High Transportation Costs Hurt Indonesia’s Eastern Economies

May 18, 2011

By Erman Rahman

Indonesia is rapidly developing and home to some of the richest Asians, yet still has huge pockets of extreme poverty. The disparity of Indonesia’s Eastern regions – the islands of Papua, Maluku, Sulawesi, Kalimantan, and Nusa Tenggara – has been a major concern for decades. These islands comprise 69 percent of the country’s total land area and 19 percent of its population, but represent the country’s lowest average incomes. In addition, the islands of Eastern Indonesia are quite dispersed and their terrain is remote and rugged, making it even more difficult for local farmers and businesses to transport goods to the rest of the country.

A recent study found that the cost of transporting goods in Eastern Nusa Tenggara is much higher than in other parts of Indonesia. Above, a vessel stops at Java's Merak Port. Photo by Sakurai Midori

Transportation challenges are an often overlooked, crucial impediment to the development of Indonesia’s Eastern provinces. The World Bank’s 2010 Logistics Performance Index ranked Indonesia 75th out of 155 countries, far below that of neighboring countries such as Singapore, Malaysia, Thailand, Vietnam, and the Philippines. Good logistics sector performance implies low transportation costs for goods, in turn enhancing the competitiveness of a given economy.

A recent AusAID-funded study conducted by The Asia Foundation and the University of Indonesia found that the cost of transporting goods in one province, Eastern Nusa Tenggara (NTT), is much higher than in other parts of Indonesia. Producers bear higher costs for sea transport to get their export goods to market, with sea crossings comprising around three-fourths of total costs for transporting goods from NTT. Erratic weather reduces by half the capacity of ferry crossings for several months each year, driving costs up further. Moreover, getting goods to port is also expensive. Along six routes surveyed in NTT, road transport costs averaged 55 cents per kilometer, as compared to the average cost of 49 cents per kilometer for routes previously surveyed in other regions of Indonesia.

While national law prohibits imposing levies on the transportation of goods, as in other provinces, several local governments in NTT creatively ask for “donations” instead from businesspeople transporting goods, particularly agricultural, livestock, and fishery commodities, the main outputs of the province’s economy. Although they are illegal, in practice, most transporters pay to ease passage through the system, which further contributes to unnecessarily higher transportation costs.

Reform efforts will require a high commitment from all levels of government and may take years to realize. In the long term, reducing obstacles that create trade imbalances between NTT and the more-developed Java is clearly a priority. The study showed that for three major seaports in NTT, the average volume of goods exported from the province is only 10-16 percent of the percentage of goods that are imported from Java. On the journey from NTT back to Java, companies don’t have enough goods to fill their containers, cargo ships, and trucks, leaving them close to empty. This trade imbalance not only increases transport costs, it lengthens the overall travel time of goods coming from NTT as empty vehicles wait around for additional loads to reduce their costs.

So, what can be done? The study recommends several promising short-term measures that could be taken. Improving port infrastructure – such as adding piers and installing gantry cranes at NTT’s busiest container port, Tenau/Kupang – would improve loading and unloading times. The productivity of Tenau Port is only 12 containers per hour while the Port of Palaran in Samarinda (East Kalimantan) can handle twice as much volume. More could be done to promote competition among ferry operators, including providing operators with incentives such as a tax holiday, or soft loans to operators who open a new facility. The study also shows room for improvement in the management of stevedoring personnel at major ports. The current tariff scheme in Tenau is based on the length of time dockworkers work. This provides little incentive for them to work harder and faster. Unloading 3,000 tons of rice at Tenau port takes four days, for example, while the same task takes half that time in the Port of Lembar (West Nusa Tenggara) which uses a weight-based tariff system.

The survey findings indicate that a 10 percent reduction in transportation costs in NTT would reduce the province’s inflation rate by at least 1 percent. For citizens with an average GDP per capita of only $270 a year, this could significantly reduce the cost of living, help avert poverty, as well as make an important contribution to the economic development of NTT and Eastern Indonesia overall.

Erman Rahman is the director for Local and Economic Governance in The Asia Foundation’s Indonesia office. He can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

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