A logical approach to portly growth

What new opportunities do you see in Indonesia?
As a global operator, we want to be part of Indonesia’s growth. In Southeast Asia, Indonesia and the Philippines are leading growth of the region. With 240 million people in Indonesia, the opportunities are huge. The challenge for Indonesia, in terms of development, is getting everyone together on the same page. Foreign investors are all eager to invest. We see long-term potential. The risk is acceptable. However, for most projects that are available, the concession terms are not as long as we would like.

How long are the concession terms?
They are usually 20-year contracts for ports. Globally, our operational concessions are 40 years or more on average. The port business is capital intensive, and it is a long-term business. Each crane we buy is for 30 or more years of use. With a 20-year lease, we cannot justify even buying one crane. The concession is one thing. Then, on such a long-term project, we need to have guarantees of certain value increases, at least to cover operations. Tariffs have not been increased since 2011. For six years, our margins have been decreasing. Every year, inflation is 6-7%, and the minimum wage has increased 20% almost every year.

How this is impacting the port business community?
When you put everything together, margins are getting squeezed by at least 3% every year, without any foreseeable increases in revenue. For any operator to invest in a concession, you need to have certainty on these tariffs. That is one of the things that needs to improve.
There are some good initiatives the government has taken. Last year, Pelindo 3 finished dredging the access channel to Tanjung Perak Port. It went from 8.5 metres to 13 metres. Shipping Lines can now accommodate double the vessel size, which should decrease transportation and logistics costs.

Why are logistics less efficient and often costlier in Indonesia compared to other countries in the region?
Here, it is more of an infrastructure issue, not in the port terminals, but outside. Once you take a box out of the port and go into the production facilities, the infrastructure is poor. All the logistics outside of the port are impacting the cost of transportation more than what is happening inside of the port. If you send your box on a train rather than by road, it is almost the same cost. Usually, train transportation is much cheaper. But here the tariffs are high. You have trains, but it is difficult to change the mode of transport unless there are reductions in costs.
Shipping a box from Surabaya to Jakarta costs almost same as sending a box from Surabaya to Spain. It is not competitive, and it happens in part due to vessel size that can call at terminals, channel fees, volume or economies of scale.
Locally, we believe the best way to improve logistics costs is through processes. If you tell me my box needs to be out in three days, but the process and licenses I need to go through, inspections, payments, etc. take longer, then my overall cost actually increases. The bureaucracy and permitting should be improved to make this more cost and time efficient.

What would you recommend to the current administration to improve the port sector?
We engage with all stakeholders in the sector, and they understand us. They know the challenges, but it takes time. Some sectors could be relaxed for foreign investors. Greenfield investment is sizable and requires anyone to have long-term concessions and easier procedures.
Co-operation between SOEs [state-owned enterprises] and foreign investors should be analysed and made broader and more open. There are still many issues impacting investment that should be examined. The government knows the investment level is there, but this is not going to come from internal resources. Even if you can generate that kind of investment locally, it always makes sense to spread the risk and to do it efficiently using technology and local or foreign expertise.
Similar projects have been done in many other countries. Getting that expertise here and involving partners makes sense; it is difficult to make this investment by yourself. However, there has been a lot of positive action. The first year the government was in power, it was difficult to put things in place. After that, things started moving. They just need to continue to improve.

How have DP World’s activities in Indonesia developed over the past few years?
TPS is our only DP World asset in Indonesia and the main terminal in the Tanjung Perak Port. Last year, we handled 1.35 million teu’s, which represented 90% of the international traffic into East Java. In terms of investments, we are completing a programme of equipment upgrading, including the addition of 3 QC’s and upgrading our civil infrastructure and systems. We believe TPS will continue to be the main gateway for East Java and Surabaya. Every week, we receive between 20 and 25 vessel calls. All the international shipping lines call here.

What is the scope of the agreement you signed with the Indonesian government to provide technical assistance and help operating ports?
Kuala Tanjung is a new project in Sumatra. It is being developed, but it is still one and a half years away. We have just started the phase of analysing what sorts of volumes and investments have potential. We are doing this with Pelindo 1 and discussions are at a very early stage.
Pelindo 1 visited our terminals in Jebel Ali port, and they want to develop a similarly integrated project. We are talking about a long-term development plan that needs to be carefully analysed.

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