Improving Indonesia’s Freight Logistics System: A Plan of Action Report No: AUS5940 . Republic of Indonesia Improving National Freight Logistics Plan of Action . May 2015 . GTCDR EAST ASIA AND PACIFIC . . . Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. . Copyright Statement: The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/ The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, http://www.copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. Improving Indonesia’s Freight Logistics System: A Plan of Action Jakarta, May 2015 Improving Indonesia’s Freight Logistics System: A Plan of Action Table of Contents Executive Summary ........................................................................................................................................ 4 A logistics system in flux ................................................................................................................................. 4 Debunking some oĨƚŚĞŵLJƚŚƐĂƌŽƵŶĚ͞/ŶĚŽŶĞƐŝĂ͛ƐŚŝŐŚůŽŐŝƐƚŝĐƐĐŽƐƚ͟ ....................................................... 5 Facing the Connectivity Challenge: Freight Logistics as a Key Development Priority for Indonesia .............. 9 Benchmarking Logistics Performance: The Baseline .................................................................................... 15 Behind the Lack of Reliability in Logistics Performance ............................................................................... 22 Challenges in Gathering Data ....................................................................................................................... 28 A Framework for Freight Logistics Reform ................................................................................................... 29 Annex ............................................................................................................................................................ 39 List of Figures Figure 1. Poverty rates in 2012 ..................................................................................................................... 10 Figure 2. Prices compared to Jakarta: Higher prices in remote areas .......................................................... 11 Figure 3. Concentration index (diversified economy) vs Accessibility (access to gateways and markets) ... 11 Figure 4. Agglomeration of new manufacturing activities ........................................................................... 12 Figure 5. Growth of the consumer class in Indonesia .................................................................................. 13 &ŝŐƵƌĞϲ͘/ŶĚŽŶĞƐŝĂ͛ƐŵĂŶƵĨĂĐƚƵƌŝŶŐĞdžƉŽƌƚƐĐŽŵƉĂƌĞĚƚŽŝƚƐƐŚĂƌĞŝŶ^EĞdžƉŽƌƚƐ;ϮϬϭϯͿ ................... 14 &ŝŐƵƌĞϳ͘/ŶĚŽŶĞƐŝĂ͛ƐŵĂƌŝƚŝŵĞƐƵƉƉůLJĐŚĂŝŶŝƐůŽŶŐĂŶĚĨƌĂŐŵĞŶƚĞĚ .......................................................... 14 Figure 8. Performance Dimension Assessment for LSPs and Manufacturers ............................................... 16 Figure 9. Components of Logistics Cost/Sales (%). Total Logistics Cost/Sales=20% ..................................... 16 Figure 10. Sea freight cost vs. value of shipped from the two hubs in Java (Jakarta and Surabaya) ........... 19 Figure 11. Value comparison of logistics cost components vs. value of one container of rice .................... 20 Figure 12a. Shipping rate (IDR/km) vs distance (km) .................................................................................. 20 Figure 12b. Shipping rate (IDR) vs boat capacity (TEU) ................................................................................ 20 Figure 13. Shipping time vs turnaround time (days) .................................................................................... 21 Figure 14. Dwell time (days) vs volume (TEU) in Tanjung Priok ................................................................... 23 Figure 15. A framework for freight logistics reform ..................................................................................... 29 List of Tables Table 1. Problematic port services identified ............................................................................................... 22 Table 2. Documents adding to the delay of PIB submission ......................................................................... 24 Table 3. Regulatory complexity for the logistics sector providers................................................................ 25 Table 4. Key issues in land freight transport ................................................................................................ 27 Table 5. Proposed Action Plan to improve freight logistics in Indonesia ..................................................... 31 Table 6. Detailed Plan of Action ................................................................................................................... 33 ii Executive Summary This report is one of the deliverables of the World Bank Group advisory services for the Indonesia Port Corporation (PT. Pelindo II) on improving freight logistics in Indonesia. The work was carried out by member of the Trade & Competitiveness Global Practice under Sjamsu Rahardja (task team leader), with Jean-Francois Arvis, Cordula Rastogi, Henry Sandee, Natalia Cubillos, and Maria Monica Wihardja, under the overall guidance of Rodrigo Chaves (World Bank Country Director for Indonesia) and Mona Haddad (Practice Manager). The team also obtained contributions from John Arnold, Ruth Banomyong, M. Adhi Dipo, Christian Ksoll, Dini Takola, Nanda Nurridzki, Stephen Magiera, Theo Kumaat, Peter Milne and Renee Miews. Titis Pusparesmi and Erly Tatontos provided program support. The team gratefully acknowledge cooperation from the Indonesian Logistics and Freight Forwarding �����ia�i�� ������� �h� �������ia� ��p������� �����ia�i�� ��������� �h� �������ia “hip -Owners Association (INSA), the Association of Land Transport (ORGANDA), the Association for Port Transportation (ANGSUSPEL), and the Association of Priority Lane Importers (APJP), in facilitating interviews and data collection among their members. Also the team gratefully acknowledge hospitality and support from PT Pelindo I, PT Pelindo III, PT Pelindo IV, Port administration in Ambon, and branch office of PT. ASDP in Ambon. iii Executive Summary A logistics system in flux Indonesia is unique: no other nation is as archipelagic in nature as Indonesia. Over 17,000 islands span across 5,200 km and provide 54,000 km of coastline. Previously, the Dutch added their packet steamers and introduced a network of roads and railways in denser areas in Java and Sumatra. But for centuries traditional maritime transport was the primary means of transporting freight and connecting people ďĞƚǁĞĞŶƚŚĞĂƌĐŚŝƉĞůĂŐŽ͛ƐŝƐůĂŶĚƐĂŶĚďĞLJŽŶĚ͘ tŝƚŚ/ŶĚŽŶĞƐŝĂ͛ƐďŝƌƚŚĂƐĂƐŽǀĞƌĞŝŐŶŶĂƚŝŽŶŝŶϭϵϰϱ͕ƚŚĞĨĂďƌŝĐŽĨŶĂƚŝŽŶŚŽŽĚĐŽƵůĚŽŶůLJďĞǁŽǀĞŶƚŽŐĞƚŚĞƌ by connecting the remotest islands of the new country by sea. The regular inter-island passenger and freight services that were initiated by the new Republic of Indonesia acted like umbilical cords connecting markets and populations in the major islands to the more remote and far-flung islands. It is inconceivable that /ŶĚŽŶĞƐŝĂ͛ƐũŽƵƌŶĞLJƚŽǁĂƌĚƐĂŶŝndependent and integrated nation could have been achieved without the inter-weaving of its more than 920 permanently inhabited islands by allowing freight, people and ideas of the new nation to intermingle and drive the development process forward. Today, ĂĐƌŽƐƐ/ŶĚŽŶĞƐŝĂ͕ƚŚĞĨƌĞŝŐŚƚůŽŐŝƐƚŝĐƐƐLJƐƚĞŵŝƐŝŶĨůƵdž͘Ɛ/ŶĚŽŶĞƐŝĂ͛ƐĞĐŽŶŽŵLJŚĂƐĚĞǀĞůŽƉĞĚ͕ƐŽ the country has been increasingly exposed to more intense competitive pressure from globalization. This has led the fabric of the system to begin to fray. ƵƌƌĞŶƚůLJ͕/ŶĚŽŶĞƐŝĂ͛ƐůŽŐŝƐƚŝĐƐƉĞƌĨŽƌŵĂŶĐĞƌĂŶŬƐϱϯŽƵƚ of 160 countries, below members of the G20 and the middle-income countries of ASEAN that Indonesia is often associated with. Traders who wish to have their freight sent from Java or Sumatra to other islands are likely to be confronted with long supply chains, uncertainties in delivery time, and high costs needed to compensate for at least 70 percent empty volume on the return voyage (backhaul). But even in the main industrial and international gateways, such as Jakarta and Surabaya, Indonesia lags in performance, as the time to trade through these ports and move freight from ports to industrial areas is generally longer than in other major ASEAN countries. For example:  The average time needed to clear a container carrying imports into the port after it is unloaded from a vessel (container dwell time) in Tanjung Priok was 6.5 days in 2013, double the dwell time ŝŶdŚĂŝůĂŶĚ͛ƐƉŽƌƚŽĨ>ĞĂŵŚĂď.  Moving a container from the industrial area of Cikarang to the port of Tanjung Priok, 56 km away, takes up to 6 hours, compared with just 2 hours for similar distances between the Pasir Gudang area and the port of Tanjung Pelepas in Malaysia.  Freight trucks making trips to Tanjung Priok spend on average 75 percent of their time in congestion due to delays in customs clearance and queuing for the use of lift-on and lift-off facilities.  /ŶƚĞƌǀŝĞǁƐƐƵŐŐĞƐƚƚŚĂƚďĂĚůŽŐŝƐƚŝĐƐĐĂƵƐĞϭϬƉĞƌĐĞŶƚŽĨ/ŶĚŽŶĞƐŝĂ͛ƐĞdžƉŽƌƚƐƚŽŵŝƐƐƚŚĞŝƌǀĞƐƐĞůƐ in Tanjung Priok. Unreliable freight logistics undermines competitiveness and affects the livelihoods of the poor. Obstacles to moving freight and together with a lack of reliability both internally and internationally have major adverse impacts on economic development in at least two ways. First, they directly impact the competitiveness of firms in the manufacturing and retail sectors, imposing a major challenge to economic growth in Indonesia. Low reliability of supply chains increases inventory costs for manufacturers and reduces tŚĞƌĞůŝĂďŝůŝƚLJĂŶĚƚŝŵĞůŝŶĞƐƐŽĨĞdžƉŽƌƚƐ͘dŚŝƐƐŝƚƵĂƚŝŽŶǁŽƌƐĞŶƐ/ŶĚŽŶĞƐŝĂ͛ƐĂůƌĞĂĚLJĞƌŽĚŝŶŐůĂďŽƌ - cost advantage in manufacturing, undermines its much needed diversification away from commodity exports, and constitutes a serious handicap in integrating into global production networks. Poor logistics Executive Summary ������������������������������������������������������������������������������������������������������������ Second, poor connectivity impedes peripheral regions in eastern Indonesia from exploring potential opportunities for diversified commerce. If logistics were more efficient, especially at the port-hinterland interface, businesses in eastern Indonesia could tap into the potential for using backhaul capacity to ship their products to the more densely populated provinces in western Indonesia. Poor connectivity also undermines domestic price stability of important staple products for consumers in eastern Indonesia, such as food, which accounts for two-���������������������������������������������. Debunking some of the myths around “Indonesia’s high logistics cost” Myth 1. High logistics cost is due to high transport cost The policy debate around high logistics costs in Indonesia often starts with cost comparisons of transporting freight on domestic and international routes. For instance, it is cheaper to ship a container of Chinese mandarin oranges from Shanghai to Jakarta than to send freight from Jakarta to Padang in West Sumatra, despite the distance between the former cities being six times further than the latter. But such comparisons, intriguing and motivating as they are, do not offer much of an explanation behind the issues around perceived high freight logistics costs in Indonesia. Analysis carried out in this study reveals that transport costs are in ĨĂĐƚŶŽƚƚŚĞŵĂŝŶŝƐƐƵĞŝŶ/ŶĚŽŶĞƐŝĂ͛Ɛ logistics costs. Instead, logistics costs in Indonesia are largely driven by the high value of time—the costs incurred in organizing logistics and the time taken for the goods to reach their destination. For shipping goods to eastern Indonesia, freight costs take up 1.5 to 6 percent of the value of goods, while the value of time can take up to 18 percent of the value of goods. Such a high value of time is caused by excessive time spent in transit (shipping) and caused by broken supply chains, and the time needed for loading and unloading of cargos, together with other delays, such as trucks missing a vessel or the late arrival of a vessel at the port. Prolonged turnaround times at the port are also associated with longer voyage times, causing uncertainties and unreliability in the supply chain. Surveys among manufacturers suggest that transport costs comprise less than half of total logistics costs ŽĨ /ŶĚŽŶĞƐŝĂ͛Ɛ ŵĂŶƵĨĂĐƚƵƌĞƌƐ. This study conducted a survey among manufacturers in Greater Jakarta, Surabaya, Semarang, Palembang, Lampung, Medan and Makassar. The results suggest that transport and container-handling costs constitute 40 percent of total logistics costs of manufacturers, while the contribution of inventory costs, warehousing, and logistics administration to total logistics costs is about 26 percent, 17 percent, and 17 percent, respectively. Myth 2. Cost is the ultimate measure of logistics performance Based on this study, the fact is that reliability and timeliness matter most in determining logistics performance������������������������������������������������������������������������������������������� logistics and freight forwarding association (Asosiasi Logistik dan Forwarder Indonesia, or ALFI) suggest that reliability and timeliness are important metrics besides cost in evaluating logistics performance for manufacturers and logistics service providers (LPS). While 39 percent of respondents from ALFI considered cost to be their ultimate metric of performance, 30 and 31 percent of them also considered reliability and timeliness, respectively, as the most important performance indicator in logistics. Meanwhile, 41 percent and 29 percent of manufacturers think that reliability and timeliness, respectively, should be the ultimate performance indicator in evaluating logistics performance. 5 Improving Indonesia’s Freight Logistics System: A Plan of Action Myth 3: The domestic sea freight industry is failing to respond to market demand Contrary to the popular belief, the findings from this study also suggest that the domestic sea freight industry in Indonesia is responding to market forces. Domestic shipping rates are associated with distance on the routes served or vessel capacity, which is consistent with market efficiency: shorter distances incur higher rates, while longer distances incur lower rates. Liners also tend to deploy larger vessels on more active routes, resulting in economies of scale. However, domestic liners are facing an operating environment that is undermining operational efficiency due to bottlenecks in infrastructure and unreliable ƐĞƌǀŝĐĞƐŝŶŵĂŶLJŽĨ/ŶĚŽŶĞƐŝĂ͛ƐƉŽƌƚƐ͘dŚĞLJĂƌĞĂůƐŽƐƵďũĞĐƚƚŽǀĂƌŝĞƚLJŽĨƵŶŚĞůƉĨƵůƌĞŐƵůĂƚŽƌLJƉƌĂĐƚŝĐĞƐ͕ƐƵĐŚ as an inability to deduct VAT on bunker fuel, requirements to carry a minimum number of seafaring passengers, and national vessel certification that is not yet recognized internationally. Myth 4: Developing infrastructure will be sufficient to improve freight logistics It is indeed true that infrastructure bottlenecks cause congestion, which results in time lost for mobile assets, such as trucks and vessels, which could have been used to create higher investment returns. This will certainly affect the incentives for operators to invest in more efficient and modern equipment. But addressing logistics inefficiencies is not just a matter providing physical infrastructure . A related problem is that, given the constrains and an unconducive regulatory environment, Indonesia has comparatively less developed logistics services than its peers to respond to demand from manufacturing and fast growing modern retail sectors, as well as the challenge of organizing fully reliable supply chains to distant regions. Multiple licenses/permits and various FDI restrictions are increasing the cost of entry for third-party logistics (3PLs), which integrate trucking, warehousing and freight-forwarding services into supply-chain management services. Other practices, such as uncertainties over the rules for applying VAT on logistics services, a monopoly of dock laborers in certain ports, the lack of competition in the supply of bunker fuel, and non-internationally recognized vessel certifications, all serve to create rents, raise operational costs, and undermine fluidity in the supply chain. . Myth 5: Trade-related policy has nothing to do with efficiency and fluidity of supply chains Trade facilitation is the cornerstone of an efficient and reliable supply chain. Current practices, and procedures to comply with trade-related measures, such as reports from pre-shipment inspections and recommendation letters from authorities permitting imports, are causing delays for manufacturers and traders in receiving Bea Cukai (Customs) Form BC 1.1, even before starting the customs clearance process. In addition, goods that are subject to trade-related regulations have a higher chance of needing further clarification by Customs. In addition to the documents already submitted, resulting in further delays in releasing goods from the port. In fact, 80 percent of priority importers (MITA) say they have experienced such additional delays. While most of the trade-related measures are intended to protect health and consumer safety, excessive use of trade regulations with long compliance processes subjects Indonesian manufacturers to longer lead times and higher inventory costs. 6 Executive Summary What can be done and what should be framework for policy actions WƌŽďůĞŵƐ ŝŶ /ŶĚŽŶĞƐŝĂ͛Ɛ ĨƌĞŝŐŚƚ ůŽŐŝƐƚŝĐƐ ƵŶŵĂƐŬ ĂŶ ŝŶƚĞƌĐŽŶŶĞĐƚĞĚ ƌĞůĂƚŝŽŶƐŚŝƉ ŽĨ ĨŽƵƌ ŬĞLJ ĂƌĞĂƐ͗ infrastructure, governance, fluidity and service quality/competence. Even if better infrastructure may be important in streamlining freight logistics and improving connectivity, this still needs to be combined with improvements in the other three areas. Therefore, a comprehensive solution to logistics constraints prevalent in Indonesia would need to focus on a well-balanced menu of actions that include: introducing modern integrated logistics solutions, a favorable regulatory environment for the private sector to respond to demand, and improving the quality of existing infrastructure to address chokepoints in the logistics network. Policy interventions can be designed around the following pillars (see Table 5 and 6 for detailed elaboration): 1. Strengthen governance and command structures. Lack of coordination and overlapping mandates in logistics-related regulations are hampering the effectiveness of reforms and the development of quality logistics services. The Government might want to consider of establishing a task force with a clear mandate to implement and supervise reforms or public investments in freight logistics. This initiative is expected to improve inter-agency coordination and increase the quality of reform implementation. Such a task force will also benefit from strong political support, inclusive representation of key technical agencies and a full time Secretariat filled by professionals, and proper incentives - unlike previously established task forces (e.g., Timnas PEPI). The establishment of a ͞ůŽŐŝƐƚŝĐƐŽďƐĞƌǀĂƚŽƌLJ͟ĐĂŶŝŶĐƌĞĂƐĞƚŚĞƋƵĂůŝƚLJŽĨƉŽůŝĐLJĚŝĂůŽŐƵĞĂŶĚƌĞĨŽƌŵŵŽŶŝƚŽƌ ing on freight logistics through the use of data and scientific evidence. A regulatory review, such as that conducted prior to the implementation of the 2008 Shipping Law, is needed to identify gaps in the current rules and institutional arrangements, and which are undermining the role of logistics operators and logistics service providers vis-à-vis the regulator. 2. Foster development of quality logistics services providers. A regulatory review is needed with the aim of encouraging investment in more efficient and diversified services. Such an assessment would look at areas such as barriers to entry, competition, the fiscal regime and internal barriers, with a view to lowering the cost of entry for quality logistics services providers. This would include, among others, reviewing the licensing/permit requirements for logistics service providers, reducing multiple restrictions on FDI in logistics, and improving certainty over the application of VAT in logistics. Public and private collaboration is also needed to improve the skills capacity in managing supply chains for those workers employed by logistics service providers. 3. Improve fluidity in the supply chain. dŚĞƌĞĂƌĞŵĂŶLJƵŶŶĞĐĞƐƐĂƌLJƉƌĂĐƚŝĐĞƐƚŚĂƚĐƌĞĂƚĞ͞ƌŽĂĚďƵŵƉƐ͟ for cargo movement. Harmonization of procedures and simplifying paperwork among border agencies are needed with the aim of reducing operating costs of logistics providers, and phasing in paperless procedures for customs clearance. In major domestic and international gateways, such as Tanjung Priok and Tanjung Perak, delays in and around ports are often caused by lack of coordination between operators (trucks, terminals and control agencies). Implementing a port community system, such as INAPORT, would allow cargo vessels, freight forwarders and land transport operators to exchange data through electronic platform. This is expected to improve certainty in scheduling of shipment, cargo pick-up and therefore better synchronization in maritime supply chains. 4. Invest in logistics infrastructure. The Government may want to consider prioritizing and accelerating the implementation of a five-year port investment plan to reduce logistics costs by focusing on 7 Improving Indonesia’s Freight Logistics System: A Plan of Action projects that can show economic returns through improvements in internal and external connectivity. This would include initiatives in the following areas:  Improve the port-hinterland interface through better access in the most constrained port/city environments in eastern Indonesia. Because of the close proximity between many ports and city , it is often difficult, or even impossible, to bring containers out of the port, creating inefficient logistics and higher handling costs. Improving access roads from ports to hinterland is needed. But utilizing other transport means, such as barges or inland waterways, in river ports or ports close to major canal or rivers is also an alternative.  Evolve the current operational arrangements in some of the domestic container terminals, where container-handling is fragmented between several companies that are vertically integrated with shipping lines. The Government may want to encourage port operators to improve arrangements for container-handling to ensure unitary management, investment, and a permanent workforce for handling equipment. Consolidation will increase productivity and improve vessel turnaround times.  Encourage economies of scale in logistics and investment in logistics centers by private operators and through PPP. The development of logistics centers, particularly outside Java, would improve the efficiency and reliability of logistics services. But developing these facilities will require a clear plan and coordination that focus on improving the commercial viability and operational environment for private sector investment in logistics infrastructure (e.g., logistics parks, warehousing facilities, and cold-storage facilities, etc.). 8 Improving Indonesia’s Freight Logistics System: A Plan of Action Facing the Connectivity Challenge: Freight Logistic as a Key Development Priority for Indonesia Improving Indonesia’s Freight Logistics System: A Plan of Action 'ŝǀĞŶ/ŶĚŽŶĞƐŝĂ͛ƐŐĞŽŐƌĂƉŚŝĐŶĂƚƵƌĞ͕ĐŽŶŶĞĐƚŝŶŐƐƉĂƚŝĂůůLJƐĞƉĂƌĂƚĞĚƐŽƵƌĐĞƐŽĨƐƵƉƉůLJĂŶĚĚĞŵĂŶĚŝƐŽŶĞ of the most critical areas for economic development. Connectivity refers to the link between locations that enables the flow of goods, services and people.1 Improved connectivity results in lower poverty rates and higher rates of economic growth. Connecting rural areas to larger markets and cities provides households with improved access to goods and services at lower and more stable prices, as well as access to larger markets and greater job opportunities. Unemployed and poor workers can have access to greater income- earning opportunities and small and medium enterprises are able serve a larger number of clients and have greater access to inputs. In order for higher rates of growth to reduce poverty and facilitate in sharing prosperity, Indonesia needs to remove barriers that are preventing lagging regions from linking into more growth-generating opportunities. Lagging regions are often home to some of the poorest populations in Indonesia, even within a single island. Vulnerable households and poverty rates are higher in remote areas of Indonesia: 55 percent of the population in Papua is poor and vulnerable, compared with 30 percent of the population in West Java. But even in Java and Sumatra, poverty rates are higher in districts that are isolated from the larger urban areas (Figure 1). Figure 1. Poverty rates in 2012 Poverty rates tend to be higher in remote areas of the archipelago, even within the larger islands Source: Susenas. Price differences between regions in Indonesia are often touted as one of the most unfavorable consequences of poor connectivity, as unreliable supply chains prevent traders and local producers from responding rapidly to changes in price. Higher food inflation reduces purchasing power and investment in health and education, in turn increasing poverty and vulnerability. Indonesia ͛ƐƉŽŽƌĞƐƚŚŽƵƐĞŚŽůĚƐďĞĂƌƚŚĞ brunt of higher inflation, given that on average they spend two-thirds of their income on staple food items. Remote regions, where most of the poor population resides, ƌĞĚƵĐĞƚŚĞ͚ƚƌĂĚĂďŝůŝƚLJ͛ŽĨŐŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ͕ triggering faster price increases when demand surges (Figure 2). Likewise, the cost of consuming processed food in Papua and Sumba is more expensive than in Java. 1 World Bank 2010. Connecting Indonesia: A Framework for Action 10 Facing the Connectivity Challenge: Freight Logistics as a Key Development Priority for Indonesia Figure 2. Prices compared to Jakarta: Higher prices in remote areas Note: Principal component analysis of regional prices compared to Jakarta. Source: World Bank staff estimate. Without improving freight logistics, Indonesia will suffer serious missed opportunities from greater internal integration, as low connectivity could impair the efforts of remote regions in diversifying their economies. Improved connectivity can also contribute to greater diversification in production and exports, given that it helps businesses to develop competitive advantages in higher value-added goods, both in terms of manufactured and processed goods. These higher value-added goods need to meet tight delivery schedules, not only in a cost-effective manner but also reliably and predictably. Poor freight logistics contributes to a lack of development of potential industries such as tourism, fisheries and mineral processing in Maluku, Papua, and East Nusa Tenggara (high concentration index and low accessibility index in Figure 3). Meanwhile, due to their proximity to the main gateway port of Tanjung Priok, firms in Banten and West Java have higher access to inputs and markets, as well as more diversified businesses (low concentration index in Figure 3). Figure 3. Concentration index (diversified economy) vs Accessibility (access to gateways and markets) 0.5 Papua Economic concentration (Herfindahl) 0.4 E.Nusa Tenggara 0.3 North Maluku Aceh 0.2 West Papua Yogyakarta Central East Java 0.1 Java Bali West Jakarta Java 0.0 -23 -18 -13 -8 -3 2 Log of accesibility Source: World Bank staff estimates from BPS data. 11 Improving Indonesia’s Freight Logistics System: A Plan of Action Better freight logistics can connect resource-producing regions in the outer islands with markets and manufacturing concentrations in Java and Sumatra. With the exception of the growing crude palm oil processing industry in Sumatra, raw commodities need to be brought from the outer islands to be processed in Java. Manufactured products including processed foods need to be transported from Java to the outer islands, including supply distribution centers and retail stores. Similarly, manufacturing industries need to grow outside Java, probably closer to their primary inputs, and this will only happen if freight transports and logistics, as well as other infrastructure needs, are supportive. Developing a vertically integrated industrial structure with more domestic value-added has been a high ƉƌŝŽƌŝƚLJŝŶ/ŶĚŽŶĞƐŝĂ͛ƐĚĞǀĞůŽƉŵĞŶƚĂŐĞŶĚĂ͕ĂŶĚŝŵƉƌŽǀĞĚůŽŐŝƐƚŝĐƐŝƐĂŬĞLJĐŽŵƉŽŶĞŶƚŽĨƚŚŝƐŽďũĞĐƚŝǀĞ͘ Forcing producers to invest in processing facilities in the outer islands is not economically sustainable if existing freight logistics cannot help producers to access domestic and international markets through the main gateways in Java and Sumatra.2 For example, poor freight logistics infrastructure and high local fees are preventing the potential development of cattle farming and meat packaging in Nusa Tenggara. Similarly, a lack of reliable energy and cold storage facilities are also preventing regions of eastern Indonesia from fully developing a competitive fisheries industry. Figure 4. Agglomeration of new manufacturing activities Source: Manufacturing census data. /ŵƉƌŽǀĞŵĞŶƚŝŶĨƌĞŝŐŚƚůŽŐŝƐƚŝĐƐŝƐĞdžƉĞĐƚĞĚƚŽŝŵƉƌŽǀĞ/ŶĚŽŶĞƐŝĂ͛ƐĞdžƉŽƌƚĐŽŵƉĞƚŝƚŝǀĞŶĞƐƐĂŶĚƐƚƌĞŶŐƚŚĞŶ confidence for pursuing openness to trade and FDI. Studies reveal that compared to other neighboring countries, Indonesia is less integrated to the regional production network as export relied more on commodity and natural resources. Recently domestic policy debate also has highlighted concerns over eroding competitiveness of Indonesian producers in the face of more intense global competition. Better ĨƌĞŝŐŚƚůŽŐŝƐƚŝĐƐǁŝůůŝŵƉƌŽǀĞƐƵƉƉůLJĐŚĂŝŶƐĂŶĚĂůůŽǁ/ŶĚŽŶĞƐŝĂ͛ƐƚŽƌĞƐƉŽŶĚďĞƚƚĞƌƚŽĐŽŵƉĞƚŝƚŝŽŶĂŶĚƚƌĂĚĞ opportunities. 2 In the period 2001-11, 95 percent of medium-size manufacturing firms emerged in Java and Sumatra, where four out of five of /ŶĚŽŶĞƐŝĂ͛ƐƉŽƉƵůĂƚŝŽŶĂŶĚĞĐŽŶŽŵŝĐĂĐƚŝǀŝƚŝĞƐĂƌĞĐŽŶĐĞŶƚƌĂƚĞĚ͘ 12 Facing the Connectivity Challenge: Freight Logistics as a Key Development Priority for Indonesia Reliable freight logistics will help producers to deliver goods to meet demand from the emerging consumer class that is growing rapidly nationwide. Around 18 percent of the population in Indonesia are ĐŽŶƐŝĚĞƌĞĚŵĞŵďĞƌƐŽĨƚŚĞ͞ĐŽŶƐƵŵĞƌĐůĂƐƐ͟, contributing to 46 percent of household consumption, while ĂŶŽƚŚĞƌ ϰϯ ƉĞƌĐĞŶƚ ŽĨ ƚŚĞ ƉŽƉƵůĂƚŝŽŶ ĂƌĞ ͞ĞŵĞƌŐŝŶŐ ĐŽŶƐƵŵĞƌ ĐůĂƐƐ͕͟ contributing to 37 percent of household consumption. Java accounts for 60 percent of the total consumer class in Indonesia, and this is growing rapidly at over 20 percent per year, while the regions in eastern Indonesia are also showing a rapid increase in their consumer class (Figure 5). Figure 5. Growth of the consumer class in Indonesia Source: SUSENAS data. Improved freight transport and logistics are now needed more than ever given increased consumption by the middle-class, which has already shifted the composition of demand. Increasingly, people with rising incomes are shifting their patterns of consumption: households are spending a larger share on processed food out of their total expenditure, resulting in an increasing role for freight transport and high-technology logistics, such as post-harvest technology and cold-storage chains. The shift in consumption demand is also triggering high growth in retail stores, such as Alfamart, especially outside Java, which is becoming a saturated market from the point of view of the retail market. Efficient and reliable freight logistics are key for Indonesia to integrate its domestic supply chains with global value chains (GVC). Countries that doubled their GVC-linked trade between 1995 and 2008 saw their income per-capita increase 12 percent more than others, 3 whereas /ŶĚŽŶĞƐŝĂ͛Ɛ ƉĂƌƚŝĐŝƉĂƚŝŽŶ ŝŶ 's ŝƐ lagging behind other middle-income countries in ASEAN. Indonesia has more than half (54 percent) of the ŵĂŶƵĨĂĐƚƵƌŝŶŐ ůĂďŽƌ ŝŶ ^E͕ ĂŶĚ LJĞƚ ŝƚ ƉƌŽĚƵĐĞƐ ůĞƐƐ ƚŚĂŶ ϮϬ ƉĞƌĐĞŶƚ ŽĨ ƚŚĞ ƌĞŐŝŽŶ͛Ɛ ŵĂŶƵĨĂĐƚƵƌŝŶŐ exports by value (Figure 6). The reason behind this lagging performance is inefficient and unreliable freight logistics. Connecting domestic supply chains to GVCs requires targeted interventions in trade facilitation, port efficiency, and express delivery services, among others. 3 ͕ϮϬϭϰ͘͞ƐŝĂŶĞǀĞůŽƉŵĞŶƚKƵƚůŽŽŬϮϬϭϰhƉĚĂƚĞ͗ƐŝĂŝŶ'ůŽďĂůsĂůƵĞŚĂŝŶ͘͟ 13 Improving Indonesia’s Freight Logistics System: A Plan of Action Figure 6. Indonesia’s manufacturing exports compared to its share in ASEAN exports (2013) Source: World Development Indicator. Maritime supply chains in Indonesia are long and fragmented, especially to the eastern islands. In addition, supply chains are so divided that they can hardly support domestic or international exports. As shown in Figure 7, a standard supply chain from Java to eastern Indonesia makes stops at two different ports and the goods are loaded and unloaded manually at least three times before arriving at the destination. Other activities in the supply chain include hinterland connections in small trucks, and the use of ferries and/or wooden ships to arrive at the outer-most islands. Throughout these activities, the owner of the goods at the final destination is usually unaware of the status of his shipment, or when it will arrive, as there are very few tracking and tracing capabilities. These gaps in information, supply-chain operating inefficiencies, and the uncertainties over the arrival of goods usually push both producers and retailers to carry larger inventories than normally necessary, thus raisin overall logistics costs. Such fragmented supply chains make it even more challenging to provide logistics in the return direction that could help to bring products from the outer islands to meet domestic demand in Java and Sumatra or for export markets. Figure 7. Indonesia’s maritime supply chain is long and fragmented 14 Benchmarking Logistics Performance: The Baseline Before any efficiency improvements can be made in freight logistics, there needs to be a baseline for the current freight logistics performance in Indonesia͘dŽĂƐƐĞƐƐƚŚĞĐƵƌƌĞŶƚƐŝƚƵĂƚŝŽŶŝŶ/ŶĚŽŶĞƐŝĂ͛ƐĨƌĞŝŐŚƚ logistics system, the World Bank followed a series of structured interviews of the main stakeholders in freight logistics, collected primary and secondary data, and carried out surveys of logistics service providers (LSP) and manufacturers in over five cities. To measure logistics performance, three key dimensions need to be considered: cost, time and reliability. These dimensions are not equal in importance and, depending on the commodity or the type of services offered, each dimension would have a different priority. The survey used an approach that allowed respondents to consider the relative importance of each performance dimension against one another. The survey results4 (Figure 8) showed that LSPs prefer low logistics costs (39 percent) over timeliness (31 percent) and reliability (30 percent), reflecting the nature of their business, as LSPs are usually not cargo owners. The stronger focus on cost reflects the type of market that LSPs are involved in: commodities with relatively lower value (such as garments or food items) tend to focus more on cost than other performance dimensions. If the respondents were handling more time-sensitive goods, such as electronics and automotive components, it is possible that the reliability and time dimensions would have carried more importance. Meanwhile, manufacturers tend to place more emphasis on reliability (41 percent), and less on timeliness (29 percent) and cost (28 percent). The findings reinforces the hypothesis that reliable supply chains are important for manufacturers to plan production, manage their inventories, and hence leverage their scale economies. Other measurements of firm-level performance confirm that the lack of reliability in logistics services affects many of the internal operational and financial decisions that attempt to reduce levels of uncertainty. The ratio of in-house logistics activities is higher than outsourced (62 percent vs 38 percent) indicating that this level of self-managed and organized logistics is due to a lack of trust in the capability of local LSPs. In addition, the average DIFOT capability (Delivery In Full and On Time) is around 81 percent, which means that out of 100 orders 19 orders will either be late or some stock-keeping units (SKUs) will be missing. In terms of manufacturing environments, this DIFOT level is higher than most other countries. Damage rates average 2.15 percent, combined with a return rate of 3.62 percent, and a relatively high customer complaint rate of 6.76 percent, show that reliability issues affect the forecast accuracy and the financial sustainability of manufacturing firms in Indonesia. 4 See background papers for this work. Improving Indonesia’s Freight Logistics System: A Plan of Action Figure 8. Performance Dimension Assessment for LSPs and Manufacturers Survey results for LSPs Survey results for Manufacturers Time Time Reliability 31% Reliability 31% 30% 41% Cost Cost 39% 28% Source: World Bank and LPEM-FEUI survey in 5 cities in Indonesia, 2014. Total logistics costs incurred by Indonesian manufacturers are 18 percent of sales, higher than in both Thailand and Malaysia, at15 percent and 13 percent, respectively. There have been numerous estimates conducted in Indonesia and commonly quoted numbers range between 25 and 30 percent of GDP. However, such estimates do not make much sense, as the logistics costs/GDP indicator is an aggregate that cannot reflect logistics realities on the ground. Logistics costs/GDP applies at the micro level and is not comparable to costs as a percentage of GDP, which is measured at the macro level. Logistics costs/sales is a more precise indicator than logistics costs/GDP, as comparisons can be made between different sectors when there are enough respondents.5 Aside from transport and cargo-handling, the results suggest that inventory carrying costs contribute 26 percent of total logistics costs incurred by Indonesian manufacturers. These results (Figure 9) confirm that reliability, and thus holding higher inventory stock to cover for uncertainties over the arrival of products, is the most important logistics dimension for Indonesian manufacturers. Figure 9. Components of Logistics Cost/Sales (%) and Average Total Logistics Cost/Sales=18% (N=162) Logistics Administration & others Transport & Cargo 3.2% (17.6%) Handling 8.2% (45.3%) Warehousing Transport & Cargo Handling 2.6% (14.6%) Inventory carrying cost: Includes cost of capital tied in inventory Warehousing: Cost of running warehouse or buying the service Logistics Administration: cost from Inventory functions indirectly related to logistics 4.1% (22.5%) Source: World Bank and LPEM-FEUI survey in 5 cities in Indonesia, 2014. 5 Other countries that use logistics costs/sales include Japan, Finland, France and Germany. 16 Benchmarking Logistics Performance: The Baseline Box 1 A Snapshot of Logistics Market in Indonesia The logistics industry in Indonesia is currently in a period of transition from a traditional fragmented structure to a more integrated form. The catalysts for this transition are primarily the transfer of skills from the larger companies to local LSPs and the demands from shippers for improvements in the quality of service. The majority of the activities of the international companies has been receiving and storing imported goods usually working through joint ventures. Another catalyst has been the growth of logistics-intensive industries such as automobiles and the rapid expansion of modern retailing. The on-going transition has four features: • Outsourcing of logistics to 3PLs; • Consolidation of service providers; • Focus on supply chain performance; and • Emphasis on information-based services rather than asset-based services Freight forwarding and logistics services providers At present, the logistics industry in Indonesia is highly fragmented. With the exception of port operators, most logistics service providers (LSPs) are family-owned businesses with focus serving selected markets or geographical areas Most are freight forwarders, who arrange sea and land transport. These are individual agents or small enterprises that do not have fixed assets and arrange relatively few shipments. The principal activity of such freight forwarders is to arrange land transport, especially from the port to an inland destination. A much smaller proportion arrange inter-island shipments but only a few have a sufficient volume to act as NVOCCs (non-vessel operating common carrier). A survey of the larger LSPs conducted by this work found that the typical physical assets held by a company were trucks (75 percent), warehouses (57 percent), handling equipment (45 percent), and container trailers (28 percent). The modern third party logistics providers (3PLs) include both international companies operating in Indonesia through joint ventures and larger, more innovative domestic freight forwarders, especially those with experience in the provision of courier services. For modern 3PLs, as opposed to traditional LSPs, warehousing and distribution are part of their core business and provides a platform for value- added services, but they are also asset-light. Usually they own trucks but complement their services by using other transport companies for the majority of their distribution activities. They prefer to lease storage facilities and to manage warehouses for others but may own central warehouses. The warehousing involves inventory managed by the vendors or retailers for which the LPS provides basic warehousing and distribution services. The larger 3PLs use Warehouse Management Systems (WMS) ����������������������������������������������������������������. The road freight transport industry can be subdivided into two major market segments: the freight transport that goes to and from the port; and the regional and urban freight transport. Small freight forwarders and road freight companies with heavy trucks dominate the first market segment; whereas regional and urban freight transport is carried out by both small and large companies with a wide variety of vans and trucks. The trucking market is very fragmented. An analysis of the structure of the companies that perform the trucking services in Tanjung Priok shows that over 75% of the companies have 20 or less trucks. Some consolidation is presently taken place that would enable a revitalization of the road freight transport 17 Improving Indonesia’s Freight Logistics System: A Plan of Action industry in Indonesia, but the challenge remains on how to support this consolidation process with policy measures A fragmented trucking market is causing that smaller companies enter into a vicious circle of downgrading quality: revenues are low because of congestion on the road causing too much idle time for the truck and driver for the operation to become profitable, which in turn results in overloading practices by the smaller operators to compensate for the losses in an attempt to maintain the business putting in danger road safety. These smaller companies often have old trucks, as they cannot afford new ones. The larger companies carrying out regional transport have often a relatively new fleet and replace the vehicles after 8 years of operation. The trucks of these larger companies are able to perform 80,000 - 120,000 km per year, which enables them to raise sufficient income for covering the operational costs and the costs of depreciation of the vehicle. Domestic shipping Inter-island container services are competitive. Five large lines operate a fleet of 170 vessels and carry about half the total traffic while another 52 smaller lines operate the remaining fleet of container vessels. Almost all container ships, which include multi-purpose vessels, are geared (have crane installed at deck) and therefore able to call ports that lack container-handling equipment or lack reliable equipment. They vary in capacity from less than a 100 TEU up to 1,800 TEU with an average capacity of about 300 TEU. The larger vessels (700 TEU or more) account for only 14 percent of the container vessel fleet but for about a third of total fleet capacity. The average age of the vessels is about 20 years. Most of the vessels are purchased in the second hand market, although some of the younger vessels in the 300-600 TEU range appear to have been purchased new. The shipping lines continue to purchase geared vessels despite the potential savings in capital and operating costs with gearless vessels. Although there are routes on which both ports have sufficient ship-to-shore gantry cranes and/or mobile container cranes, there is still a reluctance to depend on the ports to provide reliable service. In addition, there are a large number of RoRo (ferries) and wooden vessels that transport unitized cargo. The RoRo vessels are much smaller with an average GRT equal to that of the container vessels with a capacity of around 20 TEU. Interviews carried out for this work also suggest that the average operating speed of the container fleet is about 10 to 12 knots even though the design speed for most of the ships is in the range of 15-18 knots. Slow steaming is a common practice in Indonesia because of the short distances travelled. For the shorter routes, the inter-port distance can be covered in 1-2 days. Any increase in speed would reduce the travel time merely by a number of hours which would be then spent in port since the schedule of calls are organized by day. The reduction in speed also provides significant savings in fuel costs, which account for a majority of the vessels operating costs. A situation exacerbated by the higher cost of marine diesel in Indonesia relative to the international fuel price i.e. in Singapore. Reliability and the value of time, together with non-transport and cargo-handling costs, explain most of the logistics costs in Indonesia. A simple calculation of total logistics costs for goods shipped from the two main hubs on Java shows that the value of time is the main source of costs for maritime supply chains. As seen in Figure 10, sea freight costs account for 1.5 percent up to a maximum 6 percent of the value of the goods (estimated at US$15,000 per container), whereas the value of time is typically estimated at 1 percent 18 Benchmarking Logistics Performance: The Baseline per day applied to lead time, which captures the total time from start to finish. Lead time includes shipping time, and time at the port (for loading and unloading at the port of origin and destination), as well as any delays accounting for the frequency of calls (e.g., missing a boat). Figure 10. Sea freight cost vs. value of shipped from the two hubs in Java (Jakarta and Surabaya) TERNATE TARAKAN PANJANG BENGKULU LUWUK PEKANBARU GORONTALO PALEMBANG BITUNG BATAM AMBON BALIKPAPAN MEDAN Sea Freight KENDARI Value of Time SAMARINDA PADANG MAKASSAR PONTIANAK BENOA BANJARMASIN Value of goods (percentage) 0% 5% 10% 15% 20% 25% Source: World Bank staff estimates, 2014. The largest cost-saving opportunity lies in reducing the time component of logistics costs. The value of time represents the cost of unreliable logistics services and it represents the largest share of logistics costs compared with sea freight and handling costs. Even for a relatively low-value commodity such as rice, on a supply chain from Surabaya to Ambon the sea freight cost is not a very high (5 percent) as a proportion to the value of 1.0 kg of rice, which is about the same magnitude of the handling and costs for short-distance freight transport/dryage (Figure 11). From a consumer perspective, most of the gains would stem from making supply chains more reliable, thereby decreasing the time component of logistics costs. 19 Improving Indonesia’s Freight Logistics System: A Plan of Action Figure 11. Value comparison of logistics cost components vs. value of one container of rice Trucking & Handling @ Surabaya 125 Handling & Trucking @ Ambon 150 Sea Freight 263 Value of excess lead time 769 Value of goods 7,250 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 IDR/kg of rice Source: World Bank staff estimates, 2014. Unable to accurately measure the true costs of unreliability, Indonesian producers usually complain about the high cost of domestic freight. However, domestic freight rates are already responding to market mechanisms. Shipping rates are determined by distance on the routes and/or ship capacity, which is consistent with market efficiency. As Figure 12a shows, freight-shipping rates increase with distance (larger distances incur higher rates). Furthermore, the shipping rate increase based on the distance is lower than the actual increase in distance. Similarly, shipping rates are higher dependent on ship capacity (larger vessels charge higher rates), thus shipping lines have been introducing progressively larger ships on more active routes, resulting in economies of scale. Figure 12a. Shipping rate (IDR/km) vs distance (km) Figure 12b. Shipping rate (IDR) vs boat capacity (TEU) Source: World Bank staff estimates, 2015. 20 Benchmarking Logistics Performance: The Baseline Other sources of uncertainty include the time spent in port (i.e., turnaround time), which in turn increases shipping time. There is a strong association between shipping time on domestic routes and time spent in port (Figure 13). Turnaround times are often uncertain and unreliable, as many ports have a significant dispersion of turnaround times around the average. Shipping lines have to anticipate this uncertainty into their own schedules, thus shipping times increase by two days if a vessel stays at a given port for more than three days. The causes of uncertainty include port performance, the quality of port services, and congestion. Figure 13. Shipping time vs turnaround time (days) Source: World Bank staff estimates, 2015. 21 Behind the Lack of Reliability in Logistics Performance Indonesian manufacturers perceive the lack of reliability in logistics services as the major constraint for their businesses. Reliability is a key dimension on logistics performance and it is usually the result of a combination of low-performing areas. Infrastructure gaps, governance obstacles, supply-chain weaknesses and low-quality services summarize a bundle of issues behind the lack of reliability in logistics performance. /ŶǀĞƐƚŵĞŶƚ ŝŶ ŝŶĨƌĂƐƚƌƵĐƚƵƌĞ ŚĂƐ ůŽŶŐ ďĞĞŶ ƐĞĞŶ ĂƐ ŽŶĞ ŽĨ ƚŚĞ ŬĞLJ ŝŵƉĞĚŝŵĞŶƚƐ ƚŽ /ŶĚŽŶĞƐŝĂ͛Ɛ development. From the sea freight logistics perspective, the inefficiency in port services due to the lack of appropriate infrastructure greatly affects the performance of the rest of the supply chain. Some of the larger and busier ports are currently able to operate at an acceptable performance level given the constraints on hinterland connections and the regulatory difficulties of expanding activities with private sector participation. However, all ports in Indonesia (large, medium and small) are in need of upgrades regarding capacity, access and/or technology changes. Improvements in sea-side access to ports (i.e., channels), and the quality of the layout of the infrastructure (i.e., berths), as well as the terminal equipment in both the quayside and the yard-side, will need to be approached on a case-by-case basis through the development of detailed feasibility studies and technical designs. Although the gaps in infrastructure continue to impose strains for traders, the surveys of domestic shipping lines undertaken for the study suggest that the efficiency of port services are affecting them equally and impeding their businesses from meeting schedules. The following table shows some of the most important productivity problems that were mentioned in the survey. Table 1. Problematic port services identified Location Issues  Availability of slots and programming of berth window is problematic (e.g., Belawan, Biak, Manokwari, Sorong, Surabaya) Pre-berth  Maritime pilotage services are not efficient (e.g., Ambon, Belawan, Jakarta, Jayapura, Surabaya)  Working hours and productivity of labor/longshoremen (TKBM) are problematic and mediocre (e.g., Ambon, Anggrek, Bengkulu, Bitung, Gorontalo, Jayapura, Surabaya, Toli- At berth Toli) with no change over the past five years and in some cases it is reported to have worsened  Total Stuffing and stripping of containers At the yard  Ship turnarounds in ports are generally slow Source: World Bank Survey, 2014. Port trade facilitation issues and long dwell times are causing additional lead time and logistics costs for producers. Container dwell time measures the total time spent on removing containers, from the time a vessel arrives in port to the point when the container leaves the port premises. For producers, especially those of exports and re-exports, longer dwell time means delays in the availability of inputs, increasing uncertainties and requiring higher inventory levels and carrying costs. Behind the Lack of Reliability in Logistics Performance Lack of coordination and governance in trade facilitation Administrative and bureaucratic procedures account for most of the delays in submitting the customs declaration (PIB), which is the primary explanation for longer dwell times. Although Tanjung Priok operates close to full capacity (thus giving the terminal operators little room to manoeuver), port infrastructure cannot fully explain the long delays in clearing containers. As shown in Figure 14, there is very little correlation between the cargo handled (TEUs) and dwell time (days). Instead, long bureaucratic processes are the main cause of delays in the pre-customs clearance stage and during the customs inspections. Figure 14. Dwell time (days) vs volume (TEU) in Tanjung Priok 250000 New import restrictions 10 Restrictions on importers 225000 registration (API) 8 TEUs Days 200000 6 175000 4 150000 2 Jul-11 Jul-12 Jul-13 Jul-14 Jan-11 Mar-11 Jan-12 Mar-12 Jan-13 Mar-13 Jan-14 Mar-14 May-11 Sep-11 Nov-11 May-12 Sep-12 Nov-12 May-13 Sep-13 Nov-13 May-14 Sep-14 Nov-14 Volume (TEUs) Days (right axis) Source: World Bank staff analysis on JICT data, 2014 Current facilitation efforts target automation of processes but do not question the need for the current requirements, which should undergo a review process. The requirements need to be reevaluated and re- engineered, to comply with international standards and focus on efficiency. Current sources of complications and delays to submit the customs declaration (PIB) include: 1. Many technical requirements often with no strong justification by international standards (e.g., the pre-shipment inspections (PSI) recently introduced by the Ministry of Trade). 2. Document and certificates issued after ship arrival (Table 2):  Delays in obtaining the manifest customs approval BC11 (about 30 percent is submitted after arrival of the vessel) or the PSI report. 23 Improving Indonesia’s Freight Logistics System: A Plan of Action  Some documents can only be submitted to the relevant ministries after the vessel arrives (e.g., Certificate of Origin, original Bill of Lading (B/L), surveyor report). 3. Processing is inefficient due to many manual interventions:  Requirement for hard copies and a lack of automation by non-customs agencies (i.e., Quarantine, BPOM). Implementation of the national single window has been slow and very partial.  A large majority of importers in the priority channel (80 percent) experience customs rejection (i.e., SKEP) of their submission, resulting in additional delays and uncertainties.. Table 2. Documents adding to the delay of PIB submission Delay after vessel arrives Document % Respondents (days) Recommendation letters 31 6.4 Import license 29 10.6 Standards certificate (SNI) 8 12.1 Pre-shipment verification certificate (surveyor report) 3 12.1 Insurance policy 3 3.5 Certificate of analysis (laboratory) 3 3.5 Quarantine letter 2.9 5.7 BPOM letter 2.5 8.5 Packing list 2.5 5.0 Commercial invoice 2.5 4.3 Bill of lading 2 12.1 BC11 1 14.2 Source: World Bank survey on MITA importers, 2014 Low quality services and regulatory barriers for innovation Port performance has been adversely affected by low labor productivity. Although the results of the survey for domestic shipping lines suggest that port performance has generally improved compared with five years ago, the time spent at some ports is still sometimes as much as half of the sailing time (e.g., Belawan-Jakarta, Surabaya-Makassar). In addition, some ports have very high container-handling charges that are not associated with the quality of services. In fact, container-handling charges in Indonesia are higher in ports where total turnaround time6 is longest, such as in the case for Sorong and Jayapura.7 These higher charges reflect the bargaining power of unionized labor in the ports and not the productivity of the services provided. /ŶĚŽŶĞƐŝĂ͛ƐůŽŐŝƐƚŝĐƐƐĞƌǀŝĐĞƉƌŽǀŝĚĞƌƐ;>^WͿ͕ƐƵĐŚĂƐƚŚĞƚƌƵĐŬŝŶŐŝŶĚƵƐƚƌLJĂŶĚŽƚŚĞƌƐ͕ŽƉĞƌĂƚĞŝŶĂŚŝŐŚůLJ fragmented regulatory environment. There are too many institutions issuing and implementing regulations, and as a result the plethora of rules, including fiscal rules, end up raising logistics costs. Nine 6 Turnaround time (TAT) is estimated as the total time between estimated time of arrival (ETA) and estimated time of departure (ETD) 7 Sorong has TAT from 50 to 89 hours, charging IDR 2,168,290 for container-handling charges, whereas Jayapura has a TAT of 72 to 96 hours, charging IDR 1,840,094 for container-handling charges. 24 Behind the Lack of Reliability in Logistics Performance national laws and many more ministerial decrees, not to mention a plethora of local government regulations, guide the Indonesian logistics environment. The result of this fragmentation means that:  Laws and regulations are developed independently by each ministry resulting in frequent conflicts of interest between ministries and sectors.  The regulatory framework does not fully recognize logistics as an activity and does not facilitate the integration of supply chain services.  Many local government regulations target logistics as a source of revenue, requiring duplicative and unnecessary permits, fees for which no services are provided, fees for the transport and loading/unloading of goods, and trade barriers between districts. The regulatory environment in Indonesia does not facilitate investment in multi-activity companies and integrated services. As a growing sector, the logistic services industry 8 is constantly evolving and demanding upgrades. However, there are complex rules for investing in the sector and limited access to market. Table 4 summarizes some of the most pressing problems. Table 3. Regulatory complexity for the logistics sector providers Problems Description Logistics integrators have to  Typically they need to separate the business into different legal entities go through multiple permits for for each activity, for instance, trucking, freight forwarding and each activity warehousing need to be registered with different agencies  The Government revised its negative investment list (DNI) in July 2007. All transportation services (freight forwarding, road transport, maritime transport services, air cargo transportation services etc.) are now subject Restrictions in FDI undermines to minority (49 percent) foreign ownership. However, warehousing is flexibility to establish subject to a lower threshold (33 percent) except for investment in eastern integrated logistics providers Indonesia.  There are gateway (i.e., port of entry) restrictions on foreign companies looking to provide express delivery service (EDS) and freight- forwarders. No such restrictions apply to local firms  Ministry of Transport reported that it processes about 2,000 permits/day. Recently, the ministry also reduced processing time, Prevalence of permits for extended the time validity of permits, simplified requirements, and transport operators increased the use of ICT in processing permits. However, it is not clear whether the ministry plans to streamline, through review, the remaining permits to ensure their alignment with competition, quality and safety.  Dominant players (e.g., labor union, dominant SOEs) often have influence over bottlenecked infrastructure facilities such as ports . Monopolies for certain key While the situation might be similar to that where private firms have control activities on such infrastructure, the regulatory framework to ensure access on ‘last mile’ infrastructure and competitive conduct of dominant players is not yet clearly enforced Source: World Bank survey, 2014 8/ŶĚŽŶĞƐŝĂ͛ƐƌĞŐƵůĂƚŽƌLJĨƌĂŵĞǁŽƌŬƌĞĐŽŐŶŝnjĞƐƚŚĞĨŽůůŽǁŝŶŐŵĂŝŶĐĂƚĞŐŽƌŝĞƐŽĨ>^WƐ͗;ŝͿIntegrated LSPs: freight-forwarders, shipping agents, express delivery services (EDS), third-party and fourth-party LSPs (3PL and 4PL), and multimodal transport LSPs; and (ii) Specific activities such as customs clearance agents, warehousing services, trucking services. 25 Improving Indonesia’s Freight Logistics System: A Plan of Action Regulations affecting operating environment of logistics providers Current fiscal rules, and more specifically VAT rules, raise the cost of freight and logistics services. There are ambiguities about the eligibility of freight and logistics operators to the VAT regime and about which guidelines apply to specific activities. Large operators, including major shipping lines, do not operate under VAT, which means that they cannot claim back the VAT paid on their inputs, including payments for bunker fuel. The lack of clarity is also evident on the VAT rate that is applied on individual services related to international shipments: /ƚ ŝƐ ŶŽƚ ĐůĞĂƌ ǁŚĞƚŚĞƌ ƚŚĞ ͚ϭ ƉĞƌĐĞŶƚ ŽĨ ϭϬ ƉĞƌĐĞŶƚ͛ ƌĂƚĞ ƐŚŽƵůĚ ďĞ ƵƐĞĚ ŝŶ collecting VAT from domestic trucking, storage and handling associated with international shipping. This uncertain situation prompts many companies to set aside funds to guard against tax penalties. One way to have a more predictable tax system would be to design guidelines to extend general VAT to modern logistics operators, and eventually use the legacy fiscal regime for small-scale operators. Another problem relates to difficulty faced by shipping liners to deduct VAT from bunker fuel purchase which affects cash-flow of domestic shipping liners. There are also regulatory constraints concerning the acquisition of new tonnage for domestic shipping. The cost of purchasing used vessels includes a significant premium because the vessels must be modified to meet specific requirements of Biro Klasifkasi Indonesia (BKI). This includes vessels that are currently certified by one of the thirteen members of the International Association of Classification Societies (these societies curreŶƚůLJĐĞƌƚŝĨLJŵŽƌĞƚŚĂŶϵϬƉĞƌĐĞŶƚŽĨƚŚĞǁŽƌůĚ͛ƐŝŶƚĞƌŶĂƚŝŽŶĂůƚŽŶŶĂŐĞŝŶĐŽůůĂďŽƌĂƚĞĐůŽƐĞůLJ with the International Maritime Organization) on updating their requirements. An equally important constraint is the restriction on chartering vessels for use in the inter-island trades. This restriction relates to the lack of legislation allowing reflagging of vessels that are bare boat chartered during the period of the charter. The ability to charter in vessels is important when serving routes that require geared vessels but have the possibility to be served by gearless vessels once the ports on this route have been upgraded. Similar to the fiscal rules, required administrative procedures also add delays and raise costs of logistics services. For example, commercial warehousing operations face burdensome compulsory reporting: warehouse owners, managers or tenants must submit to the local government and the Ministry of Trade an extensive monthly administrative report on items, including name, number of items, time of entry, time of release, and daily amount of goods stored in the warehouse. The costs of maintaining such a reporting scheme translate into additional costs that are later passed to the consumer. Infrastructure bottlenecks The land freight transport industry in Indonesia is also a source of uncertainty for traders in Indonesia. Trucking is the main mode of transport for distributing final products from production centers to the market. Traders have used these services widely as there are no other reliable alternative modes of transport such as rail or inter-island shipping. In addition, trucking may have been traditionally over-used because of the history of subsidized fuel. In fact, freight cost is comparable to international benchmarks: the average truck-trailer transport across Java is US$1.31/km, comparable to a worldwide average of US$1.00/km with likely longer average trip distance than trucks in Java. The sources of uncertainty in land freight transport come from the congestion, delays and low quality services. Table 3 shows the main messages from the survey of 83 trucking firms operating in Greater Jakarta (Jabodetabek): 26 Behind the Lack of Reliability in Logistics Performance Table 4. Key issues in land freight transport  On average, one third of the total roundtrip time to and from Tanjung Priok is Long idle and waiting times spent waiting at factories or in the port due to congestion or queues  From a return trip of 12 hours to the industrial areas in Cikarang to Tanjung Priok and back, up to 4 hours are spent idle  Total cost for trucking industry in greater Jakarta could be anywhere between Total cost increases due to US$1.9 to US$4.4 billion/year (assuming that 30 to 70 percent of registered congestion and delay trucks are currently operating) Low efficiency in  For example, 62 percent of trucks taking goods to Tanjung Priok port are synchronizing cargo delivery empty on the return leg of the trip (no return containers) and pick-up Source: World Bank survey, 2014 27 Challenges in Gathering Data Challenges in gathering data for this study reflects challenges for evidence based policy making on logistics in Indonesia. During the course of this work, the team identify issues that prevent the team from undertaking the following tasks:  No regular survey statistics on logistics services industries (trucking, freight forwarding, shipping liners) making it difficult to present more precise picture on market and structure of logistics industries in Indonesia. Instead, many of studies on logistics relied on secondary data developed by donor funded projects.  Data on equipment, facilities, traffic, and terminal characteristics (e.g., handling rate, labor cooperative) for individual terminal and port under Pelindo I to IV and Ministry of Transport are not publicly available. This limits ability to analyze port productivity and run a counter-factual simulation on the impact of improvement in port. This work used data from terminals obtained from Pelindo IV to perform port productivity analysis and calculating value of time in logistics.  Restrictions to access ƵƐƚŽŵƐ͛ĐĂƌŐŽĐůĞĂƌĂŶĐĞĚĂƚĂŝŶƉŽƌƚŵĂŬĞƐŝƚĚŝĨĨŝĐƵůƚƚŽĐŽŶƐƚƌƵĐƚĚǁĞůů time indicator that separates time spent by traders on pre-customs clearance, customs clearance, and post-customs clearance. Outdated origin-destination and difficulty to obtain complete information and schedule for domestic cargo voyage for major and feeder ports presents formidable challenges for fully developing a connectivity model A Framework for Freight Logistics Reform dŚĞƉƌŽďůĞŵƐŝŶ/ŶĚŽŶĞƐŝĂ͛ƐĨƌĞŝŐŚƚůŽŐŝƐƚŝĐƐƵŶŵĂƐŬ an interconnected relationship of four key areas: (i) logistics infrastructure; (ii) governance and command structure; (iii) supply-chain fluidity and trade facilitation, and (iv) the development and quality of logistics services/competences (Figure 15). While better infrastructure is important to streamline freight logistics and improve connectivity, it needs to be combined with the other three areas. One example is the distribution of goods to the outer islands: the logistics costs in eastern Indonesia will always be higher than those in western Indonesia due to economies of scale. But addressing and prioritizing reforms simultaneously would improve the efficiency and reliability of supply chains, which in turn would reduce the differences in costs across the country. Figure 15. A framework for freight logistics reform Poor reliability and Low productivity and inefficiencies in freight lack of quality service handling and transport offerings 2. Development and Quality of Low efficiency in assets logistics utilization Service Challenges in policy implementation 1. Governance Low return voyage and Command from outer Java Structure 3. 4. Supply Chain Fluidity and Logistics trade facilitation Infrastructure Long lead time and order cycle and high inventory carrying cost The reform plan (Table 5 and Table 6) focuses on these four areas and evaluates the impact on freight logistics costs (i.e., high, medium-high and moderate); the level of sophistication of the reform (i.e., easy, moderate, medium effort, serious effort) and the time frame in which it might be implemented. The key pillars for action are summarized as follows:  The analysis and interviews of this work suggest that the reform process should start by strengthening governance and command structure as a key issue as logistics reform is a cross-cutting theme involving many agencies, and require capability to monitor logistics performance and impact of policy changes. Establishment of a Logistics Task Force with clear mandate to coordinate and implement reform is Improving Indonesia’s Freight Logistics System: A Plan of Action needed. However, experiences from previous task forces (i.e, Team for Investment and Export, Team for Flow of Goods, and INSW Team) suggest that the proposed Logistics Task Force needs strong political commitment from the Government and a full-time Secretariat with adequate funds and flexibility to hire technical experts. ͞ůŽŐŝƐƚŝĐƐŽďƐĞƌǀĂƚŽƌLJ͟ŝƐĂůƐŽŶĞĞĚĞĚƚŽĐŽŽƌĚŝŶĂƚĞĚĂƚĂĐŽůůĞĐƚŝŽŶŝŶĚŝĨĨĞƌĞŶƚĂŐĞŶĐŝĞƐĨŽƌƉŽůŝĐLJ researches and policy making process in logistics. Within this pillar, there is also a need to review implementation of Law no.17/2008 on Shipping to identify gaps and issues in port management and operating environment for domestic sea shipping.  Second, developing quality in logistics services to meet growing demand. Currently the policies governing entry and permits in logistics is significantly fragmented. Reforms in this area should focus on streamlining and improving regulations to improve capability and operating environment for logistics services providers to compete, expand, and innovate. Simplify licensing/permits for 3PLs, reduce barrier to entry for freight-forwarders and clarify the use of VAT in logistics are important issues that need to be addressed. It is also important to recognize the role of FDI as source of know-how and Indonesia should implement ASEAN commitment to allow 51% foreign investment in logistics sector.  Third is improving fluidity of the supply chain, which is essential for competitiveness of firms and ability to respond to market opportunities. The focus of this area should be to reduce cost associated with clearances and transaction with different agencies and improvement in reliability of freight scheduling through the use of electronic platforms. INSW is already partially implemented but there is no effort yet to revisit existing clearance procedures and risk management in border agencies. Similarly, Port Community System (INAPORTNET) has started to operate in Tanjung Priok but not yet in other ports. Finally is the development of logistics infrastructure, which requires prioritization and streamlining in permits /regulations that are hampering private sector investment. To facilitate PPP in maritime logistics, /ŶĚŽŶĞƐŝĂ͛Ɛ ŽǁŶ ĞdžƉĞƌŝĞŶĐe suggests that the structure for coordinating, and project preparation and execution is still weak. 30 A Framework for Freight Logistics Reform Table 5. Proposed Action Plan to improve freight logistics in Indonesia Action Impact Ease Timeframe 1 Strengthen governance and command structure 1-1 Establish a task force/ implementation unit with a clear mandate and full time Secretariat to supervise the As soon as possible “Quick implementation plan of action Win” 1-2 Improve the availability of facts and data for informed policymaking: (“logistics observatory”) Medium term (MT) 1-3 Assess Implementation of Law no 17/2008 on Shipping to identify gaps and issues Short term (ST) 1-4 Improve compliance in transport and logistics services (rules, safety, insurance) MT- long term (LT) 1-5 Improve transparency and contestability of (port) services contracts MT 2. Foster development and quality of logistics services 2-1 Simplify licenses of freight-forwarders and 3PLs ST-MT “Quick Win” 2-2 Alignment of trucking company regulations with international best practices MT 2-3 Issue VAT guidelines for transport and logistics ST “Quick Win” 2-4 Improve consistency of FDI regulations for logistics MT 2-5 Facilitate skills development MT 3. Improve supply chain fluidity and trade facilitation 3-1 Reduce administrative burden of managing warehouses ST 3-2 Encourage paperless solutions for trade-related procedures ST-MT “Quick Win” 3-3 Publication of dwell time with breakdown on pre-customs clearance, customs clearance, and post-clearance in ST “Quick Win” major ports 3-4 Phase out unnecessary documentary requirements ST “Quick Win” 3-5 Anticipation in the submission of trade related information (e.g. reducing time spent for pre-customs clearance) ST “Quick Win” 3-6 Roll out INAPORT to all Indonesian ports to synchronize maritime supply chains ST-MT “Quick Win” 31 Improving Indonesia’s Freight Logistics System: A Plan of Action 3-7 Sharing port operational know how to increase productivity ST-MT 3-8 Introduce action plan for encouraging 24/7 operations of ports MT 4. Invest in logistics Infrastructure 4-1 Prioritize and sequence investments in ports based on connectivity impact and streamline permits/license MT procedure for investment 4-2 Improve port -hinterland interface MT-LT 4-3 Encourage PPP in logistics facilities MT-LT High Medium-high Moderate Easy Moderate Medium effort Serious effort 32 A Framework for Freight Logistics Reform Table 6. Detailed Plan of Action Strengthen governance and command structure Action Problem Implementation/First steps Responsibilities Connectivity and logistics are themes crossing over many agencies and sectors. Although individual actions are to Coordinating Ministry 1-1 Establish a Task Force / be implemented by one or several agencies, it is critical for Presidential decision, approval of the Plan of Action by for Economic Affairs Implementation Unit to the plan of action to be supported by a comprehensive the Cabinet (CMEA) and supervise the high-level implementation structure that will catalyze and Coordinating Ministry implementation plan of Definition of the work program and monitoring monitor implementation of individual activities for Maritime Affairs action (CMMA) It could be a time-limited implementation unit Working group led by Establish an autonomous logistics observatory with buy- 1-2 Availability of fact and Many policies on logistics reform are not based on CMEA, CMMA, Ministry in from all key and private stakeholders. data for informed policy evidence from the field and consistent and comparable of Transport, data are not publicly available Start with feasibility study to define the data to be making: “observatory” Bappenas, and Statistic collected and analyze and prepare a business model Agency (BPS) The Shipping Law of 2008 introduced modern organizational and operational principles in Indonesia (e.g., landlord model) and governs the organization of domestic shipping industry 1-3 Assess Implementation There is evidence of unequal implementation in both ports. Benchmark the implementation of the law CMMA of Shipping law There is also a need to review the role of BKI in using their classification to certify domestic vessels and review the possibility of allowing reflagging of vessels that are bare boat chartered during the period of the charter. 33 Improving Indonesia’s Freight Logistics System: A Plan of Action Many basic regulations for the maritime sector and trucking are not enforced properly. Lack of compliance means that compliant operators are at a disadvantage and 1-4 Improve compliance in prevented from modernizing and expanding the sector. Monitor enforcement of maritime and trucking regulation. transport and logistics Examples include overloading of trucks, and improper Identify the capacity constraints of agencies that prevents Ministry of Transport services insurance or manifest information in domestic shipping. proper enforcement Level playing field for the logistics sub-sector would be conducive for the modernization of the sector, its development, and ultimately raising the quality of service. The costs of loading and unloading containers in ports in 1-5 Transparency and eastern Indonesia are high, while productivity is low Review contractual practices for stevedoring companies contestability of (port) compared with most ports in western Indonesia. This is (including dock workers’ cooperatives) with view to Ministry of Transport services contracts partly due to monopolies or a lack of contestability of dock promoting competition and transparency laborers 34 A Framework for Freight Logistics Reform Development and quality of logistics services Action Problem Implementation/First steps Responsibilities Simplify the licensing schemes so that freight Freight forwarders and 3PLs need to obtain a multitude of forwarding companies can engage in any type of Working group led by licenses. The regulations for multi-modal service providers are logistics services without having to establish a Ministry of Transport 2-1 Simplify licenses of unclear and only few companies have been able to apply separate company for each type of service. Reduce include BKPM, Ministry of forwarders and 3PLs successfully. There is also no clear industry category for the number of agencies involved. Introduce Trade and Ministry of “integrated logistics services” classification for integrated logistics service provider Industry (i.e., based on Central Product Classification (CPC)) Review the existing framework in detail and Trucking regulations are relatively specific in Indonesia with 2-2 Alignment of trucking benchmarking against international standards in truck Working group led by ambiguities regarding type of services or geographical areas regulation (EU, Thailand, Malaysia) company regulations on CMMA and Ministry of of operation. For instance, the separation of own account vs. international practices Identify rules that should be revised and those that Transport commercial freight is not clear on the ground should be abolished Develop clear guidelines on implementation of VAT in There are currently no clear guidelines for collecting and 2-3 VAT guidelines for freight logistics, including the possibility of claiming Working group led by DG reclaiming VAT in freight logistics causing uncertainty for transport and logistics VAT on inputs, in order to reduce the costs for Tax logistics service providers operators In some logistics activities the foreign equity limit is reduced to 2-4 Consistency of FDI BKPM to better categorize logistics in its investment 30 percent. This limits the possibility to attract FDI in CMEA and BKPM regulations for logistics list integrated services (third party providers) At present there is lack of in-house knowledge on logistics (e.g. supply chain planner, supply chain forecasters). Most Facilitate dialogue with private sector (ALFI) to 2-5 Facilitate Skills skills development happens directly “on the job” with few establish logistics training center with private sector as CMEA, ALFI Development standards of competency. There a need to improve the main contributor for funding, training curriculum and relevance of formal education at local universities with materials. demand for logistics skills from the industry Improve fluidity in supply chain and trade facilitation 35 Improving Indonesia’s Freight Logistics System: A Plan of Action Action Problem Implementation/First steps Responsibilities Each month every commercial warehouse that stores Socialize Permendag 90/2014 and obtain clarity goods deemed by the Government as “basic necessities/ whether warehouses owned by logistics service 3-1 Reduce administrative important products” needs to submit monthly report to DG providers are subject to such an onerous process. burden of managing of Domestic Trade. While the objective is understandable Ministry of Trade Use sample for audit/inspection of warehouses to warehouses (to monitor hoarding), implementation will not be easy as check log-book for flow of necessity/important goods are often in transit for distribution and mixed with products from warehouse other products. Importers currently go through multiple clearances from Fully implement the Indonesian National Single 3-2 Encourage paperless different government agencies, for some products Window System (INSW) and eliminate clearance solutions for trade-related including clearances from city, provincial governments, Customs, CMEA requirements that do not add meaningful value such procedures regional offices of line ministries and the central offices of as ensuring health and consumer safety the ministries 3-3 Publication of Dwell Dwell times in ports are far worse than international Port operators mandated by Government to measure time with breakdown on competitors yet except in Tanjung Priok, dwell time is not dwell times in all international ports and domestic pre-customs clearance, being consistently measured and reported. This deprives container terminals and to post data on open data CMMA customs clearance, and policy makers of a key tool to systematically identify websites. Institute sanctions for failure to post-clearance in major problems and determine remedial actions and to help monitor/report. ports shippers decide which ports to use. Start a collective review process that includes fast Many import requirements have a strong negative impact track for elimination of the most problematic NTMs. on trade logistics, as the importers have to submit more The review should balanced the trade facilitation 3-4 Phase out unnecessary paperwork, which is often not available in time. impact with the social goals of the measure (e.g. CMEA documentary requirements Among the requirements, the requirement by Ministry of health, environment) Trade for pre-verification is especially problematic in term Pre-verification inspection reports provide no intrinsic of costs and delays value. Eliminate their use Action Problem Implementation/First steps Responsibilities 36 A Framework for Freight Logistics Reform At present only priority importers can submit their 3-5 Anticipation in the Customs review with the private sector the manifest prior to arrival in Indonesian ports. Such submission of trade related possibility of extending the possibility to submit Customs early submission contributes to lowering dwell time in information manifest prior to arrival of the ship ports Vessels and port services do not coordinate arrivals Working group led by 3-6 Roll out INAPORT to all ports and departures. (domestic shipping) Deployment of INAPORT net (an IT solution) CMMA, includes Ministry in Indonesia to synchronize beyond Tanjung Priok in major ports (Belawan, of SOE, Ministry of maritime supply chain The movement of cargo in most ports is not well Surabaya, and Makassar). Transport, CMEA, monitored due to the absence of proper systems Customs There is a wide disparity in port productivity between ports. Difference of exposure to international practices and lack of mobility means that operational Set up a cross-support mechanisms with IPC so staff in ports in secondary ports have typically less that experience staff can support operations in 3-7 Increase productivity by experience with productivity other ports Ministry of Transport, sharing port operational know A positive experience in Pontianak, where IPC IPC (Pelindo II) how brought experienced staff form TP to re-engineer the process, so that operational efficiency could be Definition of priority port for re-engineering improved with minimum investment and transfer of know-how 3-8 Introduce action plan to Some facilities are not available at night or during the Encourage 24/7 operations in ports, and adjacent encourage 24/7 operations of weekend, while containers arrive in Jakarta 24/7 and facilities (container depot). Ensure that agencies All border agencies ports the international terminal is also open 24/7 have budget allocation to support 24/7 operations Invest in logistics infrastructure Action Problem Implementation/First steps Responsibilities 37 Improving Indonesia’s Freight Logistics System: A Plan of Action MOT jointly with financiers agree on list of priority projects including soft needs to solve organizational 4-1 Prioritize and Sequence Prioritize domestic port investment (infrastructure and issues at the local level investments in ports based equipment) according to its impact on freight logistics Ministry of Transport, and connectivity Definition of criteria to assess and categorize the on connectivity impact and CMEA, CMMA, Bappenas, project streamline permits/license Procedure for private sector to obtain permits/license to BPKM procedure for investment invest in developing or upgrading ports takes long time Identify steps for obtaining permits/license for developing or upgrading ports that can be streamlined Improve port-hinterland interface in the most constraint Define connectivity program for eastern Indonesia port-hinterland environments in eastern Indonesia with all relevant stakeholders (Public Works, MOT, Ministry of Transport, 4-2 Improve port hinterland Pelindos) Ministry of Public Works, interface Solutions should be adapted to the local situation and Ministry of Trade, CMEA could involved local ICD or distribution center Experiment with pilot project Definition of a master plan to assess the demand Encourage private investment (full or PPP) in logistics 4-4 Encourage PPP in for surfaces in the different regions, with eventually CMEA, Ministry of Finance facilities including distribution centers or in container logistics facilities a staggered schedule and different TORs (joint (PPP unit) freight stations outside port areas project, Transport, Commerce). 38 Annex Presentation on Reducing Freight Logistic Costs in Indonesia SUMMARY • Connectivity in freight logistics is important for Indonesia to grow faster, transform its economy and promote shared prosperity • Producers recognize that reliable freight logistics is key in determining the competitiveness of supply chains • Indonesia’s archipelagic character presents a unique challenge because poor sea-port-land connectivity gives rise to long and broken supply chains, especially to eastern Indonesia where it is almost impossible to have a reverse supply chain to the west • World Bank team analysis suggests that the freight rate is not the main component driving logistics costs in Indonesia. The more important issues are low reliability and excessive time in freight logistics • Improvements in domestic connectivity depend primarily on reducing delays in maritime freight and better port hinterland interfacing of supply chains, especially in Eastern Indonesia • International connectivity is handicapped by a burdensome process for imports and excessive regulatory burden on logistics services • Freight logistics problems in Indonesia are complex and simply building infrastructure will not be enough. Policymakers should consider improving the regulatory and incentive environment by addressing governance and command structure in freight logistics; minimizing chokepoints in trade facilitation to allow faster lead times for producers; and encouraging competition and development of quality logistics services 2 Improving Indonesia’s Freight Logistics System: A Plan of Action Facing the challenge: Freight logistics as a key component for Indonesia’s development • Indonesia’s GDP needs to grow by some 8% annually to avoid the middle-income Reducing poverty & trap and to improve the well-being of the vulnerability bottom 40% of its population • Given Indonesia’s archipelagic nature, connecting supply chains and spatially Diversifying economic separated sources of supply and demand activities can help to diversify economic activities • Without improving freight logistics, the country will suffer missed opportunities from greater internal and international Tapping emerging economic integration, leading to slower opportunities growth than necessary and more time to achieve its development goals 3 Higher connectivity helps to link poorer regions to growth centers • Vulnerable households and poverty rates are higher in remote areas of Indonesia: Poverty rates tend to be • 55% of the population in Papua higher in remote areas are poor and vulnerable, compared with 30% of the population in West Java • Even in Java and Sumatra the poverty rates are higher in districts that are isolated • For growth to reduce poverty and facilitate shared prosperity, Indonesia has to remove barriers that are preventing lagging regions from linking into more growth generating Source: SUSENAS opportunities 4 40 Annex: Presentation on Freight Logistic Framework and Plan for Action Better freight logistics can help regions to better exploit their comparative advantage Poor freight logistics can impair efforts by regions to diversify their economies • Economic isolation further undermines 0.5 Papua the ability of regions to fully exploit Economic concentration (Herfindahl) their comparative advantages 0.4 • Papua is more remote than West Papua. E.Nusa Tenggara It has far lower GDP per capita growth (- North Maluku 0.3 3% vs. 15%, 2007-12) and is half as Aceh economically diverse as West Papua West Papua Yogyakarta 0.2 • Despite potential in tourism, fisheries, Central East and mineral processing, poor freight Java Java logistics contributes to the lack of 0.1 Bali West development of those industries in Java Jakarta Maluku, Papua, and East Nusa Tenggara Banten 0.0 • Proximity to the main gateway port of -23 -18 -13 -8 -3 2 Tanjung Priok in Jakarta helps firms in Log of accessibility Banten and West Java regions to access Source: estimates from BPS data inputs and markets 5 Reliable freight logistics will help producers to deliver goods to meet demand from emerging consumer class • Around 18% of the population is “consumer class”, contributing to 46% of Where is the new consumer class? household consumption, while another Everywhere! 43% of the population is “emerging consumer class” contributing to 37% of household consumption • The consumer class is growing by 21% per year • Java still hosts 60% of the consumer class • But regions in eastern Indonesia are also showing a rapid increase in their consumer class • These new consumers are changing the pattern of consumption demand: higher demand of processed products as Source: SUSENAS data income elasticity for those products is higher than for “basic goods” 6 41 Improving Indonesia’s Freight Logistics System: A Plan of Action But the maritime supply chain is long and fragmented Jakarta Imports Surabaya Other Islands Container Port Consolidation in Eastern Manual by FF Indonesia unloading Ferry Domestic Wooden Ship JAVA Shipping Bulk short-sea Domestic Unstaffing shipping Goods container Small Manual trucks loading • Extremely fragmented Container yard Small Trucks supply chains to Eastern Container depot Indonesia Main • Lack of supply chain Island Retail continuity: Once imports or Retail domestic goods reach the outer islands, the same supply chain can hardly run backwards to support domestic or international exports 7 Benchmarking logistics performance: The baseline • Before any efficiency improvement can be made in freight logistics there is Measuring logistics a need for a baseline of current freight performance logistics performance in Indonesia: • This section of the report looks at overall performance measurements from the perspective of logistics Logistics costs/sales service providers (LSP) and from manufacturers Outline: • Reliability is a key logistics performance issue AND inventory holding cost is the highest Top issues for freight component of overall logistics logistics in Indonesia costs 8 42 Annex: Presentation on Freight Logistic Framework and Plan for Action Producers care more about reliability than costs of logistics It is important to know how service providers (LSPs) and users of those services (manufacturers) perceive relative importance of key logistics performance:  Survey results suggest that LSPs prefer LSPs Manufacturers low logistics costs (39%) over reliability (30%) and timeliness (31%). This is understandable as LSPs are unlikely to be cargo owners  Meanwhile, manufacturers tend to place more emphasis on reliability (41%) over cost (28%) and timeliness (29%). These findings reinforce the hypothesis that reliable supply chains are important for N = 205 N = 125 manufacturers to plan production, manage their inventory and hence leverage their scale economies Source: WB & LPEM-FEUI surveys of freight forwarders and manufacturers in Jakarta, Surabaya, Bekasi Semarang, Medan, Makassar and Palembang 9 Transport costs only explains 17% of the logistic costs in Indonesia Components of Logistics Cost/Sales (%) • Logistics cost/sales is more precise than logistics cost/GDP and enables Total Logistics Cost/Sales = 20% comparisons within industrial sectors Logistics • This concept measures at the micro level Admin and is not comparable to costs as a Transport & Cargo percentage of GDP which is measured at 3.4% Handling the macro level (17%) 8% • Countries that use logistics cost/sales 3.3% (40%) Warehouse include Japan, Finland and Germany (17%) • Survey of 205 firms in Jakarta, Bekasi, 5.2% Semarang, Surabaya, Medan, and (26%) suggests that logistics cost/sales of Indonesian manufactures is around 19- 20%, which is higher than in Thailand and Inventory Malaysia (15% and 13%) N = 75 • Aside from transport and cargo handling, Transport & Cargo Handling the result suggests that inventory Inventory carrying cost: Includes cost of capital tied in inventory carrying cost contributes to 26% of Warehousing: Cost of running warehouse or buying the service logistics cost incurred by Indonesian Logistics Administration: cost from functions indirectly related to logistics manufacturers 10 Source: WB & LPEM-FEUI survey in 5 cities in Indonesia 43 Improving Indonesia’s Freight Logistics System: A Plan of Action Instead, reliability and value of time explain most of total logistics costs in Indonesia Logistics costs for goods shipped from the two hubs in Java (Jakarta and Surabaya) • The value of time throughout the TERNATE maritime supply chain is the largest TARAKAN component of the logistics costs PANJANG BENGKULU • Sea freight cost only accounts for LUWUK 1.5% to max 6% of the value of goods PEKANBA… GORONT… PALEMBA… • The value of time is typically BITUNG estimated at 1% per day which is BATAM applied to lead time AMBON BALIKPAP… • Lead time includes: MEDAN KENDARI • Shipping time SAMARIN… Sea Freight • Time at port (unloading, unstuffing) PADANG Value of Time • Delays accounting for the frequency MAKASSAR of calls (e.g. missing a boat) PONTIANAK BENOA Percentage value of goods BANJARM… 0% 5% 10% 15% 20% 25% 11 Example: Logistics cost scenario for 1 TEU of rice from Surabaya to Ambon Million Rupiah 20.0 • The cost of having rice waiting at ports (value of time) can be significantly 15.0 high in the overall logistics cost • Turnaround time for a container vessel in the Port of Ambon can be up to 4 days 10.0 5.0 0.0 Trucking Charges Port Charges Sea Freight Waiting time @ Port Port charges Port to Hinderland Sidoardjo-Port (Surabaya) (Surabaya-Ambon) (Value of time) (Ambon) (Ambon) 12 Source: WB Survey of shipping liner 2014, Ministry of Trade survey 2014 44 Annex: Presentation on Freight Logistic Framework and Plan for Action The largest cost-saving opportunity is to reduce the time component of the logistics costs Example: Logistics cost scenario for 1 TEU of rice from Surabaya to Ambon  Even for a relatively low value commodity like rice, Trucking & sea freight cost is not a Handling @ 125 Surabaya very high (5%) in proportion to the value of 1 kg of rice Handling & Trucking @ 150  Handling and drayage Ambon costs are about the same magnitude as sea freight Sea Freight 263 cost Value of  From a consumer excess lead 769 perspective most of the time gains would come by making the supply chain Value of 7,250 more reliable hence goods decreasing the time component of logistics costs 0 2,000 4,000 6,000 8,000 IDR/kg of rice Source: WB Survey results 2014, Ministry of Trade survey 2014 13 Maritime example: domestic freight rates in Indonesia are already responding to market mechanisms • Shipping rates are determined by distance on the routes or ship capacity, consistent with market efficiency: • Shorter distances get higher rates, and longer distances get lower rates • Shipping rates increase is lower than the increase in distance • Shipping lines introduce progressively larger ships on more active routes, resulting in economies of scale 14 45 Improving Indonesia’s Freight Logistics System: A Plan of Action Maritime example: more uncertainty at port increases shipping time • There is a strong association between shipping time on the domestic routes and time at ports (turnaround time) • The primary explanation is that in many ports there is significant dispersion of turnaround time around the average, i.e. turnaround times are highly uncertain and unreliable • Shipping lines have to anticipate this uncertainty in their schedules • The causes of uncertainty include, port performance, quality of service, and congestion 3 days at ports => 2 days more shipping 15 Low efficiency of ports and port services are undermining reliability in freight logistics • Improvements in seaside access to ports (channel), quality of the layout of the infrastructure (berth) as well as terminal equipment (quay- and yard-side) need to be approached on a case- by-case basis through the development of detailed feasibility studies and technical designs • Surveys of domestic shipping lines undertaken for the study suggest the efficiency of port services are equally affecting them from meeting their schedule: • Availability of slots and programming (berth window) are problematic (i.e., Belawan, Biak, Manokwari, Sorong, Surabaya) Pre-berth • Maritime pilotage services are not efficient (i.e., Ambon, Belawan, Jakarta, Jayapura, Surabaya) • Working hours and productivity of labor/longshoremen (TKBM) are problematic and mediocre (i.e. Ambon, Anggrek, Bengkulu, Bitung, Gorontalo, Jayapura, Surabaya, Toli-Toli) 16 At berth with no improvement over the past 5 years. On the contrary, in some cases it is reported to have worsened • Total stuffing and stripping of containers At the yard • Ship turnarounds in ports are generally slow 46 Annex: Presentation on Freight Logistic Framework and Plan for Action Port performance: Greatly affected by low labor productivity • Surveys of domestic shipping lines undertaken for the study suggest that port performance compared with 5 years ago has improved in general • However, the time spent at some ports is sometimes as much as half of the sailing time (ex. Belawan-Jakarta, Surabaya-Makassar) • Higher container handling charges are not associated with quality of service, but reflect the bargaining power of unionized labor. In fact, container handling charges are higher in some places (e.g., Papua) where the total turnaround time (ETD-ETA) is highest Container Port of Time at berth Time at berth Turnaround Waiting time Handling destination (effective) (idle) time Charges Sorong 24 hours 16-21 hours 10 hours 50-89 hours IDR 2,168,290 Jayapura 24-72 hours 48 hours 60 hours 72-96 hours IDR 1,840,094 17 Key issues in land freight transport/trucking Trucking is the main mode of transport for distributing final products from production centers to market in Indonesia. There is concern that trucking may be over-used in Indonesia because of subsidized fuel, coupled with the absence of reliable alternative modes of transport (such as rail or inter-island shipping) Main messages coming out of the survey of 83 trucking firms operating in Greater Jakarta (Jabodetabek) identified the following issues: • On average, 1/3 of roundtrip time to and from Tanjung Priok is spent waiting at factories Long idle and waiting times or in the port due to congestion or queues • Out of one return trip of 12 hours to the industrial areas in Cikarang to Tanjung Priok, approximately 4 hours are spent idle • The average cost for truck-trailer transport from the port to destinations in Greater Freight cost is comparable to Jakarta and West Java is US$3.59/km, as opposed to a worldwide average of just international benchmarks US$1.00/km. This high cost is despite the use of subsidized fuel. Average truck-trailer transport across the whole of Java is US$1.31/km. Total cost increases due to • Total cost for trucking industry in Greater Jakarta could be anywhere between $.1.9 to congestion and delay $4.4 billion/year with the assumption that 30%-70% of registered trucks are operating Low backhaul and low • For instance, 62% of trucks taking goods to Tanjung Priok port are empty on the return efficiency in synchronizing leg of the trip (no return containers) cargo delivery and pick-up 18 47 Improving Indonesia’s Freight Logistics System: A Plan of Action Poor trade facilitation causes longer lead times for producers There has been little correlation between • Container dwell time measures total time spent removing containers from the time a vessel dwell time and import volume arrives at port New import 250000 restrictions 10 • Dwell time affects terminal performance as longer Restrictions on dwell time implies lower container turnover importers registration (API) • Long dwell time causes delays in productive 225000 8 activities (especially exports and re-exports) and can increase uncertainty, which leads to higher inventory costs for consignees TEUs Days • The port is located in a dense urban area and is 200000 6 operating at close to full capacity: congestion is disruptive for trade and the port-city environment • Data from JICT suggest very little correlation 175000 4 between cargo handled and dwell time • Data suggest that port infrastructure cannot fully explain long delays in clearing containers 150000 2 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 • Instead, new non-tariff measures (NTMs) with long bureaucratic processes are likely to cause problems in pre-customs clearance and Volume (TEUs) Days (right axis) Source: WBG analysis on JITC data customs inspections 19 Prior to submitting the PIB, manufacturers and importers face complex time-consuming bureaucratic requirements and procedures Importers submit customs declaration (PIB) with paperwork from other sources. Sources of complications and delays include: Documents which potentially add the Number of days delay % 1. Many technical requirements, often with no strong justification by international standards (e.g. the pre-shipment inspection by the delay for PIB submission after vessel arrives respondents MoT) Recommendation Documents 31 6.4 Import license 29 10.6 2. Submission of PIB is delayed by documents and certificates SNI 8 12.1 most of which are issued after ship arrival: Pre-Shipment Verification • Delays in obtaining the manifest customs visa BC11 (about 3 12.1 certificate (Surveyor Report) 30% is submitted after arrival of the vessel) or the PSI report 3 3.5 Insurance Policy • Some documents can only be submitted to the relevant ministries after the vessel arrives (COO, original B/L, Certificate of Analysis 3 3.5 surveyor report) Quarantine Document 2.9 5.7 BPOM Document 2.5 8.5 3. Processing is inefficient due too many manual interventions: Packing List 2.5 5.0 • Requirement of hard copies and lack of automation by non Commercial Invoice 2.5 4.3 customs agencies. Implementation of the national window has Bill of Lading 2 12.1 been slow and very partial BC11 1 14.2 • A large majority of importers including in the priority channel (80%) experience rejection (SKEP) of their submission Source: WB survey on MITA importers resulting in additional delays • 24/7-services are not working: Government official who signs the document is not present and there is no replacement. Current facilitation efforts target automation of processes but do not question the need of current or new requirements which needs a review process 20 48 Annex: Presentation on Freight Logistic Framework and Plan for Action Complex institutional set-up and fragmented regulatory environment in the logistics sector • Indonesia’s regulatory framework recognizes the following main categories and components of the logistics service provider (LSP) • Integrated LSPs: freight-forwarders, shipping agents, express delivery services (EDS), third- party and fourth-party LSPs (3PL and 4PL), and multimodal transport LSPs. • Subsidiary services: customs clearance agents, warehousing services, trucking services. • Other value-added services: entire supply-chain management. • Regulatory fragmentation: Indonesia’s LSPs operate in a highly fragmented regulatory environment. The logistics environment is regulated by 9 national laws and many more ministerial decrees, not to mention a plethora of local government regulations. Another indication is that 15 ministries are members of the National Logistics Team. The results of this fragmentation mean that: • Laws and regulations are developed independently by each ministry resulting in frequent conflicts of interest between ministries and sectors. • None of the regulations takes a truly holistic perspective of the entire logistics environment. • Many local government regulations target logistics, requiring duplicative and unnecessary permits, fees for which no services are provided, fees for the transport and loading/unloading of goods, and trade barriers between districts. 21 Complex rules for investing in the sector and limited access to market Logistics integrators have • Typically they need to separate the business into different legal entities for each activity, to go through multiple for instance, trucking, freight forwarding and warehousing need to be registered with different permits for each activity agencies • The Government revised its negative investment list (DNI) in July 2007. All transportation services (freight forwarding, road transport, maritime transport services, air cargo Restrictions in FDI transportation services etc.) are now subject to minority (49%) foreign ownership. undermines flexibility to However, warehousing is subject to lower threshold (33%) except for investment in Eastern establish integrated Indonesia. logistics providers • There are gateway (i.e., port of entry) restrictions on foreign companies looking to provide express delivery service (EDS) and freight-forwarders. No such restrictions apply to local firms • Ministry of Transport reported that it processed 2,000 permits/day. Recently the Ministry also reduced processing time, extended the time validity of permits, simplified requirements, Prevalence of permits for and increased the use of ICT in processing permits. However, it is not clear whether the transport operators Ministry plans to streamline, thorough review, remaining permits to ensure their alignment with competition, quality and safety 22 • Similar in fixed-line and energy sector in Indonesia, dominant players (e.g. labor union, dominant SOEs) often has influence over bottlenecked infrastructure facilities such as Monopolies for certain the port. While the situation might be similar to that where private firms have control on such key activities infrastructure, the regulatory framework to ensure access on ‘last mile’ infrastructure and competitive conduct of dominant players is not yet clearly enforced 22 49 Improving Indonesia’s Freight Logistics System: A Plan of Action Problems with implementing VAT in freight logistics Ambiguities and problems with the implementation of value-added tax (VAT) in freight logistics: • Uncertainty with VAT on international freight: Logistics operators often asked to pay VAT from international freight services. This situation prompts many companies to set aside funds to guard against tax penalties • Uncertainty over the scope of services subject to VAT on freight-forwarding: The rate is 10% of 10% of the transaction value, but it is not clear which services fall under the rule. Should the transaction value include freight charges and other activities (storage, document handling, etc.)? • Lack of clarity on VAT on individual services related to international shipment: It is not clear whether 1% of 10% rate should be used in collecting VAT for the domestic trucking, storage and handling services that are associated with international shipping • Inability to offset output VAT with VAT paid on inputs: Express delivery and freight forwarding are not allowed to credit VAT paid on inputs. Major domestic shipping companies have complained that they cannot credit VAT on bunker fuel purchased from PT. Pertamina These additional costs are passed to consumer 23 Burdensome reporting and incoherent FDI policy for commercial warehousing Commercial warehousing, regardless of the products stored, is subject to onerous reporting requirements and different limits on foreign ownership • Warehouse owners, managers or tenants must submit to the local government, copying the Ministry of Trade, a monthly administrative report on item names, the number of items, time of entry, time of release, and the daily amount of goods stored in the warehouse. • Before 2014, warehousing was not listed under the Negative List for Investment (DNI) and was presumably open to 100% FDI. Now warehousing is listed under the DNI with a 33% of foreign equity limit. For cold-storage warehousing outside Bali, Java and Sumatra, the equity limit is 67%. It is unclear whether a ‘Grandfathering Clause’ applies for existing FDIs in warehousing. These additional costs are passed to consumer 24 50 Annex: Presentation on Freight Logistic Framework and Plan for Action A framework for freight logistics reform • Problems in Indonesia’s freight logistics unmask an interconnected relationship of Poor reliability and Low productivity inefficiencies in 4 key areas: infrastructure, governance, and lack of freight handling and fluidity and service quality/competence. quality service transport offerings 2. • Even if better infrastructure is important in Development streamlining freight logistics and improve and Quality connectivity, this still needs to be of logistics Low efficiency in assets utilization combined with three areas. Service Challenges in policy 1. • Distributing goods to outer islands in implementation eastern Indonesia will always be more Governance Low return and voyage from expensive than in western Indonesia due Command outer Java to economies of scale issues. Structure • But efficiency and reliability of supply 3. 4. chains can be improved by addressing Supply Chain and prioritizing reforms simultaneously in Fluidity and Logistics trade Infrastructure the 4 key areas through a plan of action. facilitation Long lead time and order cycle and high inventory carrying cost 25 Back-up Slides 26 51 Improving Indonesia’s Freight Logistics System: A Plan of Action Methodology to Measure Logistics Performance The World Bank worked together with ALFI (Indonesian Logistics and Freight Freight Forwarder Association) and conducted survey to 175 companies in Jakarta, Medan Forwarders and Makassar Members of APINDO (Indonesian Employers Organization) were selected as the primary respondent population for the survey: • The World Bank in conjunction with APINDO organised 2 seminars to test the survey questionnaire in Jakarta and Surabaya Manufacturers • LPEM FEUI supported the data collection process in Semarang, Makassar, Palembang, Medan, Bekasi, Tangerang • A total of around 236 responses were collected but only 205 questionnaires were usable The World Bank conducted surveys of 83 trucking companies members of AMBT Trucking (Freight Transport Organization) and ANGSUSPEL (Port Freight Transport Association) The World Bank conducted structured survey interviews with the main shipping Shipping companies as well as some smaller shipping companies operating traditional vessels Logistics performance is weak relative to the international benchmark LSPs average performance Whether outsourcing is preferred than having • DIFOT: 81% logistics services done in-house • Damage rate: 3.7% • C2C: 13.8 days Manufacturer average performance • DIFOT: 82% • Damage rate: 2% • C2C: 19 days • Forecast accuracy: 81%  Delivery in full and on time (DIFOT) is only 80% for  More than half of surveyed firms still LSPs and manufacturers: 2 out of 10 shipments prefer to undertake logistics either arrive late or damaged (lower than arrangement in-house benchmark for good performance DIFOT > 90%)  There is a big opportunity for  Forecast accuracy of manufacturers is also relatively outsourcing logistics activities but low as 2 out of 10 shipments are either in excess availability of quality service or less than what are needed => risk of running providers is an issue high inventory cost Source: WB surveys in Jakarta, Surabaya, 28 Bekasi, Semarang, Medan, Makassar 52 Annex: Presentation on Freight Logistic Framework and Plan for Action Logistics cost breakdown by firms characteristics (manufacturing firms) • Total logistics cost is largest for small and non-exporting firms, which are also the most sensitive to higher costs • The inventory carrying cost component is largest among Logistics Cost/Sales (%) by large firms, which also have the lowest transport and Type of Firm handling costs, and exporting firms. Exporter Components of Logistics Cost (%Cost/Sales) by Type of Firm Non-exporter 50 40 Large 30 20 Small 10 0 5 10 15 20 25 0 Small Large Non-exporter Exporter Source: WB & LPEM-FEUI survey in 5 cities in Transport Warehouse Indonesia Inventory Logsitics adm. & other 29 What is connectivity? A conceptual framework Connectivity refers to the position of a port or region on a the network of domestic shipping Connectivity of a node (port) depends on: • Its connections to others, hence the structure of the network (routes, frequencies and volumes) • The friction on the network: the total logistics costs for each of the routes on the network including costs incurred at origin and destination 30 53 Improving Indonesia’s Freight Logistics System: A Plan of Action Shipping connectivity can be weakened due to costs and inefficiencies at the port and hinterland supply chains Factors that REDUCE the What is special to connectivity Indonesia • Costs and delays associated with maritime services, frequency of service, network structure • Very long distances • Port supply chain inefficiency, which has to do • Predominance of point to point with port operation, as well as handling practices route as opposed to loops, i.e. by shippers: few routes among all the possible (double start structure of the • In eastern Indonesia it is frequent that network) ports are used as storage areas, using the yard for stripping the containers • Extreme fragmentation of the supply chain especially at • Hinterland supply chains inefficiencies destinations in eastern Indonesia.: including: • Multiple labor intensive • Stripping of containers on port premises stuffing, unstuffing, loading • Local truck transportation and additional unloading loading unloading to trucks or smaller ships to distribute the goods 31 The impact of connectivity Low connectivity can • Increase the cost of goods imported from the hubs whether Indonesian or not • Reduce competitiveness by reducing opportunities of shipping goods produced in the outer regions Impact of low connectivity can also be seen by the consumer through Price differences in Indonesia: final prices: Higher prices in remote or congested areas • Against a common misconception, the connectivity effect is much more than just the transportation markup (estimated at only 2-6 % in eastern Indonesia), a universal feature • On top of connectivity the productivity of the retail sector may explain even more divergences between the freight emission poles (e.g. Surabaya) and remote areas • Urban congestion and higher salaries also add to logistics and retail costs. 32 54 Annex: Presentation on Freight Logistic Framework and Plan for Action Price differences and connectivity in the US Comparison between the US and Price differences in the US Indonesia: • Both countries have similar regional price differences but with different dynamics, because productivity effects are playing in different directions • Remoteness effect on price differences is very strong in Indonesia. This is associated with lower retail productivity and limited urban effects (Jakarta) • In the US remoteness applies to Alaska and Hawaii, otherwise price differences are driven by differences between urban and less urban states. 33 Measuring maritime connectivity Port connectivity: Scheduled domestic shipping in Indonesia can be analyzed as a • Depends on the number of connections and the total network of ports with capacities and logistics costs incurred en route and at destinations costs on the edges of the networks, which constitute the routes: • It can be integrated into a 0 to 1 index measuring the percentage of connections effectively accessible by their importance. • Model based on capacities, delays, rates on identified routes from Capacity given by gravity equation published sources and company surveys. • Limited statistical data, only scheduled container liner shipping Impedance K related to logistics costs network can be reconstructed using commercially available but incomplete schedules. • By nature (unpredictable schedules), Connectivity index for port I given by bulk and traditional shipping brings lower connectivity than that estimated for liner shipping. 34 55 Improving Indonesia’s Freight Logistics System: A Plan of Action Connectivity Index and Consumer Price Index (CPI) are closely related Connectivity is closely related to the price level at the provincial level: Higher connectivity, lower price difference Three ways to improve connectivity: 1. Reduction of maritime lead time and uncertainty in lead times: a 1% improvement leads to a 5% improvement in connectivity 2. Better connection between ports and hinterland in remote locations 3. A denser structure of the network with more connections, which as opposed to 1 and 2 cannot be easily achieved by policies in the short to medium term 35 Domestic maritime network connectivity 100% 36 56 Annex: Presentation on Freight Logistic Framework and Plan for Action Domestic maritime network connectivity SURABAYA 41% JAKARTA 38% MEDAN 23% MAKASSAR 18% BANJARMASIN 15% PADANG 12% • The results are consistent with SAMARINDA 11% the knowledge of the BALIKPAPAN 10% importance of the ports PONTIANAK 10% AMBON 10% • The two main hubs (Jakarta BITUNG 9% and Surabaya) are connected KENDARI 8% to almost half of the network BENOA 7% BATAM 6% • Medan and Makassar play an PANJANG 6% intermediary role (not Bitung) BENGKULU 6% PALEMBANG 6% PEKANBARU 5% GORONTALO 4% TARAKAN 4% TERNATE 3% LUWUK 3% 0% 10% 20% 30% 40% 50% 37 Domestic shipping: Some insights • Domestic shipping network mainly consists of single-port-to-single port routes out of Java with some exceptions where multi-port routes have been introduced to serve the outer islands; • Domestic shipping in Indonesia is provided by fewer than 10 shipping companies, • Domestic shipping companies are involved in a full range of business activities: • Terminal operations; • Domestic freight forwarding; • Container leasing; • Warehousing/ 3PLs; • Trucking; • Container Yard Operation. • The largest companies carried between 250,000 TEUs to 500,000 TEUs each per year in 2013, mainly servicing clients with FCL shipments. • According to shipping companies, the process for renewing vessel licenses and certificates has become more cumbersome: requirement is for once a year and has to be done manually. • The absence of third-party liability insurance is one of the reasons why ships are often abandoned in the ports. 38 57 Improving Indonesia’s Freight Logistics System: A Plan of Action Sea freight rates are comparable, load factors seem generally low Average Sea Freight Rates (IDR/TEU) in 000 SAMARINDA MEDAN • A sample of sea freight rates quoted by MAKASSAR Routes from BANJARMASIN shipping companies shows that these BENGKULU are comparable to international Jakarta PEKANBARU rates BALIKPAPAN • Ranges in sea freight rates for the PONTIANAK PADANG same route are often wide between SURABAYA shipping companies, for which there is no simple explanation 0 1,000 2,000 3,000 4,000 5,000 6,000 • Load factors seem relatively low TERNATE (between 10-80%) depending on the AMBON MEDAN route: the average is less than 50% BITUNG • Low load factors imply that the Routes from GORONTALO shipping lines are running under Surabaya BALIKPAPAN capacity even for outbound routes BENOA SAMARINDA MAKASSAR 0 2,000 4,000 6,000 8,000 39 Technical efficiency of port services: Frontier analysis Gorontalo 84% Kendari 82% Pantoloan 81% Bitung 80% Makassar 77% Ambon 73% • Technical efficiency is ranging from 0 to 100% Tarakan 71% Sorong 64% • It represents how close a port is to Toli Toli 63% its best possible productivity, given Balikpapan 62% its situation (size and equipment) Ternate 61% Merauke 61% Fak-Fak 56% Manokwari 56% Jayapura 52% Biak 45% ParePre 17% Nunuka 14% 0% 20% 40% 60% 80% 100% 40 58 Annex: Presentation on Freight Logistic Framework and Plan for Action Example of Container Handling Charges and TBKM in Selected Ports • For a sample of 10 ports under Pelindo IV: • The average container handling charge for one full TEU Container is about IDR 1.4 million, ranging from IDR 767,700 to IDR 3,291,453. • The average container handling charge for one empty TEU Container is about IDR 640,000, ranging from IDR 272,750 to IDR 1,532,046. • For a sample of 10 Pelindo IV ports, up to half of the container handling charges paid by shippers represent labor costs of longshoreman for handling of containers and represent on average about 30% of the total container handling charges. • In some cases where stripping of incoming containers has to be done within the vicinity of ports (“CFS”) additional costs are charged in the amount of up to IDR 917,547 per TEU. Are large trucking companies more efficient? An example from Greater Jakarta Trend of size of fleet and empty return cargo (localized smoothing method) 100 • There seems to be a negative 80 relationship between the size of trucking companies and empty return cargo • This suggests that smaller trucking 60 companies tend to have less information in synchronizing the times when they should collect cargo 40 0 200 400 600 800 fleet N=83 42 59 Improving Indonesia’s Freight Logistics System: A Plan of Action Current trade facilitation initiatives ICT initiatives for trade facilitation • No significant impact mostly because of regulatory issues: • Sharing information and service level agreements across Pre- Cargo Cargo Release government agencies, as well as with private agents such as Arrival/Departure Clearance INAPORT and ICARE are not in place • Hardcopy requirements are still required by regulations INATRADE licensing system at MOT • Change management to remove/re-engineer procedures needs a legal basis BPOM online • Building capacity has not been properly addressed. system Professionalism and standard operations at all levels need to be put in place INSW Portal • Most of the improvements so far have been reached on removal logistics and have been implemented mostly on B2B environments with Customs cooperation (ICARE, INAPORT) Customs EDI • Most government agencies except Customs and BPOM still lack ICT capabilities • Lack of command structure: Inter-agency cooperation is not INAPORT institutionalized, but some efforts (like the recent Mini-labs) have been successful at pointing specific problems (e.g. dwell time) ICare 43 Issues in the implementation of freight logistics policies • There are many initiatives and considerable overlap, with occasional contradictions between them. For example the plan to have Kuala Tanjung in North Sumatra as an international hub port where all domestic shipping will be transshipped vs. the fact that the “New Priok” continues to be an international gateway undermines the credibility of the Government’s plan • The lines of command and the governance structure of many initiatives are not clear. Many teams have issued recommendations but they have frequently not been followed up by the line ministries they affect. • Connectivity Working Group for MP3EI (economic master plan of the previous government) is chaired by Vice Minister of Bappenas but without official institutional support from Bappenas and adequate command structure to coordinate policies on connectivity • Budget provisions for most teams are limited and occasionally stop after a number of years. • There is lack of monitoring of the results achieved and the impact of the various laws, blueprints, etc. on the reduction of freight logistics costs is unclear. • Regional and local governments have in most cases not been involved in the drafting or implementation • Many initiatives were launched to considerable fanfare but within just a few years interest in their implementation seems to fade away. 44 60 Improving Indonesia’s Freight Logistics System: A Plan of Action 62