Indonesia Protects Its Shipping Industry

Starting in January, as a result of legislation pushed through the Indonesian House of Representatives, all vessels operating in Indonesian waters will be required to be registered domestically, which could kick off seagoing chaos.

Some 80 percent of the vessels servicing Indonesia's US$1 billion offshore oil and gas industry are estimated to be carrying foreign flags, primarily Singaporean ones. Hatta Rajasa, the coordinating minister for the economy, earlier this month told reporters the government was seeking to revise the laws because of their potential to damage oil production.

The change, which alters the country's second Shipping Law, was actually made in 2005. It has been phased in slowly to reinforce the so-called cabotage principle granting the right to individual countries to trade and navigate within their own coastal waters. Foreign investors in Indonesian companies face a cap of 49 percent ownership with the local partner holding at least 51percent. In Indonesia's case, under the law, all domestic shipments of commodities such as rice, crude palm oil, coal, oil, wood products, fresh produce, fertilizer and cement have to be shipped in Indonesian bottoms.

Thus, in addition to just the offshore oil and gas industry, executives say, dry bulk cargo and palm oil, of which Indonesia is the world's biggest exporter, could also be affected, possibly leading to inflationary pressures.

Ship Management International, in its November issue, announced that Singapore-based Thome Ship Management had opened its first office in Indonesia.

"The new Indonesian cabotage law which will result in the increase in the number of Indonesian-flagged vessels trading in Indonesian waters is an opportunity for us to open our own office in Indonesia," Thome Group chairman and chief executive officer Olav Eek Thorstensen was quoted as saying.

There are concerns that the change is simple protectionism, which seemed to have been made pretty clear by Oentoro Surya, the president of the Indonesian National Shipowners Association, who was quoted as telling Malaysian Shipowners Association conference a year ago that the law was a way to grow the country's national fleet.

Two Indonesian shipping companies – PT Wintermar, an offshore marine company which is about to sell 25 percent of its shares in an initial public offering this month, and Pt Berlian Laju Tanker Tbk, appear to be particular beneficiaries, according to Singapore-based shipping and banking executives.

However, Indonesia is hardly alone in seeking to protect its maritime industry. The United States is one of the biggest offenders, having in the 1920s passed the Jones Act, which in addition to creating far-reaching benefits for sailors, requires that domestic cabotage be carried by ships owned at least 75 percent by Americans, although foreign carriers can call in international ports with trade goods and passengers. The law is credited with keeping the US maritime industry alive.Foreign ships which make multiple stops, like cruise ships, may be receive special dispensation.

Shipping companies in Singapore, Australia and other countries that ply Indonesian waters are said to be trying to figure out how to deal with the law. At the end of 2007, according one report, only about 65 percent of domestic cargo was carried in domestic bottoms. It was estimated that an additional 650-odd vessels would be required before the law took effect, requiring additional investment of as much as US$4.6 billion.

If indeed it were necessary to finance the construction of the new vessels, that could be a problem. However, those familiar with the shipping industry say, the shipping companies are seeking to work out the re-registry of their vessels under the Indonesian flag.

Although Indonesia's cabotage laws have been in place for a considerable amount of time, said a Singapore-based shipping finance executive, Jakarta hasn't bothered to enforce them. "What has happened over the last year is that the authorities have said, ‘Okay, no more waivers are to be granted. The rules will be enforced strictly.'"

Even so, shipping executives say, the government is continuing to grant waivers to tanker fleets simply because if they don't, the country's offshore oil and gas industry could come to a stop. Oil and gas revenues account for a quarter of the total revenues of the Indonesian government and about the same percentage of foreign trade.

"More tankers are getting reflagged as Indonesian ships," the finance executive said in a telephone interview. "But that isn't as simple as just changing the home port name on the back of the ship. When you change flag status, the regime under which you operate changes in respect of enforcement history, the judicial framework, record keeping, property registries. Indonesia is fairly behind the curve. Banks and other financial institutions rate Indonesia as one of the weakest flags around because of the weak enforcement of maritime law."

The result is that the mortgage framework for those financing ships follow the rules of that state. While the number of Indonesian banks offering shipping finance has surged, interest rates on rupiah loans can be as high as 15 percent annually. And the international banks face problems with the financing. Because of Indonesia's spotty enforcement of maritime laws, banks have to allocate significantly higher amounts of capital to do the deals, the financing executive says.

"We are keen to do business in Indonesia but the amount of capital the bank has to allocate is much higher than the average shipping contract across the board. There is a knock-on effect across the industry."

On top of that, as far as the banks are concerned, there are serious questions about the Indonesian legal system as a whole, which has allowed numberless debtors to escape international creditors.

Scott Marciel, the US Ambassador to Indonesia, called attention to the issue in an interview on Nov. 17 with The Jakarta Globe, warning that "The outcome might be to prevent oil and gas companies from doing the drilling and production they want to do. That certainly was not the intent."

Marciel said he had discussed the matter "at the ministerial level. I have been told that senior authorities are aware of the problem and are looking at how to address it."

Protectionist measures, he told the newspaper, have led to "unintended consequences" for Indonesia.