Indonesian Negative Investment List vs. Cabotage Principle: ASEAN Investors Afloat in a Sea of Uncertainty in Indonesia

In furtherance of Indonesia's commitment to welcome the implementation of the ASEAN Economic Community (AEC) in 2015, Presidential Regulation Number 39 Year 2014 regarding List of Business Fields Closed to Investment and Business Fields Open, with Conditions, to Investment, dated April 24, 2014 (the 2014 DNI), continues to treat foreign investors from ASEAN countries differently than investors from other countries. This was also true of the previous Negative Investment List under Presidential Regulation Number 36 Year 2010 (2010 DNI).

Both the 2014 DNI and its predecessor allow investors from ASEAN countries to hold up to 60% share ownership in Indonesian shipping companies engaged in sea transportation business activities with foreign routes. Supposedly bringing a breath of fresh air to Indonesia's investment climate, the above provision, bearing in mind the prevailing laws and regulations in the field of shipping, begs one question: how effectively has it been implemented?

Cabotage Principle in a Nutshell

Indonesia's shipping regime has upheld the cabotage principle since 2005 through Presidential Instruction No. 5 Year 2005 regarding the Empowerment of the National Shipping Industry, dated March 28, 2005. This principle was further incorporated into Law No. 17 Year 2008 regarding Shipping, dated May 7, 2008 (Shipping Law), in which the cabotage principle was translated as the requirement that sea transportation activities within Indonesian waters only be done by Indonesian-flagged vessels manned by Indonesian crews. To be registered and flagged as Indonesian, the vessels must be owned by an Indonesian citizen or an Indonesian shipping company.

Under the Shipping Law, an Indonesian shipping company may be in the form of a joint venture company between an Indonesian person and/or legal entity and a foreign entity, owning at least one Indonesian-flagged vessel measuring at least 5000 gross tonnage (GT). As regulated under Article 158 of the Shipping Law, such a joint venture must be majority owned by the Indonesian person and/or entity.

The 2014 DNI, as its predecessors did, specifies that the allowed foreign ownership in a joint venture shipping company may not exceed 49%, with the exception, starting with the 2010 DNI, that ASEAN investors may hold up to 60% ownership in Indonesian shipping companies engaged in sea transportation business activities with foreign routes.

Vessel Registration

Minister of Transportation Regulation No. 13 Year 2012 regarding Vessel Registration and Nationality (MOT Reg 13), which came into effect on February 14, 2012, prescribes that the registration of a vessel may only be carried out by, among others, a joint venture shipping company that is majority owned by an Indonesian person and/or entity.

Practical Implications

It is then apparent that there is an inconsistency between the limitations on foreign ownership under the 2014 DNI and the existing shipping regulations in Indonesia, particularly the Shipping Law and MOT Reg 13. An ASEAN investor can submit an application to the Indonesian Capital Investment Coordinating Board (BKPM) to hold 60% of shares in the establishment of a shipping joint venture. However, an issue will surface when it comes to the registration of such shipping joint venture's vessel.

In practice, there is yet to be a successful registration of a vessel owned by a shipping joint venture with more than 49% foreign ownership, due to the abovementioned provisions of the Shipping Law and MOT Reg 13. Despite the fact that the drafting of the 2014 DNI took into consideration recommendations from the different ministries, the treatment given to investors coming from ASEAN countries in terms of share ownership in an Indonesian shipping company apparently failed to heed the currently applicable requirements and limitations, and it remains to be seen when, or if, MOT Reg 13 will be amended to accommodate the foreign ownership allowed under the 2014 DNI for ASEAN investors.

To date there has not been any meaningful discussion among the relevant authorities to reconcile this discrepancy. Absence of certainty will inhibit efforts by ASEAN investors to take advantage of the 2014 DNI.

This article is intended for informational purposes only and does not constitute legal advice. This article should not be acted upon in any specific situation without appropriate legal advice.