Changes in Indonesian Shipping Law to reflag vessels

Indonesian Flag

Starting in January, all commercial vessels operating domestically in Indonesian waters will be required to fly the Indonesian flag under a 2005 law just coming into effect.

Shipping industry executives say some 80 percent of the vessels servicing Indonesia’s offshore oil and gas industry carry foreign flags, primarily Singaporean, and the change could increase costs and cause chaos, especially for the local energy industry.

Hatta Rajasa, the coordinating minister for the economy, earlier this month told reporters the government was seeking to revise the laws because of their potential to damage oil production.  The change to the Shipping Law was made in 2005 under the principle of cabotage, which restricts foreign operators from domestic trading in another country’s coastal and interior waters.

Enforcement has been delayed for years, a foreign shipping executive said, but now officials have decided to clamp down.

Foreign investors in Indonesian shipping companies face a cap of 49 percent ownership, with the local partner holding 51 percent. Under the law, all domestic commodities shipments must be made by Indonesian flag carriers.

Thus, in addition to the offshore oil and gas industry, executives say, dry bulk cargo and palm oil could also be affected, possibly driving up prices.

Diplomats and foreign companies have complained that the change is simple protectionism and Indonesian companies seem poised to try to gain from the changes.  Wintermar Offshore Marine is launching an initial public offering this month, while Berlian Laju Tanker recently announced plans to increase its fleet by seven ships.

Indonesia is not alone in protecting its maritime industry. The United States requires domestic cargo to be carried on ships owned at least 75 percent by Americans.

Foreign shipping companies are said to be looking for a solution. Building new fleets in Indonesia is too expensive, so shipping industry sources say companies are trying to re-register vessels under the Indonesian flag.

“More tankers are getting reflagged as Indonesian ships,” the finance executive said. “But that isn’t as simple as just changing the home port name on the back of the ship. When you change flag status, the regime under which you operate changes.”

In Indonesia, weak enforcement of maritime law and difficulties in finding affordable maritime financing are a problem, the executive said, meaning the business is more expensive under the Indonesian flag.

“We are keen to do business in Indonesia but the amount of capital the bank has to allocate is much higher than the average shipping contract across the board. There is a knock-on effect across the industry,” he said.