Indonesia Spending $200 Billion Boosts Krakatau: Freight

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A truck driver waits at a shipping container port to unload his cargo, in Jakarta. The Indonesian government plans to develop 14 ports as international harbors, striving to reverse a slide in freight transport performance when compared with Asian neighbors. Photographer: Ed Wray/Bloomberg

The support cables snapped and the bridge buckled, hurling vehicles into muddy water and killing at least 19. Built to resemble San Francisco’s Golden Gate, the structure on Indonesia’s Borneo island was just 10 years old.

The Nov. 26 disaster was a reminder of how far Indonesia’s transport system lags behind its neighbors. President Susilo Bambang Yudhoyono plans to spend about $195 billion on such projects as overhauling ports, reconstructing roads and building bridges, part of a drive to overhaul a freight-transport network ranked among Asia’s worst.

The resulting construction may benefit businesses including PT Semen Gresik, Indonesia’s largest cement maker, and PT Krakatau Steel, its biggest steel producer. Shares in both will rise in the next 12 months, according to forecasts from Jakarta-based stockbroker PT Danareksa Sekuritas.

“Cement, steel, toll-road and construction companies should experience increased demand during the building phase,” said Kelly Chung, a Hong Kong-based fund manager at ING Investment Management, which oversees about $445 billion.

Indonesia’s 2011-2025 development plan seeks 4,012 trillion rupiah ($440 billion) of investment, with about 1,786 trillion rupiah assigned to items such as highways, harbors and power plants. To spend the cash effectively, the government must overcome corruption so severe that it’s rated the “most problematic factor” for doing business in the country, according to executives surveyed in the World Economic Forum’s Global Competiveness Report 2011-2012.

Enemy Number One

“The president had said the number one enemy is corruption,” Edy Putra Irawady, deputy minister for trade and industry at the Coordinating Ministry for Economic Affairs, said by telephone from Jakarta on Nov. 29. “The mechanism of bureaucracy should be transparent and accountable.”

Yudhoyono is seeking to improve Indonesia’s roads, bridges and ports to spur annual economic growth of as much as 9 percent, closing the gap to Chinese and Indian rates of expansion.

“It’s reasonable to expect substantial growth of infrastructure investments and a subsequent lowering of logistics costs,” said Henry Sandee, a senior trade specialist at the World Bank in Jakarta. “Otherwise, Indonesia may face difficulties even in sustaining economic growth beyond 6 percent per year. We aren’t only talking about international trade costs. Domestic shipping rates are also high.”

Private Investment

The push to improve transport links within the archipelago of more than 17,500 islands, as well as to pivotal overseas markets, depends on the private sector for more than half the total investment target. For ports, that signals reliance on companies such as Hutchison Port Holdings Ltd. and DP World Ltd. to deepen harbors, add cranes and train staff.

Shares in Semen Gresik, headquartered in Gresik, East Java, will climb about 8 percent to 10,300 rupiah over 12 months from current levels, while Cilegon, Indonesia-based Krakatau Steel will advance about 52 percent to 1,275 rupiah in the 2012 financial year, based on Danareksa Sekuritas target prices. Domestic spending stands to benefit both companies, it said.

For PT Maersk Indonesia, a unit of A.P. Moeller-Maersk A/S, owner of the world’s biggest container shipping line, choked roads and crowded ports fan delays and add to costs. Berths that are too shallow for the biggest vessels prevent direct links to markets such as Europe, forcing Indonesia to feed goods overseas through terminals in Singapore.

Ships carrying 3,500 standard 20-foot containers, or TEU, are currently the biggest that can berth in Indonesia at Tanjung Priok port in Jakarta, compared with up to 13,000 TEU for those sailing between China and Europe, said Jakob Friis Sorensen, president director of PT Maersk Indonesia in Jakarta.

‘Time is Money’

“Time is money in this business,” Sorensen said. “The model that Indonesia chose was to rely on Singapore instead of building enough of its own infrastructure. Otherwise, it could have had bigger vessels calling directly.”

Last week’s collapse of the 710-meter (2,330-feet) bridge spanning the Mahakam River in East Kalimantan province has underscored concerns about infrastructure. Yudhoyono ordered an investigation into the cause. Nineteen people are confirmed dead, the National Agency for Disaster Management said today.

“We must continue rescue efforts, search for survivors and prevent future collapse,” Yudhoyono said in Bogor, West Java, two days after the tragedy.

Behind Asia

Indonesia ranked 75th out of 155 economies in the World Bank’s Logistics Performance Index for 2010, the most recent, down from 43rd in 2007. The index measures the perceptions of international freight forwarders doing business with Indonesia.

The fourth-most populous country placed below Singapore, Japan, Taiwan, South Korea, China, Malaysia, Thailand, India and Vietnam. Better logistics performance is strongly linked to trade expansion and economic growth, according to the World Bank.

Indonesia has signed about $39 billion of accords with Japanese and Indian investors since December, for projects including ports, mass transit systems and power plants. The government aims to add 20,000 kilometers of roads and 15,000 megawatts of power capacity by 2014.

It also plans to spend 117 trillion rupiah on 92 port projects, including the redevelopment of the country’s 25 main ports, Deputy Transport Minister Bambang Susantono said by telephone from Jakarta this week.

The government’s goal is for gross domestic product in resource-rich Indonesia to swell to as much as $4.5 trillion in 2025, an annual expansion of 7 percent to 9 percent. That compares with average yearly growth of 5.2 percent in the decade through 2010. China expanded 10.3 percent last year while India grew 10.1 percent, according to the International Monetary Fund.

Infrastructure Needs

Investment in infrastructure, including ports, was about 3 percent of GDP in 2000, below the more than 8 percent in 1995-1996, the World Bank said in the June edition of its Indonesia Economic Quarterly. The Asian crisis in the late 1990s contributed to the fall, the lender said. The ratio rose to 4 percent of GDP in 2008-2009, it said.

More spending relative to GDP can help Indonesia achieve expansion of as much as 8 percent by 2020, HSBC Holdings Plc said in a June note. Yudhoyono’s development plan also aims to reduce inflation to 3 percent by 2025 from 6.5 percent in 2011-2014 as better transport links curb costs.

Dubai-based DP World owns 49 percent of PT Terminal Petikemas Surabaya in Surabaya, East Java, with the rest controlled by state-owned PT Pelabuhan Indonesia III. Hutchison Port Holdings, based in Hong Kong, helps operate the Jakarta International Container Terminal. It acquired the Koja Terminal in 2000.

‘Sticky Web’

Indonesia’s push to increase infrastructure investment faces obstacles. Aside from corruption, parliament has yet to mandate land sales to aid road and port development. Europe’s debt crisis is also casting a pall over the global economy.

Graft in complex infrastructure projects that need many local partners over multiple years is often a bigger obstacle to investment than in mining and oil contracts, said Allan Bell, a lawyer in Hong Kong who specializes in helping governments recover stolen assets and consults for the World Bank.

“The project cycle is huge,” Bell said. “With resources, once you get your license, you go in, have your drilling or mining operation up and, if your science was good, your resource can be extracted and within a few years you start to see a return. With infrastructure it could be 10 or 20 years. It’s just much more of a sticky, sticky web.”

PPP Initiative

The National Development Agency’s 2011 book of 79 identified public-private partnerships worth $53 billion shows only 13 are ready for offer, the World Bank said in an October report. “Few projects are in the advanced preparation stage,” the lender said.

Still, investment is climbing in absolute terms. Foreign direct investment jumped almost 173 percent to $13.3 billion in 2010 from a four-year low of $4.9 billion in the previous year, United Nations data show. Fiscal stability under Yudhoyono has put Indonesia on the verge of its first investment-grade credit rating since the 1990s.

The country attracted 181 trillion rupiah of total investment in the nine months through September, a 21 percent increase from a year earlier, government data shows.

This month, a national logistics blueprint to improve infrastructure to and from ports, reduce transport times and uncertainty, and cut costs will be submitted to the president, Irawady said. The goal is to cut logistics expenses to 11 percent to 12 percent of production costs by 2015, from about 14.8 percent currently, he said.

“If you increase capacity on infrastructure, there will be so much more you can do,” said Su Sian Lim, a strategist at Royal Bank of Scotland Group Plc in Singapore. “Indonesia’s true growth should probably be 7 percent to 8 percent.”

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