Amid the government’s concerted drive towards increasing activity in oil and gas exploration, Indonesia in March 2014 made public its latest revision to cabotage principles for offshore vessels. In both extending deadlines for exemption from cabotage laws for a handful of offshore vessel types and removing others from the exemption list altogether; this decision is set to allow for the measured growth of Indonesia’s shipbuilding industry at a time in which inter island trade and ASEAN connectivity are projected to reach new heights (See Indonesia’s Shipping & Shipyard Industry).

The context for Indonesia’s policy towards cabotage on offshore vessels can be best summarised by the 2008 Shipping Law. Article 8 of this regulation states that sea activities in the country’s waters are to be convened only by national sea transport and shipping companies that use Indonesian flagged ships manned by Indonesian crews. At the time of this law’s introduction, players in the industry were given three years to adjust to new requirements, with formal implementation taking place on 7th May 2011.

Though this three year period was marked by a substantial uptick in the capacity of domestic vessels from 192.76 million tonnes in 2008 to 316.48 million tonnes by 2011; local shipyards buoyed by cabotage principles were unable to meet demand for a variety of specialised ships, particularly offshore vessels. This necessitated the creation of exemptions for a number of vessels that would allow for the continued use of foreign flagged ships past the mid-2011 deadline. Government Regulation No. 22/2011 and Ministry of Transportation (MOT) Regulation No. 48/2011 put in place the guidelines for these cabotage exemptions for offshore vessels, as well as the dates by which foreign vessels would no longer be exempt. These deadlines differed depending upon the type of offshore activity involved.

Cabotage Exemption Deadlines as Per MOT Regulation No. 48/2011

Sources: UOB Kay Hian, Ministry of Transportation

Coinciding with the deadline for cabotage exemption for several offshore vessels (such as dredgers), the Ministry of Transportation at the end of 2013 announced its plans to revise the existing end dates in line with the local ship building industry’s progress in being able to supply offshore vessels . Extensions to cabotage exemptions would be granted in cases where domestic shipyards had yet to develop adequate vessel production capabilities, and would be removed from offshore vessels now ably manufactured by Indonesian companies. As such, in March 2014, the Ministry of Transportation released MOT Regulation No. 10 of 2014, which now stands as the regulation of reference for cabotage as it pertains to offshore vessels.

For offshore vessels yet to have reached exemption deadlines laid out in the earlier 2011 MOT regulation, there is no change. SURF laying barges used in offshore construction previously earmarked for cabotage laws starting from December 2013, are to remain part of the exempted ships list until December 2014. Moreover, foreign flagged vessels used in dredging activities can up until December 2014 still be used insofar as they are larger than 5,000 m3. Foreign flagged dredgers with a capacity smaller than this are now subject to cabotage principles.

Offshore vessel types that are now readily supplied by members of the Indonesian National Shipowners Association (INSA) such as anchor handling tug supply (AHTS) ships are now subject to fully enforced cabotage principles and have been removed from the list of exempted ships.

Revised Cabotage Exemption Deadlines as Per MOT Regulation No. 10/2014

Source: Ministry of Transportation

As can be seen in the table above, the Indonesian government’s most recent amendment of cabotage principle exemptions also provides new details on an upcoming December 2014 deadline for heavy floating cranes and crane barges and limits the involvement of foreign flagged ships to only the larger versions of this vessel.

To legally operate a foreign flagged vessel categorised as one of the offshore vessels not yet subject to strict cabotage laws, a company must still obtain a permit from the Ministry of Transportation. This permit is only granted to companies able to fulfil a number of requirements, including:

• Conducting a minimum of one attempt to procure an Indonesian flagged vessel, communicated in writing with INSA. INSA is obligated to reply to all communication within 5 working days (if documents are received in full) should there be no Indonesian flagged ship available.
• Submitting a work plan complete with project schedule and designated work area marked with geographical coordinates.
• Have in place a charter party agreement between a national shipping company and foreign vessel owners, evidenced by work contracts and/or a Letter of Intent from employers. Despite exemptions, foreign flagged offshore vessels must still be operated by a local shipping agent.
• Licences allowing the use of foreign vessels in Indonesian waters are valid for a maximum period of 6 months, but can be extended upon evaluation.

Interestingly, it should also be noted that foreign vessels not designated in the list of cabotage exempted ships can obtain special exemption from the Ministry of Transportation upon being evaluated by a special team. This team consists of members of the Directorate of Sea Traffic and Transportation, the Directorate of Seaports and Dredging, and the Legal Department of the Directorate General of Sea Transportation, among other government bodies. Should the evaluation process prove successful, foreign owned vessels will receive a permit to operate in Indonesian waters for a maximum of three months.

Indonesia’s amendment to its cabotage principles should be interpreted as a measured strategy; flexible enough to allow for a relaxation in deadlines if domestic supply of specific offshore vessels falls short but at the same time strict enough to cease exemptions when the local industry has sufficiently improved upon its production capabilities. This policy has already had success in encouraging the development of the Indonesian shipbuilding industry – now able to manufacture 19 types of offshore vessels, up from only 9 in years past – without severely impinging upon the efficiency of shipping in and around the archipelago.

Global Business Guide Indonesia - 23rd June 2014

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)

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