main source of global economy (contributing 80 per cent of world GDP), such inefficiency in urban logistics drags as much as 2 until 4 per cent of city GDP down in the form of lost time, wasted fuel, and higher cost of doing business. Jakarta itself loses US$ 5 billion a year in congestion.

According to the report, the traditional model of large diesel trucks rumbling through cities and blocking traffic as they drop off and pick up packages will largely disappear. Change is coming to every step of their operations, from warehouse operations (where the current approach focuses on sorting packages for daytime delivery) to capital expenditures (where they will need to invest in fleet electrification and autonomy) to final delivery (where consumers will want a broader set of delivery options).

Companies in this sector are in an enviable position. As e-commerce and commercial freight grow, so will the demand for the services of logistics companies – yet the competition is also likely to intensify. Take a case: venture-capital investments in urban delivery services in Europe and the United States rose from less than $200 million in 2013 to $1.7 billion in 2015. With so much money coming into the sector, and the emergence of new delivery methods and business models, logistics players will have to be both smart and nimble to succeed.

Chinese e-commerce player JD.com, for example, has announced plans to invest more heavily in logistics automation, including automated warehouses and drone deliveries. When provided within an efficient network, instant and same-day delivery options can create higher profit margins. In the longer term, digitization will become a priority in vehicles, infrastructure, and data to improve such functions as load pooling journeys, traffic-flow management, and predictive maintenance.

Finally, customer communications will become even more important. Customers must know the time, place, and method of delivery (such as droids or autonomous ground vehicle lockers) and how to access their parcels. Because some consumers do appear willing to pay a premium for enhanced services, logistics companies that excel in these and other kinds of execution could see higher revenues and profits.

Writing by Yosi Winosa, Email: yosi.winosa@theinsiderstories.com

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