Further protective practices clouding Indonesia's export waters

Indonesia has announced plans to implement legislation that will require exporters of coal and crude palm oil (CPO) from Indonesia (and the import of rice and goods for government procurement) to use vessels “controlled by” Indonesian shipping companies and to procure insurance from Indonesian insurance companies. Ministry of Trade Regulation No. 82/2017 on the Utilisation of Indonesian Sea Carriage and Insurance for Export of Certain Goods (“Regulation 82”) was approved in October 2017 and was due to come into effect from 30 April 2018. The specific requirements of Regulation 82 have been criticised by stakeholders and industry bodies for being too vague and potentially disruptive, forcing the Indonesian government into considering delaying implementation while it publishes technical guidelines on the requirements of Regulation 82.

Regulation 82 stipulates that the vessels must be controlled by a shipping company incorporated in Indonesia, which means that such company would, under current foreign investment rules, need to be majority Indonesian-owned and minimally own one Indonesian flagged vessel (meeting certain size specifications). However, it is unclear whether the vessels used by exporters need to be Indonesian flagged vessels and manned by an Indonesian crew in order to qualify as “controlled by” an Indonesian shipping company. It is also not clear whether a vessel chartered by an Indonesian company would fulfil the criteria of being controlled by an Indonesian company, and if so, whether time charters and bareboat charters would both be covered. The insurance requirement appears to relate to insurance of the cargo being exported, but it is unclear whether hull and machinery and P&I insurance for the export should also be obtained from an Indonesian company.

Notably (and consistent with the approach taken to the transitional nature of domestic cabotage rules currently in effect), Regulation 82 provides that vessels controlled by foreign shipping companies and foreign insurance companies can be used if Indonesian ones are unavailable, however, no elaboration on what “unavailability” means has yet been given, including whether this will have any link to the standard of ships or insurance on offer. Exporters therefore do not currently have clarity on what they need to do to comply.

The penalty for breach of Regulation 82 is administrative sanctions, including exporters having their export licences frozen or revoked.

The uncertainties of the requirements of Regulation 82 are having an economic effect on coal and CPO export businesses, as exporters delay entering into new contracts until the position is clarified. There are concerns that Regulation 82 if implemented wholesale in its current form, will raise prices of Indonesian coal and CPO, making them less competitive with other suppliers. Additional tax charges may be levied for the use of Indonesian insurance and vessels and it is unclear if buyers using free-on-board contracts would have to comply. There are concerns that revenues will be affected if exporters have to swap to using CIF contracts, where the seller is responsible for insurance and organising the shipping. Exporters also worry that Indonesian vessels may not find importers wishing to use them on the return journey increasing the cost to exporters.

Regulation 82 is coming under fire for being anti-competitive and not in line with WTO principles. Practically, exporters’ main concerns are whether there are enough Indonesian vessels meeting the standards required by international importers, whether Indonesian insurance companies have the requisite insurance products on offer and whether international importers will be satisfied that Indonesian insurers can provide adequate insurance to protect their cargo.

The Indonesian government has recently announced that an exemption to Ministry of Transport Regulation No. PM 100/2016 (“Regulation 100/2016”), allowing foreign vessels to undertake certain offshore drilling works in domestic waters (such as jack-up rigs, semi-submersible rigs and deep-water drilling rigs), will be extended to the end of 2018. Regulation 100/2016 requires only Indonesian flagged vessels to be used in domestic waters for certain oil and gas offshore activities, unless Indonesian vessels are unavailable or lack capacity. The extension to this exemption suggests that, while the Indonesian government is keen to promote the domestic maritime industry to be competitive with international shippers, it recognises that the local market does not currently have the capacity or experience to undertake certain operations.

One industry expert has recently commented that of the approximately 10,000 ocean-going bulk carriers trading in global markets, only 69 are currently flying the Indonesian flag. Given the substantial bulk commodity trade from Indonesia, this deficit is significant and not, arguably, feasibly addressable through coercive legislation without a sizeable step-change in the Indonesian bulk carrier fleet and to the trust of importers needing to become comfortable with local insurance offerings. It seems more than possible that the Indonesian government may apply the same approach to Regulation 82 that it has done to date with Regulation 100/2016 with an exemption based approach, but it will have to navigate a fine line between disruption to well established supply chains and its policy of further pushing ahead the acceleration of Indonesia’s maritime industry.