CONNECTING TO COMPETE IN INDONESIA LOGISTICS PERFORMANCE INDEX 2010

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1 1 CONNECTING TO COMPETE IN INDONESIA Bambang - a local Indonesian pineapple producer - would like to can pineapples in Lampung, Sumatra and export them to Europe. Sumatra Island is competitive in pineapples because of its environment, but port and logistics bottlenecks within Indonesia raise transport costs for Bambang and other pineapple producers. Transport costs are substantially above Thailand - the principal exporter of canned pineapples in the world- and shipping charges out of Lampung are about 4 percent higher than Thailand per carton. Higher costs are partly due to back-hauling of empty containers and the need to transship imported tin for cans through Jakarta rather than directly to Sumatra. Lowering transport costs and improving logistics infrastructure and services would not only allow producers like Bambang to sell more but also boost other key exports from Indonesia. requires the ability to move goods across borders quickly, reliably, and at low cost. LOGISTICS PERFORMANCE INDEX 2010 The World Bank s Logistics Performance Index (LPI) 2010 is a comprehensive index of logistics performance in 155 countries. The LPI covers the entire supply chain and is based on a survey of nearly 1,000 logistics professionals worldwide. It is a useful tool in comparing logistics performance across countries and identifying key reform priorities within countries. Logistics encompasses an array of essential activities for trade including transport, warehousing, cargo consolidation, border clearance, distribution, and payment systems. Competitive trade logistics is a fundamental building block of trade and economic development, and more so in a global economy that has become increasingly interconnected and interdependent. Better logistics have a greater effect on trade promotion than tariff cuts. They lower prices for consumers and support diversification into higher value-added exports. Global production chains also depend on a robust logistics sector. Coordinating the various stages of product development, component production, and final assembly

2 2 EXPLAINING THE LOGISTICS PERFORMANCE INDICATOR (LPI) The LPI consists of two parts and is based on numerical ratings of 1 (weakest) to 5 (strongest) to assess logistics performance. International LPI - based on the assessment of foreign operators located in the country s major trading partners, and is a weighted average of the six components. 1. Efficiency of the customs clearance process; 2. Quality of trade and transport-related infrastructure; 3. Ease of arranging competitively priced shipments; 4. Competence and quality of logistics services; 5. Ability to track and trace consignments; and 6. Frequency with which shipments reach the consignee within the scheduled or expected time. Domestic LPI - based on logistics professionals assessments of the country where they work, and contains detailed information on individual aspects of logistics performance. 1. Quality of trade-related infrastructure; 2. Competence of service providers; 3. Efficiency of border procedures; and 4. Data on the time and cost of moving goods across borders. Photo Source: World Bank Photo, Container Terminal in Tanjung Priok in Jakarta, Cornelis Kruk (2009).

3 LPI 2010 score 3 INTERNATIONAL LPI EVALUATING INDONESIA S PERFORMANCE Indonesia ranked 75 in 2010 as measured by the International LPI, compared with 43 in Indonesia s overall performance lagged behind in the past 3 years measured by a score of 2.76 in 2010 compared with 3.01 in 2007 (1 worst; 5-best). This reflects stronger efforts by other countries to introduce reforms and improve logistics performance. Indonesia s overall performance is in line with its per capita income level. However, Vietnam, India, and the Philippines all have higher LPI scores than Indonesia despite their lower income levels. Thailand and China, both lower middle income countries, have higher scores of 3.29 and 3.49, respectively. Figure 1. Indonesia and ASEAN+6 countries International LPI 2010 Index G-20 average Lower middle income average Having an LPI lower by one point such as 2.5 rather than 3.5 implies two to four additional days for moving imports and exports between the port and a company s warehouse. Connecting to Compete 2010: Trade Logistics in the Global Economy Figure 2. International LPI 2010 versus LPI 2007 Scores for Indonesia and ASEAN + 6 countries. Myanmar Cambodia Lao PDR Indonesia Vietnam India Philippines Thailand Malaysia China Korea, Rep. New Zealand Australia Japan Singapore LPI Score LPI Score 2010 LPI Score 2007 and LPI 2007

4 4 PERFORMANCE AREAS THAT NEED EVALUATING While gaps are present when comparing Indonesia to the lower middle income group average, Indonesia s performance is noticeably above the group average in three areas: ease of arranging shipments; tracking and tracing of shipments; and timeliness of delivery. In contrast, Indonesia s performance lags behind the ASEAN+6 average in all 6 core aspects of logistics performance. The gap is narrower in two areas timeliness and the ease of arranging international shipments. Both comparisons highlight the fact that further action is needed on a number of fronts particularly border management, service sector performance (transport, logistics and freight-forwarding services), and overall logistics infrastructure. Figure 3. Indonesia s Ranking in the International LPI 2010 Index by the 6 components, as compared to ASEAN and lower-middle income countries. Efficiency of customs clearance Infrastructure quality Ease of arranging shipments Quality and competence of services Ability to track and trace consignments Timeliness of deliveries Indonesia ASEAN Score Lower middle income Photo Source: World Bank Photo, Traffic in Indonesia, World Bank Indonesia Country Team, 2009.

5 5 POSITIVE TRENDS IN LOGISITICS PERFORMANCE There are a number of positive trends in Indonesia s logistics performance. Three areas stand out in particular: telecommunications and information technology infrastructure; private logistics services; and the incidence of corruption on logistics activities (see Figure 4). Indonesia s performance trends in these areas is relatively close to, or even exceeds, the ASEAN+6 average, and lay a strong foundation for moving forward on the remaining constraints. For other areas customs, trade and transport infrastructure, and regulation private sector opinion is more divided on recent trends. The biggest gap with respect to the ASEAN+6 average is related to border procedures, including customs and other border management agencies: 50% of respondents reported that these areas have worsened over time. Figure 4: Changes in Indonesia's logistics environment since % 80% 60% 40% 20% 0% -20% -40% -60% Improved or much improved Much worsened or worsened Much worsened or worsened (ASEAN+6) Improved or much improved (ASEAN+6) FACT: The cost of shipping a 40 feet container from Padang on the coast of West Sumatra to Jakarta is currently US$ 600. The same container is transported from Jakarta to Singapore for US$ 185, despite being further away. The graph above reflects a set of LPI survey questions in which respondents indicated whether particular aspects of the logistics environment have improved or worsened since Their responses provide a clearer and more robust guide to recent trends than a simple comparison of LPI scores.

6 6 SUCCESS IN GLOBAL MANUFACTURING SUPPLY CHAINS STARTS WITH THE ABILITY OF FIRMS TO MOVE GOODS ACROSS BORDERS RAPIDLY, RELIABLY AND CHEAPLY. According to a World Bank survey of international buyers at the Jakarta Trade Expo 2009, most firms are satisfied with factory gate prices and the quality of Indonesian products but find high transport costs and lack of reliability of delivery schedules as the main constraints for business transactions. Source: World Bank-Ministry of Trade Survey LOGISTICS HAS BECOME A KEY DETERMINANT OF COMPETITIVENESS, ESPECIALLY IN A WORLD OF JUST-IN-TIME DELIVERIES. A survey conducted in 2005 shows that the cost of firms in textiles, electronics, automotive and food and beverage sectors are 14 % higher due to logistics inefficiencies. What did firms say? Electronics manufacturers: unpredictability affects their just-intime inventory system. Agro-producers: delays affect the expiry date of their products and uncertainty affects delivery on time. Furniture producers: difficulties in delivering their products on the agreed schedule because of logistic bottlenecks. Source: University of Indonesia Study

7 7 DOMESTIC LPI IDENTIFYING BOTTLENECKS The Domestic LPI provides further information on specific elements of major supply chain bottlenecks, such as time and cost, infrastructure, services and border management. The time and cost for moving goods across borders is an important outcome measure of logistics performance. For exports, Indonesia s performance is slightly better than the ASEAN+6 average and noticeably better than the G-20 and lower middle income group averages. However, import costs and lead times are significantly higher than the ASEAN+6 average. The best import lead time is worse than the G-20 and lower middle income averages. Reliability can be even more important than time and cost for overall supply chain performance. Indonesian logistics operators report that nearly one-third of all shipments do not meet their criteria for timely delivery. In the face of uncertainty as to when deliveries will be made and the state of the merchandise, manufacturers have to maintain higher inventory levels that make them less competitive. Data from the Domestic LPI 2010 indicate that the major sources of delay facing logistics operators are related to maritime transshipment and solicitation of informal payments. Best and median lead times* for import/export transactions. Indonesia ASEAN+6 G-20 Lower middle income Export Best lead time (days) Median lead time (days) Import Best lead time (days) Median lead time (days) *Lead time is the transport time for export and imports from the point of origin to the port of loading or equivalent or to the buyer s warehouse. Photo Source: World Bank Photo, Container Terminal in Tanjung Priok in Jakarta, Cornelis Kruk (2009).

8 8 INFRASTRUCTURE QUALITY REMAINS A CONSTRAINT In the LPI 2010, logistics professionals rated the quality of air and maritime ports, road and rail links, and warehousing facilities. They also assessed usage charges in each of these areas. The lower half of Figure 5 shows that Indonesia compares favorably with its ASEAN+6 neighbors when it comes to usage charges for core trade-related infrastructure. Its performance is above average in relation to rail transport and agents fees. The only major exception to this pattern is maritime ports, where private operators perceive the level of fees and charges to be relatively high. Given Indonesia s reliance on inter-island maritime connections, this contributes to high distribution costs within the archipelago. Figure 5: Infrastructure quality and usage charges, from one (worst) to five (best). When it comes to infrastructure quality, however, the picture is very different (see the top half of Figure 5). There is a significant performance gap in all areas except warehousing, and information and communication technologies (ICTs), where the difference between Indonesia s score and the ASEAN+6 average is substantially smaller. High logistics costs also have an impact on domestic prices. In Indonesia, there are regional price differences caused by logistics costs. Intra- and especially inter-island distribution of goods is a challenge with prices of goods in the outer islands being substantially higher than in Java. Rice prices in one province can be up to 64% higher than in another, and a bag of cement in Papua is 20 times that of in Java. Ports Airports Road Rail Warehousing/transloading Telecom & IT ASEAN+6 Indonesia Ports Airports Road Rail Warehousing/transloading Agents Score Photo Source: World Bank Photo Library, Woman Farming in Indonesia, by Curt Carnemark, 1993

9 9 EFFICIENT REGULATION CAN BOOST SERVICES SECTOR PERFORMANCE Indicators on the competence and quality of trade-related service providers show that Indonesia s performance is fairly consistent in freight forwarding, warehousing and distribution, maritime transport, and air transport (Figure 6). In all four cases, however, there remains a substantial performance gap with respect to the ASEAN+6 group and the G-20. This performance gap is magnified in the last two sectors, road and rail transport. Rail transport services are rated lower than other sectors in most countries, but the difference in Indonesia is particularly large. Road transport also stands out, since the ASEAN+6 and G-20 averages are relatively close to those of the other sectors, but Indonesia s score is considerably lower. Poor logistics increase costs, cause delays in delivery and affect the quality of the delivered product. Palm oil farmers pick up the beans green despite their quality being affected, to avoid them rotting due to the low frequency of transport and delays. Lack of adequate cold storage transport affects the quality of horticultural products, seafood and fish. Poor logistics are also an impediment for agricultural diversification in remote areas. Figure 6: Quality and competence of service providers, from one (worst) to five (best). Farmers specialize in tubers as they are not as perishable and withstand better long transport times than higher value added horticultural products. Freight forwarders Warehousing Maritime transport Air transport Rail transport Road transport G-20 ASEAN+6 Indonesia As a result of high logistics costs to Java-based processing facilities, high quality products with great potential, such as shrimp from Eastern Indonesia, cannot be exported Score

10 Days % of shipments 10 STREAMLINING BORDER MANAGEMENT PROMOTES EFFICIENCY IN TRADE Clearance times for imports in Indonesia are noticeably longer than in its ASEAN+6 and G-20 peer groups (see Figure 7). These times reflect the performance of customs, but also that of other border agencies that handle goods during the clearance process, such as health/sanitary and phytosanitary and certification agencies. Since physical inspection can substantially increase clearance times, it is encouraging that Indonesian border management agencies use this procedure less frequently than their peer group averages. Nonetheless, implementation of simple measures such as continuing customs operations on Saturday afternoons and Sundays (subject to private sector demand) could help improve clearance times that are currently inflated due to congestion. Figure 7: Import clearance times (days) and rate of physical inspection (percentage of shipments) Indonesia ASEAN+6 G-20 Lower middle income 40% 30% 20% 10% Clearance time without physical inspection (left axis) Clearance time with physical inspection (left axis) Rate of physical inspection (right axis) 0% In addition to speed, reliability of the clearance process is also important for supply chain performance. Exports are cleared on time but not imports. Data from the Domestic LPI show that although exports are nearly always cleared on time, 50% of respondents indicate that imports are hardly ever or rarely cleared in a timely way. On average in the ASEAN+6 countries, this finding is reversed: nearly 60% of respondents indicate that imports are often or nearly always cleared on time. Transparency in the clearance process, and in relation to border agencies more generally, is an issue in Indonesia. 40% of LPI survey respondents say that clearance procedures are hardly ever or rarely transparent, and 50% indicate that they hardly ever or rarely receive adequate and timely information on regulatory changes. Customs is only one part of the border clearance process. Other agencies, such as quality, standards, and inspection agencies, as well as health/sanitary and phytosanitary (SPS) agencies are also important. Survey results show that satisfaction with Indonesian customs is slightly above the lower middle income group average. The same is true for health/sps agencies. But there is a greater level of dissatisfaction with quality and standards inspection agencies their performance is rated lower than all three comparator group averages (ASEAN+6, G-20, and lower middle income group). Efforts to improve the speed and reliability of clearance procedures need to focus on improving the efficiency of all three sets of agencies, and enhancing their ability to work together.

11 11 OPTIONS FOR ADDRESSING LOGISTICS BOTTLENECK IN INDONESIA Congestion is a major issue at Tanjung Priok Port and its terminals, such as Jakarta International Container Terminal (JICT). In the long run, a new deep water port should be considered. In the meantime, measures such as expanding capacity, considering a 24/7 work regime (24 hours-7 days a week) subject to private sector demand and in coordination with border management agencies, streamlining document processing, and strengthening the National Single Window, can all help manage port traffic more efficiently. Implementation of a new gate system and improved information technology should also help alleviate these problems to some extent, and can also be expected to limit the scope for unofficial payments. Improve the quality of trucking and freight-forwarding services. Market structure is currently an important factor contributing to the performance gap in core logistics services. Key markets such as trucking and freight forwarding are characterized by a few large firms and many small ones, but very few medium-sized companies. In the trucking sector, special loan schemes could be put in place to facilitate the development of medium-sized operators, as well as fleet upgrading. Voluntary certification of freight forwarders could help SMEs identify suitable operators. Improve connections between gateways and internal markets. One part of this involves facilitating inter-island shipping. At the moment, it can be less expensive to ship a container to Singapore or Malaysia than it is to ship it within the Indonesian Archipelago. Develop national road infrastructure, such as the Trans- Java Highway. Complementing national projects with better regional connections can facilitate small towns access to the road network. Building infrastructure is not enough, however. A sustainable funding mechanism could be put in place to cover ongoing maintenance needs, for instance one based on the user pays principle. Photo Source: World Bank Photo Library, Transportation in Indonesia, by Curt Carnemark, 1993

12 12 GOVERNMENT ACTIONS ON TRANSPORT REFORM The Government of Indonesia places trade facilitation among its top priorities and has taken concrete steps to enhance its logistics performance. Establishment of the National Logistics Team, a crossdepartmental team under the Coordinating Minister for Economic Affairs in Preparation of a Logistics Blueprint in 2008 that provides a broad strategy to make domestic and international trade logistics more efficient. Prioritizing and Coordinating Measures for Transport Reform A Blueprint is first and foremost a planning tool with broad strategies. In order to turn broad goals into actionable reforms, there are further steps that could be taken based on the current strategies in the 2008 Logistics Blueprint:- Identify a Roadmap / Plan of Action based on the Blueprint Prioritization of measures based on objectives Identification of short and medium-term measures and implementation schedules/costs Ensure private-public coordination in implementing actions Passage of the New Shipping Law (Law No. 17/2008) in Initiated a National Single Window System, which was launched as a small pilot project in March 2007 and has since gradually expanded its coverage to more government agencies and ports.

13 13 SUMMARY OF LOGISTICS REFORM GOALS, INFRASTRUCTURE ISSUES AND POTENTIAL STRATEGIES Certain strategies could be considered to address existing gaps and achieve key objectives in Indonesia s transportation system: OBJECTIVES EXISTING GAPS POTENTIAL STRATEGIES REDUCING CONGESTION AT PORTS IMPROVING INTER-ISLAND SHIPPING AND CORRIDOR MANAGEMENT IMPROVE CUSTOMS OPERATIONS (NATIONAL SINGLE WINDOW) IMPROVING ROAD AND RAIL INFRASTRUCTURE IMPROVING THE QUALITY OF TRUCKING AND FREIGHT-FORWARDING SERVICES IMPLEMENTING EFFECTIVE LOGISTICS REFORM The Jakarta International Container Terminal is heavily congested and dwell times of containers are long. Tanjung Priok port will reach full capacity within 5-6 years Connections between ports and transport corridors need to be improved. Cost of transporting containers between islands need to be lowered. Existing constraints in inland shipping capacity and along transport corridors. Coordination between customs, other border management agencies and terminal operators need to be improved for more streamlined procedures. Rail infrastructure needs to be improved. Better road maintenance at the national and provincial levels to better connect rural and urban areas to national road networks. Indonesia lacks competent and financiallyviable mid-sized trucking and freight-forwarding service firms. Logistics reform involves a number of government agencies and private sector stakeholders. Design an efficient truck movement system that utilizes railway and container freight stations outside the port area. Create depots for empty containers near industrial areas away from the port area. Move towards 24/7 operations on a trial-basis as a fee-based option and prepare study/needs assessment for 24/7. Plan to develop new ports (deep water Greenfield ports). Complement the shipping law with clear implementing regulations and procedures. Conduct an analysis of container and bulk flows between main ports and islands to identify constraints and opportunities to lower cost of domestic shipping. Establish a corridor management agency to coordinate inter-agency measures and programs, identify investment opportunities and promote development. Regular communication channels among agencies. Ensure operating procedures align with the NSW automation system. Develop a user-friendly system by providing targeted training/education programs for firms (especially SMEs) on how to use the NSW. Extending the construction of the last kilometer of railway from Bandung inland container depot to the port terminal. Create a wholly-owned subsidiary of the railway operating company for freight services. Rail service should use at-grade crossings on JORR at nighttime. Developing a sustainable funding mechanism for road maintenance through levying road user charges. Providing special loan schemes at lower interest rate via an escrow account for companies to renew/ acquire fleets. Establishment of a voluntary certification scheme (such as FIATA examinations) to improve the quality and credibility of freight forwarders. Formation of a broad-based, multi-sectoral, public-private sector logistics committee should be a next step since the establishment of the government logistics team. Having a coordinating team will contribute to a more systematic, integrated and effective implementation strategy. The committee should be responsible for coordinating the execution of reform measures, with benchmarks and indicators to monitor progress.