Mon, 05 Jul 2010

From: The Jakarta Post

By Danang Parikesit, Yogyakarta
Indonesian top politicians and policy makers are all talking about our competitiveness in the world market. Some are quoting the results of World Bank’s Logistics Performance Index (LPI) 2007 and 2010, which basically demonstrates the lack of competitiveness in the Indonesian logistics system.

President Susilo Bambang Yudhoyono in his remarks when inaugurating the recently established National Economic Committee stressed that economic connectivity is one of the top priorities for the government. Several government and private sector organizations have already rushed to propose project initiatives.

All the major initiatives involving mega investments are aimed at among others, reducing transportation costs. But are we addressing the heart of our physical distribution problems? Most reports say that the logistics costs are enormous and reduce the capability of our goods and services to compete in the international market.

What drives the high logistics costs? Are we putting too much faith in our economy to infrastructure development? Is it a transportation infrastructure bottleneck or is it the economic behavior of the transporters that creates the high cost of transportation?

While it is apparent that our infrastructure and progress lags behind our neighbors, and new emerging economies such as India and China, the problem lays not only in the cost of transport infrastructure and services. While it is true that we need to heavily invest in providing an adequate transport infrastructure, leading us to believe if we fix our infrastructure we will solve the suppressed economic development, it may lead us into disappointment.

The Indonesia logistics blue print has several methodological issues and the most obvious one is its inability to clearly identify the factors affecting the high logistics’ costs. The study did not indicate the actual production and transaction costs of transporting goods so we do not know the cause of inefficiency. Several in-depth studies undertaken by various public and private organizations have pinpointed a direction for cost reduction strategies, which we should proceed with, but generalizing it into a wider geographical area will be problematic.

An interesting finding comes from the combined analysis of the input output table of the Central Statistics Agency (BPS) and the original destination survey of the Transportation Ministry. Added with various transport statistics, we have additional information for refining the Indonesian future logistic policies. Here are several lessons that can be learned.

First, it is true that the cost of transporting goods and services has increased overtime. Not only the absolute amount of transport costs components escalated, but the rate of change across commodities rose as well. The biggest hike was on basic commodities and the lowest was on service sectors.

It means that transporters for agriculture, forestry and mining commodities should be the main target of intervention when dealing with reducing the cost of transport. The mining sector suffers most from this cost increase with around 20 percent annual costs increase in the last five years.

Share of transport costs to the final cost of delivering trade and service sector, which is an urban sector, is relatively higher than other sectors but its rate of increase is relatively lower. Pushing for a more efficient urban transport system will be a good strategy for maintaining competitiveness of our cities.

Second, most goods delivered within the distance of less than 1,000 kilometers. Local delivery and a local distribution system is still dominating the value and volume of final transport costs. Combining this data with the first lesson above, we know that the key to a cost-reducing strategy should start from the production site to the closest transport hub.

Third, it is important to recognize that final transport costs basically consist of a cost of production and profit margin enjoyed by transporters. A careful look at the statistics will reveal an interesting feature of the Indonesian transporters. The basic production costs are not as high as we all thought. It is actually very low compared with the final costs charged to the commodity owners.

It demonstrates that the Indonesian transporters if they are hired or in business, enjoy the lucrative differential between final costs and basic costs of production. It has only two meanings. We are dealing with an oligopolistic behavior of transporters or the transporters are charging a high risk premium for working under a non-secure business environment.

The third possibility is perhaps a combination of both. Many bulk commodities are transported by few companies able to set the tariff above market. Past studies on the distribution of rice also confirmed this phenomenon. The Indonesian Business Supervisory Commission (KPPU) processed several cases of oligopoly in the agriculture commodities, which show a sign that oligopolistic behavior does exist in the Indonesian commodity market. And it is ruining our competitiveness.

What about the business risk? The reason why transporters are charging a high premium to their customers is due to the risk of doing business. Unnecessary transactions occur along the supply chain, creating a chain of rents and transfers that charges into the final commodity price.

With an artificially high price of commodities, and the difficulties for our competition authority to deal with the issue, the government should try to eliminate such a business practice by promoting a parallel supply chain, for example using the ICT to shorten the business process and eliminate unnecessary transactions.

What we still do not know is if transporters’ profits are suppressed and if they are willing to voluntarily participate in such a cost-reduction effort, or they are actually surfing nicely in this business climate and even profit from it.

Targeting at improving the supply chain in agriculture commodities by creating a network of local transportation, warehouses and regulatory systems enable farmers to enjoy higher farm-gate prices.

In all of the basic sectors, for example agriculture, forestry and mining sectors, the government should eliminate oligopolistic behavior of the transporters before rushing into mega projects.

The writer is a professor of transportation at Gadjah Mada University, and the chairman of the Indonesia Transportation Society. He is also with the Institution of Engineers Indonesia.