Steel producers against imports liberalization

• Vincent Lingga
  

  The Jakarta Post

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Jakarta | Mon, October 2, 2017 | 10:32 amDomestic basic steel producers have raised concerns over the government’s plan to further liberalize steel imports as part of a concerted program to improve Indonesia’s position in the World Bank’s annual The Ease of Doing Business Index which now ranks Indonesia 91st out of about 185 countries.

“Even now with import restrictions still in place, imports already control about 55 to 60 percent of our annual steel consumption of around 12 million tons, while our own steel industry operates only at 40 percent of its capacity,” says Hidayat Triseputro, the executive director of the Indonesian Iron and Steel Industry Association.

Data at the trade ministry show Indonesia is now the world’s third biggest net importer of steel and steel trade deficit last year exceeded US$6 billion, the second largest after the oil and gas trade deficits.

Hidayat expressed fear that further import liberalization would damage the national steel industry, which is still at an infant stage of development, because a good portion of the foreign steel entering the country did not meet the national quality standard (SNI). 

But an inter-ministerial team at the office of the chief economics minister in charge of preparing technical details for the 16th deregulatory package still includes basic steel among the commodities in the upcoming import liberalization measures. 

The main factor that prompted the import liberalization initiative seems to be President Joko “Jokowi” Widodo’s high ambition to upgrade Indonesia’s ranking in the World Bank Ease of Doing Business Index to 40th in 2019. 

One of the 10 parameters assessed in the World Bank survey is the efficiency of trading across borders and one of the key yardsticks to measure this efficiency is the length of dwelling time (the speed, simplicity and predictability of clearance) of containers at the seaport. Non-tariff measures (NTM) on imports and their administration have been found to slow down the clearance process of goods. 

Trade Law No. 7/2014 allows NTMs to control imports with the objective of protecting national security, the public interest, the health of the people and the sustainability of fauna and flora and the environment.

The law specifically stipulates that the government can impose NTMs to control imports of certain goods to protect domestic manufacturing industries from unfair foreign competition in order to enhance their growth and to safeguard the balance of payments at a healthy level and to protect farmers from unfair competition from foreign producers

NTMs on imports are also deemed necessary because tariff barriers are no longer effective to control imports because more than 65 percent of Indonesian imports have been derived from its free trade agreement 
partners.

Yet more important is that Indonesia is the world’s largest archipelago and its coastline is quite porous making it easy to smuggle contraband into the country or circumvent Indonesia’s trade laws.

While most businesspeople assume that Indonesia will eventually have to libelarize its market, they think this process should be gradual and selective, taking into account the development and competitiveness of domestic industries.

Moreover, according to trade ministry data, Indonesia’s position is not so bad with regards to trade protectionism: NTMs in Indonesia cover only 272 of 5,229 harmonized sysem tariffs, as against 601 in the Philippines, 313 in Malaysia, 558 in India and 1,507 in South Korea. 

But uncontrolled import flows could threaten the growth of domestic industries, erode the market competitiveness of local industrial goods and adversely affect the business climate, making investors doubt the long-term certainty and sustainability of their businesses. 

Domestic steel producers suspect that because a lot of foreign steel are often sold here at incredibly low prices, they might have entered the country illegally or circumvented import laws.

Steel executives also argue that in so far as the dwelling time at ports is concerned, the impact of NTMs on steel imports is rather negligible on the eficiency of goods flow because steel procurement or import is inherently a long process, ranging from two to four months from the time orders are made. Because production is mostly based on firm orders with specific technical and quality specifications. 

Hidayat argued that steel impor restrictions are still necessary because the national steel industry — with a total capacity of about 13 million tons, compared to 1.1 billion tons in China — is still in the infancy stage of development. Moreover, steel is seen as the mother of most downstream manufacturing industries and is strategic to the economy. 

No wonder most countries in Asia — which have suceeded in developing competitive manufacturing sectors like Japan, Souh Korea, Taiwan and China — started with the building of competitive basic steel industries.

Another reason why trade restructive measures are needed is that basic steel materials or products vary widely in quality, technical specifications and usage.

“Without restrictive measures that require thorough inspection, steel imports could easily circumvent our trading laws and quality specifications and inundate our market,” Hidayat said.

Instead of liberalizing imports, the government should help support the development of the basic steel industry through compulsory local content requirement, higher quality standards and tougher terms for new steel investment to ensure efficient and non-polluting industries.

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NGOs, firms need constructive engagement

• Vincent Lingga

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Jakarta | Wed, September 6 2017 | 12:54 amThe emotional outbursts of the Indonesian Palm Oil Association (GAPKI) against international environmental NGOs, though regrettably smacking of an expression of xenophobia, are the understandable explosion of frustrations over what plantation companies see as a perpetual foreign attack on palm oil, currently one of the largest foreign exchange earners in the country.

The editorial published on the GAPKI website on the 72nd independence anniversary last month, which urges the government to free palm oil from “colonial attacks” by international NGOs, reflects the industry’s wrath over what they consider to be a complete lack of appreciation for improvements already made in sustainable palm oil management over the past ten years.

Indonesian palm oil and its derivatives have been under the scrutiny of international environmentalists since the early 2000s after the widespread forest fire in 1997 and the astronomical expansion of oil palm plantations since the 1990s, which caused massive deforestation. 

Lately, several NGOs also have been campaigning to virtually coerce overseas industrial users or consumers to boycott Indonesian paper-grade pulp and dissolving pulp in a protest against the environmentally and socially irresponsible practices they allege in pulp estate management. 

Dissolving pulp for making viscose fiber fulfills Indonesia’s need for textile materials, because cotton does not grow well in the country.

Palm oil now accounts for almost 50 percent of global vegetable oil consumption and has increasingly been leading the market, as agronomists estimate its yield per hectare to be nine times as high as soybeans, five times as high as rapeseed and eight times as high as sunflowers. 

For Indonesia, now the world’s largest palm oil producer, this commodity has been developing as a very important part of the economy, since smallholders own 40 percent of the estimated 11 million hectares of oil palm plantations. Indonesia exported around 26 million tons last year, or almost half of the global palm oil trade.

We should, however, give credit where credit is due. International NGOs have campaigned tirelessly to build market (consumer) pressures to force the government, companies and farmers to implement environmentally and socially sustainable management in palm oil and forest products.

The NGOs’ global public opinion campaign has also contributed to strengthening the commitment of the government and businesspeople to legislate and enact stronger rules on high standards of sustainability.

Palm oil producers are now governed under the sustainability standards of the Indonesian Sustainable Palm Oil (ISPO) program, which is legally compulsory, and the international multi-stakeholder Roundtable on Sustainable Palm Oil (RSPO), a market-driven certification scheme. 

Palm oil and pulp producing companies, notably the big ones, have increasingly realized, again owing partly to the stringent scrutiny by NGOs, that what is bad for the environment and the surrounding communities is also bad for business.

Several years of constructive engagement have led the European Union and Indonesia to a sustainability certification scheme for wood products under the EU Forest Law Enforcement, Governance and Trade (FLEGT). This scheme audits the entire supply chain in Indonesia, from the source of timber to downstream processing, and to the point of exporting to ensure social and environmental sustainability.

Even now, international NGOs still play a role in promoting sustainable management practices of natural resources, especially in the forestry sector where the rule of law at all levels, from forest-use planning to licensing, management and law enforcement, is still inadequate.

Certainly, the achievements of the ISPO sustainability program still fall short of expectations, as the program is an ongoing process, especially because the pulp and palm oil industries involve millions of smallholders/farmers with complex poverty problems. The problem has been made even more complex by the huge gap in land registry and titling and the poor land–use planning in the country.

Now, as the NGO scrutiny has increasingly extended from environmental problems to social issues such as labor and human rights and land disputes, the solution has become even more complex and more time consuming, a process that often requires capacity building at local administrations and government institutions. 

The problem, though, is that most foreign NGOs often fail to comprehend the complexity of social conflicts and land disputes in Indonesia. They often and easily resort to a blame game against big companies if the conflicts are not resolved as quickly as they expected and mount up campaigns to boycott products. They tend to use the conditions in developed countries as their benchmark.

Attacking big companies is much easier, as they have a high profile and visibility, and many of them are listed on the Indonesian stock exchange with tough disclosure requirements. But what is actually needed is continuous and constructive, not adversarial, engagement between NGOs, the government, businesses and farmers.

Take, for example, the negative campaign on pulp producers run by several NGOs through their websites, alleging that they had grabbed the lands of the local people and deprived them of their traditional means of livelihood.

True, land disputes have mushroomed, especially since the Constitutional Court’s 2012 decision confirming that customary and communal forests are not state forests/land and must be excluded from state land concessions. 

But the claims for customary forests/land cannot always be settled quickly, because they must first be verified by the directorate general of social forestry and environmental partnership in cooperation with independent teams consisting of anthropologists, sociologists, informal leaders, legal consultants and lawyers.

For example, publicly listed PT Toba Pulp Lestari (TPL), which produces dissolving pulp in North Sumatra, received 11 claims from local communities for plots of land inside its concession. After a long process of verifying the claims, the Ministry of Environment and Forestry decided last December to approve only one of the claims covering 5,172 ha of forests and took them out of the TPL concession. 

TPL Director Mulia Nauli confirmed TPL had returned that piece of land to the state and President Jokowi ratified the status of the land as customary/communal forests on Dec. 30, 2016 in a ceremony at the State Palace. But the ministry said the remaining 10 claims had yet to be verified by the directorate general of social forestry and environmental partnership and independent teams, and so ordered the TPL to wait for the results of the verification before acting on those 10 claims. 

But several NGOs still continue to bash the TPL on their websites and social media, accusing the company of grabbing the local people’s lands and pushing industrial users to boycott TPL’s products. The government should not allow such negative campaigns with baseless accusations to damage Indonesian products in the international market. 
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The writer is senior editor at The Jakarta Post.

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The IMF’s management of Indonesia’s crisis: A lesson

• Vincent Lingga

Jakarta | Mon, July 10 2017 | 12:37 amWithout a doubt former president Soeharto’s strong resistance to reforms required by the International Monetary Fund’s (IMF) rescue program should be blamed for Indonesia’s economic crisis that caused what analysts considered one of the most substantial cases of wealth destruction in modern history, as the rupiah melted from Rp 2,500 to the dollar in mid-1997 to Rp 17,500 in early 1998.

But Paul Blustein, a staff writer of the Washington Post, concluded in a book on the IMF’s crisis management that cascading errors and misjudgment by the IMF, the World Bank, the United States Treasury, the US Federal Reserve and the Asian Development Bank played no small part in worsening Indonesia’s economic crisis.

“The Indonesian crisis is a tale of error piled atop error ... by the Fund and Indonesians, with each side’s bad moves compounding the other’s and dragging the country’s economy to depths nobody had previously imagined possible,” Blustein notes in his book The Chastening: Inside the crisis that rocked the global financial system and humbled the IMF.

The IMF did have its fair share of blunders and misjudgment. For example, it told Asian countries to tighten fiscal policy during the crisis. Therefore, the credibility of the IMF, as a monetary crisis fighter, took a beating in Indonesia, South Korea, Thailand, Russia, Brazil and Turkey from 1997 to 1999.

Its biggest mistake was the drastic order for the Indonesian government to close 16 insolvent banks, including several owned by members of the Soeharto family, in November 1997. In the absence of any kind of deposit insurance program, the bank closures panicked depositors and prompted massive deposit withdrawals from most other private banks.

Despite the blunder, however, the IMF will still be called upon the instant a crisis in one country spreads to another. As imperfect as the IMF is, the world needs the economic equivalent of a fire brigade when markets plunge. In facing the big risk of financial contagion, the mere existence of a strong, active IMF can limit the transmission of crises from one country to another. 

The global financial and capital markets have become so huge, so unruly and so panic-prone that the IMF’s resources could be overwhelmed when a crisis strikes.

One of the biggest lessons from the crisis is that the IMF should strengthen its early warning system by conducting more vigorous surveys of banks and regulatory systems in countries and by providing advice on how to reduce risks and vulnerabilities.

It should be acknowledged though that the business of detecting financial crises is sometimes extremely difficult. The set of early warning indicators on high vulnerabilities like those in Thailand, South Korea, Malaysia and Indonesia seemed initially not fully reliable. In fact, most analysts observed that none of the existing early warning models anticipated the Indonesian crisis in 1998.

The crisis showed that countries need protection from panicking creditors that is somewhat similar to the kind of protection companies get under bankruptcy laws, whereby a company can ask the bankruptcy judge to call a halt to foreclose on debtors’ assets, thereby providing it with the breathing space to negotiate new and more realistic terms for repaying its debts.

A country that runs out of hard currency and defaults or declares a moratorium on all payments risks severe punishment from the financial market, or the creditors seize the country’s assets overseas.

Here the idea of a bail-in or standoff with the full support of the IMF it to give creditors adequate time to calm down and the debtor enough time to devise a sensible plan of action under the IMF’s oversight.

This is what the IMF implemented in its second rescue program in South Korea in early 1998, but under terms of a bail whereby the fiscal and monetary authorities in the United States, Britain and Japan used moral suasion to induce the foreign creditors to stop pulling their money out of the crisis-stricken country.

The rationale is that it is in the creditors’ interests to prevent a total panic, roll over their loans and accept a rescheduled payback of their claims, because a default would be avoided if all creditors participated. 

The idea is to buy time for the crisis country to resume growth, to give it a breathing space and to make sure that the creditors that are being saved from default bear a fair share of the burden involved in the rescue.

This is also called a standstill, but this solution requires a high degree of government intervention and coordination to ensure that creditors act together.

Creditors may accept the rationale that they have a collective interest in refraining from demanding immediate repayment. 

A bail-in is also good from justice point of view, because taxpayers’ funds are not used to bail out the rich, but a financial stampede is prevented, like in Korea and Brazil.

But this standstill can be effective only if the debtor countries also prevent their own citizens and foreigners from moving their money abroad. This is what Malaysia did in September 1998 by imposing capital controls. Malaysia performed well one year after following that action, despite the attack by the IMF and the US.

But the problem is how to get the IMF imprint to ensure that the debtor countries really make genuine efforts to correct their fundamental economic problems and good-faith efforts to negotiate debt repayment with their creditors.

Indonesia is now in a much stronger position to weather external shocks than in the past, thanks to the series of bold reforms taken immediately after the 1997-1998 Asian financial crisis.

“We have taken great lessons from the crisis, which cost us as much as 70 percent of our gross domestic product, as the economy contracted by 13 percent in 1998 and the rupiah melted from Rp 2,400 to the US dollar in 1997 to less than Rp 16,000,” Finance Minister Sri Mulyani Indrawati noted at the 50th Asian Development Bank annual conference in Yokohama in early May. 

She was referring to the massive fiscal, monetary and financial-sector reforms that transformed the central bank into an independent institution and introduced high budget discipline, fiscal decentralization and integrated financial oversight.
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The writer is senior editor at The Jakarta Post.

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Commentary: Poor, inadequate infrastructure causes inequality, poverty

• Vincent Lingga

  The Jakarta Post

Yokohama | Mon, May 8 2017 | 12:12 am

Six of the more than two dozen simultaneous seminars and conferences held on the sidelines of the four-day 50th Asian Development Bank Board of Governors meeting in Yokohama, Japan last week focused on various aspects of infrastructure development.

The rationale is self-evident. Infrastructure investment has the multiplier effect of increasing efficiency and competitiveness, promoting both international linkages and domestic economic integration and increasing an economy’s productive capacity.

Many international and national studies have also concluded that inadequate physical infrastructure is not only an impediment to growth, but is also one of the root causes of poverty and inequality. And poverty as well as inequality are the main problems of most ADB members.

An ADB report on Asian infrastructure needs issued in February concludes that inadequate physical infrastructure is not only an impediment to growth, but is also one of the root causes of poverty. 

Addressing the region’s infrastructure and connectivity means addressing the risks and uncertainties linked to regional investment and the lack of public funding. 

The study estimates infrastructure needs in developing Asia and the Pacific at more than US$22.6 trillion through 2030, or $1.5 trillion per year, if the region is to maintain growth momentum. 

Meanwhile the National Development Agency in Jakarta put Indonesia’s infrastructure financing needs at around Rp 5,000 trillion ($373 billion) for the 2015-2019 period or $75 billion a year. Of which, 40 percent is expected from the government and 60 percent from the private sector.

Panelists at the seminars agreed that the existence of large infrastructure gaps across many countries reflected a combination of institutional and financial constraints. And the best way to speed up infrastructure development is through public-private partnership (PPP) schemes because of the limited financing resources of governments. 

But the central issue is when governments enter into a long-term contract with a private entity to give it a license to operate public infrastructure, they must address such questions as who will be responsible for land acquisition; whether or not there could be changes in the future to the regulations on setting tariffs or tolls; who will take on the risk of a loss in the event that the income does not match projections.

A key issue in confronting these difficulties is how to define the roles of the private and public sectors in such a way that infrastructure gaps can be closed while ensuring good service delivery and protecting both investors’ and taxpayers’ (consumer) interests. 

“We need better solutions to attract investors to PPP projects because infrastructure development requires big investment and is long term in nature, thereby exposing investors to risks related to exchange rates, maturity mismatch, policy and tariff changes,” Indonesian Finance Minister Sri Mulyani Indrawati noted.

Even though the Indonesian government has launched a PPP program since 2005 and has set up many support facilities for the program, very few large infrastructure projects have attracted investors as a result of an acute lack of bankable projects.

Panelists at infrastructure-related seminars here said many tendered projects lacked proper contracts, appropriate risk allocation, a sustainable revenue model, government support, key project inputs such as international-standard studies for feasibility, social safeguards, uncertain resource assessments and properly secured land.

Hence, the role of the ADB Office of PPP which was set up in 2014 to help enable the governments of its developing member countries such as Indonesia to prepare bankable infrastructure projects to be offered to private investors under the PPP scheme. 

The PPP Office provides assistance to set up regulatory frameworks and transaction advisory services (TAS) to developing member countries to deliver bankable PPP projects and coordinate and support PPP-related programs. 

The ADB last year also set up a $73 million technical assistance fund to focus on creating a pipeline of bankable PPP projects to support the ADB program of scaling up its operations by 50 percent from $14 billion in 2014 to more than $20 billion in 2020, with 70 percent of this amount for government and private infrastructure investment.

Yet more encouraging is that the ADB also has embarked on cofinancing programs with the World Bank and China-led Asian Infrastructure Investment Bank (AIIB) ) despite previous concern that the Japanese government, one of the ADB’s largest shareholders, was lukewarm to the establishment of the AIIB.

Multilateral development banks like the ADB and the World Bank have been effective in building good infrastructure because they combine finance with expertise and knowledge, drawing on their experience across countries. In addition to bringing advanced technologies to projects, the ADB has helped strengthen government capacity in planning and implementing infrastructure projects. 

During the conference last week the ADB also announced another initiative to improve and monitor the business environment for PPPs and to strengthen the bankability and implementation of PPP projects at the ADB Board of Governors meeting, which ended on Sunday.

The initiative was the Infrastructure Referee Program (IRP) whereby the ADB will provide independent third-party advice through qualified consultants to help public and private parties to resolve disagreements that may arise over the life of a PPP project.

Riyuichi Kaga, head of the ADB’s PPP Office, said disagreements between public and private parties over risk allocation could arise during tendering, negotiation, construction or operation, potentially triggering protracted delays and increased costs.

An enabling environment that delivers well-prepared, viable proposals for private investment is critical for PPP projects. However, to meet their potential, they need to be structured within a regulatory and institutional environment conducive to private investment.

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Commentary: EU moves to wipe out palm oil from the European economy

• Vincent Lingga

  The Jakarta Post

Jakarta | Wed, April 12 2017 | 12:09 am

The European Union has since 2013 been slapping anti-dumping countervailing duties on Indonesian exports of palm oil-based biodiesel, despite a lower EU court ruling last year that annulled the duties. 

Then early last week, the European Parliament voted overwhelmingly to totally ban biofuels made from palm oil by 2020 to prevent the EU target of sourcing 10 percent of its transport fuels from renewables from inadvertently contributing to deforestation.

While the motion is not yet legally binding, EU lawmakers are now drawing up amendments to EU legislation that would be legally enforceable if approved by the European Commission.

We see this move and its objective simply as an illusion. Certainly, the EU cannot take a farm commodity out of its economy and think that would solve its problems. The political move would instead only damage EU ties with Indonesia and Malaysia, which together supply more than 80 percent of the world’s palm oil, and many other smaller producing countries in Africa and Latin America.

Yet more worrisome, the palm oil issue could become a perpetual thorn in the side of Indonesia-EU relations at a time when they are negotiating a comprehensive economic partnership agreement.

The EU Parliament’s motion seems to have been prompted mostly by the strong lobbying of the EU vegetable oil (soybean, rapeseed and sunflower) industry, which naturally would never be able to compete with palm oil. 

Palm oil, which now accounts for almost 50 percent of global vegetable oil consumption, has increasingly been leading the market as its yield per hectare is estimated by agronomists at nine times as high as soybean, five times as high as rapeseed and eight times as high as sunflower.

Palm oil is now the most widely used vegetable oil in the world. It is almost impossible for most consumers to go a day without using or eating something that contains palm oil. Some analysts in Europe have even predicted that palm oil will steadily grow to be a US$88 billion industry by 2022.

Palm oil has been developing as one of the biggest non-oil exports from Indonesia and a very important part of the economy, as 40 percent of the estimated 11 million ha of oil palm estates are owned by smallholders. Indonesia exported around 26 million tons last year, or almost half of the global palm oil trade.

In fact, data submitted to the EU Parliament showed that palm oil lately accounted for two-fifths of all global trade in vegetable oils, and the EU is the second largest consumer, with annual imports of 7 million tons. Almost half of these imports are used to make biofuels.

True, in the first decade after the beginning of the palm oil boom in Indonesia in the mid-1990s, oil palm estate development had caused deforestation and sometimes community 
conflicts.

But due to strong pressure from international consumers with the full support of green NGOs and the increasing awareness on the part of the government of climate change impacts, the industry has been subjected to much tougher rules designed to make the commodity sustainable economically, socially and environmentally. 

Palm oil producers are now overseen and ruled under the sustainability standards of the Indonesian Sustainable Palm Oil (ISPO) program, which is legally compulsory; and the international multi-stakeholder Roundtable on Sustainable Palm Oil (RSPO), a market-driven certification scheme. 

A nationwide sustainability certification program has been implemented since the early 2000s under RSPO and ISPO principles and criteria by accredited certifying bodies supported by independent social and environmental auditors. In fact, oil palm cultivation is arguably the most transparent industry now, as its farm practices are periodically examined by auditors and constantly scrutinized by 
green NGOs.

Chain Reaction Research (CRR), which is partly funded by the Norwegian Agency for Development Cooperation (Norad), concluded after a study last year of the 10 biggest oil companies listed in the Indonesia Stock Exchange (IDX) that major palm oil growers have increasingly found that what is bad for the environment is also bad for business.

The financial risk of losing buyers committed to sustainable supply chains has helped motivate four of the biggest planters to mend their ways, according CRR, which conducts sustainability risk assessment for financial analysts and investors in environmentally intensive commodities, especially palm oil, and pulp 
and paper.

The survey shows the No Deforestation, No Peat, No Excessive Exploitation (NDPE) policies do have an effect on suppliers to strengthen their sustainability policies and practices.

Despite the progress, green NGOs have constantly attacked the sustainability campaign, either motivated by real concern about environmental damage or influenced by lobbyists funded by EU and United States vegetable oil producers who are afraid of the palm oil competitive advantage. 

Certainly, the achievement of the sustainability campaign is still short of expectations as the program is an ongoing development process, especially as the industry also involves millions of smallholders with complex poverty problems. The problem has been made more complex by the huge gap in land titling in the country.

But a blanket ban, as the EU Parliament recommended, is destructive, only reflecting a stance of bad faith that tends to see a glass-half-empty situation instead of half full.

A constructive engagement modeled on the scheme EU and Indonesia have established under the EU Forest Law Enforcement, Governance and Trade (FLEGT) is much more productive for the global economy. This program audits the entire supply chain in Indonesia, up from the source of timber to downstream processing until the point of exports to ensure social and environmental sustainability.

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Commentary: Still waiting for long-delayed reform of logistics services

• Vincent Lingga, The Jakarta Post

Jakarta | Thu, April 6 2017 | 12:19 am

A raid by the police at the East Kalimantan port of Samarinda on March 17 uncovered massive rent-seeking practices and confiscated Rp 6.1 billion (US$450,000), believed to be illegal fees collected by stevedores from coal mining companies. 

A preliminary investigation found that most coal companies had been extorted by stevedores organized under the Komura cooperative. Some firms even claimed having to pay up to $220,000 in monthly illegal fees, otherwise their coal exports were not loaded. Police also found that stevedores charged up to Rp 180,000 per 20-foot container and Rp 350,000 per 40-foot container, more than 15 times the fees charged at other major seaports. 

The massive illegal levies are only a small part of the labyrinth of seaport handling in Indonesia, which has made our logistics costs the highest in Southeast Asia. 

But as the world’s largest archipelagic country with over 14,000 islands, ports as the key part of sea transportation play a vital role within the logistics system. 

There are two main constraints in the system. One is the lack of physical infrastructure and the crumbling of a lot of existing infrastructure. This problem is being solved through the development of infrastructure, such as ports, airports and roads, which has been accelerated since 2015.

The second constraint, inefficiency caused by regulatory and bureaucratic barriers and corruption, is supposed to be the main target of the 15th reform package. 

It is now almost four months since chief economics minister Darmin Nasution pronounced that “the 15th reform package, which will focus on the logistics system, will be issued within a few days.” Yet the launch date remains uncertain.

The long delay only shows the complexity of the tangled regulatory and bureaucratic web affecting the logistics system. The port-handling process alone involves more than a dozen institutions and service providers apart from land transportation.

The utter inefficiency in port handling and sea transportation in Indonesia has often been exposed by studies by national and foreign institutions. But even incremental improvement seems difficult.

After a few months in office President Joko “Jokowi” Widodo set up in early 2015 a special task force in charge of expediting dwell times — the total time spent releasing containers from the port after a vessel berths — at major seaports to two to three days from as long as one week.

But after two years, the dwell time even at Tanjung Priok, Indonesia’s largest port that handles almost 70 percent of the country’s imports, remains one of the most inefficient in the ASEAN region.

No wonder a 2016 World Bank report cynically noted: “It is cheaper to ship a container from Shanghai, China, to Jakarta than from Jakarta to the West Sumatra capital of Padang, though Shanghai and Jakarta are six times farther apart than Jakarta and Padang.” 

Inefficient port handling and sea transportation hinder connectivity between the islands, preventing least developed regions from linking to growth centers on other islands. Poor sea freight logistics makes it very difficult to connect resource-rich regions on the outer islands such as Sulawesi, Kalimantan, Papua, Maluku and Nusa Tenggara to the more developed Java and Sumatra.

This connectivity problem has been among the main barriers to the development of manufacture on the sparsely-populated outer islands, because manufactured products have to be transported either to the most-populated islands of Java and Sumatra or be exported.

However, poor sea transportation makes the supply chains extremely fragmented and prevents manufacturing companies from integrating into global value chains.

The 2016 World Bank study concludes that manufacturers estimate logistics costs account for 20 percent of their sales, comprising 40 percent for transportation and cargo handling, 17 percent each for administration and warehousing and 26 percent for inventories, also the highest in Southeast Asia. 

The high inventory costs reflect the uncertainty in supply chains, as many industrial companies often simply don’t know when their inputs or parts will arrive due to uncertainty in port handling, bureaucratic paperwork and inefficient road transportation. 

A 2013 study by the Bandung Institute of Technology and the Association of Indonesian Logistics concluded that transportation accounted for almost 50 percent of logistics costs. This study also blamed price differences between regions on poor connectivity, as unreliable supply chains prevent traders and local producers from responding timely to price changes. 

Logistics services also suffer from an extremely fragmented regulatory and licensing system as too many institutions issue and implement too many regulations.

“We operate in a highly fragmented regulatory environment, as each service component of the logistics system requires permits from different institutions and is subject to different laws and regulations,” says H. Syarifuddin, the executive director of the Association of Courier, Postal and Logistics Service Providers (Asperindo).

For example, trucking, freight forwarding and warehousing need to be registered with different government agencies, thereby preventing the integration of supply chain services. This fragmentation means laws and regulations are developed separately by each ministry. Worse, the logistics sector also is subject to the different regulations of local administrations.

This is quite inimical to enhancing efficiency, because as a growing sector, the logistics services industry is constantly evolving to meet new demands that need a more integrated approach that ensures efficiency throughout the supply chain.

In today’s increasingly complex logistical industry and particularly in Indonesia, a comprehensive solution to managing multiple aspects of a business is urgently needed. Under such a framework, companies, instead of organizing supply chains with multiple service providers, would only need to deal with a single business entity that manages the entire supply chain.

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