Written by Jonathan M. Streifer

The Minister of Transportation in Regulation K.M.22 of 2010 clarified the deadline for the imposition of cabotage provisions under the Shipping Law, particularly with respect to the shipment of certain strategic commodities such as oil and gas, coal and cement. Indonesian cabotage rules under the Shipping Law of 2008 require domestic sea transportation of all goods and persons to be carried out by Indonesian flagged vessels owned by Indonesian companies. Foreign investment is permitted in Indonesian shipping companies engaging in domestic sea transportation but is subject to a maximum 49% foreign share ownership limitation. An Indonesian shipping company having foreign shareholders in any percentage up to the maximum 49% must also own a self-propelled vessel of more than 5,000 gross tonnes.

The Shipping Law requires compliance with the cabotage rules by May 7, 2011. A regulation pre-dating the Shipping Law conflicted with the Shipping Law, and Regulation KM.22 revokes that regulation.

The principal and expected consequence of compliance with the cabotate rules is that foreign flagged vessels will not be permitted to engage in domestic sea transportation after this date.  An unfortunate and unexpected consequence, in conjunction with other provisions in the Shipping Law, is that various vessels other than those engaged in domestic sea transportation are or are interpreted by the relevant government agencies to be captured by the cabotage provisions including floating production and storage platforms, drilling rigs and vessels used in the course of the vessel owner’s principal business. It is not possible under current practice to register such vessels under the Indonesian flag without complying with the 49% foreign ownership requirement, even in industries in which up to 100% foreign ownership is permitted, such as mining. On the other hand, it is not possible to operate such vessels in Indonesian waters under a foreign flag, even if those vessels are not engaging in domestic sea transportation.

A concern of oil & gas producers, mining companies, and other industries requiring various types of shipping and offshore services is whether the Indonesian shipping industry can continue to service those businesses at the required levels, including respect of certain types of offshore rigs and platforms requiring significant investment. Foreign owned vessels, rigs and FPSOs, among others, have a similar concern about the capacity of the Indonesian shippers to finance vessel ownership and operation in light of the restrictions imposed by the cabotage rules, including those on foreign ownership of Indonesian shipping companies.