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The long-term prospects of Indonesia's logistics sector

Jakarta Post - March 15, 2023

Haris Eko Faruddin, Jakarta – The logistics industry is a driving force for the national economy. Logistics transportation is one of the supports for the rise of the economy, which is currently in a slump due to the COVID-19 pandemic.

Logistics relates to moving goods or services, energy, and other natural resources from the origin to the end of use, including procurement, maintenance, distribution and supply (to replace) equipment and human resources.

Through Presidential Instruction No. 5/2020 on Arrangement of the National Logistics Ecosystem, the government has developed an action plan to improve national logistics performance, improve the investment climate and increase the competitiveness of the national economy.

The national logistics system reform aims to reduce logistics costs from 24 percent to 17 percent of the Gross Domestic Product (GDP) in 2024. The government's strategic move is to increase port efficiency to reduce national logistics costs.

According to a study from the World Bank in 2014, logistics costs from sea transportation in Indonesia contribute 2 percent to 3 percent of the price of goods at the consumer level, while waiting costs at ports due to dwelling time are far greater with a contribution of 6 percent to 15 percent of the price of goods.

There have been several breakthroughs taken in the field of logistics transportation. The government has constructed 11 ferry ports from a target of 36 ports by 2024. Optimization of the maritime highway program is also continuing. Currently, 32 ships are operating, serving 32 routes and stopping at 114 ports, including those in Papua and West Papua provinces.

Air transportation infrastructure is also being improved continuously. The government has set a target to build 10 new airports serving 43 air routes by the end of 2024.

The improvement of integrated and consolidated logistics transportation can be carried out by improving port logistics transportation facilities, optimizing the digitization of logistics services, providing strategic food transportation modes and cross-sector collaboration.

Developing countries, including Indonesia, need holistic efforts to increase the competitiveness of their logistics sector, including improvements related to logistics, such as customs, infrastructure, quality of logistics service providers, timeliness and tracking and tracing systems.

Among these indicators, based on World Bank Logistics Performance Index data in 2018, the lowest score for Indonesia is on customs indicator, while on timeliness indicator Indonesia has the same score as Vietnam. The quality of Indonesia's logistics service providers, however, score below those of Vietnam and Malaysia.

This indicates that Indonesia needs to adopt a more integrated logistics approach, including optimizing the transportation system, improving the financial sector and improving the warehouse sector to ensure efficiency in the entire supply chain.

Opportunities to increase Indonesia's trade are also growing, driven by increased e-commerce activities. This, of course, indicates the urgency of accelerating digital transformation, which covers all sectors related to logistics.

In the long run, the Indonesia Emas (Golden Indonesia) 2045 vision aims to open up opportunities for the domestic shipping industry to increase capacity in line with optimal export and import performance. This condition allows the logistics industry to improve its ability to meet growing export-import needs. The Indonesian maritime and shipping industry needs to increase ship capacity by up to 4.6 times the current condition to realize Golden Indonesia 2045.

Suppose the targets set by the government are realized. In that case, Indonesia's total trade value and volume in 2045 are predicted to grow by 6.8 times (from US$305 billion to $2,064 billion) and 5.3 times (732 million metric tonnes to 3,862 million metric tonnes), respectively when compared with 2020.

Shipping company Samudera Indonesia calculates that to achieve the targeted value and volume of international trade in 2045, Indonesia will need a vessel capacity of 225 million DWT in 2045 when compared to 49 million DWT in 2022.

To meet long-term logistics targets, supporting infrastructure must be prepared carefully. Infrastructure plays an essential role in determining a country's logistics performance. The leading logistics activities, which include transportation and warehousing, require infrastructure for airports, seaports, roads, railroads and information and communication technology (ICT).

Apart from being an essential factor in logistics, the quality of this infrastructure is an attraction for investors in building factories, developing businesses and trading activities. Poor quality of logistics infrastructure is one of the causes of huge logistics costs.

Improving the quality of logistics infrastructure is an essential factor in national logistics performance. Many world economists believe that Indonesia will become one of the top five countries in the world in terms of economy in 2030. Indonesia's potential in the ever-growing ASEAN region, lies between the economic strengths of China and India and e-commerce which is growing very fast.

The government is also working to improve a conducive business climate, transparent logistics service delivery, fair business competition, simplification of logistics service schemes and arrangements so as not to burden the community, and ensuring the direction of good logistics service policies and policies prioritizing professionalism. The presence of a quality and strong logistics service sector will automatically guarantee the welfare of the community.

[The writer is an analyst at Bank Mandiri.]

Source: https://asianews.network/the-long-term-prospects-of-indonesias-logistics-sector