Private Sector Investments in Indonesian Public Ports
by Terence D. Smyth

Introduction

The Republic of Indonesia has moved from close regulation of port development toward a much freer market. The country now looks to the private sector to bring to its ports equity capital, modern technology and productive methods of conducting business. In return, it offers foreign investors access to one of the fastest growing markets in the world and an extensive and expanding port system.

In conjunction with P.T. Dwipantara Transconsult of Jakarta, Seaport Consultants worked with the Indonesian Directorate General of Sea Communications (DGSC) to prepare a brochure on private sector investment opportunities in Indonesian public ports. We drew on this brochure to prepare this report.

Indonesia

Indonesia is one of the newly-industrializing countries of Southeast Asia. The country has experienced rapid economic growth, a rising standard of living and an emerging middle class in the last decade. With such economic expansion comes rapid growth in international trade.

For many years, Indonesia relied on oil and gas exports to drive its economy. Starting about a decade ago, high-level policy changes stimulated the development of a domestic manufacturing industry and attracted foreign investment.

Indonesia is an archipelago that stretches east to west for a distance comparable to the width of the U.S.A. The country depends on ocean shipping for most of its commerce.

Some facts on Indonesia:

• The country is huge: a 1993 population of 188 million with 210 million projected for the end of this century.
• It has a large and growing economy: 1993 gross domestic product (GDP) of some U.S.$135 billion and GDP growth of over six percent a year for many years.
• It has a rapidly-growing manufacturing sector of the kind that drives the growth of containerized cargoes.
• Indonesia is a major investor in itself: gross domestic capital formation has recently been about 27 percent of GDP.
• Exports of goods other than oil and gas have climbed at over 16 percent a year in nominal dollar terms over the last dozen years.

In summary, Indonesia today is a modernizing nation with a strong economic track record and excellent growth prospects.

Indonesian Ports

The major Indonesian ports were originally administrative departments within DGSC. In 1983, four state port corporations were formed to manage each some 25 to 30 branch ports. They changed status in 1992 to common-stock companies held by the Government of Indonesia (GOI). Smaller ports remain under the direct administration of DGSC, and there are a large number of private industrial ports.

The four port corporations (now called P.T. Pelabuhan Indonesia I to IV or Indonesia Port Corporation I to IV) are limited-liability, profit-making companies. They have a mandate to involve the private sector in port developments.

The maritime trade of Indonesia through public ports totaled some 350 million tonnes in 1993, of which general cargo is about a third. Figure 1 shows the trend in total Indonesian port throughput between 1986 and 1991. Cargo tonnages increased at 10 percent a year over this period, with international traffic growing by 12 percent a year.

Container traffic began seriously in Indonesia when Container Terminal I in Tanjung Priok opened in the late 1970s. Containers appeared in the other large ports in the 1980s and in small ports in this decade. Figure 2 summarizes the throughput since 1989 in the country's seven largest container ports. Total traffic measured in twenty-foot equivalent units (TEU) almost tripled in this period with an average growth rate of 27 percent a year. The annual growth rate was above 20 percent in all ports.

In summary, Indonesian cargo volumes have grown at rates that are well above those of the national economy. Container traffic has increased even more rapidly as containers penetrate the general cargo markets of the major ports and appear in increasing numbers in remote, small ports. Where there is such growth and change, there are opportunities for investment.

The Port Investment Environment

The institutional environment in which the private investor in the port sector operates has changed rapidly in recent years. Although the general legal framework for a greater private sector role in Indonesian ports is largely in place, the regulations and policies surrounding private port investment are still in evolution.

Private operations in the Indonesian port sector and foreign investment in Indonesian infrastructure are not new. For many years, private Indonesian companies have provided break-bulk handling services in ports. In 1993, Tanjung Priok began experimenting with agreements in which private stevedoring companies conducted all operations within specific areas of the port's break-bulk sections. PT Pelabuhan Indonesia II has recently completed negotiations with a private company for the development of Tanjung Priok's Container Terminal III.

Milestones in the evolution of the port and shipping sector over the last decade include:

• Presidential Instruction No. 4 (1985), which brought in new customs measures and relaxed entry restrictions for shipping, freight forwarding and shipping agency work.
• Paket November 21 (1988), which introduced further changes that freed up the shipping sector, including the latitude to use foreign ships in inter-island trades.
• Enactment in 1992 of a new maritime sector law that modernizes the legislation for maritime transport and ports, and provides the legal basis for greater private participation in ports.
• Government Regulation No. 20 of 1994 on Share Ownership in the context of Foreign Investment Companies (Penanaman Modal Asing [PMA]).
• Planned for 1994, promulgation of the Government Implementing Regulations for the 1992 maritime sector law, to be followed by implementing Ministerial Decrees.

Any Indonesian Legal Entity involved in port services can invest in port facilities in cooperation with a public port corporation. In the past, the Indonesian Legal Entities have been domestic companies.

The provisions of Government Regulation No. 20 of 1994 now allow agreements directly between an Indonesian port corporation and foreign investors that have established Indonesian Legal Entities in association with Indonesian partners. Among other things, this regulation allows foreign investors to own up to 95 percent of the shares in companies investing in infrastructure projects such as ports. The process requires that:

1. The investors establish an Indonesian Legal Entity as a Foreign Investment Company (PMA).
2. The Indonesian Legal Entity establishes an agreement with the Indonesian port corporation for the port activities.

The Indonesian Legal Entity can receive a business license for 30 years from the date operations begin. The GOI may renew these licenses for another 30 years if the company continues to benefit the national economy.

The public port corporations provide business and legal assistance. They also take an active role in establishing tariffs for port services or the rules for tariffs setting.

The forms of business agreements between Indonesian Legal Entities and port corporations include:

• Joint Operation - a port corporation and a private investor both invest capital and jointly manage a segment of port business.
• Management Contract - a port corporation delegates the management of a business unit to a private party.
• Joint Venture - a port corporation and a private company jointly invest capital in an another Indonesian Legal Entity that carries out business for an indefinite period.
• Built-Operate-Transfer (BOT) - a port corporation grants a business concession to a private company, and the private company invests its capital and operates the business for a time. After the agreement period expires, the company transfers to the port all the assets it has developed.

Private Sector Investment Opportunities

The scope of private operations in the public ports includes: