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Reorienting the East Indies

Indonesia’s reforming government has decided to tackle the nation’s ageing port infrastructure, as it looks to awaken the region’s sleeping giant economy.

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When President Joko Widodo, known as Jokowi, took office in 2014, he arrived with pledges to overhaul the island nation’s ailing port and transport sector, and to spend a larger share of the national budget on updating the country’s infrastructure. With overall logistics costs equivalent to more than a quarter of GDP, his enthusiasm to boost efficiency and the economy was widely applauded.

 

Jokowi’s wider reform agenda has buoyed South East Asia’s largest economy, which grew in 2016 for the first time in five years by 5%, up from 4.9% in 2015. Indonesia sustained the 5% year-on-year growth in the first quarter of 2017.

 

However, despite the policy drive by Jokowi, the World Bank has noted weaker investment growth and government spending. The World Bank expects growth of 5.2% this year, and 5.3% in 2018, and believes the Indonesian recovery looks robust.

 

Maritime nation

 

Jokowi’s infrastructure plans to 2019 need US$358B of investment. In 2016, the World Bank approved US$800M in infrastructure loans to Indonesia, with US$950M pending. The Asian Development Bank has lent US$2B. Japan’s development agency has invested in the power sector.


Indonesia’s maritime economy is at the centre of Jokowi’s wider reforms. “We have turned our back on the seas, oceans, straits and bays for too long,” the president declared in his inaugural speech. “We have to work as hard as possible to turn Indonesia into a maritime nation once again.” Of course, maritime trade is entwined in the world’s biggest archipelago, with, arguably, 17,000 islands stretched over 5,000 km on either side of the equator from the
Java Sea to the Banda Sea.

 

The administration has acknowledged that decades of neglect have hampered development. The port sector remains inefficient, its equipment outmoded and its terminals gridlocked. Corruption and bribery are endemic, supply chains are riddled with vested interests, and a sprawling bureaucracy constricts change, says Indonesia Investment. Alongside its poorly developed port infrastructure and waterways, Indonesia is underserved by a scant network of roads and railways.

 

Jokowi’s “sea toll road” initiative has sought to address the parlous state of the country’s maritime infrastructure with investment in the ports sector to 2019 – in order to stir growth with lower transport costs for the region’s ‘sleeping giant’ economy. “We want to build a sea toll,” the president told a Beijing meeting of the Asia-Pacific Economic Cooperation following his election. “Sea toll is a maritime transportation system to lower our transportation cost. As you know, we have 17,000 islands, so we need seaports and deepsea ports."

 

Sea toll

 

The sea toll initiative is investing in Indonesia’s six existing main ports – Belawan, Batam, Makassar, Sorong, Tanjung Perak and Tanjung Priok – 24 new commercial ports, 1,000 non-commercial ports and vessels by 2019. Although much of the emphasis is on container shipping capacity, the government is looking to boost bulk handling infrastructure for intra-Indonesian trade, as well as export trade. Jokowi plans to reduce Indonesia’s logistics costs from around a quarter to a fifth of GDP by 2019.


State-owned port operator PT Pelabuhan Indonesia I (Pelindo I) has earmarked US$1.36B for its developments, which will include 1 Mtpa dry bulk terminals at the Port of Kuala Tanjung in North Sumatra. The first stages of North Sumatra ports development are scheduled for completion in 2018 and 2019. Pelindo I aims for Kuala Tanjung to become a major transit hub for shipments to Europe, with a strategic position to rival nearby Singapore.


PT Pelabuhan Indonesia II (Pelindo II) has plans to raise US$1.1B to build and operate five new ports. Pelindo II has allocated US$90.25M for a new deepsea port at Kijing, which will provide 15 Mtpa of dry bulk handling capacity
for the bauxite-rich area of West Kalimantan. The port of Pontianak has struggled to cater for demand, while estuary silting has restricted vessel access. The new deepwater port will be situated around 70 km south of Pontianak near the mouth of the River Kapuas.


In 2015, Tekul Lamong multipurpose terminal in East Java was opened by PT Pelabuhan Indonesia III (Pelindo III), and included capacity to handle 10.3 Mtpa of dry bulk. The US$287M terminal was built to ease operations at Tanjung Perak. Pelindo III has also completed dredging Tanjung Perak, which can now accommodate 90,000 dwt bulkers. A US$87M investment in a dry bulk terminal at Tanjung Perak includes nine silos and three warehouses to accommodate 200,000t of dry bulk, as well as a 250m quay, a grab ship unloaders and a conveyor.


Indonesia needs further investment in bulk port capacity to help secure its status as the world’s largest exporter of thermal coal and the second largest coal exporter overall. Exports of thermal coal have grown over the last decade
to 368 Mt in 2015 from 163 Mt in 2007, according to the Indonesian Coal Mining Association. Asia’s power sector has driven demand, with China, India, Japan and Korea the main export destinations for Indonesian coal.

 

Indonesia has the tenth largest reserves of coal in the world, roughly 3% of proven global deposits. Some 60% of Indonesia’s coal reserves consist of cheaper, lower quality sub-bituminous coal. Over the last decade, more than 90% of Indonesia’s coal production and exports have come from south and east Kalimantan in the Indonesian part of Borneo. South Sumatra is the other major coal area, with smaller reserves on the islands of Java, Sulawesi and Papua. Indonesia’s coal sector opened to foreign investment in the early 1990s, which drove the rise in production and exports. The Asian boom of the 2000s powered a further surge in production. However, the 2008 global recession reduced coal demand, as well as prices, stalling Indonesia’s economic growth. The proliferation of capacity created a supply glut, which was exacerbated by over-production as miners looked to counter the slump in coal prices between 2010 and 2013.


Coal production in Indonesia is expected to climb this year and in 2018, as miners exceed targets to secure profits from recently improved prices. Estimates vary on Indonesian coal production, but the Oxford Institute for Energy Studies (OIES) calculates that last year it was as high as 480 Mt. But Jakarta is concerned that reserves will be depleted unless output controls are enforced, and it is tightening regulation of mine licences. The National Development Planning Agency has set a 400 Mtpa production cap from 2019 to secure domestic supply.


Export dominance


Coal exports account for around 80% of total coal production, with the remainder sold on the domestic market. But President Jokowi wants the nation’s coal to power domestic growth as well as its Asian neighbours. The Indonesian Ministry of Energy now requires coal producers to reserve a specific amount of their production for domestic consumption. Jakarta is also using export taxes to discourage coal exports.


Jakarta views coal as the backbone of its energy policy. The government aims for coal to supply around 30% of the country’s energy mix by 2025. Overall domestic consumption is expected to increase by 10% this year to 101 Mt, largely for the power and cement sectors. Indonesia is also amid a huge 35 GW power generation development programme, including 20 GW of coal-fired burning plants, which will further boost demand for the nation’s fossil fuels and intra Indonesian coal trades.

 

OIES estimates that the implementation of the 35 GW programme will increase demand from Indonesia’s power sector to 140-150 Mt in 2020, and 210-245 Mt in 2030. As Jakarta pushes infrastructure and industrial development, cement producers and other industrial companies are upgrading their capacity, which will also fuel demand for domestic coal. OIES expects coal demand to increase from 91 Mt in 2015 to 160-176 Mt in 2020, and 250-295 Mt by the end of the next decade.

 

However, Jakarta has struggled to control Indonesian mining since a 2009 law allowed district authorities to issue permits. Lax control of smaller concessions has led to an excess of permits and inadequate law enforcement. Meanwhile, royalties and taxes remain unpaid . Jakarta has tried to tighten mining regulations. In early 2017, mineral and coal mining companies owed the government a total of IR5.1T (US$383.37M), down from the IR6.65T owed
at the end of 2016.

 

Revenue trap


Indonesian authorities have clamped down on unlicensed exports, to bolster revenues and reserve coal for domestic markets. However, the probes have disrupted exports. Earlier this year, up to 130 large bulkers at a time were kept idle off Kalimantan ports, some for two months. In March, 40 vessels were reported off the port of Samarinda, which had to rely on transhipment loading vessels. Coal supplies were affected down the Barito River to Taboneo.


Jakarta has also been in clashes with foreign investors over licences. Churchill Mining has sought to annul an international tribunal decision last year that rejected its US$1.3B claim against Indonesia for revoking its coal mining
rights. In 2012, Churchill alleged that Indonesia had unfairly expropriated its interest in the East Kutai coal project in East Kalimantan. Indonesia has disputed the validity of the Churchill licenses.

 

The Indonesian government had also wanted to pursue a policy that would curb shipments of all raw materials, apart from coal, and instead require the mining sector to “add value” to the products before export takes place. Initially, the plan was to ban raw minerals exports from 2014, according to Indonesia Investments. However, Jakarta has had to take a more flexible approach as it faces growing fiscal pressure.

 

The need for revenues has also prompted Indonesia to ease its bauxite and nickel export ban. The ban on unprocessed ore exports was imposed in 2014 to encourage mining companies to establish higher-value processing and smelting industries. But Jakarta’s hefty budget deficit forced a policy retreat in January over nickel ore. As Indonesia looks to a future that is less oriented around the export of its abundant natural resources, it remains just as much
in need of the revenues from the riches as ever before.

 

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