Despite the Indonesian government being eager to push for infrastructure development, Southeast Asia's largest economy fell 10 positions in the World Bank's 2016 Logistics Performance Index (LPI), from 53rd position in 2014 to 63rd position this year. The LPI is determined through a worldwide survey involving operators on the ground (global freight forwarders and express carriers) that provide feedback on the logistics in nations where they operate and those with which they trade. High logistics costs are a problem for any economy as it makes products and services less competitive, while foreigners will think twice before investing in the country.
There are six main indicators that are assessed in order to determine the ranking of the World Bank's Logistics Performance Index:
- Customs; the efficiency of the clearance process (including speed, simplicity, and predictability of formalities)
- Infrastructure; the quality of trade and transport related infrastructure (including ports, roads, railroads, and IT)
- International Shipments; the ease of arranging competitively prices shipments
- Logistics Competence; the competence and quality of logistics services (including transport operators and customs brokers)
- Tracking & Tracing; the ability to track and trace consignments
- Timeliness; the timeliness of shipments in reaching destination within the scheduled or expected delivery time
The decline in ranking of Indonesia in the 2016 Logistics Performance Index (LPI) will surely come as a disappointment to the Indonesian government, analysts, investors and other stakeholders as the central government has in fact been eager to push for infrastructure development in order to improve intra-island and inter-island connectivity in the country. For example, it has scrapped a large portion of gasoline, fuel and electricity subsidies - basically starting from the inauguration of Joko Widodo in late 2014 - and redirected the available funds to the government's record high infrastructure development budget.
In fact, among the six indicators that are used to determine the LPI ranking, Indonesia scored lowest in the infrastructure category, signalling that the lack of adequate quality and quantity of infrastructure in Indonesian remains the main bottleneck that causes significant economic costs.
Logistics Performance Index 2016:
|1. Germany =||4.12||4.44||3.86||4.28|
|2. Luxembourg ↑||3.90||4.24||4.24||4.01|
|3. Sweden ↑||3.92||4.27||4.00||4.25|
|5. Singapore =||4.18||4.20||3.96||4.09|
|9. Hong Kong ↑||3.94||4.10||4.05||4.00|
|12. Japan ↓||3.85||4.10||3.69||3.99|
|24. South Korea ↓||3.45||3.79||3.58||3.69|
|27. China ↑||3.32||3.75||3.70||3.62|
|32. Malaysia ↓||3.17||3.45||3.48||3.34|
|35. India ↑||3.17||3.34||3.36||3.39|
|45. Thailand ↓||3.11||3.12||3.37||3.14|
|63. Indonesia ↓
|64. Vietnam ↓||2.75||2.70||3.12||2.88|
|71. Philippines ↓||2.61||2.55||3.01||2.70|
|73. Cambodia ↑||2.62||2.36||3.11||2.60|
Source: World Bank
However, there is enough reason for optimism. Over the past year, we have seen the kick-off of various infrastructure projects in Indonesia, including new toll (and non-toll) roads, new railways, port & harbor development, airport development, and power plant development. However, it will take time before these projects are completed and therefore we predict that in the next LPI ranking (scheduled to be released in 2018) Indonesia will improve its infrastructure ranking significantly.
Still, it will require a long road ahead before Indonesia's infrastructure is on par with that of advanced economies. The biggest challenge being the availability of money. It is estimated that Indonesia needs some USD $450 billion to finance the government's infrastructure development plans for the 2015-2019 period (and if all these projects were to be achieved it will still not make Indonesia's infrastructure on par with infrastructure in advanced nations). The government (including state-controlled enterprises) can only come up with approximately 50 percent of the funding and therefore the private sector needs to play a big role in the nation's infrastructure development.
As such, Indonesia needs to continue its efforts to create a good investment climate, offer attractive incentives, and raise efforts to realize successful public-private partnership projects. Private investors, particularly foreigners, are currently still hesitant to engage in long-term and costly investment projects in Indonesia due to the nation's flip-flop policies (raising the lack of legal certainty), land acquisition turmoil, and corruption. Moreover, several of the grand infrastructure projects are not commercially attractive for the private sector, even though these project are key to boost the overall economy of Indonesia (it are these projects that should be handled by the government).
The process of decentralization that occurred in the post-Suharto era has actually made it much more complicated to plan infrastructure projects. Cooperation and coordination between the central and regional governments is not smooth and hamper more rapid infrastructure development, especially now regional leaders have become actors in terms of contract-making for development projects. Overall, the quality of human resources at the local level in Indonesia is insufficient. This is an issue that cannot be overcome quickly.
By nature, infrastructure projects are more susceptible to political risks (because these projects usually constitute long-term projects, not unoften covering the presidential terms of different presidents). A new government or a shift in the political situation of the country can undermine previously agreed contracts (we have seen this phenomenon in Indonesia's mining sector). Given that Indonesia is a young democracy (experiencing growing pains) and also forms a highly complex country in terms of diversity, size, welfare and inequality, political risks are an issue that need to be kept in mind for investors even though the political situation seems stable at this moment (and in the foreseeable future).
Government-led infrastructure development includes the government's program to add 35,000 MW to the nation's power capacity, add 1,000 kilometers of new toll road, add 3,258 kilometers of railway, 15 new airports, and 24 new ports.
What are the 30 priority infrastructure projects of Indonesia (2016-2019)?
|Priority Infrastructure Projects 2016-2019|
|Balikpapan-Samarinda Toll Road||National Capital Integrated Coastal Development (Phase A)|
|Manado-Bitung Toll Road||Waste Processing System Jakarta|
|Serang-Panimban Toll Road||Development plan Water Supply System Semarang|
|Trans Sumatra Toll Road||High Voltage Direct Current|
|Soekarno-Hatta Railway||Electricity Transmission Sumatra|
|North-South Line Jakarta MRT||Central-West Java Electricity Transmission|
|Makassar-Parepare Railway||Batang Power Plant|
|Kuala Tanjung Port||Electric Steam Power Plant Indramayu|
|Bitung Port||Electric Steam Power Plant South Sumatra|
|Karangkates Hydroelectric Power Plant||Bontang Oil Refinery|
|Kesamben Hydroelectric Power Plant||Revitalization Refinery Development Masterplan|
|Lodoyo Hydroelectric Power Plant||West Java Port (northern coast)|
|Inland Waterways Cikarang-Bekasi-Sea||Tuban Oil Refinery|
|LRT South Sumatra||Palapa Ring Broadband|
|LRT Jakarta||East Kalimantan Railway|
This article was written by R.M.A van der Schaar, the Managing Director of Indonesia Investments. He obtained his Masters degree in Southeast Asian Studies from Leiden University (the Netherlands) with a major focus on the society, history and linguistics of Indonesia.