Indonesia Freight Transportation Report Q2 2008

In November 2007 the government said it was planning to spend around INR15.8trn (US$1.73bn) to modernize its ageing state-run railway system. The funds would come from both public and private sources, and be used to upgrade rail track, signaling, and bridges, transport ministry officials said. Experts said that of the total of 6,500km of track on Java and Sumatra islands, only around 4,500km was available to be used for passenger services because the rest was too old and in a state of disrepair. One third of the 1,275 carriages operated by Kereta Api, the state railway, were over 40 years old. Taufik Hidayat, director of Indonesian Railway Watch, a lobby organization, was quoted by Reuters news agency saying 'it is really urgent to revitalize our railway infrastructure. Train transport is used by a large number of passengers and a large number of people on low incomes also rely on the trains as they are cheap'. In BMI's view there will be further moves to recapture the potential of rail transport, not just for passenger travel, but also for freight. In our just-published Indonesia Freight Transport Q208, we forecast that rail freight traffic will grow by an annual average of 6.9% in 2008-12, a sharp improvement on the fairly stagnant 1.6% registered in the preceding five year period.

There are a number of factors behind this strong forecast. The Indonesian economy and commodity trade will grow strongly, as will Indonesian commodity exports, including mining output. We are projecting annual GDP growth of 5.8% in 2008-12. Port capacity is growing. We are now projecting an overall annual average growth rate of 6.7% for the freight transport sector as a whole during 2008-2012. To put this in context, growth will be higher than GDP expansion - expected to average 5.8% per annum - but the reality is that for an economy of Indonesia's size and potential this will still be somewhat below the country's and the industry's real potential. Safety concerns and poor regulation are important constraining factors. By transport mode, we expect airfreight to lead the way, followed by pipeline throughput, maritime and coastal freight. Airfreight growth reflects the dynamic effect of growing domestic deregulation and rapidly rising regional passenger and freight demand, despite safety concerns (highlighted by a European Union ban on Indonesian carriers at the end of June 2007), and the possibility of a shakeout among the new budget operators.

Indonesia's freight industry has a poor-to-average BMI freight rating with a composite score of 55.8 out of a potential total of 100. Comparatively speaking, its stronger points include the country's long-term economic risk, freight growth, and the transport intensity index - a measure of immediately past and future foreign trade growth. Compared against its peers, however, Indonesia's scores for long-term political risk, infrastructure growth and the regulatory and competitive environments are all disappointing, and indicative that a lot more needs to be done before the industry begins to perform closer to its potential.

For the 2007-2011 forecast period, we expect the transport and communications sector to continue outpacing the economy as a whole. It will achieve average annual growth of 6.1%, versus 5.8% for overall GDP. The total value of transport and communications GDP will rise to US$37.7bn in nominal terms by 2011, representing 6.5% of Indonesia's GDP.