26 Nov 2020
‘Steady as She Goes’ in Shipping Sector as Omnibus Law Maintains Cabotage Ban, Foreign Ownership Restrictions
This is the eighth in our series of ABNR Legal Updates on the Job Creation Law, which entered into force on 2 November 2020. This time we look at the changes the Job Creation Law makes in the shipping sector.
The Job Creation Law (“JCL”, or Omnibus Law, as it is familiarly known), makes few significant changes to the regulatory regime governing Indonesia’s shipping sector, as established by the 2008 Shipping Law, despite the overtly protectionist character of this legislation, including its tight restrictions on cabotage and foreign ownership caps.
In addition to the Shipping Law, the following statutes that relate either directly or indirectly to shipping (in the broadest sense) have also been amended by JCL:
- Law No. 32 of 2014 on the Marine;
- Law No. 27 of 2007 on Coastal and Small Island Management;
- Law No. 31 of 2004 on Fisheries (as amended);
- Law No. 4 of 2009 on Mineral and Coal Mining (as amended);
- Law No. 22 of 2001 on Oil and Natural Gas.
For purposes of brevity, we shall confine our analysis in this ABNR Legal Update to the ways in which JCL has affected the Shipping Law, which continues to be the key legislation in the sector:
- Foreign Ownership Restrictions Remain
JCL maintains the Shipping Law’s strict ban on cabotage (see also Section 3 below), which means that domestic shipping in Indonesia must be operated by domestic shipping companies using Indonesian flagged vessels and Indonesian crews. However, joint ventures with foreign shipping companies are also permitted by the Shipping Law, subject to a 49% ownership cap, as stipulated in the Negative Investment List (Dafter Investasi Negatif / DNI), the most recent iteration of which is incorporated in Presidential Regulation No. 44 of 2016.
It appears that this 49% cap on foreign ownership in the shipping industry is not going to change any time soon, despite the Government’s commitment to relaxing, or even eliminating, restrictions on foreign investment in general through the abolition of the DNI and its replacement with a new mechanism known as the “Positive Investment List.” There are at least two interlinked reasons for arriving at this conclusion:
- in order to obtain a shipping license (a prerequisite for an Indonesian shipping company), the applicant must own at least one Indonesian-registered vessel. However, JCL fails to amend Article 158(2) Shipping Law, which provides that a vessel may only be registered in Indonesia if it is owned by an Indonesian corporation / citizen or a joint venture between an Indonesian and foreign partner that is majority owned by the Indonesian partner. Due to this registration restriction, it would thus appear that a JV between an Indonesian and foreign party will need to be at least 49% Indonesian-owned before it can obtain a shipping license.
- The cabotage ban means that only Indonesian flagged vessels may be used for domestic shipping. Consequently, the Government’s decision to leave Article 158(2) alone implies that foreign investment in the domestic shipping industry will continue to be capped at 49% going ahead as it will be impossible for a JV involving a foreign investor to register a vessel in Indonesia unless the JV is majority Indonesian-owned.
- Changes to Sanctions Regime
Under the Shipping Law, sanctions consisting of fines and terms of imprisonment may be imposed for a long list of violations, whether or not these result in loss, injury or death. For the most part, these fines and terms of imprisonment remain the same under JCL. However, JCL amends many of the relevant provisions to insert important riders to the effect that injury, loss of property, loss of life and/or a marine accident (as the case may be) must result from the violation before a fine or term of imprisonment may be imposed. Thus, it appears that the overall sanctions regime will be less rigorous going ahead.
Further, while the fine for a failure on the part of a shipowner to remove a wreck within 180 calendar days of the vessel’s loss has been significantly increased to IDR 10 billion rupiah from IDR 200 million previously, the violation must now result in a marine accident before a fine may be imposed (previously there was no requirement that an accident must occur before the levying of sanctions).
Given the frequency with which groundings, sinkings, collisions and various other marine accidents occur in Indonesia (often with significant loss of life and property), the decision to limit exposure to sanctions to cases where loss, injury, death and/or an accident occurs might be considered a risky move by some.
- Cabotage Restrictions Maintained but Exemption for Special Operations Strengthened
As explained in Section 1 above, JCL confirms Indonesia’s restrictive cabotage policy that requires domestic shipping to be operated by domestic shipping companies using Indonesian flagged vessels and Indonesian crews. Foreign-flagged vessels are specifically prohibited from transporting passengers and freight between ports in Indonesia. However, a previous exemption that was first introduced by ministerial regulation in 2011 has now been strengthened by its specific incorporation in the amended Shipping Law, namely, the exemption for foreign vessels conducting “special operations” (kegiatan khusus) in Indonesian waters where these do not involve the carriage of passengers / goods and suitable Indonesian-flagged vessels are unavailable for such operations. According to the JCL’s Elucidation, examples of such special operations include those conducted for purposes of tourism, industry, mining, agriculture, research, dredging, and social activities.
That fact that the exemption is now enshrined in statutory form will provide greater comfort to vessel owners and operators availing of it as it can now no longer be overturned at the whim of a minister.
In addition, the Shipping Law’s stipulation that a foreign shipping company that conducts special operations in Indonesian waters must appoint an Indonesian shipping company as its agent has also been repealed by JCL. While this obligation continues to be incorporated in the relevant ancillary regulation for the Shipping Law (Government Regulation No. 20/2010), which remains in effect, there is nothing now to stop the government from dropping it entirely should it so wish (whereas previously it would have been impossible to do so as the obligation was a statutory one). Reading between the lines, this could well be what the government plans to do going ahead. However, whether or not this is the case will not become clear until the necessary ancillary / implementing regulation has been issued.
- Centralization of Regulatory Power and Alignment with OSS System
The amended Shipping Law continues to vest licensing authority in provincial and county/municipal governments for local sea transportation and shipping-related operations (such as the licensing of freight-forwarding companies and stevedoring companies). However, as with other economic sectors, JCB now requires the licensing authority of local authorities in the shipping sector to be exercised in accordance with norms, standards, procedures and criteria established by the central government. This should help to overcome the many problems that have arisen as a result of divergent approaches to licensing at the local level.
JCL also amends the Shipping Law so as to take account of the changes that have taken place as a result of the introduction of Indonesia’s Online Single Submission (OSS) system, which makes it mandatory for companies (especially newly established companies) to obtain licenses based on the forms, procedures and requirements established by the OSS System. As a result, the role of the Ministry of Transportation will be limited to simply giving recommendations as opposed to actually issuing the licenses, as was the case previously under the Shipping Law.
Should you have any queries on the above or require legal advice as to how you can best protect your interests during this time of uncertainty, please contact the persons below, call us on +6221-2505125 or email us at firstname.lastname@example.org.
Mr. Emir Nurmansyah (email@example.com)
Mr. Nafis Adwani (firstname.lastname@example.org)
Mr. Agus Ahadi Deradjat (email@example.com)
 Law No 17 of 2008 on Shipping (Undang-Undang No. 17 Tahun 2008 Tentang Pelayaran)
 Undang-Undang Nomor 32 Tahun 2014 Tentang Kelautan
 Undang-undang Nomor 27 Tahun 2007 tentang Pengelolaan Wilayah Pesisir dan Pulau-Pulau Kecil
 Undang-Undang Nomor 31 Tahun 2004 Tentang Perikanan
 Undang-Undang Nomor 4 Tahun 2009 Tentang Pertambangan Mineral Dan Batubara
 Undang-Undang Nomor 22 Tahun 2001 Tentang Minyak Dan Gas Bumi
 Presidential Regulation No. 44 of 2016 on Business Sectors that are Closed or Conditionally Open to Investment (Peraturan Presiden No. 44 Tahun 2016 Tentang Daftar Bidang Usaha Yang Tertutup dan Bidang Usaha Yang Terbuk Dengan Persyaratan di Bidang Penanaman Modal)
This edition of ABNR News and the contents hereof are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained herein. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.