INDONESIA Trends and Developments Contributed by: Emir Nurmansyah, Ulyarta Naibaho, Muhammad Muslim and Adithya Lesmana, ABNR Counsellors at Law
New Regulations Create Additional Obstacles for Foreign Direct Investment (FDI) in the Domestic Shipping Industry On 28 October 2024, Indonesia passed the Third Amendment to Law No 17 of 2008 on Shipping through Law No 66 of 2024 (the “Third Amend - ment”), after receiving approval from the Indo - nesian House of Representatives on 30 Septem - ber 2024. The Third Amendment further tightens Indonesia’s cabotage regulations and introduces several other changes that will greatly affect foreign direct investors in Indonesian shipping industries. Vessel ownership requirement change for joint venture companies Indonesia’s cabotage rules prohibit the use of foreign-flagged vessels for domestic shipping services, covering all maritime activities within Indonesia, including the transporting of goods or passengers between ports and islands within the country’s territorial waters. Foreign vessels are also restricted from operating for non-transpor - tation purposes in Indonesian waters, although exceptions are available for certain types of ves - sels, such as those used in seismic surveying, oil drilling and salvage operations, subject to strict requirements. When the cabotage policy was introduced in 2010, it dramatically changed Indonesia’s ship - ping industry, requiring international shipping companies operating in the country to reflag their vessels with the Indonesian flag. This policy also impacted other industries, particularly the oil and gas industry, by affecting international service providers that supplied foreign-flagged rigs and offshore support vessels for various projects in Indonesia. The implementation of the cabotage policy resulted in a significant increase in FDI in Indo -
nesia, as international shipping companies were required to form joint ventures with local Indo - nesian partners holding a majority share in order to reflag their vessels. Registering the vessels under the joint venture company’s name was also a condition for changing the vessels’ flags. At that time, joint ventures needed to own at least one vessel of 5,000 gross tonnage (GT) to obtain the sea transportation business licence needed for vessel operation in Indonesia. With the enactment of the Third Amendment, Indonesia now adopts more stringent limita - tions on foreign investment in Indonesia’s ship - ping sector by significantly raising the vessel ownership requirement for joint venture compa - nies, regardless of whether the vessel is used for commercial shipping or for supporting their business. These companies are now mandated to own and operate vessels of 50,000 GT each, which is slightly larger than a Panamax-sized vessel. This represents a substantial increase from the previous requirement of at least one vessel with a minimum of 5,000 GT. Additionally, they must partner with a local ship - ping company, which must retain at least 51% of the shares in the joint venture. The definition of a local shipping company includes limited liability companies specifically engaged in sea transpor - tation business activities with a valid sea trans - portation business licence that are owned 100% by Indonesian shareholders up to the ultimate beneficial owners of the company. A shipping company with any foreign ownership is therefore not qualified to hold the 51% shares in a joint venture shipping company, even though the shipping company is established under Indo - nesian law.
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