The merger of state port operators into one Pelindo is expected to cut logistics costs and trigger economic growth. But how it will do it since the port is not a single factor in total logistics cost?
On the official announcement for the merger of state ports operators (Pelindo I-IV) on September 1, 2021, the Ministry of State-Owned Enterprises (SOEs Ministry) stated at least three missions of the decision: stronger national port industry, better maritime connectivity, and for port operator (Pelindo) competitiveness. With such missions, Pelindo (after the merger) will stay in a very strategic position in unlocking the country’s acute problem – high logistics cost.
Vice SOEs Minister II Kartika Wirjoatmodjo even expects further, the merger will trigger and encourage national economic growth.
It might be too early to affirm the merger mission, but at least, this is a real effort in improving the logistics performance and unlocking its bottlenecks. Evidence has said that high logistics cost is one of the key bottlenecks in Indonesia’s economic growth. Logistics cost reaches more than 23% of GDP (Gross Domestic Products) and around 40% of goods retail price, according to Indonesia Logistics and Forwarders’ Association (ALFI/ILFA).
Compared to neighboring countries, including the ones in ASEAN, Indonesia’s logistics cost to GDP is the highest, higher than Vietnam (15%), Thailand (13,2%), Malaysia (13%), and Singapore (8,1%). It is also much higher than the world’s leading economy country – China -, which is only 12% of GDP.
The country’s Logistics Performance Index (LPI), though there was an increase from 63rd (2017) to 46th (2018), according to the World Bank, in ASEAN scope, it was down to fifth, from fourth. It was lower than Singapore (7th), Vietnam (39th), and Malaysia (41st).
Indonesia scored at 3.15 of 5 at maximum, in which LPI indicators contribution are as follows: customs scored 2.67, infrastructure (2.89), international shipments (3.23), logistics competence (3.10), tracking & tracing (3.30), and timeliness (3.67).
Of the 23% logistics cost to GDP, it distributes to some factors, in which cost for inventory contributes the highest, reaching 8.9% of the total, then followed by land transportation (8.5%), administration (3.5%), and the remaining of 1.4% by port.
Though relatively low, but since it plays a key role as the gateway, interface, and center of supply chain and cargo distribution, the port has a very significant multiplier effect on other sectors. The port plays a key role in creating efficiency in national logistics.
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But, the big question is that will this merger will be able to overcome the country’s logistic cost since there are so many factors as bottlenecks for the country’s logistics efficiency?
Noted that, in addition to the operating system of the port, there are other factors why logistics cost in Indonesia is very high, compared to other countries. First, imbalance cargo in-bound and out-bound among the regions in Indonesia. For example, in-bound cargo in Papua is much higher than its out-bound, creating high transportation costs as transporters have to charge from a one-way trip for two trips operational costs. This is in view of the fact that Indonesia’s economy is still centralized in Java, followed by Sumatera. Java and Sumatra contribute around 80% of the total Indonesia’s GDP, data says.
Second, the low efficiency of the maritime supply chain due to the domination of small ports (most of which are not operated by Pelindo yet) in the process of domestic distribution. But with poorer infrastructure, these small ports have created inefficiency. The small ports can only be accessed by smaller vessels, making the cost per unit of cargo higher compared to bigger vessels.
Third, low value of land transportation. This is due to some factors, including poor connectivity between ports and hinterlands, poor connectivity with other modes of transportation (railway), poor productivity of trucking, and the poor system used by land transportation (more trucks not equipped with GPS yet).
Fourth, overlapping regulation both in the process of business operation and investment permit. The overlapping regulation in business operation, let say in the import/export process, for example, has resulted contributed to high logistics cost (administration that reached 3.5% of GDP). The overlapping in the business permit, including in investment also affects the process of developing new transportation facilities/infrastructure (port).
Optimize Connectivity
Again, as stated in the announcement, SOEs Ministry noted that one of its (merger) missions is to build up maritime connectivity throughout the country, in addition, to build a stronger national port industry and port operator (Pelindo) competitiveness.
Based on the studies, unconnected ports remain a bottleneck due to unintegrated among the ports with other ports. This unintegrated is due to some factors, including the different levels of infrastructure, facilities, systems, and services. Connectivity among the ports can be optimized if the ports are at the same level.
It is true that Pelindo, before the merger, has started to build connectivity, at least among the ports under their management. Some concepts have been introduced in the last ten years. State port operator PT Pelindo II/IPC, for example, has initiated a ‘pendulum concept’ which is almost the same as the concept of President Joko Widodo’s sea toll (Tol Laut). The pendulum requests some ports acting as a hub with similar infrastructures, facilities, and systems, while others as feeder ports.
Each Pelindo (I-IV) has begun to develop their leading ports acting as hub, including Pelindo I’s Kuala Tanjung, Pelindo II’s Tanjung Priok, Pelindo III’s Tanjung Perak, and Pelindo IV’s Makassar New Port (MNP). Meanwhile, other ports have also been developed as feeders.
Even, Pelindo II/IPC has also initiated the ‘maritime trilogy’, a concept that integrates shipping lines, ports, and hinterlands (cargo centers). This maritime trilogy (integrated port network) calls for first, port standardization and connectivity (a port integrates with other ports), meaning that all infrastructures, facilities, systems, and services are at the same level. Connectivity among the ports can be optimized if the ports are at the same level.
Second, this concept also calls an integration with shipping (a port integrates shipping line). This means that a port should be able to build a shipping strong network (shipping alliance). Third, a port should be connected with industry or cargo centers (a port integrates with industry centers).
All these concepts (pendulum and maritime trilogy) are expected to create connectivity.
There are some efforts and programs that have been started for realization by the four Pelindo. Pelindo has started to standardize ports by emphasizing physical development and digitalization so that services and operations are faster and easier. Port modernization, port standardization, port digitalization, and port connectivity have been done.
But, though concepts and efforts have been taken, it has not been optimal yet. The problem of connectivity is still contributing to the high logistics cost within the country, while the existing programs of the four Pelindo for connectivity could not run optimum yet.
This is because each Pelindo has its policies, planning, execution, and control. Differences in policies, planning, and controlling among them potentially cause less synergy and less connection in port operation.
The merger decision, expected to be effective in October this year, can be an option for a solution. Moreover, as the SOEs Ministry has said, the merger is the most suitable option for building connectivity as it can maximize synergies and create added value.
This merger makes policies and planning better as said by President Director of PT Pelindo II/IPC Arif Suhartono said: “In the future, Pelindo will have better control and strategic controlling. The development planning will be more holistic to realize an integrated port network, thus finally supporting a lower logistics’ costs.”
Noted that low efficiency of maritime supply chain due to the domination of small ports in the process of domestic distribution. But with poorer infrastructure, these small ports have created inefficiency. The small ports can only be accessed by smaller vessels, making the cost per unit of cargo higher compared to bigger vessels.
Moreover, the merger will make the management model change from region-based to business lines and entities, thus business focusing can be realized better. The integration among the ports in serving similar commodities can be done optimally.
In addition, a business focusing according to clusters, as Arif has said, will improve capabilities and expertise which will have an impact on increasing customer satisfaction through better service quality and increased efficiency in the use of financial resources, assets, and human resources.
Expected Multiplier Effect
In addition, to support efficiency in port operation and build connectivity, the Pelindo merger is expected to cut logistics costs, as claimed by Arif Suhartono. Even, the SOEs Ministry says that this merger will benefit the national economic growth.
This might be overconfidence if the view of the fact that of the 23% logistics cost to GDP, the port operation contribution is only 1.4%, while the share of others is much higher: inventory (8.9%), land transportation (8.5%), and administration (3.5%). But, just think about its multiplier effect!
By building connectivity among the ports, it will not help to lower logistics cost contributed by port operation, but it will trigger to cut cost in inventory, administration, even triggering to cut cost inland transportation.
“Port plays as the center of logistics activities. Any efforts of the port to build efficiency, will create a multiplier effect to others,” commends Yukki Nugrahawan Hanafi, Chairman of ALFI/ILFA. “If we can build a better connectivity, other costs in logistics, including costs for inventory, land transportation, and administration will be lower.”
Moreover, the merger will make Pelindo more strategic and have more resources in doing development and business expansion. Noted that merger makes Pelindo one of the leading global port operators. In the container sector, for example, the merger will make Pelindo handle 16.7 million TEUs throughput in a year, making it the 8th largest container terminal operator in the world. This merger will also make Pelindo a very big company with total assets reaching more than Rp 111 trillion, according to SOEs Ministry.
With this, Pelindo, in addition to its strategic position as the operator of ports as the center of logistics activities, has very big resources both in supporting logistics efficiency and encouraging economic growth. With this strategic position, Pelindo can help to cut logistics costs and supporting the national economy through the following steps.
First, Pelindo will be more strategic in doing investment both in improving port performance or building new ports throughout the nation that potentially trigger industry growth, especially the industry in the eastern part of Indonesia. Noted that one of the main causes of high logistics cost is due to imbalanced industry among the regions in the country. In addition, if the port can trigger industry growth, it will help the economic growth.
Second, Pelindo can easily build synergy with other parties. Let us say with other transportation mode operators of airport, railway, or toll road operator to build multimodal connection. Good to know that poor multimodal has a very significant effect on the high logistics cost in the country. Even, poor land road access between port and hinterland has contributed the highest to the total logistics cost within the country.
Third, the merger is expected to act as a role model for other parties in streamlining business administration, processes, and permits, especially the trade-related institutions. This is expected to help simplify the process of business (trade) permits, thus finally cut the administration cost. Noted that administration cost significantly contributes to the logistics cost. Administration cost share to 3.5% of 23% logistics cost to GDP.
