Nov.14, 2005

Cutting port handling costs

The government should deal firmly with foreign liners and their local agents that refuse to abide by Minister of Transportation Hatta Rajasa's ruling early this month, which slashed the terminal handling charges (THC) of containers and the costs of processing bills of lading.

Cutting the THC on 20-foot containers from US$150 to $95 per box and 40-foot containers from $230 to $145 was indeed a significant move that will go a long way in helping businesses cut their costs amid the high inflation-environment due to the October increase in fuel prices.

The ruling that was adopted at a meeting of the Coordinating Team for Facilitating Exports and Imports also cut the processing fee of bills of lading from $30-40 per document to only around $10.

However, the government should also thoroughly look into the grievances raised by foreign shipping companies regarding the unusually high costs they have to bear at Indonesian seaports. Foreign liners have always set the THC rates for Indonesia much higher than those in other seaports in Southeast Asia because of what they claim to be extra operational costs at Indonesian ports. And surcharges are a significant part of the THCs slapped on Indonesian importers or exporters.

Foreign liners have argued that the surcharges reflect the gross inefficiency and rampant corruption at seaports, pointing out that from the first gate of entry into the port, to docks and even in the waters of the harbor itself, illegal levies seem to arise anywhere. No wonder, port-handling costs in Indonesia are often almost twice as high as those in other ASEAN countries.

The fact that the new THC rates still include surcharges amounting to $25 for 20-foot containers and $40 for 40-foot containers reflects an official recognition of the high costs and high risks faced at Indonesian seaports.

Even though foreign freighters control the shipment of almost 80 percent of Indonesian exports and imports, and that it is the conferences of foreign shipping companies (shipowners) that usually have the final say in determining THCs for containers at Indonesian seaports, the government should act firmly to enforce the new ruling.

In fact, the reform measures should not stop at the THC but should go further in removing other sources of high costs at seaports such as the arduous bureaucratic procedures that often require more than 20 signatures from officials in various government agencies involved in port operations to clear the release of an imported consignment. And illegal fees are levied at almost every stage of this process.

A recent study of 75 large export-oriented industrial companies at four of Indonesia's largest seaports by University of Indonesia's Institute for Social and Economic Research concluded that logistics services accounted for an average 14 percent of total production costs, and inefficiency, illegal levies and arduous bureaucratic procedures at seaports account for a significant portion of these high costs.

Low costs of logistics -- meaning low transport costs, short transit times, reliable delivery schedules, careful handling of goods in cold storage chains -- are vital for trade and smooth distribution of goods.

Industrial companies cannot manufacture goods without the inputs they need, and, in the case of Indonesia, most manufacturers still rely on imported materials. Hence, if delivery times are expedient and reliable, manufacturers would not need to hold large inventories of inputs, thereby cutting their inventory costs.

Cutting the gross inefficiency, corruption and uncertainties in cargo-handling and customs clearance procedures that have caused Indonesian seaports to be classified as high-risk harbors will greatly facilitate smoother foreign and inter-island trade. This, in turn, will strengthen the competitiveness of Indonesian commodities as almost 80 percent of domestic and foreign trade is done through sea transportation.

Since efficient port handling is the key to efficient logistics, the government therefore should treat seaports primarily as basic infrastructure, not as a facility that is tasked with earning as much profit as possible. Though a seaport should run as a self-financing entity, its biggest contribution to the economy should be a smoother, more efficient flow of goods, not the amount of dividends state-owned port management companies pay annually to the government.