30 Dec 2024
New Rules Introduce Further Barriers to Foreign Direct Investment in Domestic Shipping Sector

On 28 October 2024, Indonesia enacted the Third Amendment to Law No. 17 of 2008 on Shipping by virtue of Law No. 66 of 2024 (the “Third Amendment”), following its approval by the Indonesian House of Representatives on 30 September 2024. The Third Amendment makes Indonesia’s cabotage rules even stricter, and introduces various other changes that will impact on vessel owners and operators. 

Cabotage - 50,000 GT Vessel Required

Indonesia’s cabotage rules prohibit the use of foreign-flagged vessels for domestic shipping services. This policy covers all maritime transportation activities within Indonesia, including the transport of goods or passengers by sea between ports and islands within the country's territorial waters. The policy also prohibits the operation of foreign vessels for non-transportation purposes within Indonesian territorial waters, although there are exemptions available for certain types of vessels used in, among other things, seismic surveying, oil drilling, and salvage operations, subject to strict requirements.

The introduction of the cabotage policy in 2010 significantly transformed Indonesia's shipping industry, requiring international shipping companies operating in the country to reflag their vessels with the Indonesian flag. The policy also affected other sectors, including oil and gas, particularly international service providers that supply foreign-flagged rigs and offshore support vessels for various oil and gas projects across Indonesia. 

The introduction of cabotage also led to a significant increase in foreign direct investment (FDI) in Indonesia as international shipping companies seeking to reflag their vessels with the Indonesian flag were required to form joint ventures with local Indonesian partners who would hold a majority share. Registering the vessels under the joint venture company's name is also a mandatory condition for changing the vessels’ flag. At the time, joint venture companies were also required to own a vessel of at least 5,000 Gross Tonnage (GT) to obtain the Sea Transportation Business License necessary to operate vessels in Indonesia.

The Third Amendment imposes stricter limitations on foreign investment in Indonesia's shipping industry by significantly raising the vessel ownership requirement for joint venture companies. Under the new rules, these companies must own a vessel of at least 50,000 Gross Tonnage  (GT), a substantial increase from the previous threshold of 5,000 GT. Additionally, they must partner with a local shipping company that is required to retain the 51% or majority of shares in the joint venture. 

Previously, foreign investors could partner with any Indonesian individuals or entities to hold the 51% of shares. However, the Third Amendment now requires that the holder of these 51% shares must be a national sea transportation company with a valid sea transportation business license. This heightened requirement also extends beyond the shipping industry, including to foreign joint venture companies in non-shipping sectors that operate vessels for their own purposes, requiring the ownership of at least one 50,000 GT vessel. 

The Third Amendment does provide an exemption. The requirements do not apply to existing joint venture shipping companies or those operating vessels in non-shipping industries that established and registered their vessels before the Third Amendment was enacted. However, the exemption will end if the companies alter their shareholding structure or acquire new vessels.

Other Significant Changes

In addition to the provisions designed to strengthen the cabotage policies, the Third Amendment also introduces the following significant changes:

(i) Development of Sea Transportation in Remote Areas

The Third Amendment establishes two new categories of sea transportation services for underdeveloped and remote areas: Pioneer Lines (Pelayaran Perintis) and Public Service Water Transportation (Angkutan Laut Pelayaran Rakyat). These are recognized as separate category, rather than being grouped together under the broader category of "water transportation in underdeveloped and/or remote areas, as was the case previously.

Although the legislation does not offer a detailed explanation as to the difference between Pioneer Lines and Public Service Water Transportation, it outlines the following general differences between the two categories:

   (i) Pioneer Lines are intended for passengers and/or cargo, while Public Service Water Transportation is specifically aimed at economy-class passengers;

   (ii) National Sea Transportation Companies operating Pioneer Lines will receive compensation from government (central or regional), while providers of Public Service Water Transportation will receive a subsidy from the government (central or regional).

The calculation of both compensation and subsidies is to be further provided for by implementing regulations.

(ii) Source of Funds for Traditional Marine Transportation

The Third Amendment seeks to strengthen Traditional Marine Transportation by specifying that it will now be funded through the State Revenue and Expenditure Budget (Anggaran Pendapatan dan Belanja Negara), the Provincial Revenue and Expenditure Budget (Anggaran Pendapatan dan Belanja Daerah Provinsi), the District/City Revenue and Expenditure Budget (Anggaran Pendapatan dan Belanja Daerah Kabupaten/Kota). The term Traditional Marine Transportation (Pelayaran Rakyat) refers to small scale sea transportation businesses operated by individuals or communities using traditional sailing boats, mostly in remote and underdeveloped areas.  

(iii) Restructuring of the Government's Port Management Authority

Before the enactment of the Third Amendment, the government institutions responsible for port management were (i) the Port Authority (Otoritas Pelabuhan) and (ii) the Port Management Unit (Unit Penyelenggara Pelabuhan). The Port Authority was established at commercially operated ports, while the Port Management Unit was set up at ports that were not yet commercially operated. However, following the Third Amendment, all terminology has been standardized under the term Port Management Institution (Penyelenggara Pelabuhan).

The Third Amendment also divides the authority of the Port Management Institution, whereby the Minister establishes a Port Management Institution for main ports and collector ports that are either commercially operated or not yet commercially operated, while the Regional Governments establish Port Management Institutions for feeder ports that are not yet commercially operated. Thus, the Port Management Institution may operate at either the national or regional level, depending on whether it is established by the Minister or the Regional Government. 

The Port Management Institution established by the Minister would replace the role of the Port Authority and Port Management Unit established by the central government prior to the Third Amendment. Meanwhile, the Port Management Institution established by the Regional Government would take over the authority of the Port Management Unit formed by the Regional Government. 

The Third Amendment also clarifies that Regional Government authority is limited to managing non-commercial feeder ports, which was not specifically regulated before.

(iv) Enhancing Local Stevedoring Business

Port companies operating multipurpose and/or conventional sea terminals must now establish partnership with local stevedores. This aims to enhance micro, small and medium enterprises while upholding the principles of equality and fairness in business practices.

Before the enactment of the Third Amendment, port companies were permitted to independently carry out loading and unloading activities at the sea terminals that they operate.

(v) Mandatory Involvement of Hydro-Oceanography Agency in Navigational Aids Management

In managing navigational assistance, the Ministry of Transportation is now obliged to involve and coordinate with the Hydro-Oceanography Agencies of the Indonesian Navy, especially for the publication of Indonesian marine charts and nautical announcements. 

(vi) Pilotage

The Third Amendment broadens the definition of a compulsory pilotage area to include:

1. nature reserve areas and conservation areas;
2. conservation areas in waters, coastal areas and small islands; and/or
3. conservation areas at sea.

The term “compulsory pilotage area” refers to a designated maritime zone where the use of a qualified pilot is required for vessels to navigate safely. In these areas, ships must hire a local pilot who is familiar with the specific conditions of the waters, such as tides, currents, navigational hazards, and port layouts. The pilot's role is to assist the captain to safely navigate the vessel through these potentially complex or congested areas. Pilotage services are primarily provided by the authorities but may be delegated to the private sector if necessary.

With the inclusion of the additional category of compulsory pilotage area mentioned above, the scope of these areas has been expanded to include not only congested and hazardous maritime zones but also nature reserves and conservation areas, in an effort to strengthen protection for the marine environment.

Regarding the procurement of pilotage services, particularly in Special Terminal Areas, the law now mandates that the management and operation of such services be carried out by a company holding a port business license. Previously, the license holder of a Special Terminal could independently provide pilotage services for their own terminal. 

A Special Terminal refers to a sea terminal managed and operated for the license holder's own interests, typically used by companies in the mining sector to transport their output.

(vii) Ship Arrest

The Third Amendment revises the provisions on ship arrest by eliminating the requirement for the issuance of implementing regulations, which had prevented the ship arrest provisions from taking effect since the enactment of the Shipping Law. The concept of ship arrest was introduced by the enactment of the Shipping Law, which allows a vessel involved in a civil case related to maritime claims to be arrested through a court order, without the need for the aggrieved party to file a civil lawsuit. Despite this, the Shipping Law only briefly mentions ship arrest without outlining the specific procedures for its implementation. Therefore, it requires the relevant government institution to issue an implementing regulation.

The removal of the requirement for issuing implementing regulations in the Third Amendment has instead created greater uncertainty about whether the ship arrest provision is now effective. Even if the provision is deemed effective, the lack of specific procedures for ship arrest creates uncertainty on how the process should be executed.

Although the Third Amendment introduces a new provision stating that the arrest of a ship involved in a criminal or civil case by the court shall be carried out in accordance with the prevailing laws and regulations, Indonesian law (particularly Procedural Law) does not contain specific provisions regarding ship arrest. 

(viii) Maritime Tribunal

The Maritime Tribunal is an inquisitorial body under the Ministry of Transportation that is responsible for investigating vessel accidents. The Third Amendment expands the authority of the Maritime Tribunal to include summoning and investigating vessel operators, shipowners and authorized personnel/officials involved in a maritime accident. Previously, the Maritime Tribunal’s role was limited to enforcing[ABNR3] [ABNR4]  the professional conduct and qualifications of the captain and crew members, and conducting investigations solely into the actions of the captain and crew members following a maritime accident.

The Tribunal is now also authorized to impose administrative sanctions on vessel operators, shipowners, and authorized personnel or officials found to be responsible for errors and/or negligence that lead to a maritime accident, whereas previously, it could only impose such sanctions on the captain and crew members. The administrative sanctions for operators and shipowners may include a written warning, suspension, or revocation of their business permit, while authorized personnel or officials may face disciplinary action.

The Third Amendment also grants the Maritime Tribunal authority to act as a mediator in disputes related to seafarers' employment agreements. 

ABNR Commentary

While the intention behind increasing the vessel ownership requirement to 50,000 GT may be to strengthen domestic shipping companies, it will create a significant additional barrier for foreign businesses interested in investing in Indonesia's shipping sector. To do so now, the prospective investor must, first, be a shipping company that owns a vessel slightly larger than a Panamax-sized ship, which is significant. And second, they must partner with a local shipping company, which is required to contribute at least 51% to the joint venture, which may be challenging to find considering the funding requirements. 

Additionally, the above two requirements also extend to joint venture companies in non-shipping sectors that intend to own and operate vessels in support of their primary businesses. As a result, the adoption of the Third Amendment poses a challenge, especially in the offshore oil & gas and construction sectors. These industries generally do not require 50,000 GT vessels, but instead employ smaller, more specialized high-tech vessels, which are mostly procured through a Foreign Direct Investment (FDI) scheme. 

The exemption to the two requirements offers only temporary relief as a company availing of the exemption will eventually have to comply with the new requirements as soon as they adjust their shareholding structure or acquire a new vessel. Accordingly, as it may not be feasible to comply with both requirements, companies outside the shipping industry might choose to give up vessel ownership entirely.

Moreover, the government's efforts to address price disparities between Indonesia’s regions may be hampered by the new barriers to FDI in the shipping sector. The current high level of sea transportation costs are largely caused by a shortage of vessels in Indonesia. Unfortunately, the new requirements may close off opportunities for foreign investors to contribute to the expansion of the domestic fleet.

The expansion of the Maritime Tribunal's authority also introduces additional risks for vessel operators' officers and personnel. The Tribunal is now authorized to summon, investigate and impose administrative sanctions on officers / personnel if they are found responsible for a maritime accident. The disciplinary action that may be imposed on officers / personnel could be perceived as an individual sanction, thereby increasing their personal risk. However, the legislation is unclear as regards the type of disciplinary sanction that could be imposed on them, such as whether it might include any form of financial sanction. 

It is also still unclear whether the term "officers and personnel" could be interpreted by the panel of judges of the Maritime Tribunal or other relevant government institutions to include directors of the vessel operator. This lack of clarity allows for a broad interpretation of the definition of the term. In such a case, it could significantly affect the decision-making process of the board, as the key management officials of the vessel operator.

By partner Mr. Sahat Siahaan (ssiahaan@abnrlaw.com), foreign counsel Mr. Gustaaf Reerink (greerink@abnrlaw.com), and senior associates Mr. Muhammad Muslim (mmuslim@abnrlaw.com) and  Mr. Adithya Lesmana (alesmana@abnrlaw.com)

This ABNR News and its contents 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 in this legal update. 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.