Liberalised but protected: Shipping law introduces new cabotage rules and welcomes private sector participation

The year 2011 marks the implementation of the 2008 shipping law, a far-reaching reform of maritime transport that provides space for private sector participation in infrastructure development. Yet the rules also include a degree of protection in that they require domestically flagged vessels to ship goods across the archipelago. “There is a clear dichotomy in the law: while it protects the interests of domestic shipping through cabotage, it also liberalises port management,” Damas Jati, the editor-in-chief of the trade journal Indonesia Shipping Times, told OBG.

A NEW AUTHORITY: A Port Authority, within the Ministry of Transport, was established in January 2011 independent of the four state-owned port operators Pelabuhan Indonesia (Pelindo) I-IV, under the Ministry of State-Owned Enterprises. The overall aim is to provide space for local government and the private sector to enter port management, ending the current monopoly of the Pelindos. While Pelindos I and II are financially strongest, collecting the concession fees of JICT, Koja and Terminal Petikemas Surabaya (TPS), and with Pelindo II is considering an initial public offering, the other two will continue to rely on state subsidies.

Private operators have generally welcomed the move. “While significant advancement has been made to improve the performance of the logistics, shipping and port industries, there continues to be a number of regulatory issues that need to be addressed or simply removed,” Jakob Friis Sorensen, the president director of Maersk Indonesia, told OBG. “Indonesia should continue to pursue its ambition to liberalise these industries and create an open market system that fosters a highly competitive business environment.” Liberalisation should lower the excessive cost of domestic inter-island shipping. Shipping a container from Padang to Jakarta costs more than from Singapore, for instance.

FOREIGN INTEREST: There has been foreign interest in the government’s port liberalisation drive. A new port capable of handling 100,000 twenty-foot equivalent units (TEUs) opened at Palaran in Kalimantan in 2008, a joint-venture between Indonesia’s largest shipping company Samudera, Pelindo IV and Palaran local government. The port, which cost Rp200bn ($24m) to develop, caters mostly to Samudera’s ships.

The UAE’s DP World, already operator in Surabaya since it acquired P&O, announced plans to bid for the Tanjung Emas Port in Semarang and new port facilities in Riau islands off the coast of Singapore during a visit of the Emirati company’s senior vice-president, Suhail Al Banna, in December 2010. Meanwhile, French shipping line CMA-CGM is said to be in final negotiations for a 50-year concession to expand the Batu Ampar port on Batam island. The new regulator takes over any new port concessions as well as port services at existing facilities, such as pilot boats. “One of the main challenges is political,” Jati, told OBG. “Who makes the investment decisions for port infrastructure?”

CABOTAGE RULES: Beyond the political challenges of reform, implementation of the cabotage rule will likely stretch domestic shippers’ capacity. The requirements came into force starting in May 2011. An April 2011 presidential amendment to the law exempts foreign-flagged oil and gas vessels of Class C (larger than classes A and B) from the requirements of the cabotage law, although priority is still expected to be given to local shippers. Contractors spent around $1.5bn on maritime transport linked to oil and gas, with local shippers capturing $700m in 2010. This market segment is expected to grow to $3.2bn in 2011. “The decision by the government to exempt class C vessels from the cabotage principle will not have a great effect on national shipping companies because there are very few organisations that operate such vessels,” Sugiman Layanto, the managing director of oil and gas shipping company Wintermar, told OBG.

Despite the political challenges of implementing reform, the government clearly wants to steer private investment towards sea transport. With new institutions setting clearer guidelines, shipping lines and port operators are keen to cater to the sector’s long-term growth.