Flaws appear in Indonesia’s ‘big bang’ foreign investment promise

Earlier this year Yusen Logistics unveiled a consolidation service for air cargo out of Java. According to the Japanese firm, this has brought a marked improvement in transit times to international destinations. Yusen followed up on this move in March with the start of import operations at Jakarta’s Halim Perdanakusuma International Airport.

The Indonesian government said it is hoping to see a lot more activity by international logistics firms across the sprawling archipelago. To encourage an inflow of investment and operators, it loosened investment restrictions in almost 50 sectors, including the logistics field. In many cases, the threshold for foreign ownership was lifted from 49 percent to 67 percent. In some segments, such as cold storage facilities, the limit went from 33 percent to 100 percent.

This planned “big bang” opening of Indonesia, announced in early February, is meant to stimulate economic expansion and push GDP growth to an annual rate of 7 percent by 2019. The transportation sector is a major target, with the foreign ownership limits for transport supporting services and warehouse distribution to be raised from the current 49 and 33 percent, respectively, to 67 percent for both.

Indonesian freight forwarders, however, said they are unfazed by the prospect of more competition from international operators. Verdi Madison, managing director of Trans Pacific International Logistics, does not regard them as competitors, arguing that they have a different clientele, which consists of foreign-based companies. He said these outside firms have failed to make inroads with Indonesian shippers, lacking the domestic expertise and the flexibility of local forwarders, which the domestic clientele expects.

According to Madison, Indonesian cargo agents are more concerned about new regulations on freight forwarding issued last year, which have met with stiff opposition from the national forwarder organization. The main bone of contention is a massive increase of the minimum required authorized capital of a firm engaged in freight forwarding. This went up from 200 million Rupiah (US$15,250) to Rp. 25 billion (US$1.9 million), of which at least 25 percent must be fully issued and paid-up. However, the amount can be lower if the company can obtain a recommendation from related associations.

The new requirements are not limited to new entrants but include incumbent operators, forcing them to tie up a large amount of capital, Madison said. The changes are currently in limbo, however, as the forwarder association has rejected the rules, arguing that many agents cannot afford the required capitalization.

On a more conciliatory note, the Indonesian Logistics Association has welcomed the big-bang plan to open up the logistics sector to foreign investment, stating that this should help to reduce logistics costs, making Indonesia more competitive – something necessary in light of ASEAN integration.

According to the government, the planned liberalization should go some way toward preparing the country for free-trade agreements, including the ASEAN Economic Community and, eventually, the Trans-Pacific Partnership.

There is a feeling within the country that Indonesia’s economy could do with a shot in the arm, after GDP growth slowed to 4.8 percent last year, its lowest increase since 2009. In the long term, though, the outlook remains promising, thanks to rising regional trade, high domestic consumption and an increase in exports fueled by several sectors, such as manufacturing, which is projected to show 6.4 percent growth this year.

Madison said he expects 10 to 15 percent growth for his company this year, adding that he sees pharmaceuticals as an up-and-coming commodity, alongside established export engines like garments and seafood. Overall, the Indonesian logistics industry is expected to grow 15.4 percent by 2020, according to figures from research consultancy Frost & Sullivan.

However, the potential growth faces serious constraints, Madison notes. He points to a lack of direct lift to many markets. To North America, for example, the main routing is on Middle Eastern carriers across the Atlantic, which is significantly cheaper than moving on Asian airlines across the Pacific. A lack of maindeck lift is another constraint. Even Surabya, Indonesia’s second-largest city, has no international freighter service, so maindeck freight has to be funneled through Jakarta. But the capital’s Soekarno-Hatta International Airport is chronically congested, a situation that has worsened after the authorities scaled back the maximum number of aircraft movements last year. The rise of low-cost airline activity has further compounded the problem, Madison says.

National carrier Garuda Indonesia is expanding. Last year, it ordered thirty 787-9 aircraft. While this is welcome, Madison comments that the resulting belly space represents relatively limited cargo capacity. Garuda management appears to have quietly shelved plans for freighter activities that it had indicated a few years ago.

The capacity constraints are one area where a large influx of multinational forwarders could impact local cargo agents, Madison reckoned. Given their clout with airlines, they may take up a large share of the available lift, he said, leaving local forwarders to scramble.

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