Red Tape and Company: What a Toll Road Blockade Says About the Economy

The idea for this article came when I was working on completely different short article for the Indonesian navy, on the topic of Indonesian seas as means of unifying the country. It was then when I found out these interesting tidbits, such as the fact that it is much cheaper to ship a container to Singapore than to Padang.

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Red Tape and Company: What a Toll Road Blockade Says About the Economy
Yohanes Sulaiman | January 26, 2012

'Bad policy choices will have a long-term impact on Indonesia’s ability to attract foreign investors.'

Last Thursday, a dispute between a workers union in Bekasi and the Indonesian Employers Association led to the blockade of the Jakarta-Cikampek toll road. The incident is a symptom of deep trouble in the Indonesian economy, arising from bad policy choices by both the central and local governments, the union’s inability to understand the problems faced by Indonesian businesses and entrepreneurs feeling the squeeze of rising costs and overseas competition.

The negotiations between employers association Apindo and the Bekasi Workers in Action (B3) union stalled as both sides accused each other of acting in bad faith. The union argued that Apindo reneged on its promise to withdraw its court challenge to a Bekasi wage regulation, while Apindo declared that it challenged the regulation in the court because the regulation was misguided from the beginning.

Apindo’s complaint is that the Bekasi city government determined the minimum wage simply by averaging the Apindo and the union’s proposed wages, in efforts to woo workers ahead of elections.

While it would of course be great if workers could be paid more than just the minimum wage, the problem is that factories will see profits fall due to higher production costs and increasing international competition.

One of the major components of production costs in Indonesia is transportation. In fact, according to former Finance Minister Fuad Bawazier, it could amount to 30 percent of production costs.

As many who regularly drive between Jakarta and Cikarang can attest to, even without the protests, the traffic is horrible. Trucks with supplies have to line up for hours in order to go past the Cikarang toll gate. After they pass it, they have to navigate narrow, traffic-jammed streets to reach their factory of destination, wasting precious time and fuel in the process.

And even when trucks with goods reach the port of Tanjung Priok, the problems don’t end. The port is both inefficient and backlogged, with a six-day wait before it can process goods, adding to costs.

Not to mention the dreaded red tape. According to data compiled by the World Bank’s Doing Business project in 2011, in Indonesia it took 17 days to clear goods for export and 27 days for import. In contrast, in Singapore it only requires five days to complete export procedures and four days for import.

Not surprisingly, shipping between Indonesia’s many islands is a very expensive venture. The World Bank’s Indonesia Economic Quarterly noted in its June 2011 edition that it would be cheaper to send goods from Jakarta to Singapore than from Jakarta to other ports in Indonesia.

In fact, it costs $600 to send a 20-foot container from Jakarta to Padang, West Sumatra, while it only costs $185 to ship the same container to Singapore.

Due to this very costly transportation system — far exceeding the global average of just 10 percent of total production costs — and not to mention the prevalence of bribery, it should be understandable that factory owners are reluctant to raise wages. This would severely undermine their competitiveness. But predictably, this angers laborers who say that the minimum wage they receive is not enough to cover basic expenses.

Both the central government and the regional government should be blamed for this dysfunctional relationship.

In the case of the central government, its failure to rein in corruption, to improve national infrastructure and to craft a coherent economic policy is making it difficult for factory owners to lower their production costs. And these failures are partly due to corruption.

The 2008 report of the Corruption Eradication Commission (KPK) stated that 30-40 percent of the national budget was stolen each year — and that is added to the usual bureaucratic waste and inefficiency that eat up part of the remaining funds.

Considering the vast size of Indonesia and the already small portion of the national budget spent on infrastructure (10.7 percent in 2011), it is easy to see why transportation in this country remains fraught with difficulties.

While the government is asking the private sector to pick up the slack, misguided populist policies are preventing the private sector from investing in infrastructure.

For instance, the Kompas daily newspaper pointed out in October that in spite of the rising costs of fuel, the government has refused to raise the official transportation fee for cement from Makassar in South Sulawesi to Kendari in Central Sulawesi, even though that fee was set in the mid-1990s .

The private sector, seeing that there is no profit to be made, refuses to be involved and those willing to invest have found that it is becoming harder and harder for them to maintain their fleet faced with such price controls.

All these factors work in tandem to increase the transportation cost in Indonesia and in turn, squeeze businesses’ margins of profit and make it harder for them to accommodate their workers’ demands.

To further exacerbate the situation, regional governments are also often behaving irresponsibly by pushing populist measures of their own. Usually, these are the result of promises made ahead of elections, such as drastic increases in minimum wages.

When unions in the end decide to hit the bricks, regional governments often blame the factory owners, emboldening the union and making it increasingly unlikely for the two sides to reach a compromise solution.

Bad policy choices of this kind will have a long-term impact on Indonesia’s ability to attract foreign investors.

Already, potential investors are spooked by high rates of corruption, massive red tape and uncertainty caused by substandard and the overlapping local and national regulations.

With labor disputes and uncontrolled industrial action now thrown into the mix, it is highly questionable whether the Indonesian economy will remain as strong as Moody’s Investors Service thinks.
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Jason88

9:52am Jan 27, 2012

Excellent analysis. Poor infrastructure is a main threat to stability (economic, social) in this country. Would a new president be able to solve the matter? Is anyone capable and willing and bold enough to get this country on track for a better future? Why can't we have a Lee Kuan Yew type of leader and PAP type of party here - is it a cultural rooted matter we all arranged ourselves to live with incapable, greedy administrations?

Yohanes-Sulaiman

1:28pm Jan 27, 2012

@Jason: Thanks for your comments.



We used to have someone like Lee Kuan Yew: Suharto. The problem, however, is that he failed to create a professional bureaucracy and actually demolished it in order to ensure the longevity of his rule.



I think you can have a strong and effective president in a democratic society. The problem, however, is whether the leadership is competent enough to push for good policies and to actually craft a short term and long term planning, and really follow through the plan, not just throwing the topics depending on the whims.

DrDez

2:50pm Jan 27, 2012

infrastructure, failing education, 40% theft of budget (sic), mob and religious violence, uncertain legal framework, protectionism, ineffectual judicial process, mafia's, gangs, drug syndicates, uncertain wage structure (min wage) a high proportion of the administration facing corruption charges, police violence increasing, media freedoms eroded, mobs running unchallenges, growing radicalism etc...

On the positive we have lots of minerals and a growing middle class oh and a presidential jet

Yohanes-Sulaiman

4:48pm Jan 27, 2012

@DrDez: Don't forget the national treasure, such as the two billion rupiah-toilets, twenty billion rupiah meeting room, and four music albums, composed by our Great Leader.

RuleBritannia

6:32pm Jan 27, 2012

@DrDez - ever considered making an alternative advertisement for Indonesia to run on CNN in the mornings with the official one?? I think you've just about covered the salient points for anyone wishing to come and invest here!

DrDez

8:46pm Jan 27, 2012

Can you imagine how prosperous the whole nation could be if only we could tackle some of these issues? It could be spread and national properity wouold follow. Investment would be incredible and the standard of living of every Indonesian could improve dramatically. SBY had a mandate to change but in my opinion it is worse now than at anytime in the last 43 years

That is what sickens me most I feel.

DrDez

8:49pm Jan 27, 2012

RB - I dont need to. Any investor here should be aware of the risks and if they weigh the returns to be greater than the risk then it will continue.

Our GDP by population growth alone is about 2.5%, last year investment GDP was about 2% leaving about 1.5% actual growth...