Promoting Regional Development in Indonesia through Better Connectivity

March 13, 2011

Henry Sandee

By: Henry Sandee, Senior Trade Specialist at the World Bank office Jakarta.

Many supermarkets in Jakarta sell oranges from China rather than from Kalimantan, for the simple reason that it is cheaper. It is actually cheaper to transport goods from China to big cities in Java then it is from Kalimantan. Consequently, logistics and connectivity have become buzz words to describe what Indonesia could be doing better to improve trade and competitiveness.

Through a presidential instruction (Inpres No. 5/2008), the Government recognized that sound logistics are crucial to the efficient distribution of goods throughout the archipelago. The need for urgent action seemed to be confirmed when Indonesia’s ranking in the World Bank’s Logistics Performance Index fell from 43 in 2007 to 75 in 2010.

The urgency of the situation has not gone unheeded: in his Independence Day speech in August 2010, President Yudhoyono stressed the need to bring down logistics costs and boost domestic and international trade. Subsequently, the connectivity agenda was born, with emphasis on three levels of connectivity in Indonesia: intra-island (transport networks within an island), inter-island (air and sea networks between islands), and international connectivity (international sea and airports, and the agencies that oversee international trade).

The concept of connectivity accepts that economic growth is by nature imbalanced. The challenge is then to connect remote regions to the major economic growth poles, and raise living standards across space. While growth will likely continue to be uneven, better connectivity across regions would go a long way towards improving access to social services and economic opportunities.

Indonesia has much to gain from its growing integration with the global economy. But to really take advantage of these opportunities, there’s much that needs to be done at all three levels of connectivity.

At the intra-island level, Indonesia is paying a high price for poor connectivity. The traffic jams in Greater Jakarta are now notorious and deterring investment. Poor road quality across Java and the lack of a Trans-Java Expressway add to the costs of moving goods by road across Indonesia’s main island. Meanwhile, the 2010 Logistics Performance Index rates the rail network in Java as being far worse than average in the ASEAN+6 group.

In terms of inter-island connectivity, inefficiencies abound. The cost of shipping a 40-foot container from Padang to Jakarta is US$600, while the cost of shipping the same container from Jakarta to Singapore is only US$185, despite being further away. High-quality products such as shrimps from eastern Indonesia cannot be processed in Java because this would make them too expensive to sell either in Jakarta or to export to other Asian markets.

As for international connectivity, Indonesia’s main ports are inefficient. Tanjung Priok – the country’s main international sea-freight gateway – is close to full capacity. Average dwell time of containers here is five days compared with three days for major regional ports. Road access to the port is also becoming increasingly congested.

The logistics and connectivity challenges that Indonesia faces are almost overwhelming. However, there’s growing consensus in Indonesia about the priorities that could have the most impact on reducing logistics costs.

Intra-island priorities include developing a Trans-Java Expressway, which would require accelerated land acquisition. Improving railway services is another priority. There is also an urgent need to expand commuter services in Greater Jakarta to increase passenger numbers from under half a million to 3 million per day.

Inter-island priorities focus on reducing shipping costs of sea transport. This not only requires strengthening competition among shipping lines, but also improving the performance of ports. For example, productivity in eastern Indonesia ports is so low that ships find it more attractive to return empty than waiting to be loaded. Expensive cargo-handling costs also contribute to the high price of inter-island shipping.

International priorities include making Indonesia’s main sea gateways more efficient and better connected to main production centers. Dry ports, where the clearance of export and import containers takes place, would also help reduce congestion in Tanjung Priok.

Action is being taken. Recently, the Government introduced 24/7 services of public agencies in key commercial ports in order to serve more ships in less time. The National Single Window, which helps simplify trade activity in five major ports, is another measure that is in full swing. More action on other priorities is still needed.

With greater connectivity, consumers would see lower and more stable prices. Reliable transport services would help make Indonesian goods more competitive, and make markets more accessible. Businesses could diversify into new products and exports. Job opportunities would no longer be limited to the big cities. Also, manufacturing centers in Java would be better connected to the commodity-rich outer islands – and hopefully put an end to the current situation of having commodities processed more cheaply overseas.

In turn, greater connectivity would have a positive impact on poverty reduction and regional development throughout Indonesia. However, it will require strong coordination on the priority actions, and monitoring for successful implementation. The ASEAN Economic Community will be effective in 2015. To benefit fully from economic integration in the region, Indonesia needs to firstly improve access to goods and services domestically.