Cutting the red tape

At present four state-owned enterprises - Pelindo I, II, III and IV - have a monopoly on the control of port land, operations and the provision of port related services. This means that even where private stevedores have secured terminal concessions in Indonesia, such as ICTSI at Makassar, Hutchison at Jakarta and the host of bulk terminal operators under contract to miners, they do so only under agreement with the Pelindo companies. 

The new law, in theory at least, ends this monopoly. It provides the basis for serious port reform by allowing for the creation of a series of independent Port Authorities which will regulate all future port development and provide basic port infrastructure such as approach channels and breakwaters. The idea is that the Pelindo companies will then become just another commercial service provider answerable to the new port authorities.

The aim of the Shipping and Port Act is simple - to improve the quality and reduce the cost of services at ports in Indonesia.

But before it can enter into force a series of implementing regulations designed to clarify and interpret the law have to be approved. Drafts of these regulations have already been circulated but these are unlikely to be finalised until after elections later this year - parliamentary elections are scheduled to take place on April 9 followed by Presidential elections in July when a president and vice-president for the 2009-2014 period will be chosen.

For port investors the devil will be in the detail according to David Wignall, a leading Indonesia port consultant and investor. "The effectiveness of the new law depends on the implementing regulations" he says. "Pelindo doesn't want to lose its monopoly and, with strong support from unions, hopes to use the implementing regulations to stifle competition and to maintain the status quo."

Among the issues that remain undecided are how ownership and access to port land will be governed, how port authorities will be financed and manned, how free and fair competition will be ensured, how the development process will be managed and, of course, what will happen to Pelindo.

President Yudhoyono is seeking a second presidential term. If he succeeds, and opinion polls are favourable, he will have a strong mandate for his political platform of tacking corruption, promoting economic growth and thinning out Indonesia's bloated civil bureaucracy. As a supporter of the initial shipping reforms, a convincing win could arm him with the political muscle to open up Indonesia's inefficient port systems to healthy competition in the face of opposition from Indonesia's civil service and unions.  

If the reforms are forced through as originally intended then Mr Wignall believes this would see the creation of some 20-25 port authorities with full regulatory powers. Investors could then bypass Pelindo and work directly with local and provincial governments to develop new services or build new facilities. The new port authorities would have the power to decide on a case-by-case basis which projects to pursue. They would also be in a position to issue tenders for port operating concessions.

This scenario would see Pelindo eventually become a private company, although how the company would be broken up and funded is anyone's guess at this stage given that some 80% of Indonesia's smaller ports are thought to be operating at a loss.

One leading figure at an international port operating company who did not wish to be named says he does not think the draft reforms go far enough to attract serious foreign investment in Indonesia's ports. "It looks like an improvement, but it hasn't gone all the way yet," he claims, although he refuses to elaborate.

Mr Wignall argues Indonesia has much to gain from opening up its ports to competition, whether this allows international operators to invest in new terminals or not. "I don't think getting foreign investment has been the big driver in all this," he explains. "But Indonesia does want to improve the performance of its ports and to do that there must be fair competition on a level playing field. This is a big opportunity to improve things. There is huge potential for private investors to improve ports in Indonesia. Whether it's local investors or international investors doesn't really matter.

"At the moment there is a severe lack of competition and little incentive to do anything more cheaply or more efficiently. It's all very incestuous. It works for some people as it is, but not for Indonesia."

The leading ports of Cilacap, Cirebon, Jakarta, Kupang, Makassar, Palembang, Semarang and Surabaya would all make obvious targets for private investors seeking base cargoes, while modern container facilities would be welcomed in Sulawesi, Sumatra and most other regions. Agricultural bulk export terminals for palm oil as well as commodities such as cocoa that are usually - and very expensively - bagged for shipment could also be lucrative. Liquid bulk terminal operation in competition with state-owned energy company Pertamina has potential, while reefer facilities for fish exports are all but non-existent in Indonesia.

 "We could see investment as soon as 2010," says Mr Wignall. "The fastest way in might be for small companies operating tugs or offering pilotage because the initial investment levels and start-up times are lower."

The Trojan horse for port reform should the Shipping and Port Act come unstuck might emerge in the shape of new trade areas in ports managed by the regions.

A new bill is currently being examined by Indonesia's House of Representatives which is designed to introduce a series of special economic zones (SEZs). This would see a new agency established able to issue investment-related licenses under one roof and tax incentives introduced to encourage investment. In all, 18 regions across the archipelago have so far proposed new SEZs.

The government has already declared sites in Batam, Bintan and Karimun as SEZs using a special government regulation in lieu of law while awaiting endorsement of the SEZ bill. Riau's Dumai, West Java, Central Java, East Java, Bali, South Sulawesi's Makassar, North Sulawesi's Bitung Island and East Kalimantan are next in line. "SEZs are included in the new ports and shipping law and it might be the easiest way of private investors getting statutory approval," says Mr Wignall.