||Improving domestic connectivity is one of key strategic pillars in the Government's Medium-Term Development Plan 2010-2014 (RPJMN). Improving domestic connectivity is one of the strategic foci of the Government's Master Plan for the Acceleration and Expansion of Economic Development 2011-2025 (MP3EI) issued in May 2011. To achieve higher and more inclusive growth across the region in Indonesia, the MP3EI has three strategic foci: (i) accelerating economic development in six economic corridors, (ii) improving national connectivity, and (iii) strengthening human resources, science, and technology, which are prerequisites to sustained, accelerated and green growth. The new ADB Country Partnership Strategy (CPS) currently being finalized has two key pillars, inclusive growth and environment sustainability. Strategically, the RPJMN provides CPS direction while the MP3EI will be the convergence of ADB's sectoral/thematic interventions and the Government's vision of accelerated development. The policy and advisory technical assistance (TA) for Supporting Domestic Connectivity will support the government initiative on the second strategic focus on improving domestic connectivity, with emphasis on inter-island connectivity. It was requested by the government during the CPS consultation prior to the release of the MP3EI. The TA were first included in the Asian Development Bank (ADB) TA pipeline in May 2011. The priority areas covered under the TA was formulated based on discussion with the Ministry of Transport (MOT), the National Development Planning Agency (Bappenas), and other government counterparts during ADB Fact Finding and consultation missions. Agreement was reached with the government on the impact, outcome, outputs, implementing arrangement, cost and financing arrangement, and terms of reference of the TA.
|Project Rationale and Linkage to Country/Regional Strategy
Good economic management post Asian crises restored economic growth to an average of 5.1% during 2000-2009. Economic growth in 2010 strengthened further to 6.1% supported by more buoyant investment and exports. However, significant development challenges remain. Recent economic growth is still significantly below the pre-crisis level and the government's medium-term target of 7-8% as stated in the RPJMN. While poverty and unemployment have trended downward, they remain relatively high. Poverty rates in some provinces in the eastern part of Indonesia is relatively higher. In addition, the government also intends to reduce inflation over the medium term. Currently, inflation is still higher and more volatile than in other competitor countries and increasingly becomes an issue that could potentially slow down poverty reduction. The major sources of recent inflationary pressure are from the supply side with visible regional dimension, suggesting that its solution in the medium term has to include improved domestic connectivity.
The government recognizes that lagging infrastructure, underdeveloped inter-island connectivity, and an inefficient logistics system are among key constraints in achieving its target of higher growth, faster poverty reduction, and lower inflation. A number of studies have pointed out that infrastructure and logistic systems have emerged as a major constraint for accelerating economic growth. The quality of Indonesia's infrastructure and logistical systems is lower than that of its regional neighbors, resulting in lower levels of domestic and international connectivity. The recent success of the country in maintaining a healthy macroeconomic environment throughout the crisis has boosted Indonesia's ranking in terms of economic competitiveness by 10 places in the Global Competitiveness Index (GCI) to 44 in 2010. However, at 82, Indonesia's ranking on infrastructure is far below its overall GCI ranking, implying that infrastructure is a drag on the country's competitiveness. The Global Enabling Trade Report (2009) ranked Indonesia 75th in terms of efficiency of customs administration and 94th in terms of transparency of border administration out of 121 countries. As a result, the time taken for containers to be cleared at Indonesian ports is very high, with about 25% of import containers requiring more than 10 days to be cleared. The restrictive regulations results in a low level of competition in the provision of logistics services. Logistics costs in Indonesia is estimated at about 14% of total production costs, compared to only about 5% in Japan (Basri and Hill, 2010).
The impact of lagging infrastructure, poor inter-island connectivity, and inefficient logistic system have appeared in a number of forms. Sending a 40 feet container from Jakarta/Surabaya to Bitung (North Sulawesi) costs $600 compared to approximately $300 from Jakarta to Singapore because small domestic container ships cannot capture economies of scale compared to larger vessels. The productivity in container moved/hour of the typical crane in Indonesia ports is 40-45 while Singapore can achieve 100-110 per hour. According to one estimate, the turn-around time for domestic shipping at the 25 strategic ports is on average 2.7 days. With average sailing time being 1.5 days ships were spending about 75% of the total time between destinations at port. Due to delays in cargo handling, the main shipping lines report that they often have to leave Jakarta Port before completing the loading to keep to schedule. Reflecting poor logistics and inadequate transport infrastructure, about 70% of the rice price differences across provinces are explained by the degree of remoteness (World Bank, 2010). High inter-island freight rates mean availability and prices of basic commodities fluctuate widely in remote areas resulting in higher average inflation in some regions in Indonesia. A bag of cement which costs IDR 50,000 in Jakarta or Surabaya (Java) will cost IDR 75,000 in Jayapura and IDR 500,000 in Wamena (both in Papua). In addition, Indonesia's manufacturing sector is not well integrated into international production networks because of unreliable transport and high logistics costs.
To help address the challenges, the connectivity pillar of the MP3EI focuses on (i) improving intra economic corridor connectivity by developing roads, shipping, railways, and improving local access to the centers of growth and facilities; (ii) improving inter economic corridor connectivity by developing good interconnection between primary ports and airports (especially in the eastern Indonesia) and reducing logistical and economic costs of inter-corridor delivery of goods and services, and (iii) improving international trade logistics by preparing ports and airports as international hubs in western and eastern Indonesia, optimizing the operation of the National Single Window, and enhancing the operation of international ports and airports through implementation of an integrated logistic system. After the issuance of the MP3EI, the Government will revisit, harmonize, synergize and update its existing planning documents, such the National Logistic System (SISLOGNAS) and National Transport System SISTRANAS. The update will be reflected in the road map and annual implementation of connectivity programs. This exercise can be strengthened significantly with available updated information, particularly on the second element on inter economic corridor connectivity.
Connecting less developed eastern Indonesia to domestic and international markets will improve access to goods and services at lower, more stable prices as well as increase production and the volume of domestic and international trade by lowering transaction costs. In addition, improved connectivity will (i) support greater integration between regions to reduce price volatility resulting from the impact of sudden shocks in production or demand; (ii) increase market access as well as the competitiveness of Indonesian goods, including those from eastern part of the country and (iii) contribute to greater diversification in production and exports while encouraging the domestic rather than foreign commodity processing, thereby improving employment and reducing poverty.
Linkage to Country Partnership Strategy/Regional Cooperation Strategy:
The new ADB Country Partnership Strategy (CPS) currently being finalized has two key pillars, inclusive growth and environment sustainability including climate change. Strategically, the RPJMN provides CPS direction while the MP3EI will be the convergence of ADB's sectoral/thematic interventions and the Government's vision of accelerated development. The proposed TA will support the government initiative on the second strategic focus on improving domestic connectivity, with emphasis on inter-island connectivity. The TA will also indirectly support regional cooperation and regional trade by supporting government's priority to enhance inter-island connectivity and an enhanced domestic logistics system.