Author:
William Sabandar
COO of the Indonesian Business Council (IBC)
03 December 2024
This article is originally published on The Jakarta Post on December 2024
Achieving 8 percent economic growth, much higher than the average 5 percent over the past decade, and eradicating poverty to zero percent have been declared as the development goals of the Prabowo Subianto-Gibran Rakabuming Raka administration. To fulfill these goals, President Prabowo aims to achieve food and energy self-sufficiency within five years and accelerate the downstreaming of natural resources. While these aspirations are admirable, they are nearly impossible to accomplish without recognizing the unique role of logistics that is often-overlooked. This is a determining factor that we have yet to fully master.
Indonesia’s logistics costs currently stand at a staggering 14.3 percent of its GDP, which is equal to around Rp 3 quadrillion (US$189 billion), virtually as much as our current annual national budget. Reducing these expenses would allow the country to deliver more high-priority national programs.
This burden is felt most especially in eastern Indonesia where logistics costs are conspicuously higher compared with the western provinces. For instance, building a simple house in Papua can cost around three times as much as building one somewhere in Java. Such differences demonstrate the difficulty of delivering products to more distant locations, which slows down growth and widens disparities in the development of various regions.
”Indonesia's logistics costs currently stand at a staggering 14.3 percent of its GDP, which is equal to around Rp 3 quadrillion (US$189 billion).
Furthermore, Indonesia’s ranking in the World Bank’s Logistics Performance Index 2023, at a modest 63rd out of 139 countries, highlights the nation’s shortcomings in this sector. This ranking pales in comparison to other ASEAN countries like Singapore (ranking first), Malaysia (31st), Thailand (37th), the Philippines (47th) and Vietnam (50th).
The index evaluates six key dimensions of logistics performance: customs efficiency, infrastructure quality, international shipments, logistics services quality, tracking and tracing, and timeliness.
While making strides, Indonesia continues to lag behind in several dimensions, particularly in terms of timeliness, infrastructure quality and tracking and tracing. To achieve the ambitious goals of 8 percent economic growth and poverty eradication, Indonesia must prioritize addressing its logistics challenges. An effective logistics system is not just a tool to achieve one goal, but it is also the catalyst for overall national development, which includes the nation’s prosperity.
In order to overcome these obstacles and fully utilize the opportunity for national development, a comprehensive approach is required. The Indonesian Business Council (IBC) has highlighted logistics as one of the sectors that need enhancements and has provided the government with 15 policy recommendations to support the government’s 2024-2029 development agenda.
To comprehensively manage Indonesia’s logistics hurdles, it is essential to examine the issue through three distinct lenses: geographical uniqueness, institutional transformation and human capability improvements.
Indonesia is faced with intricate geographical realities, as the world’s largest archipelagic country consisting of over 17,000 islands, around 6,000 of them inhabited. The population and industries are concentrated in Java, whereas the abundance of land and sea-based natural resources are spread around the eastern regions. This begs for a strategy to develop a special maritime-based logistics system. Supporting the system, we will need to activate the productivity of our spatial planning that caters to our unique resources distribution all over the archipelago, by building a growth center in every main island or cluster of islands. This growth center would act as a logistics hub, enabling international interactions at ports around the country, cutting the extra time it takes to first ship goods to one central port before going abroad.
”We will need to activate the productivity of our spatial planning that caters to our unique resources distribution all over the archipelago, by building a growth center in every main island or cluster of islands.
Second, Indonesia’s logistics system keeps struggling with both service delivery and regulatory issues. With an average clearance time of seven days, Indonesian ports fall significantly behind regional peers like Singapore and Malaysia (one day), the Philippines and even India (two days). According to the 2023 Logistics Performance Index, India’s timeliness performance has improved by 10 percent over the past four years, while Indonesia’s has remained stagnant. Additionally, India’s logistics costs as a percentage of GDP have decreased from 14 percent to 12 percent in the same period, while Indonesia’s have remained relatively high.
Indonesia’s ability to track and trace shipments is limited, holding back supply chain visibility. Such delays and higher costs significantly impact the competitiveness of Indonesian businesses and economic growth. Moreover, Indonesia’s current logistics system is disorganized, with many different agencies working separately without a coherent network. This sectoral method has slowed down coordination and efficiency.
Recognizing these problems, the government of former president Joko “Jokowi” Widodo completed many national strategic infrastructure projects (PSN) including Patimban Port and the Makassar New Port logistics hub, with ongoing projects among which are the Lahat-Kertapati Logistics Railway and the East Kalimantan Logistics Railway infrastructure. But hard infrastructure enhancements alone are insufficient. Investments in soft infrastructure are required, including regulatory frameworks, digital systems and governance. Therefore, a high degree of institutional transformation is needed. In 2017, The government initiated the National Logistics Ecosystem (NLE) as part of the Economic Policy Package (PKE) Phase 15. The goal of the NLE is to reduce logistics costs and improve the efficiency of the Indonesian logistics system. In reality, the current system suffers from redundancy in tasks, limited automation and a lack of integration between various systems.
”Indonesia’s ability to track and trace shipments is limited, holding back supply chain visibility. Such delays and higher costs significantly impact the competitiveness of Indonesian businesses and economic growth.
The creation of a unified national logistics platform should facilitate data sharing, streamline processes and improve transparency, instead of making things more complicated and potentially creating loopholes. To escort the success of the NLE and other logistics reforms, strong governance and regulatory oversight are of utmost importance. This will help minimize corruption and prevent the emergence of illicit practices, and thus create a level playing field for all stakeholders.
Lastly, as the system advances, the workforce will need to evolve. Human capability improvement is another critical component of this upgrade. Building a culture of service excellence will drive consistent high-quality performance across the logistics ecosystem. Decentralizing development centers can be a solid first step, allowing for a broader employee reach and more comprehensive training. By collaborating with the private sector to develop targeted training curricula, we can ensure that the skills imparted are directly relevant to industry needs. On top of that, stronger knowledge and understanding of the system should be accompanied with stronger monitoring and evaluation for all levels.
”Lastly, as the system advances, the workforce will need to evolve. Human capability improvement is another critical component of this upgrade.
As a guideline to the whole system, a clear and measurable set of key performance indicators must be established. By redefining specific targets at the regional level, such as for islands or ports, policymakers can track progress and allocate resources effectively. A data-driven procedure will help reveal more detailed characteristics of the system, its strengths and weaknesses.
Prioritizing logistics refinements will ultimately enable Indonesia to position itself as a regional logistics hub and unlock its full potential as a global economic powerhouse.