Current Status and Future Trends of Logistics in Indonesia under AEC

1. Current Status and Future Trends of Logistics in Indonesia under AEC Togar M. Simatupang School of Business and Management Bandung Institute of Technology - Indonesia ASEAN+6 Trade Logistics Connectivity Symposium 2015 under the theme of “ASEAN+6 Connectivity at the Crossroads: Progress and Future” at the Thailand International Logistics Fair Co-organized by the Department of International Trade Promotion (DITP) and Reed Tradex 3-4 September 2015, Bangkok International Trade & Exhibition (BITEC) Bangkok 10260 Thailand

2. Overview 1. Objective  This presentation provides an update of current status of logistics in Indonesia, and discusses some anticipated future trends for the AEC and beyond. 2. Status of Logistics Industry in Indonesia 3. Development and Progress of the infrastructure and logistics system in Indonesia 4. Preparation of infrastructure and logistics system for AEC in 2016 and beyond 5. Preparation of infrastructure and logistics system to concert with ASEAN+6 6. Human resources 7. Concluding remarks 2

3. Status of Logistics Industry in Indonesia 3

4. Logistics Supply Chain The typical actors involved in the transportation of goods from shipper to importer. Source: Gupta, S., Goh, M., Desouza, R. and Garg, M. (2011), “Assessing trade friendliness of logistics services in ASEAN”, Asia Pacific Journal of Marketing and Logistics, Vol. 23 No. 5, pp. 773-792. 4

5. Challenges • Improving the availability of infrastructure: – World Bank (2014) reported the 5thrank under Singapore, Malaysia, Thailand, and Vietnam. – Global Competitiveness Report (2013-2014) issued by World Economic Forum (2014) noted Indonesia’s infrastructure at the 61strank out of 148 countries. Enhancing the national logistics performance: – Logistics Performance Index(LPI) at the 53rdrank out of 160 countries, the rank of infrastructure is at 56. – The growth of logistics services is around 14% per year. – National logistics costs is aroun 23,6% of GDP (2013) and 14% of production cost (2012). Balance trade between west and east of Indonesia – 80% of GDP is produced in Java-Sumatra-Bali – 80% of 245 million of population are in Java-Sumatra-Bali Maritime-based industry ASEAN Economic Community (AEC) in 2015 • • • • 5

6. Level of Competitiveness Low Competitiveness in Infrastructure Road (GCI 2011) High land transport costs – low connectivity of economic centres Developing Asia Vietnam ASEAN Indonesia Indonesia Indonesia China China Thailand Thailand Malaysia Indonesia Malaysia Singapore 0,00 1,00 2,00 3,00 0 2 4 6 8 Trip time (hr/100 km) Backlog in Expressway Development Demand growing 8-10% pa to support growth Malaysia China Indonesia Key centres congested, large areas under-developed Philippines Thailand Indonesia Vietnam 0 0,2 0,4 0,6 0,8 6 Expressway Density (km/1000pop.)

7. Persistent Problems in Doing Business in Indonesia for 2013-2014 and 2014-2015 7

8. Logistics Performance Index 2014 1 2 3 4 5 6 Country LPI 2014 rank 3 27 36 55 47 61 38 42 56 65 14 rank 2 26 30 56 75 44 23 38 34 58 7 rank 6 10 39 74 35 42 22 25 70 44 19 rank 8 32 38 41 61 49 35 24 48 52 11 rank 11 23 33 58 64 48 29 41 54 57 9 rank 9 31 29 50 90 56 36 33 47 51 10 Singapore Malaysia Thailand Indonesia Philippines Vietnam China South Africa Saudi Arabia India Japan 5 25 35 53 57 48 28 34 49 54 10 1= Custom, 2= Infrastructure, 3=International Shipment, 4= Logistics Quality and Competence, 5=Tracking dan Tracing, 6 = Time lines. 8

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10. Dwelling Time and Shipping Cost 10

11. Market Size of the Logistics Industry in Indonesia Transportation makes up around 87.6 % of the total transportation, storage and courier market Source: Indonesian Statistical Agency, Analysis by Frost & Sullivan, 17 March 2015. 11

12. Logistics Expenditure in Key Industries 12

13. Transportation and Logistics Market Size Projection • Expected to grow by CAGR of 15.2% • Economic growth a key driver Source: Indonesian Statistical Agency, Analysis by Frost & Sullivan, 17 March 2015. 13

14. Domestic Demand in ASEAN to Drive Growth: Key to success for Indonesia is logistics and trade facilitation that amplify business competitiveness and reduces cost •ASEAN’s T&L sector expanding rapidly, in line with the region’s economic growth •The projected growth in ASEAN countries will have an average growth of 7.9% where exports play a greater role, while domestic demand is expected to be moderate Regional Economic Growth •LSPs in Asia’s T&L sector, homegrown and global, are rising •AEC will foster more collaboration and market entry •Consolidation will also be likely Number of Logistics Service Providers •Rising domestic demand, especially in infrastructure investment and private consumption in ASEAN will change the nature of trade in the region •Domestic consumption has been driving growth in Indonesia that represents more than 50% of GDP Domestic Needs Source: Indonesian Statistical Agency, Analysis by Frost & Sullivan, 17 March 2015. 14

15. Development and Progress of the Infrastructure and Logistics System 15

16. Status of Infrastructure and Logistics Development Acceleration and Expansion of Economic Development 2011 National Logistics System 2012 Jokowi's Nine Priorities Agenda (Nawacita) 2014 Maritime-Axis Development 2015 16

17. Government focus and initiatives MP3EI: •Master plan of Acceleration and Expansion of Economic Development •Aims to be one of world’s biggest economies by 2025 •$442.72 billion in investments required (2011 – 2025) •17 infrastructure projects worth $22.26 billion identified at launch May 2011 •May set up bank to finance infrastructure projects •6 economic corridors: Sumatra, Java, Kalimantan, Sulawesi & N Maluku, Bali & Nusa Tenggara, Papua & Maluku MP3EI: Infrastructure (42.5%) MP3KI: •Acceleration & Expansion of Poverty Reduction •Policies directed at elevating the poor •60 million poor & near poor (24% of total population) (2011 – 2025) •Boost downstream investment; outside Java & Bali (East Indonesia) •129 business sectors eligible for tax allowance •60 million poor & near poor (24% of total population) Tax incentives •Telkom allocates $150 million to expand fiber optic network to 2 million homes in 2012 •497 cities; focus on Java •13 million homes targeted through 2015 IT & Communications 17

18. Achieving economic transformation through the strategies of the Master Plan •Master plan of Acceleration and Expansion of Economic Development (2011-2012) •Aims to be one of world’s biggest economies by 2025 •$442.72 billion in investments required 18

19. MP3EI’s Position on National Development Plan The National Mid- term Development Plan 19

20. REGIONAL APPROACH IN INFRASTRUCTURES DEVELOPMENT Construction of public works infrastructure implemented through a development regional approach which is suitable to “infrastructure for all” and “sustainable development” principles New Development Region (Maintenance and construction of new roads for the region development) Developing Regions (Maintenance and improvement of national roads and involve the private with the Government Support) Grown Regions (a high standard road network development, include private sector) 20 Source: Kemenko Perekonomian

21. 6 Economic Corridor Development 21

22. National Logistics System & Indonesia Economic Master Plan (MP3EI) Economic Mission 2025 Self sufficient, advanced, just, and prosperous Indonesia MP3EI 2 1 Economic Corridors Connectivity National Logistics System Improving competitiveness Improving Prosperity IPTEK / INOVASI 3 Science & Tech Source: State of Logistics Indonesia 2013 at http://www.indonesia-investments.com/upload/documenten/world- bank-state-of-logistics-indonesia-2013.pdf 22

23. Six Key Drivers of National Logistics System (NLS) Key Commodity National Competitiveness Logistics Infrastructure Logistics Service Providers Human Resources Information and Communication Technology (ICT) Social Welfare Harmonization of Regulation Source: State of Logistics Indonesia 2013 at http://www.indonesia-investments.com/upload/documenten/world- bank-state-of-logistics-indonesia-2013.pdf 23

24. Implementation Framework Locally Integrated and Globally Connected for National Competitiveness and Social Wellfare MP3EI SDM SDM SDM Regulasi dan Kebijakan Corridor Papua & Maluku Corridor Sulawesi Corridor Kalimantan Corridor Bali dan Nusra Corridor Jawa Corridor Sumatra Infrastruktur Transportasi P R O D U S E N K O N S U M E N Saluran Distribusi Grosir Distributor Pasar Ritel Pelaku dan Penyedia Jasa Logistik Infrastruktur Infomasi (TIK) Regulasi dan Kebijakan SDM SDM SDM Program and Action Plan Ministries, Province/Regency/City Strategy, Program, and Action Plan Mid Term of National Development Plan 24 Sumber: Sislognas (2012) Background Substances The challenges of implementation

25. Scheme of National Logistics System Sea Lines of Communication Alur Laut Kepulauan Indonesia(ALKI) or Archipelagic Sea Lanes 25

26. Jokowi’s Nine Priorities Agenda 1. To renew the state’s obligation to protect all people and provide security to all citizens through the free and active foreign policy, national security and the development of reliable national defense based on integrated national interests and strengthening national identity as a maritime nation. The presence of the government through a clean, effective, democratic, and reliable governance, by giving priority and efforts to restore public confidence in democratic institutions and continue the consolidation of democracy through reform of the political party system, electoral and representative institutions. To reject a weak state by reforming the system through corruption-free dignified, and reliable law enforcement. To build Indonesia from its periphery; to strengthening the rural areas within the framework of a unitary state of Indonesia. 2. 3. 4. 26

27. Jokowi’s Nine Priorities Agenda 5. To improve the quality of Indonesians by improving the quality of education and training through “Smart Indonesia” program and increasing Indonesia’s social welfare and health through the “Healthy Indonesia” and “Prosperous Indonesia” programs. To improve people’s productivity and competitiveness in the international market so that Indonesian can move forward and stand up with other Asian nations. To achieve economic independence by moving the strategic sectors to domestic economy. To revolutionize the nation’s character through a policy of restructuring the national education curriculum with advanced civic education; to teach the history of the nation, the values ​​of patriotism and to love the country, as well as to build the passion and character to defend the state through national education. To strengthen diversity and social restoration of Indonesia by highlighting the policy of education for diversity and creating spaces of dialogue among citizens. 6. 7. 8. 9. 27

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29. Scheme of Pendulum Nusantara: Maritime Highway 29 Source: Lino, R.J. (2012), "Indonesia Maritime Infrastructure", World Export Development Forum 2012.

30. 24 strategic ports – 5 hub ports – 19 feeder ports for Maritime Highway 30

31. The government will need to invest Rp 699 trillion (US$57.40 billion) for its sea-highway program between 2015 and 2019 in support of President Joko “Jokowi” Widodo’s maritime-axis doctrine. Source: http://www.thejakartapost.com/news/2014/11/22/govt-sets-out-maritime-dream.html 31

32. Maritime-Axis Development 32 Source: http://www.thejakartapost.com/news/2014/12/30/maritime-axis-development-boost-ri-s-gdp.html

33. Infrastructure Development Transportation Cost to TC ration in Indonesia is three times compared to Japan due to poor infrastructure. Indonesia needs to spend 545 billion dollar for the next 5 years to boost economic growth. 33

34. Preparation of Infrastructure and Logistics system for AEC in 2016 and beyond 34

35. Quality of Infrastructure of ASEAN 35 Source: World Economic Forum (2014)

36. ASEAN Connectivity 36

37. The “Brunei, Indonesia, Malaysia and the Philippines” East ASEAN Growth Area (BIMP-EAGA) Source: http://asiafoundation.org/in-asia/2010/09/22/philippines-spearheads-asean- effort-to-establish-regional-ro-ro-sea-transport-network/ 37

38. Beyond ASEAN Connectivity 38

39. Proposed Physical Connectivity • Upgrade infrastructure and facilities at prioritized gateway ports, airports, and border check points • Improvement of cold-chain infrastructure and efficient cargo handling of labor • Enhance Multi Modal Transport Infrastructure – Promote trade terms and practices related to multimodal transport including INCOTERMS 39

40. Proposed People-to-People Connectivity • Increasing business connectivity and partnership among responsible agents; • Increase participation of business sector in forming relevant negotiation strategies involving in international transport and logistics; • Accelerate the support for the establishment of ASEAN logistics curriculum • Accelerate the MRAs on National Skills Qualification System towards a standardized process in capacity building. • Human Resource Development – Upgrade skill through joint training and workshop – Encourage the establishment of regional center of excellence 40

41. Proposed Institutional Connectivity • Logistics Service Provider (LSP) – Adopt best practices in providing logistics services – Promote Regional Cooperation of LSP – Develop / Update database on logistics service provider Acceleration of the implementation of ASEAN Framework Agreement on the Facilitations of Goods in Transit (AFAFGIT) Removal of constraints on movement of goods across border Encourage implementation of 24x7 customs operations in selected border points Simplify administration of the issuance international trade documentation by competent authorities Review the need for selected non-tariff barriers (NTB) and explore possibility to remove unnecessary NTB Standardize the protocol establishing ASEAN single window with regards to the diversity of infrastructure, legal, and data system of individual member countries, Explore possibility of allowing drop-shipments at transit countries by international land transportation • • • • • • • 41

42. Proposed Safety and Security • Clearer regulations on the implementation of cargo security requirements • Support for service providers in the training and costs of implementing safety and security measures and physical installations • Better support from governments in creating awareness and education amongst the stakeholders in the supply chain in complying with the safety and security regulations implemented by various international regimes 42

43. Preparation of Infrastructure and Logistics System to Concert with ASEAN+6 43

44. Global Engagement of ASEAN 44

45. ASEAN-Japan-India Logistics Network Source: http://www.mofa.go.jp/policy/oda/whi te/2011/html/honbun/b1/s3_2.html 45

46. ASEAN + 3 and ASEAN + 6 • ASEAN Plus Three Logistics Cooperation for Future Trade Facilitation, proposed by Japan – Improving physical and digital connectivity and development of logistics support services—due to infrastructure investment (in transport, telecommunications, etc.) and ICT technical progress—have reduced trade costs of conducting cross-border business and thus encouraged trade and investment activities. EPAs with ASEAN+6 target: – ensuring free movements of goods, services, and people (mutual abolition of tariffs; development of logistics systems, infrastructure, and simpler customs clearance; services deregulation; and movement of skilled temporary workers and provision of training programs); – Facilitation of intraregional economic activities (standardization of investment rules and dispute settlements; and harmonization of intellectual property systems, certification systems, and competition laws); – Economic cooperation (economic/social infrastructure and cooperation in human resource development, industrial policy, environment, and energy conservation). • 46

47. Current Status of ASEAN Plus Connectivity • The logistics and transportation market in Indonesia remains highly fragmented. All logistics firms are trying to leverage on transportation market growth according to their capabilities and competencies. The increasing needs of outsourcing logistics services to the 3rd Party Logistics (3PL) to maximize cost efficiency. Presidential Regulation Number 39 of 2014 allows FDI maximum at 33% for distribution, warehousing, and cold storage. FDI of global logistics companies with advantages of standardized process and work quality, best practices for handling cargo and technology, visibility of logistics activities, and customer relationship management. Local logistic companies are suggested to improve efficiency in terms of business operations, by adopting the Just in Time (JIT) technique, to reduce the inventory carrying cost and transportation cost. Dealing with House Keeping: – Consumer product distribution, Logistics bottlenecks in main ports – Master plan for economic development, Coordination with local government – Regulatory reform to reduce/eliminate unnecessary costs through regulation review, clearing house for regulation, regulatory impact analysis (RIA), and regulation update. Economic Partnership Agreements (EPA) to improve logistics and transportation. • • • • 47

48. Streamlining Trade Procedures and Distribution Logistics Rationale Lower the cost and risk of transnational economic activity and promote the efficient division of labor within the region. Improve the efficiency not only of production activities but also of distribution between production centers and from production to consumption sites. Current Cooperation Physical Infrastructure East Asia Japan Private Sector Needs Advancements in information technology and the standardization of distribution tools such as pallets Future Priority Emphasis on logistics (e.g. Just In Time, Supply Chain Management) Action Target Source: Satoshi Suenega (2004), "Japan’s Technical Cooperation in Logistics", Technical Cooperation Division, Ministry of Economy, Trade and Industry. Reduce within five years the time needed to deliver goods from the point of production to destinations by more than two third Actions Plan  Training of Certified Logistics Master  Promotion of IT in the logistics sector  More efficient customs clearance Streamlining the flow of goods 48

49. Human Resources of Logistics 49

50. Logistics Services Integration in ASEAN • Objectives of Roadmap – To create ASEAN single market by 2020 by strengthening economic integration through liberalization and facilitation measures in area of logistics services – To enhance competitiveness of ASEAN production base through creation of integrated ASEAN logistics environment – Measures will cover FREIGHT LOGISTICS and Related Services 1. Liberalization 2. Trade & Logistics Facilitation 3. Service Provider 4. Human Resource 5. Multimodal Transport 50