Policy Paper on Infrastructure1

RECOMMENDATIONS to GOVERNMENT
Below are summary recommendations to problems within infrastructure projects both from the perspective of users and providers of infrastructure: Problems 1: Unclear rules and regulations regarding permit, approval and land lease, which lead to uncertainty of cost, requirements to do business and procedures to do tenders Recommendation to problems 1: Proposed project/tender by the government should be clear from the first place (timetable, cost, feasibility study, regulations, etc) and given guaranteed by the government Issue effective Laws to support and accelerate building of infrastructure To effectively doing the land lease, it is not all about regulation but more on understand local politics and culture and doing intense communication, clarifying the benefits of the project to the people. Problems 2: Lack of coordination between central and local, among ministries and local government, which lead to unclear plan and project within the territory (no integrated and synchronize blueprint) Recommendation to problem 2: Make integrated blueprint that connect the central and provincial project within the same territory. Thus, there will be no overlap program and hesitance to do such program Involve business people from the first place to hinder the stumble block to the project offered The GOI should give clear directions and commit on coordination among the governmental level, both in central and local. This need also be backed up by strong political will Problems 3: Bureaucracy which make longer and convoluted process to get permit and license as well as land lease. Thus, short period of project implementation is available. Recommendation to problem 3: Cut off unnecessary bureaucracy & create a plan from the beginning what the costs on each step of the process to get permit, license, as well as approval Clear, simple and transparent bureaucracy process Problems 4: Red tape and corruption are considered to be common in every project. This making doing business costly and thus not competitive Recommendation to problem 4: Law enforcement need to be binding to seamless the whole process on doing project. This will hinder the corruption along the process

Author by Lena Herliana, Manager EU-Program ACTIVE, Business Support Desk, Indonesian Chambers of Commerce and Industry (KADIN Indonesia) for the ACTIVE Program supported by EU

Problem 5: Lack of long term access for infrastructure development both from government as well as from financial institutions Recommendation to problem 5: Financial institution should also support the funding for the infrastructure by more easy access to the fund as well as by lowering the lending rate Government should provide sufficient budget to set up project as soon as possible Problem 6: Lack of capacity of governmental people to provide clear decision, act fast in reasonable timeframe Recommendation to problem 6: Enhance the capacity of government level both staff and the echelon to plan project effectively and efficiently Problem 7: Lack of political willingness to support the infrastructure development Recommendation to problem 7: Put the improvement of sector as long term agenda rather than political interest Problem 8: Lack of sufficient land infrastructure connectivity to link with the production area, processing area as well as with the seaport Recommendation to problem 8: Create and implement a long-term plan for land connectivity development and update existing integrated transportation plans for greater Jakarta Start to build and improve land connectivity access outside Java to accelerate the regional development among economic corridors Reactivate extension of road networks in provinces/districts to improve access to markets, and deal with the contractual and capacity issues that cause significant continuing underperformance Need to focus on rail development in Java to move the freight from the roads to ease the congestion which has been in obesity status. On the other, need also to develop mass transportation modes for fast mobilization Continue supporting the capacity build out at Tanjung Priok and commit to upgrading and expanding new port facilities as identified across the archipelago Continue to improve the efficiency of port operations in the regions and close the gap in output compared with that of other regional ports Commit to have efficient trading across borders comparing to regional best practice which include small numbers of documents needed for doing export-import, short time (dwelling time) to do export-import and competitive cost on doing export-import Local shipping to get the same treatment as foreign shipping companies, especially the exemption of value added tax to fuel oil and loading and unloading of goods export and imports

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The framework of the Paper

The concept of the paper is as follow. The first section, the background, gives brief explanation on infrastructure development in Indonesia. These include the financial support, the performance to GDP, and current effort done by the government. The second section showing the current performance of Indonesia infrastructure based on world survey and index on this sector, comparing this with the neighboring countries, especially with ASEAN and Asia-Pacific region. In this section will be identified also which related infrastructure are contributed most to the cost of doing business and underperforming. The third section is listing the opportunities given by the government and explains the current status of the project being proposed. The projects related to the underperforming ones, which are seaport, connecting roads, and rail development. The fourth section is discussing problems heading to infrastructure development within the related project addressed by users and providers of the infrastructure. Those are being compiled from the survey. The last sections are some recommendations to problems which being proposed by business people in this sector.

1. Background
Infrastructure development in Indonesia remains inefficient despite a significant increase in government spending on development projects over the last six years. The State budget shows that from 2005 to 2011, there was a 25.5 percent increase in government spending on infrastructure project per year. However, even though there is increase on the budget, the ratio of infrastructure spending to gross domestic product is still far the ideal level of five percent (Table 1). From the 2011 budget, the ratio is only account for 2.1 percent. Table 1: Allocation Fund for Infrastructure (Rp Trillion)
Total State Budget Share Infrastructure to State Budget GDP Share Infrastructure to GDP Min 5 percent of GDP Total Infrastructure 2010 1,126.15 5% 6,436.30 0.87 321.82 56.13 2011 1,229.60 7.20% 7,427.10 1.20 371.36 89.02 2012 1,435.41 7.10% 7,909.86 1.28 395.49 101.55 2013 1,544.80 7.40% 8,424.00 1.36 421.20 114.66

Source: Bappenas, 2012

Furthermore, this government infrastructure spending did not significantly contribute to economic growth. It was showed from its infrastructure coefficient elasticity which stands only at 0.17 in 2011, far lower than that of China 0.33 and India 0.21. According to LIPI economist Latif the inefficient infrastructure development was mainly caused by three factors. First, infrastructure budget realization process is very slow. As of September 2011, the utilized budget stood at only around 30 percent. Second, the budget proportion for physical development was very low. Most of the budget was utilized in paying consultants, planning, and monitoring and project fees. Lastly, the government showed too much tolerance towards violations of regulations supposedly aimed to maintain infrastructure quality. The same opinion goes as well from LP3E Kadin Researcher Widyono which states that the infrastructure spending does not reach its optimality.

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Infrastructure is still a big problem in Indonesia. The cost of doing business in Indonesia is rather expensive. Indonesian companies spend at least 14.08 percent of their average production costs on logistics adding to 27.02 percent of the national GDP. This is a much higher than in other Asian countries, such as Rep. of South Korea, where companies only spend around 12.5 percent of their production cost on logistics (Figure 1). Figure 1: Logistic Cost
Logistic Cost to Production
Indonesia Indonesia

Logistics Cost to GDP

Rep. Korea

Rep. Korea

Japan

Japan

United States
0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00

United States
0 5 10 15 20 25 30

Source: Menko Perekonomian, 2012

From that average production cost, most is spent for transportation, which account for 66.8 percent. The rest is for administration as well as for procurement cost (Figure 2). Figure 2: Production Cost Composition

Source: Kadin, 2011

According to GCI 2012, infrastructure is indeed among the most obvious shortcomings in Indonesia. Spanning nearly two million square kilometers and consists of five main islands and about 30 small archipelagoes, with 17,508 islands and a population of over 234 million people, obviously faces a mammoth challenge that the government must settle to ensure equity in infrastructure development. Inequality in access to infrastructure and public services is not only experienced by rural communities, but also those who live in urban areas. For example, with regard to water services, there are 85 million people living in the service areas of water utilities, but only 35 percent of them are served.

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Decentralization reform put more pressure on infrastructure development in Indonesia. Under the law, all public service delivery functions except for defense, foreign affairs, monetary and fiscal policies, trade affairs and the legal system have been delegated to local governments since the launch of regional autonomy in 1999. Hence, decentralization poses daunting challenges for policy coordination. Furthermore, Indonesia still has high uncertainty as to which level of government is responsible for the provision of various services despite a number of regulations to clarify the matter. In addition, local governments lack of capacity to generate income makes them highly dependent on the central governments transfers, indicating that decentralization does not necessarily improve equality in access to public services. However, it is worth noting that infrastructure alone is not a sufficient condition for economic growth. It is the complementarily between infrastructure development and other factors such as human capital that significantly affects the countrys economic growth.

1.1 Public Private Partnership

In 2011, the Government of Indonesia reacted to the needs of infrastructure and launched the Master Plan for the Acceleration and Expansion of Indonesias Economic Development (MP3EI). The development plan is designed to propel Indonesia into the worlds top 10 economies by 2025. The realization requires investment of some 2,100 trillions of rupiah over the next 13 years. One of the benchmarks is to cut the logistic costs from the previous 27% of GDP to 15% of GDP in 2025. Figure 3: Source of Funding for MP3EI

Total Investment in MP3EI (IDR Trillion)

APBN

SOE

PPP

Private

Funding Gap

599 473 2160

Major Opportunity for the private sector

400
536 152 Investment (Trillion IDR)

Source: MP3EI, 2012

The government is committed to raise over 32% of the total infrastructure spending identified in MP3EI via the state budget (APBN, 7%) and indirectly via State-owned Enterprises (SOE) to invest an additional 25% of funds needed for the infrastructure projects (Figure 3). The government has made an estimate that only about 20 projects within Master Plan for the Acceleration and Expansion of Indonesia Economic Development (MP3EI) programme can commence (groundbreaking) this year. Meanwhile, the total number of MP3EI projects has reached 84, with a total investment value of Rp 536 trillion.

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In addition to this public share the government is offering public-private partnerships (PPP). Private sector engagement in these PPPs can be hedged by the Indonesia Infrastructure Guarantee Fund (IIGF) and potentially qualify for the Viability Gap Funding (VGF) from the Ministry of Finance. In Figure 3 this additional opportunity for private investment is identified by the infrastructure funding gap. Table 2: Summary of Public Private Partnership Projects By Sector/Sub Sector No Sector/Sub-sector Quantity Project Cost (US$ Million) 1 Air Transportation 4 1,354.00 2 Land Transportation 3 136.00 3 Marine transportation 4 2,875.12 4 Railways 3 4,783.00 5 Toll Road 14 33,147.53 6 Water Resources 0 7 Water Supply 18 1,978.82 8 Solid Waste and Sanitation 6 453.00 9 Telecommunication 0 10 Power 6 6,478.50 11 Oil and Gas 0 TOTAL 58 51,205.97
Source: Bappenas, 2012

New PPP projects were published by the Planning Agency BAPPENAS on 4 July 2012. The proposals have been submitted by ministries and local governments, in their capacity as the responsible parties for the project implementation. Among the 58 development projects (being worth US$ 51 billion; Table 2), three projects are ready to offer, 26 are labeled as priority projects, and 29 are still to be developed further. The three ready-to-offer projects are the Tanah Ampo Cruise Terminal in Karangasem (Bali), a Solid Waste Management Improvement Project in Bandung (West Java), as well as the Medan-KualanamuTebing Tinggi Toll Road (North Sumatera). The seaport project and the connecting road and railways are account for 4 projects, 14 projects and 3 projects accordingly. Only one project of connecting road and one of seaport development are ready for offer to the investors. The rest are spread in the priority and potential list project (See Appendix on List project). To speed up infrastructure development, the government had also taken several measures, such as issuing infrastructure bonds, conducting organizational development in order to monitor budget usage, and making a regulation on land acquisition. The recently announced by the government is the badly needed implementing regulation on land acquisition (Presidential Regulation No. 71/2012). This regulation is expected to ensure the acceleration on infrastructure development by providing clear solutions on how to settle land disputes, which has become a major constraint for development for years. Previously, the processes to acquire land for government infrastructure projects were often marred by conflicts between landowners, citizens and project developers, while the legal process to settle such disputes in court could drag on for years and in some cases indefinitely.

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The new law stipulates that all legal proceedings pertinent to land acquisition for a governmentcommissioned infrastructure project should be completed within 436 working days at the most. The law also allowed a more democratic process for providing a 60-day public consultation period before acquiring land. The National Land Agency (BPN) is authorized under law to assign an independent appraisal team, consisting of independent financial experts with expertise in agrarian issues certified by the BPN, to determine the value of compensation due to be paid to the public. The valuation process must be completed in 30 days and it can be paid in the form of money, resettlement, landownership, or stock ownership in the government project. Landowners who disagree with the compensation settlement or the proposed land price can file a legal complaint and seek court rulings up to the Supreme Court. Each court is given a maximum of 30 days to come to the rule on such a case.

1.2 Objectives
The aims of the paper are as follow: Giving clear conditions on infrastructure development in Indonesia and showing how importance this sector is for the economic growth. To present an in-depth appreciation of the port sector in Indonesia and the importance of land connectivity (railways and roads) as supporting infrastructure to inter and intra islands as well as international activities Promoting the PPP projects under the seaport and land transport Give recommendation for accelerating the existing infrastructure project to support the 2025 economic development

1.3 Methodology
The paper was prepared by having research desk, disseminate questionnaire and engage in and hold on seminar/workshop. The research desk is undertaken to have better picture on Indonesian Infrastructure performance, both from macro and micro side. While questionnaire was intended to have perspective of business people on how Indonesia infrastructure conditions is and what are the most infrastructure needed to support their business. This then will lead into some actions needs to be addresses by the whole stakeholders on how to break stumble block heading to this sector. Seminar/workshop is also parts of having the perspective on this sector as well as a media to communicate the results of the paper. The output will be the policy action needed to be implemented on the short term. The next section will expose the current performance of infrastructure development in Indonesia compare to the neighboring countries, especially ASEAN and Asia-Pacific regions.

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2. Performance
As an archipelagic country Indonesia faces considerable challenges in establishing the extensive infrastructure of all modes of transport, communications and public essentials prerequisite for its economic and social development. As indicated in Table 3, Indonesias geography and the distribution of industry and resources poses a major challenge for efficient and low cost logistics. Indonesia is the worlds largest archipelago spanning more than 5000km. About 60% of its population of about 240 million people lives on Java but the remainder is distributed among 6000 inhabited islands which are often very sparsely populated. Java is also the centre of manufacturing, while resources are widely spread over the archipelago. Even though Indonesia has a significant number of strategic ports and international airports, these hubs are focused on Jakarta, in Java, creating major challenges for inter-island connectivity and development. Many of the inter-island connections are conducted through small commercial and non-commercial ports and hundreds of small domestic airports. Table 3: Infrastructure Environment and Challenges of Indonesia More than 5000km across from northwest to southeast 6000 inhabited islands Equipped only by: Ports: 25 strategic; 111 commercial; 614 non-commercial Airport: 27 with international flight status; 100s more domestic Distribution of Total population: 240 million people People Sumatra: 20% Kalimantan: 10% Java: 60% Sulawesi: 8% Irian Jaya: 1% Distribution of Manufacturing: Java Activities Natural resources: Outside Java Integration and Integration of Indonesias 33 provinces now an imperative for development Development Regional integration with ASEAN and ASEAN-based FTAs and EPA with Japan Competitiveness in regional and international supply chains Distances Coverage
Source: Herliana, L., et al, 2010

Those than creates high cost differentials among regions on products like staple foods and basic products for industry and construction, which leads to constraints on development. There are reasons why transport infrastructure and transport services play a major role in the outcomes of economic performance of any economy, including Indonesia. As been explained before on the background section, the most cost is spent for physical transportation. Below performance will also reveal that.

2.1 Current Performance

In this paper, the benchmarks of current performance of Indonesia infrastructure sectors are based on Logistics Performance Index by World Bank and Global Competitiveness Index by World Economic Forum.

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2.1.1 Based on LPI 2012 Indonesia ranks 59th out of 155 economies in the LPI 2012, which is used in this study to benchmark the current performance of Indonesias infrastructure sector. While Indonesias ranking remains above the average performance of the group of lower middle income economies of which it is a part, its ranking did fall from 43 in the 2007 LPI. Figure 4 shows Indonesias ranking is currently the lowest in the six largest ASEAN economies. Within APEC, Indonesia ranks ahead of Peru, Russia and Papua New Guinea. This composition is not much different from the previous LPI 2010 and LPI 2009. The strengths and weaknesses in Indonesias relative performance are revealed by more detailed analysis of the six components which make up the LPI, namely: Timeliness of deliveries Ability to track and trace consignments Quality and competence of logistics services Ease of arrangement shipments Infrastructure quality and Efficiency of customs clearance. Figure 4: Global Ranking and Scores

4.5

3.5

ASEAN 6 Average
3

LMI Average
Hongkong, China (2) Singapore (1)

LPI Score

2.5

United States (9)

Canada (14)

Kore, Rep. (21)

Australia (18)

Japan (8)

Taiwan (19)

China (26)

New Zealand (31)

Malaysia (29)

Thailand (38)

Philippines (52)

Russian Federation (95)

Mexico (47)

Vietnam (53)

Indonesia (59)

Chile (39)

1.5

0.5

Source: LPI, 2012

Figure 5 shows the scores of Indonesia against APEC, ASEAN 6 and lower middle income economies for these six components. Indonesia performs relatively better in timeliness, tracking and tracing and international shipments and relatively worse in logistics competence, customs and infrastructure, even though it equals or is above the average of lower middle income economies.

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Papua New Guinea (128)

Peru (60)

Figure 5: Indonesia Score Compares with ASEAN 6 & Lower Middle Income Countries
Timeliness

Tracking & tracing

Logistics competence

APEC Ave Lower Middle Income

International shipments

ASEAN 6 Indonesia

Infrastructure

Customs

0.5

1.5

2.5

3.5

4.5

Source: LPI, 2012

When looking on the quality of related-transport infrastructure, the business respondents to the surveys, associated with the LPI 2010 scores and rankings, show particular concerns. Two-thirds of respondents evaluated the quality of port infrastructure as low or very low and more than 83% considered that road, rail and airport infrastructure was low or very low (Figure 6). Figure 6: Respondents Evaluating the Quality of Transport Infrastructure as Low/Very Low

16.67, 5%
83.33, 25%

66.67, 20%

Ports
Airports Roads

83.33, 25%
83.33, 25%

Rail
Warehousing/transloading facilities

Source: LPI, 2010

2.1.2 Based on GCI 2011-2012 When compared with GCI 2011-2012, Indonesia related-transport Infrastructure quality is indeed among the most obvious shortcoming in Indonesia. Ranked as 76 th out of 142 (Figure 7), Indonesia is below the average of the ASEAN 6 and APEC countries (Figure 8)

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Figure 7: Indonesia Ranking on Infrastructure

Vietnam (90) Philippines (105) India (89) Indonesia (76) China (44) Brunei (56) Thailand (42) Malaysia (26) Singapore (3)
0 1 2 3 4 5 6 7

Scores

Source: GCI, 2011-2012

Figure 8: Indonesias Score in Related-Transport Infrastructure Compared to ASEAN 6 and APEC Countries

Electricity

Air Transport

Seaport

APEC Average ASEAN 6

Railroads

Indonesia

Roads

Scores
Source: GCI, 2011-2012

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The graph also reveals that among other related-transport infrastructure, the connecting roads; railroads and roads, as well as seaport are under performance. It scores are below the median of the scoring. However, when compared to selected Asian countries, Indonesia is well ahead of Philippines, Vietnam and India. When looking on last three concessive period of the index, Indonesia is gradually improved its infrastructure performance. It ranks are reaching better from its last 84 in 2009-2010 to 76 in 2011-2012, and it scores also show the same (Table 4). Table 4: Indonesias Infrastructure Score Based on GCI Years Ranking Score (out of 7) 2009-2010 84 (133) 3.2 2010-2011 82 (139) 3.6 2011-2012 76 (142) 3.8
Source: WEF, 2009-2012

However, during that concessive period of that survey, business perceptions on doing business in Indonesia reflected that Indonesia infrastructure are among the third most inefficient beside corruption and bureaucracy. Those make Indonesia uncompetitive.

2.2 Current Condition of Related-Transport Infrastructure 2.2.1 Roads

Land transport depends principally on road and, to lesser extent, rail networks. There is an enormous backlog of national and sub-national road development which estimated to be in the order of 20,000 kilometers. Figure 9: Road Network 2006-2010 (km)
500,000 450,000 400,000
350,000

300,000

Km

250,000 200,000 150,000

100,000

National Provincial
District/Sub-region

50,000 0 2006 2007 2008 Year 2009 2010

Source: PDDA, 2011

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According to Land Transport Department (Figure 9 and Figure 10), the total length of roads in 2010 was 446.278 kilometers, of which only 49% was estimated to be in a good or satisfactory condition, the rest are in bad stake. The share of bad roads mostly experienced in sub-national roads. Sub-national roads account for 80% of the total road network so they cannot be ignored. Figure 10: Road Condition in 2010
120.00

100.00

80.00

Heavy damage

(%)

60.00

Minor
Fair Good

40.00

20.00

0.00

National

Provincial

District/Sub-region

Source: PDDA, 2011

Pushing ahead with the development of sub-national roads is essential if the untapped growth potential of much of the country is to be realized. While building national road links can be supported by aid financing, and there is multi-national agency support for areas of east and west Indonesia, most of the sub-national road development and routine maintenance is normally financed through the country budget. However, most of the state budget is used for the operational and administrative cost. Even there is infrastructure budget; the used of it never optimal (Widyono, 2012). The growth of road is only moving in the average of l7 percent from 2006-2007, but remind stagnant during 2007-2009 when most Asia countries experiencing economic crisis. The year after, there is huge increased on the new road development which reaches 35 percent growth in the whole region. However, there is backlog on provincial road. The percentage of provincial road in bad position is higher than on that in 2008; even there is additional new road on development. The same goes as well to national road which the percentage of bad stake is increased from the previous years. The developments of roads are still focusing in Java, mostly in Jakarta. Table 5 shows that even Java are the fifth largest in size after Kalimantan, Maluku & Papua, Sumatera and Sulawesi, however, the most length of the roads are in this area. Further data shows that the new road mostly developed in Jabotabek area, area surrounding the Jakarta city, which mostly in the form of toll road. These toll roads are built to connect the peripheral area to Jakarta city.

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When one looks a map of the island of Java, Jakarta seems so small compared to the rest of it. The land area of Jakarta is not even 1 percent of the land area of Java. But that is all that is small about Jakarta. Jakarta is still a favorite investment destination and as a city it has gained a foothold in the international arena. Most investors are favorable to put their money in Java rather outside Java. This is because outside Java has not been equipped with proper infrastructure, services and business center. Table 5: Size, Population, Length of Road, and Vehicles Numbers (in %)
Sumatera Size of Area Population Length of the road Vehicles Numbers Source: PDDA, 2011 20.6 21.2 33.8 17.9 Java 7.2 58.6 26.8 65.0 Bali&NTT 4.1 5.3 9.8 5.9 Kalimantan 32.3 5.6 9.1 6.0 Sulawesi 10.8 7.3 14.2 4.2 Maluku&Papua 25.0 2.0 6.3 1.0

The government mindset to only focus on the toll road to ease the traffic for people and freight movements might not be the best solutions to the existing problems. There are other modes of land transport infrastructure which can be considered possible to connect the hinterland area with the industrial area as well as with the port systems, such as rails. However, those still need be back up with proper subnational roads. Without any proper access that links the production area into the processing area/industrial area then into the market, the whole policy on land transport will be useless. The inadequacy and quality of the road infrastructure will then result in congestion, delays, high operating costs, and poor safety. The main problem being identified is lack of regular maintenance of the road network, followed by overloading of vehicles, demand/capacity imbalance, lack of funding, lack of productivity and management, and weak and uncoordinated institutions (WTO, 2007).

2.2.2 Rails
Currently there are four regional operations Java, South Sumatra, West Sumatra and North Sumatra with 6700 km of track of which 4400 km is in operation (3100 km on Java and 1300 km on Sumatra). The remainder was closed due to the tight competition with road transport. From those, only 10% consists of double-tract railway. Railway has been a very important mode of transport because it is a mass transport which is affordable for most Indonesian people. Rails can also support the freight movement since it increase land transport capacity. Despite its importance, the development of this transport is lagging behind the other land transport, especially the highways and toll road. Up to 2005 (Table 6), the amount of infrastructure and rolling stocks has been declining. The rail line network has been shrinking; the stations and locomotive in operations have been decreasing. Table 7 showed the low level performance of railway. The railways share of passenger transportation is stagnant, at 7% of total passenger transport, and the share of cargo transportation is under 1%. These low levels of performance, the broken track, the aging locomotive and stations have contributed to declining performance of the railways.

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Table 6: Railway Infrastructure and Rolling Stock

1939 Rail track (000 km) Stations and depots (unit) Locomotive (unit) Passengers (million)
Source: PT KAI & Dephub, 2010

Year 1955/1956 6811 6096 1516 1314 146.9

2000 4030 571 530 191.9

2009 Condition 4818 down 30% in 70 year 570 down 62% in 53 year 316 down 76% in 70 year 207 up 40% in 54 year

Table 7: Rail Transport Shares Worldwide

COUNTRY China India Korea Malaysia Thailand Japan EU & USA Indonesia Passenger Transportation Share (%) 53 22 22 8 12 29 < 10 6-7 Cargo Transportation Share (%) 71 51 31 8 12 5 10 - 30 <1

Source: Lubis, 2009

Up to now, the government has not yet considered railway as the most economic transport system for freight transport as well as for investment because some several factors, even though some study shows that cost on rail is cheaper than roads (Margner, H, 2012): - Transportation on rail track is still lacking on logistic (loading and unloading) and weaken by not yet well maintained tracks - Lack of coordination in between the different transport systems - Not proper coordinated schedules between the different systems - Not yet any logistics management specifically in exchange between systems, like truck to railway, train to ship, ship to truck, etc. - No political will which showed by the low level of infrastructure budget for this sector Furthermore, under the new Law 23/2007, there are some aspects need to be known by the investors: - Clear separation of infrastructure operation and operation of trains, rolling stock - Private train operator allowed: on infrastructure owned by government - Private railways permitted to be build: to transport their own goods after bought the land to build the infrastructure on it From current regulation, the Infrastructure of the Railway is owned by the Indonesian Government and managed by the Director General of Railways. The existing operator of the Railways is the state owned PT Kereta Api Indonesia.

2.2.3 Ports
Ports are of vital importance and significance to regional cooperation and national integration. The maritime sector is a key mode of domestic and international cargo and passenger transport. Although Indonesia is an island nation, it has a surprisingly small domestic ocean-going fleet.

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Furthermore, data shows that 95% of our Entire Domestic and International Trade Carried by Sea Transportation, however, Indonesia does not have its own trans-shipment port capable of accommodating direct calls from large trans-oceanic vessels. Those have to be trans-shipped through Singapore and Malaysian Port before entering Indonesia. According recent government reports from the government, there are some problems still exist within Indonesian ports. This sector still faces major infrastructure constrains. The best evidence of this is at Indonesias largest port, Tanjung Priok (TP), Jakarta. TP handle about 60 percent of imports and exports (in value terms) flow. Thus, the importance of a more productive TP cannot be understated. Some problems within the port sector: - Turnaround time - Dwelling time container import - Access road congestion - Transshipment container - Implementation NSW - Port facilities - Port network According to recent report by Doing Business 2012, Indonesia ranks 39 from 183 on the ease of trading across borders. Trading across borders measures the time and cost (excluding tariffs) associated with exporting and importing by ocean transport, and the number of documents necessary to complete the transaction. The indicators cover documentation requirements and procedures at customs and other regulatory agencies as well as at the port. According to that data, exporting a standard container of goods in Indonesia requires 4 documents, takes 17 days and costs $644. While importing the same container of goods requires 7 documents, takes 27 day and costs $660. Refer to best practice on regional (Table 8), Indonesia is lag behind Korea, Singapore, and Malaysia. If Indonesia could do the same as them, as a result: In term of documentations to do export & import, if best practice (Korea) is adopted, cost saving is estimated to be 41%. In term of times to do export & Import, if best practice (Singapore) is adopted, cost saving is estimated to be 79%. In term of cost on doing export & import, if best practice (Malaysia) is adopted, cost saving is estimated to be 32%. Table 8: Potential Trade Transaction Cost Savings if best practice is adopted
Potential Trade Transaction Cost Savings if best practice is adopted Indicators IND Regional best practice Global best practice Documents to exports 4 3 Korea 2 France Documents to imports 7 3 Korea 2 France Time to exports 17 5 Singapore 5 Hongkong SAR Time to Imports 27 4 Singapore 4 Singapore Cost to exports 644 450 Malaysia 450 Malaysia Coct to imports 660 435 Malaysia 435 Malaysia

Source: Doing Business, 2012

The next section will further explore the projects being offered by the government under the PPP Scheme which covered in PPP Book 2012, especially for the Seaport development and Connecting roads and rail development.

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3. Infrastructure Opportunities Offered by the Government

3.1 Railways Development
Railway transport is vital in some parts of the country especially in more industrialized and most densely populated areas. Railway transport system is needed for the large number of passengers and larger of bulk cargos. Realizing the importance of such mode transport, the government has worked out a program to revitalize the countrys railway infrastructure. One of the programs is to work on the railway project under the PPP scheme. Under the new PPP 2012, the government offer 3 project related railway infrastructure, which listed under the potential group. Below are the brief explanations.

3.1.1 Rantau Prapat Duri Dumai Tl. Kuantan Muaro Railway

Building a network of railway transportation in the region of Sumatera is believed to be one of the quick measures to accelerate the realization of people's welfare. As one part of the railway development plan of Trans-Sumatera Railway network, this section is much needed to address the surge in transport for a variety of crops especially the abundant production of oil palm kernels or crude palm oil (CPO) along the coast of Sumatera. Table 9: Project Estimation on Rantau Prapat-Duri-Dumai-Tl. Kuantan-Muaro Railway
Estimated Project Cost (US$ million) 3,780.00
Source: PPP Book 2012

Construction start 2015

Construction end 2018

Location North Sumatera and Riau Province

The government, together with the private sector, was set to start working next year on the mega TransSumatra Railway project, a 2,168-kilometer railway connecting Banda Aceh with Lampung (Table 9). The new master plan has been recently completed by the Transportation Ministry which was in line with the governments Master Plan for the Acceleration and Expansion of Indonesias Economy (MP3EI). Currently, government and private sector were conducting feasibility studies on a few of the regions in the megaproject, including areas in South Sumatra and Sei Mangke, North Sumatra, and are expected to be completed by the end of this year 2012 to meet the 2013 deadline to begin work on the project. The total investment for the project is estimated between Rp 60 trillion Rp 70 trillion, which will be execute under the PPP scheme. Under the PPP, the government will issue concessions with 25- to 30-year periods and contribute 20 percent of the total investment needed to develop the railway, while the private sector and state-owned enterprises would contribute the remainder.

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The Trans Sumatera Railway consisting of (Figure 11): Besitang-Banda Aceh: 484 km Rantau Prapat-Duri-Dumai: 246 km Duri-Pekanbaru-Teluk Kuantan-Muaro: 397 km Teluk Kuantan-Muaro Bungo-Jambi: 370 km Jambi-Betung-Palembang-Tanjung Api-api: 340 km (Including Sei Mangkei-Bandar Tinggi-Kuala Tanjung) KM3-Bakauheni: 70 km Figure 11: Map for Future Trans-Sumatera Railway

Source: RIPNAS Transportation Ministry, 2011

This is the first phase of the railway network which will stretch from the border of Sumut to Jambi, with a network length of 625 km, namely from Rantauprapat to Dumai, Riau. The railway network from Rantauprapat to Dumai will continue to Duri - Pekanbaru - Teluk Kuantan - Indragiri Hilir, and further developed until Muaro in Jambi Province.

3.1.2 Integrated Terminal of Gedebage (Railway), Bandung, West Java

The integrated terminal of Gedebage will be equipped with (Figure 12): - Regional Bus Terminal (15 Ha) - Commuter Rail Station (15 Ha) - Multipurpose land (30 Ha) The function of integrated transportation district in primary center of Gedebage is a solution for the system and the regulations of public transport condition in Bandung, which is disintegrated between railway station, local and regional bus station.

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Development of a multipurpose transport terminal for the city of Bandung is intended to improve the existing railway container terminal to be a centre of activities during implementation of long halted development plan for Gedebage dry port. It will also serve as a combination of land transportation terminal such as inter provincial bus, city mini bus station or other transportation modes (multipurpose terminal development). Figure 12: Project Map

Source: PPP Book 2012

Table 10: Project Estimation on Integrated Terminal of Gedebage

Estimated Project Cost (US$ million) 133.00
Source: PPP Book 2012

Construction start 2014

Construction end 2015

Location Bandung, West Java

The terminal will serve passengers for inter-city and intra-city destinations. So far, Bandung City has had two terminals for transportation activities; namely, Leuwi Panjang Terminal, which serves westward destinations and Cicaheum Terminal for eastward destinations. The project plans to start on 2014 (Table 10). Up to now, Bandung municipality is still facing difficulty on providing area for transport vehicles in the present terminal. It has been counted that there are around 4,000 city transport vehicles that are presently not accommodated in the terminals. The location of railway station is also far from the container shipping station which is Gedebage. The development of Gedebage as the container terminal (TPKB) has been in the Regional Spatial Plan (RTRW) of West Java. Gedebage TPKB has not played an optimal role because accesses to and from Gedebage are still bad. Conditions of the route and emplacement are not yet adequate, especially warehousing. Different with any existing dry port, Gedebage is rail based dry port. The conditions are exacerbated by the fact that the logistics line from Gedebage that is oriented to the Port of Tanjung Priok is not connected to the port. So far, the railway line stops at Pasoso Station, which is located about 2km from the dock in Priok.

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3.1.3 Revitalization of Yogyakarta Rail Station & Pedestrianization of Malioboro, DI Yogyakarta

The National Development Planning Agency (BAPPENAS) is now working on a document for the planned revitalization of the Malioboro area, a popular tourist arcade in the city. It is expected to be finished by the end of this year, before revitalization work begins in 2013. The revitalization project would cover the three main areas of Tugu train station, Jl. Malioboro and the supporting area, with funds estimated at US$870.0 million (Table 11). Table 11: Project Estimation on Revitalization of Yogyakarta Rail Station & Pedestrianization of Malioboro
Estimated Project Cost (US$ million) Capex: US$ 870.0 million Opex: US$ 26.0 million/year
Source: PPP Book 2012

Construction start 2013

Construction end 2015

Location Yogyakarta, DI Yogyakarta

Revitalization of Yogyakarta Railway Station Area: Tugu station is located in the center of Yogyakarta City. The land for re-development lies between two rivers, Code River to the east and Winongo River to the west. Figure 13: Map Project Location

Rail Station Area

Pedestrian Area

Source: BAPPENAS, 2010

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The re-development of Tugu Station land covers (Figure 13): - Site 1: Commercial facility in the train station; - Site 2: Retail and ruko building; - Site 4: Hotel; - Site 8: Apartments; and - Site 10: City Park Malioboro Pedestrianization: From a traffic management perspective, Malioboro Pedestrianization will also affect Ahmad Yani Street, as the route Malioboro-Ahmad Yani is a one-way street to the south. The route starts from the railway tract in the north and ends on the zero point intersection (Post Office) in the south. The west side of the main route is used as a slow lane currently used by non-motor vehicle traffic, parking andong and pedicab, while for the east side of the area, is used for motorcycle parking. The pedestrian tract, both in the west and east side of the area, is currently used by peddlers and vendors. The Malioboro Pedestrianization re-development comprises of a mix of parking and community facilities. The two sites (Tugu Station land and Malioboro) are adjacent to each other. It is envisaged that the rail station re-development under a PPP modality will fund the modernization of the existing railway station, the provision of parking facilities and the Malioboro Pedestrianization. The project is expected to revitalize growth in the local economy and improve it as a tourist destination.

3.2 Connecting/Feeding Road

Table 12: List of Toll-Road Project
No 1 2 3 4 5 6 7 8 9 Proyek PPP Medan Kualanamu Tebing Tinggi Toll Road Pandaan Malang Toll Road Terusan Pasteur Ujung Berung Cileunyi Gedebage Toll Road Cileunyi Sumedang Dawuan Toll Road Pasir Koja Soreang Toll Road Tanjung Priok Access Toll Road Tegineneng Babatan Toll Road Palembang Indralaya Toll Road Medan Binjai Toll Road Construction Construction Location start end 628.00 2013 2015 North Sumatera Estimated Project Value : US$ 420.00 million 2014 2015 East Java Land acquisition : US$ 325.66 million Estimated Project Value : US$ 688.00 million 2015 2017 West Java Land acquisition : US$ 151.44 million Estimated Project Value : US$ 1,015.80 million 2014 2015 West Java Land acquisition : US$ 108.60 million Estimated Project Value : US$ 612.50 million Land acquisition : US$ 29.00 million Estimated Project Value : US$ 612.50 million Land acquisition : US$ 29.00 million Estimated Project Value : US$ 318.20 million Land acquisition : US$ 28.00 million Estimated Project Value : US$ 111.00 million Land acquisition : US$ 7.12 million Estimated project value: US$ 214 million Land Acquisition: US$ 28.40 million Estimated project value: US$ 1,690.00 million Land Acquisition: US$ 97.44 million 25,000.00 Estimated Project Value : US$ 687.00 million Land acquisition : US$ 179.00 million Estimated Project Value : US$ 1200.00 million Land acquisition : US$ 133.33 million Estimated Project Value : US$ 353.00 million Land acquisition : US$ 26.67 million 2015 2011 2015 2015 2015 2014 2015 2015 2015 2017 West Java 2014 DKI Jakarta (operation) 2017 Lampung 2017 South Sumatera 2017 North Sumatera 2016 Riau 2025 Lampung-Banten (operation) 2017 Banten 2017 East Kalimantan Estimated Project Cost (US$ million)

10 Pekanbaru-Kandis-Dumai Toll Road 11 Strategic Infrastructure and Regional Development of Sunda Strait

12 Serpong - Balaraja Toll Road 13 Balikpapan Samarinda Toll Road 14 Manado Bitung Toll Road

2015

2017 North Sulawesi

Source: PPP Book 2012

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Most of the connecting road projects being offered by the government are in the form of toll road. These roads are to accommodate the inter-traffic within the city/ports, to have alternative route, to bring good from production area to the ports, as well as to link the industrial area zone with the ports, and to ease traffic movement from one region to the others. Under the new PPP scheme, the government has offers about 14 toll-road projects which will be groundbreaking this year as well. 13 of the project are listed as the priority while the remaining is on ready to offer project. Those projects are listed in the Table 12. The government support for the project can be in the form of land acquisition execution, partial construction of the toll road, or take the form of Viability Gap Funding for the projects. For Medan-Kuala Namu toll-road and non-toll road which has chosen as the Ready for offer project under the PPP scheme, the government has formed a special team to accelerate the progress. The team comprise of provincial and regency government, as well as the central government. In addition, Governor of North Sumatera also has formed a team for accelerating the process of land acquisition. One of the efforts made is providing compensation benefits to former employees of PT Perkebunan Nusantara (PTPN) who still live in the area. Up to now, the biggest problem on having the road project on the way is the land acquisition problem. Take for example the Medan-Kuala Namu project. Due to unresolved land acquisition process, the tender pre-qualification is delayed from original plan of July 2012 to August 2012. However, although the tender being delayed, but the project tender itself can likely be implemented only next year. The process is delayed in order to avoid a stalemate because of the difficulty of land acquisition when construction process begins.

3.3 Seaport Development

The government has continued to pursue stronger ties between the regions through port development. Funding constraints for port construction have been dealt with via allocations from the state revenue and expenditure budget (APBN) as well as from the PPP. According to Transportation Ministry, until 2030, the development of ports in Indonesia will cost US$ 46 billion, or the equivalent of Rp 439.67 trillion. Foreign investors are expected to contribute approximately US$ 31.5 billion, or 68.3 percent of the total funding where the rest will be contributed by the government (US$ 14.6 billion or 31.7 percent) Under the PPP 2012 scheme, the government has offered 4 maritime projects to be groundbreaking this year counted for 2,875.12 US$ Million. Table 13 listed the project offers. Table 13: List of Marine Transportation Project
No Proyek PPP Estimated Project Cost (US$ million) 1.032,36 Land acquisition: 2,36 1 Tanah Ampo Cruise Terminal, Karangasem, Bali 2 Expansion of Tanjung Priok Port, Cilamaya Karawang West Java 3 4 Construction Construction Location start end 36.00 2013 2014 Karangasem, Bali 2015 2018 Karawang Regency, West Java 2015 26.76 2015 2017 East Kalimantan 2018 South Kalimantan

Development of Maloy International Port, East Phase 1 : US$ 350.00 million Kalimantan End stage : US$ 1,780.00 million Development of Pelaihari Port, South Kalimantan

Source: PPP, 2012

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Under the list, Tanah Ampo Cruise terminal is categorized as the Ready for Offer project, while the remaining are listed as the potential projects. As Indonesian seaport are still far from adequate in terms of ship line, depth, equipment, and goods exit and entry accesses, the government plans to introduce a nationwide freight transport program to improve the movement of goods along the countrys vast waterways. The system is believed to be effective also in suppressing sea freight traffic congestion. The program is called Pendulum Nusantara (Pendulum of the Archipelago). It aims to create a single sea corridor for moving goods within Indonesia. Under the program, the government will use six seaports Belawan, Batam, Tanjung Priok, Tanjung Perak, Makassar and Sorong as the main gateways. It is believe that this program will reduce logistics costs by 20 - 30 percent from current conditions. Currently, Indonesia has 1,975 ports, with 110 commercial ports managed by four state-owned port companies. The government also has 614 state-run, non-commercial ports and more than 800 special terminals, or dedicated as private terminals. Other PPP projects for 2012 2015 are asserted below:
Port Location Kuala Enok Cilamaya Pelaihari Tanah Ampo Tg. Perak (APBS) Maloy Garongkong Bau-Bau Luwuk/Tangkiang Province Riau West Java South Kalimantan Bali East Java East Kalimantan South Sulawesi North Sulawesi Southeast Sulawesi Scheme ev./ Operations/ Maintenance ev./ Operations/ Maintenance ev./ Operations/ Maintenance ev./ Operations/ Maintenance ev./ Operations/ Maintenance ev./ Operations/ Maintenance ev./ Operations/ Maintenance ev./ Operations/ Maintenance ev./ Operations/ Maintenance Stakeholder DGST/ PELINDO I DGST/ PELINDO II DGST/ PELINDO III DGST/ PELINDO III DGST/ PELINDO III DGST/ PELINDO IV DGST/ PELINDO IV DGST/ PELINDO IV DGST/ PELINDO IV

Source: Kemenhub, 2012

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4. Some Potentials and Handicaps

According to business people in infrastructure sector, they see potential for increased European investment for following sectors: 1. Seaport development 2. Railway development 3. Connecting/feeding road development (bridge, non-toll road, intercity road other than Java) They believe that European suppliers could successfully place goods and services in those sectors. These arguments were supported by the fact that: They have quality of goods and services offered Excellent after sales services Competitive price offered However, some of the foreign investment as well as from domestic is reluctant to invest in Indonesia infrastructure because some of the following, even though some has already invest, but they found some stumble block heading to this project. Most of the handicaps listed from the perspective of users as well as from providers indicate the same matters: USERS 1. Unclear rules and regulation regarding permit, approval and land lease, which lead to uncertainty of cost and requirement to do business 2. Lack of coordination between central and local, among ministries and local government, which lead to unclear plan and project within the territory (no integrated and synchronize blueprint) 3. Bureaucracy which make longer process to get permit and licensing as well as convoluted/ complicated process 4. Red tape and corruption which make doing business costly and not competitive 5. Lack funding commitment from financial sector as well as from the government for infrastructure development 6. Lack of sufficient land connectivity to link with production area to processing area, as well as to seaport 7. Lack of adequate supply, such as raw materials, energy, equipment, as well as skill-workers

PROVIDERS 1. Unclear rules and regulatory for having permits, approvals as well as land lease which make unclear process and procedures for having tenders 2. Lack of coordination between and among central and local government as well as the ministries 3. Bureaucracy problems which lead to long process to have on approvals, permit and to clear land lease. Thus, short period of project implementation available 4. Corruption and red tape, which now charges are considered to be common in every project 5. Budget constraint which most infra project need long-term funding 6. Need to strengthen the governmental people to provide clear decision, act fast in reasonable timeframe 7. Most project is now competing on low price instead of the quality of the project 8. Political willingness both in central and local, indeed influence the infrastructure development

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5. Recommendations
Below recommendation is based on response to the questionnaires disseminate to business people that held from July-September 2012. This is in line with list of problems being raised by business people within the sector.

1. Cut off unnecessary bureaucracy & create a plan from the beginning what the costs on each step of the process to get permit, license, as well as approval 2. Proposed project/tender by the government should be clear from the first place (timetable, cost, feasibility study, regulations, etc) and given guaranteed 3. Make integrated blueprint that connect the central and provincial project within the same territory. Thus, there will be no overlap program and hesitance to do such program 4. Business people should be involved from the first place to hinder a stumble block to the program initiated by the government 5. Enhance the capacity of government level both staff and the echelon to plan project effectively and efficiently 6. Issue effective Laws to support and accelerate building of infrastructure 7. The GOI should give clear directions and commit on coordination among the governmental level, both in central and local. This need also be backed up by strong political will 8. Clear, simple and transparent bureaucracy process 9. Financial institution should also support the funding for the infrastructure by more easy access to the fund as well as by lowering the lending rate 10. Law enforcement need to be binding to seamless the whole process on doing project. This will hinder the corruption along the process 11. Government should provide sufficient budget to set up project as soon as possible 12. Need to focus on rail development to move the freight from the roads to ease the congestion which has been in obesity status. On the other, need also to develop mass transportation modes for fast mobilization 13. To effectively doing the land lease, it is not all about regulation but more on understand local politics and culture and doing intense communication, clarifying the benefits of the project to the people. 14. Continue supporting the capacity build out at Tanjung Priok and commit to upgrading and expanding new port facilities as identified across the archipelago 15. Continue to improve the efficiency of port operations in the regions and close the gap in output compared with that of other regional ports 16. Commit to have efficient trading across borders which include small numbers of documents needed for doing export-import, short time (dwelling time) to do export-import and competitive cost on doing export-import

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