Indonesia, the world’s largest archipelago with more than 15,000 islands, is in the midst of a sea change.
Southeast Asia’s largest economy has an unprecedented plan to upgrade its ports network, which is buckling under the weight of increased traffic, bureaucracy and infrastructure issues.
The scheme, which involves modernising existing ports and building a raft of new ones, is being led by the government but the private sector and foreign investors are being courted too.
“The expansion of Indonesia’s ports is extremely important, not just for the connectivity of Indonesia’s islands but also to bring down logistical costs and raise competitiveness,” Sarvesh Suri, Indonesia country head for International Finance Corp, the private equity arm of the World Bank, told FinanceAsia.
Bigger ports mean bigger ships and a greater amount of cargo that can pass through them, which attracts more manufacturers to coastal hubs and further develops industry and the economy.
Indonesia ranks a lowly 53rd on the World Bank’s logistics performance index, behind Thailand and Vietnam, which is perhaps surprising considering it is Southeast Asia’s largest economy by GDP.
“Ports in Indonesia are behind [other Southeast Asian countries] by a long distance,” Edimon Ginting, deputy country director at the Asian Development Bank in Indonesia, told FinanceAsia.
To improve this, President Joko “Jokowi” Widodo said the government will spend Rp5,519.4 trillion ($429 billion) on infrastructure upgrades over the next five years.
This will be partly met by the savings made from the fuel subsidy cut but, in December, the government said it would need $7 billion from foreign investors for ports in particular.
“Port infrastructure needs to be upgraded progressively across the board in order to support the shipping network,” Jason Chiang, director at Drewy Maritime Research, told FinanceAsia. “This will allow the shipping lines to upsize their vessels in order to realize economies of scale.”
This is no small issue for Widodo, who was sworn-in in October last year and faces a plethora of problems, including a stalling economy and the end of the commodities supercycle.
According to the government, water transportation accounts for only 4% of all transport in Indonesia, which seems tiny for an island nation.
Widodo has labelled his plan the “Sea Toll Road” or “Ocean Highway”; a co-ordinated network of ports designed to better handle international traffic and streamline more local trade.
“The new government has been focusing on developing new ports in rural areas, especially in the eastern part of Indonesia, and they have been actively promoting the idea to foreign investors in a bid to get this started,” Jakob Friis Sorensen, president director of Maersk Indonesia, told FinanceAsia.
Bottlenecks
The funding is well timed because, right now, things aren’t great. The problems are common to other areas of the economy; namely infrastructure, geography, and bureaucracy.
Broadly, increased shipping congestion is adding to already poor dwell times – an industry term that measures the time between a container being unloaded from a vessel to leaving the port.
The longer the dwell time, the greater the congestion, which restricts the number of containers that can be processed and increases the costs for those depending on the port for movement of goods.
Compounding the problem, international cargo is currently restricted to Jakarta and Surabaya, Indonesia’s two largest cities, with Jakarta’s Tanjung Priok port handling two-thirds of Indonesia’s trade, according to the World Bank.
The average import container dwell time at Tanjung Priok port increased from 4.8 days in 2010 to 6.4 days in 2013, according to the World Bank.
Tanjung Port hasn’t been expanded for 130 years even though container traffic has been growing at a 24% annual clip, according to Richard Joost Lino, president director of Indonesian Port Corporation.
Container shipping companies are required to use trans-shipment facilities in Singapore and Malaysia to feed the second-tier ports in Indonesia, which adds to time and costs.
These second-tier ports are further stymied by a lack of size and secondary infrastructure such as roads and other forms of access. Often it is cheaper to import from China rather than from within Indonesia, according to the World Bank.
“Infrastructure access in and out of ports is one of the main problems. Channel and road access in some ports are still inadequate and create difficulties for exporters/importers as well as shipping lines,” Sorensen said.
The need is pressing because a stalling economy – GDP growth has slipped from 5.78% in 2013 to 5.02% last year – coupled with the end of the commodities supercycle has left the new administration scrambling to re-position the country.
Rather than rely on the export of commodities such as iron ore and coal, Indonesia now wants to be a high-end manufacturer of cars and other machinery.
How the country’s factories get these to and from its shores to overseas markets will be key to whether this is ultimately a success.
“What the port expansion is going to do is hopefully to attract more manufacturing industries to establish both in Jakarta and outer ports, which will lead to higher volume growth,” Maersk’s Sorensen said.
Expansion
Indonesia’s four state-owned port operators – known as Pelindos 1, 2, 3 and 4 – are tasked with much of this work and have begun courting foreign investors and the capital markets for funding.
“The Pelindos are working to Jokowi’s vision of the Sea Toll. Efforts are being made to raise funds for the port infrastructure upgrades,” Drewy’s Chiang said. “There could be private sector involvement on the funding and operational side.”
Major capacity expansions for the most strategic ports are likely to be financed either in special purpose vehicles or on the balance sheets of the respective state-owned port company, Gavin Munro, head of infrastructure finance for Asia-Pacific, Societe Generale Corporate & Investment Banking, told FinanceAsia.
The latter is similar to how Pelindo II leveraged its existing operations at the Port of Tanjung Priok to fund the New Priok Port project last year, Munro said.
Opportunities will be widespread for foreign companies and investors, and investment banks are expecting a ramp up in project finance deals as a result.
“There will be strong appetite for well-structured US dollar-denominated funding for essential infrastructure assets from the major international project finance banks and key regional players, as was demonstrated with the pathfinder Pelindo II transaction last year,” Munro said.
Pelindo 2, which controls Tanjung Priok Port, is adding three new terminals there in an extension called Kalibaru Port - one will open this year and two next year - with the aim to bring down dwell times from 6.4 days to 3 days.
This is much needed: Tanjung Priok was handling 3.9 million TEUs (twenty-foot equivalent units) in 2008 but this doubled to 7.2 million in 2012 through increased productivity.
Mitsui, NYK and PSA International have been brought in to run the new Terminal 1 and a tender will soon begin for the other two terminals.
Rothschild is financial adviser on the three terminals and brought in the foreign investors for Terminal 1. It is currently looking for investors to back the other two terminals.
“The more the private sector can finance the better for the state budget,” Oliver Goetz, Asia head of infrastructure and transport for Rothschild, told FinanceAsia.
Pelindo 2 is also developing three new seaports – in Sorong, West Kalimantan and South Sumatra. Pelindo 2 will issue US$1 billion in bonds to finance the construction in the second quarter of this year and will seek additional project financing, the company said at the end of last year.
Pelindo 1, meanwhile, plans to spend $2.7 billion on modernising and expanding its ports over the next five years, including expanding terminals and deepening sea channels.
It aims to increase the size of five ports this year, including plans to turn North Sumatra’s Kuala Tanjung Port into one of the world’s largest.
To do so, it will tap the bond markets and form partnerships with state-run companies, local media reported in January.
The group has allocated Rp3.2 trillion in capital expenditure to help pay for the expansion, with Rp2 trillion coming from internal cash and the remainder coming from bank loans.
Foreign promise
Outside of the government-controlled port operators, foreign companies are already present in the sector and discussions are under way for further investment.
“Since the need in this sector is massive, the government will need a workable partnership with the private sector to meet the rapidly increasing trade volume,” ADB’s Ginting said.
Meanwhile, Drewy is advising companies, including foreign groups, involved in Indonesia’s ports upgrade on a range of matters including operations and strategy.
Its clients include port authorities, terminal operators, shipping lines, banks, investment funds and private equity.
Although Drewy’s Chiang would not name the clients involved in Indonesia’s ports upgrade, he said Japanese investors were keen on supporting Japanese companies already present in the country.
IFC, for its part, has already invested in the sector, providing financing to Hutchison Port Holdings (HPH).
HPH, part of the conglomerate controlled by Hong Kong billionaire Li Ka-shing, holds a 51% stake in Jakarta International Container Terminal and 48% of Koja Container Terminal.
“We are actively looking at more investments in the Indonesian shipping industry in the next one or two years but these depend on the size of the companies,” IFC’s Suri said.
He added that the group would look to do deals of between $100 million and $300 million in domestic companies that support the shipping and port network.
“The maritime law of 2008 is liberalising the sector as private operators are allowed [in] but, in reality, all the major hubs are, and will still be, controlled by the government through the Pelindos, and barriers to entry are very high,” Xavier Jean, corporate ratings analyst at Standard & Poor’s, told FinanceAsia.
Still, the government has been explicit in calling for more foreign involvement, realising that savings from the cut to Indonesia’s fuel subsidies – made last year – only go so far.
Financing does not appear to be a problem, with international bond markets offering a clear avenue to raise cash and investors seen as keen to take part.
“For bondholders, bond funding from ports provides a good opportunity to tap into the infrastructure story of Indonesia, reinforced by the government’s commitment to infrastructure spending after they reduced the fuel subsidy,” Jean said.
These bonds also benefit from being considered “quasi-sovereigns”, he added, given the majority ownership by the government.
Supply of new foreign bonds from this quarter is also tight as Indonesia’s big infrastructure companies – for example Jasa Marga for highways – have tended to raise either domestic or multilateral bank loans, or issued domestic bonds, he said.
Joined-up thinking
Upgrading the more underdeveloped parts of Indonesia will be a recurring theme under Widodo, with foreign companies and investors already active in the power and healthcare sectors.
A central plank in the new strategy is to provide a unified network, with consistent rules and co-operation between local ports.
There have been discussions on merging the four Pelindos into one mega-port operator, to create common standards for maintenance and services.
“There is a need to have better synergy on executing the master plan of where the ports should be located and to provide easy access for industrial areas,” Maersk Line’s Sorensen said.
A taskforce has been set up to explore the feasibility. Among the touted benefits is the possibility that discounts could be offered to foreign ships using certain ports for trans-shipment – the process of offloading from one ship to another.
Sorensen said he has seen improvements over the past two years in terms of port facilities, productivity and infrastructure, but that there is an uneven focus between the development of ports in West and East Indonesia, with more emphasis placed on the west.
“Indonesia is a maritime country, so port development across the country will be essential for the country’s future development and to improve competitiveness,” ADB’s Ginting said.
