Bumpy ride for Indonesia’s maritime highway

CMA CGM Otello departing Tanjung Priok

The departure of CMA CGM Otello (pictured) from Tanjung Priok was a milestone moment for Indonesia’s Tol Laut. Credit: KCT

Indonesia’s ambition to become an axis of international trade, on par with its former might as a gateway to the Old Silk Route, remain a dream for now, but the Jokowi government has made huge investments in ports and ships in recent years to revamp its maritime logistics.

Central to the project is a Tol Laut, or Sea Highway, connecting 24 strategic ports (5 hubs and 19 feeder ports) stretching more than 5,000 km from east to west. It is designed to facilitate trade both within and without the archipelagic nation.

Known as a short-sea shipping alternative to land freight, the idea of using inter-island and coastal shipping rather than roads is not new, as a third of European domestic freight is shipped this way. With seas making up 75%, or 7.9 million km2, of Indonesian territory between its sprawling archipelago of five main islands and some 17,000 smaller islands, it makes sense.

It is also cost-effective and environmentally friendly, as each ship sailing on its ‘Tol Laut’ is equivalent to 100–200 trucks off the road.

The plan is ambitious but necessary. The World Bank estimates that Indonesia has a USD600 billion infrastructure gap to fill by 2020, with maritime and logistics infrastructure needing USD50 billion of that total. The World Bank president Jim Yong Kim pledged up to USD12 billion in new financing over 3–4 years for Indonesia’s seaports, roads, and maritime logistics in 2015.

Indonesia’s maritime logistics will again come under the global spotlight when the International Monetary Fund and World Bank Group hold their 2018 Annual Meetings in Bali in October.

Before launching the Tol Laut project in 2016, the Indonesia Port Corporation (IPC), the nation’s largest state-owned port body, commissioned a report by shipping consultancy Drewry to map an optimal liner network and reduce inter-island container logistics costs.

The Drewry report found trucking costs the highest at 28%, followed by holding costs at 26%. It also found that restrictions on vessel size because a lack of port infrastructure, poor terminal equipment, and low productivity were holding back the development of the country’s maritime transport system.

Shipping lines reported that Indonesia’s high terminal handling tariffs and bunker costs were double those of Singapore. Routes were predominately confined to east or west Indonesia, stifling economies of scale. Drewry estimated a 33% savings in shipping and port costs arising from the proposed port overhaul.

The Tol Laut is a direct response to these shortcomings, with several infrastructure projects currently under way.

Four of Indonesia’s 24 ports that are currently under development are scheduled to be operational this year. Another seven ports are earmarked for upgrades in 2019, especially those in remote areas with little infrastructure. Extensive expansion and upgrades to Indonesia’s key container terminals are also ongoing.

In 2016, Indonesia completed work on 91 ports, mostly feeder ports, as part of the Tol Laut scheme.

The government has earmarked IDR39.5 trillion (USD2.7 billion) to upgrade its ports and IDR57.3 trillion for newbuildings, including 83 container ships and 25 pilot vessels.

Private investment in key container terminals is also vital to the programme.

Japan’s Mitsubishi provided USD3.5 billion to fund upgrades at the Port of Patimban, West Java, to help service its automotive exports, while the Port of Rotterdam Authority supplied USD2.5 billion to fund upgrades at Kuala Tanjung, which is strategically located on the Strait of Malacca.

In June, Mistui E&S Machinery won a contract to supply portainer cranes to the Port of Belawan container terminal expansion project, scheduled for completion in 2019.

Other projects include an IDR2.4 trillion container terminal currently under construction at Sorong Seget in West Papua and an international gateway terminal at Makassar in South Sulawesi.

A key part of the Tol Laut is the USD4 billion being spent on the Port of Tanjung Priok, Jakarta, with further upgrades to come. A joint venture between IPC, Mitsui, PSA International, and NYK Line saw the opening of the 1.5 million-teu-capacity Priok Baru container terminal at the port in 2016.

A measure of the port’s success was the introduction of a CMA CGM direct service linking Jakarta to Los Angeles, California, and Europe the following year.

“Tanjung Priok is now mostly using direct services for intra-Asia cargo,” Prasetyadi, director of operations and systems information at IPC, told Fairplay. “Since last year, CMA CGM has introduced direct services to the US west coast and northern Europe using [mega] vessels, reducing cargo transit time and freight costs.”

Before the upgrades, the largest vessel Tanjung Priok could dock was 5,000 teu. “Now we can accommodate giant ships that have a total capacity of up to 14,000 teu,” said the port’s chief executive officer Elvyn Masassya.

The 8,238 teu CMA CGM Otello departed on its maiden Jakarta voyage with much fanfare on 23 April 2017 – a celebration of a maritime milestone. It is one of 17 vessels that will ply the sea route, which promises a transit time of 23 days from Jakarta to Los Angeles and lower costs by eliminating transhipment.

Jean-Yves Duval, senior vice-president at CMA CGM Asia, said, “Indonesia is strategic to the developments of the CMA CGM Group in Southeast Asia. We are fully behind Indonesia’s aspiration for a mega maritime network across the island nation and seek to exploit opportunities to make a meaningful contribution. Moving forward, the group looks to write new chapters with IPC and other key stakeholders for the Indonesian maritime industry.”

Once all upgrades are complete, Tanjung Priok will have an annual capacity of 18 million teu and will have progressed from handling 4,000 teu container ships to 20,000-plus teu box ships, according to David Wignall, managing director at Seaport Consultants Asia.

In 2016, the port handled 5.7 million teu, putting it in the top 40 container terminals in the world for port volume, according to the United Nations Conference on Trade and Development.

While progress and investment is impressive, Indonesian ports still fall well below those of neighbouring Malaysia on the World Bank Global Rankings for 2016 (63rd compared with Malaysia’s 32nd).

In April, the Indonesian press released government data showing the ambitious Tol Laut project had missed its target. In 2017, the route only carried 212.9 million tonnes, or 41.2%, of its 517.2-million-tonne target.

“The first year did not run smoothly because some destinations are also serviced by commercial liners, and it created unhealthy competition,” chair of the Indonesian National Shipowners’ Association (INSA), Carmelita Hartoto, told Fairplay. “Logistics costs are not only in the shipments but also in hinterland distribution.”

In 2017, the government called on the private shipping sector to offer the same subsidies as state-owned companies, with INSA proposing to collaborate with the private sector.

“Unhealthy competition has been avoided,” Hartoto said. “Furthermore, the government has now established logistics centres in destination ports to control prices.

“There is no need for Sea Highway vessels to take cargo from Jakarta and Surabaya,” Hartoto said. “We are proposing that, under the concept of a ‘hub and spoke’ system, commercial liners carry all cargo from Jakarta and Surabaya to the hub ports in the archipelago, while smaller [government-owned] feeder vessels then carry cargoes from hub ports to remote areas. This will reduce costs by up to 30% by changing the vessel subsidy to a freight subsidy.”

The state shipping venture freight shortfall was not the only maritime hurdle that Indonesia confronted in recent months. Bigger hub ports are also a launchpad for Indonesia-flagged vessels to make their mark in international trades.

A controversial plan to extend Indonesian cabotage to key overseas trades this year was shelved after an outcry from international shipping circles alleged “discriminatory cargo reservation [was] contrary to accepted international practice and maritime free trade principles”.

INSA, however, is determined to make its play on the world stage, insisting the delay is but a stay of execution.

“We can understand that the regulation might get a negative response from foreign shipping bodies, including the International Chamber of Shipping,” Hartoto told Fairplay sister publication Ports & Harbors. “Business-wise it might reduce their coverage. However, the regulation is limited to prime export commodities, which the government needs to control.

“We need to earn back foreign exchange income from freight services, which for so long foreign shipping has enjoyed obtaining from Indonesian export commodities,” she said. 

Contact Zoe Reynolds