Coal shipping regulation 82/2017 meets rough seas.
Coal shipping regulation 82/2017 meets rough seas. (Vol 89)
Introduction.
The Pertomindo.com conference on Ministerial Regulation 82/2017 brought together a number players from diverse industries. The coal exporters had little exposure to understand the background of this Minister of Trade (MOT) Regulation 82/2017. Most coal miners are only interested in getting coal onto a ship, so debate over this regulation provides an opportunity for miners to look further into the shipping industry. This article looks at the development and possible direction of this shipping regulation.
Economic Policy Package 15.
The Indonesian Economic Policy Package 15 on the “Business Development and competitive power, national logistic service provider” is dated 15 June 2017. This was signed by the President to became a formal Government Policy, and so may explain the recent decision to postpone the regulation, rather than scrap the regulation altogether. Postponing means the government and the President did not get the policy wrong, but just miss timed its implementation as the industry is presumably not ready to fully implement the policy!
The package policy background includes; “Providing Opportunities to Increase Roles and Business Scale, with policies that provide business opportunities for national transport and insurance in transporting imported – export goods, as well as increasing shipyard business / ship maintenance in the country.” The Objectives includes;” Opening national shipping opportunities to serve import – export transport around USD. 600 Million / Year, shipping investment around 70-100 units of new vessels worth USD. 700 Million, transportation insurance of 1% -2%, loan banking DN of USD. 560 million, and new job opportunities of 2,000 seafarers”, and “Provide greater opportunities for national shipping to serve special transport such as tankers and bulkers.” At the time of the issuance of this policy, one of the four policies at the ministerial level whose draft is being finalized included; “Draft Regulations on the Terms of Use of Sea Transport and National Insurance for the Export and Import of Certain Goods, by requiring the transportation and insurance of export goods (coal & CPO) and imports (rice) and other commodities established by the Government, to use national shipping and insurance companies.”
These are nice aspirational goals but avoids any sense of practical achievement. Note that there is a treat of access to bank loans of USD 560 million for INSA members.
This policy can be found at; https://www.google.co.id/search?q=paket+kebijakan+ekonomi+15&sa=X&ved=0ahUKEwj1ge7Q1c3ZAhUBqY8KHf2BCFsQ1QIIcigA&biw=950&bih=734
Policy Origins 1
There have been a number of studies on Indonesia’s logistics. In 2012 the Asia Development Bank (ADB), with others developed a report on the “Indonesian transport sector assessment, strategy, and road map”. Much of this study focusses on land transport, domestic inter island transport, and includes a review of the international shipping transport sector.
This report identified a number of sector issues, including institutional capacity constraints, inadequate infrastructure and lack of capacity. Some of these issues could be overcome by reducing the SOE monopoly (Pelindo) and increasing competitive business into the port and shipping industry. This report recommended input towards the five-year BAPPENAS national business plan (MP3EI) that was issued in May 2011.
Some 2008 national statistics are given, including that there are approximately 1,700 ports in Indonesia, including many passenger and small vessel ports. In 2008, total sea transportation in Indonesia was 779 million tons (mt). Over the years, Indonesian shippers have captured a higher share of the domestic trade without penetrating successfully the foreign trade component. In the last 8 years, domestic sea transportation has grown at 6.0% on average with Indonesia’s international sea transportation growing at 4.9%. There are 8,000 national registered sea vessels in Indonesia and, compared to international standards, they are relatively small with an average 4,000 deadweight tons (dwt). Foreign vessels are bigger (7,500 – 25,000 dwt) with a trend to get even bigger. There are more than 1,000 Indonesian shipping companies with 8,000 national registered sea vessels in Indonesia. Indonesian shipping companies are usually small, owning only a few ships and having difficulty to raise capital to upgrade their fleet. In 2008, the new Shipping Law was enacted, breaking the monopoly of the Pelindo, and in 2009 the MOT launched the National Port Master Plan (NPMP), due for completion in 2011.
This report can be found at; – https://www.adb.org/sites/default/files/institutional-document/33652/files/ino-transport-assessment.pdf
Policy Origins 2.
The Indonesian Association of Logistics, with the help of the World Bank and others prepared a report on Indonesian shipping titled “State of logistics Indonesia 2015”. In line with President Jokowi Widodo’s vision to develop a modern transport system, known as “maritime highways”. The reports vision was to contribute to improving Indonesia’s logistics performance and to reduce the costs of transportation, improve connectivity and integration in the country and an improved competitive position of Indonesia on the global market. Note that the findings of the report and individual articles do not reflect the views of the parties that helped prepared the report.
The report is largely about the domestic shipping industry, however the final chapter 7 is titled “Intercoms and Competitive Shipping” that looks at Indonesia’s outlook for international shipping.
In 2013 the government of Indonesia encouraged a shift from FOB to CIF to support the Indonesian shipping, banking and insurance companies. This measure aims at curbing the current trade balance deficit. About 90% of the Indonesian exports are transported by foreign vessels and arranged by foreign freight forwarders. A similar policy to introduce CIF was introduced into Nigeria, though they had concerns to give sufficient time to implement the policy. One Nigerian concern was that sales based on FOB would see the funds delivered into their country upon the vessel sailing, but under CIF there would be a “time gap” where their country would only receive funds after discharged at the foreign port.
Contributors to this Indonesian papaer indicated such a change of policy would require 1 -2-year transition period, to reduce bottlenecks in the system, source suitable ships and upgrade the Indonesian shipping practices. One fundamental issue was the increased costs of Indonesian shipping should be addressed through tax incentives to Indonesian ship owners. Any such proposed change from FOB to CIF could be implemented gradually, perhaps first to ASEAN destinations with smaller ships, and then longer destinations with bigger ships. The risk is buyers of Indonesian products (coal/ CPO) may simply seek commodities from other countries. The underlying conclusion reached is “The real challenge is not to apply other Incoterms® but to make the Indonesian ship owners to become more competitive”.
This report can be found at; – http://www.nestra.net/download/StateofLogisticsIndonesia2015.pdf
“Evaluating the shift in Incoterms for Indonesian Export Products”.
During the Petromindo.com shipping conference,(see below) the representatives from the Ministry of Trade (MOT) indicated that a study by the World Bank and Institute Technology of Surabaya (ITS) had earlier prepared a report that might include aspects of a cost-benefit study. This study (2016 /17) could not be readily found on the MOT or ITS web sites, nor from a Google search. It is understood the concept behind this report was to compare Indonesia’s current fleet to the present freight industry. The report found the domestic fleet was not ready to meet the international freight needs. The report also looked at the characteristics between bulk freight (coal and CPO) and containerized freight (shrimp and rubber). The report considered that Indonesia is in strong competition with other shrimp and rubber producers, hence the higher risk buyers would shift their buying patterns to other countries. However, the reaction to the recent Petromindo.com conference shows that coal buyers may also shift to competitor countries. Indeed, this MOT regulation 82/2017 comes on the top of the recent government strategy to reduce coal production to 400 million ton, and eventually stop coal exports. Clearly coal buyers must now anticipate a higher risk for Indonesian coal.
It is understood this evaluation report was not designed as a cost benefit study, and at best may provide data and direction for a future cost benefit study. It is here in hoped that the MOT will place this report on its web site, to help the MOT become more transparent.
Coal Industry late inclusion.
At the Petromindo.com January 2018 conference, Hendra Sinadia, the executive director APBBI – ICMA (Indonesian Coal Mining Association) delivered a presentation. He mentioned the ICMA had only been invited to the MOT to discuss this 82/2017 regulation after its formulation. A Jakarta Post news item dated 18 December 2017 includes a comment by Hendra that the regulation needed further studies and presents a risk to coal & CPO exports. In the same article the chairwoman of INSA, Carmelita Hartoto, indicated this policy had been in discussion and formulation for five years. It is surprising that the Coal & CPO industries were apparently not included in such earlier discussions.
Petromindo.com Conference.
On the 31 January 2018, Petromindo.com held a sell-out conference on the MOT regulation 82/2017. Speakers from the government, shipping, legal, coal, insurance and various associations all delivered well prepared presentations. This conference is reported upon in some detail in the Coal Asia magazine (February 2018 issue). There were a large number of practical issues associated with this regulation, including; that domestic sea freight is more profitable for Indonesian companies, not enough ships, not the right type of ships, no return cargo, cost disadvantage, unclear regulations, limited time to implement, international treaties, potential trade retaliation, limited funds for ships, insurance concerns, CIF cash flow issues, trade business reputation etc.
There was empathy to improve Indonesia’s international shipping industry, but general consensus was that this regulation should be immediately postponed for 2 years and revised to meet all stakeholders needs.
Closed Door with Coal Buyers.
It is understood there was a “closed door” lunch meeting on the 22 February 2018 in Jakarta organized by the Indonesian Coal Mining Association (APBI) and the Indonesian National Ship Owners Association (INSA) with 20 selected Indonesian coal buyers. This meeting discussed the MOT regulation 82/2017 about using national shipping and insurance companies for coal and CPO. The stated purpose of this meeting was to receive constructive feedback from Indonesian coal buyers. The meeting organizers hoped the new regulation would not disrupt current sales contracts, ensure normal trade flow and looked for constructive mechanisms for a smooth transition. However, the meeting was not so smooth, wherein some coal buyers were very outspoken on the expected severe negative impact of regulation 82/2017 on the Indonesian coal trade. A number of specific points were made, largely reflecting the concerns expressed at the earlier public conference of Petromindo.com. There was a strong call to defer the regulation, though INSA seemed to want to just modify the regulation. One suggestion as previously outlined by the Association Logistics Indonesia as mentioned in the State of Logistics 2015 report, is the concept to implement the policy in stages, with ASEAN being the first step.
It was suggested that the coal producers submit proposals, in support of INSA’s aim to provide a brief technical framework for implementation in 6-8 weeks.
Postpone
On the 28 February, the Jakarta Globe reported that “Indonesia puts new shipping rules on hold as coal buyers wait”. The key point of this news item is that Indonesia has postponed indefinitely the application of new rules that would limit shipments of coal and CPO. It was reported that the new shipping rules will only be applied once vessel requirements have been calculated and satisfied by the trade ministry, shipping industry and coal & palm oil exporters. This was a reported phone conversation, and the coal industry is waiting for an official announcement. This Jakarta Globe article also emphasized the coal and shipping industries concern over the national shipping programs ability to be competitive in the international market.
The uncertainty of a postponed regulation (rather than withdrawal) increases the Indonesian coal industry risk for the producers, bankers, contractors and buyer’s etc, and risk royalty revenue for the Provinces. Responsible large miners typically look at; a) life of mine plans, (for mine lay out and mine closure), b) five-year plans (to match with equipment life), c) one-year plans (to match with sales) and d) monthly / weekly / daily mine plans (to match with manpower and individual coal shipments). The next generation of coal mines will be more difficult to finance while the shipping regulatory risk is not clear. This will be more critical for the development of new mines that need long development times and capital-intensive rail systems, such as Lahat, Central & East Kalimantan, etc. These future coal mines will support the Indonesian coal industry, and power much of Asia for the next 50 or more years.
The uncertainty of a postponed regulation (rather than withdrawal) may provide incentive for international coal buyers to spread their risk of coal source and be more supportive of Indonesia’s coal mining competitors. The Australian Adani coal mine now looks more positive.
Apparently, the MOT regulation was signed on the 26th October 2017, before the Presidential Instruction (Impres) 7/2017 was signed on 1 November 2017. This suggests the MOT regulation may not need to comply with Impres 7/2017 to provide a cost benefit study, be signed off by other ministries etc. A postponement of 82/2017 may mean this regulation may still avoid complying with Impres 7/2017. Given the publics storm of objections, perhaps the MOT may be encouraged to undertake a cost benefit study, not because it has to, but because it is a part of Indonesia’s current good governance practices.
Insurance & Environment.
Little of the coal industries discussion on regulation MOT 82/2017 is about insurance. The Allianz Global Corporate & Specialty Safety and Shipping Review 2017 provides a quick overview of shipping risk. This worldwide review found that “More than a quarter of losses in 2016 (23) occurred in the South China, Indochina, Indonesia and Philippines maritime region, which has been the top loss hotspot for a decade” and “Cargo vessels (30) account for more than a third of 2016’s losses”. Perhaps international insurance coverage may be able to spread this location risk factor over less dangerous parts of the sea, however we might expect a regulation requiring Indonesian insurance may charge a higher premium for Indonesian vessels that are predominantly sailing in Asia. There is no certainty that Indonesian insurance companies working in such a restrictive field would be fiercely competitive to bring down prices. The Alliance review found that crew negligence and inadequate maintenance are two increasing areas of risk. Environmental scrutiny is increasing with record fines being issued for pollution, including new ballast water management rules. It is likely that Indonesian shipping are not one of the better performers on these issues of crew, maintenance and environment management, possibly further pushing up insurance premiums.
This review can be found at; http://www.agcs.allianz.com/assets/PDFs/Reports/AGCS_Safety_Shipping_Review_2017.pdf
One international NGO environmental study (2015) indicates shipping now contributes about 3% of global CO2 emissions. Should Indonesia significantly expand its international cargo fleet, then meeting the Paris Climate accord may be more difficult for Indonesia.
First fix the system.
Jakarta Globe news of 21 and 23 February 2018 reports “Minister promises to correct flawed sea toll road program”. Wherein a study found that weak supervision by government agencies had allowed larger logistic companies to exploit the subsidy system of the sea toll program. Indeed, the Government’s Economic Policy Package 15 contains a list of “to-do” things for the MOT to undertake. Most coal players have heard various horror stories of improper business practices at all levels of the Indonesian domestic shipping industry. Miners now tend to have well implemented Standard Operating Procedures (SOP) over their mining and hauling operations, but the further the coal gets from the mine, the harder it is to exclude bad practices. Such horror stories often spill over into the domestic coal shipping area. It is clear that the MOT should fix the broken systems at home, and demonstrate a high compliance of best practices, before tackling the international shipping routes.
During the coffee breaks at the recent petromindo.com conference, there were some undercurrents of questions if parties within INSA (and their associated industries) stood to gain from the regulation? Previous government consultation with industry was largely focussed on shipping and insurance companies that were very supportive, and so stood to possibly gain from the regulation. Note that the Minister of Transport regulation 72/2017 [ Types, structures, moulds and mechanisms stipulation of the tariff services] Article 18 apparently requires input and prior approval from INSA for the Minister to approve changes to the tariff system. This regulation 72/2017 may open the potential for a conflict of interests in setting government fees, and as such may be further reviewed.
The Petromindo.com conference was truly the first time that a broad range of coal industry players and other stakeholders had been publicly consulted. The regulation 82/2017 appeared like a live hand grenade to the mining community. It is clear that any further development needs transparent socialization, plus the full support from a wide range of the coal & CPO producers and buyers. Perhaps future drafts could be posted on the MOT web site well in advance of proposed authorization by the Minister. Once approved by the minister, then it is suggested the regulation may contain on-line links for the public to see the approval process and detailed explanations for the path chosen. Certainly, the regulator needs to build up trust with the people.
Apparently, there are some parts of the 2008 shipping law that have not yet been developed into regulations. Perhaps a review of these laws may be undertaken to catch up on the past commitments before rushing off into the future. A review may also apply to making sure that various international trade rules and norms are properly considered in relation to this regulation 82/2017. For example, this MOT regulation 28/2017 would seem to be counter to the ASEAN “2007 Roadmap towards an integrated and competitive maritime transport in Asia” stated policy that includes “Adhere to the principle of free competition on a commercial basis for cargo movements to from or between ASEAN Member Countries.” Perhaps the ASEAN Maritime Transport Working Group (MTWG) and various ambassadors can be included in future stakeholder consultations.
The Petromindo.com and subsequent meetings raised numerous legal, technical and practical issues. It is now usual to undertake detailed cost-benefit studies on the financial, social and environmental aspects of a regulation before such deep commitment can be justified. It would appear the previous studies by the Indonesian Association of Logistics, with the help of the World Bank and others were more of a fact-finding study, with some pointers towards the further development of the international trade industry. These independent academic studies have a consultant – client bases. Such reports are typically couched in polite terms, wherein important negative aspects may be easily overlooked by a casual reading. The petromindo.com and other meetings confirm resoundingly that there are many issues that need to be reviewed by trusted independent parties, including in depth cost benefit analysis, before a workable and acceptable regulation is developed to promote the Indonesian international shipping industry.
Public reaction has included concerns to have clear regulations. Certainly, the MOT can provide clearer legal clarifications in some confusing areas, such as the use of FOB verse CIF, and the issue of exemptions etc. Fixing the wording of future regulations and accompanying implementing procedures would be most helpful for clarity of implementation.
Outline of some possible improvements.
One brick wall for the MOT plan to encourage more international shipping by Indonesian players is a series of business regulations that detracts outsiders from registering under an Indonesian company. These obstacles includes majority share ownership of Indonesian flagged ships, adherence to Indonesian law etc. By contrast many international ships register under an open registry or flag of convenience, such as Panama or Liberia. In some cases, companies recognize a second country of registration, for example the UK recognizes the Isle of Man, the US recognizes the Marshall Islands. Perhaps Indonesia could set up one of its island ports as a second registration site with regulations more amenable to foreign ship owners and for Indonesian ship owners to operate more competitively in the international market. Note that at one point the entire island of Batam was set up as duty free zone to attract industry. The operation of a second registry is not easy. However, the Isle of Man and some other second registries have some success in achieving the economic goal of supporting the national shipping industry and maintaining international safety requirements.
The cabotage principal for Indonesia is practiced by some other countries. However, this principal may need revision, to encourage a ship sailing from Medan to carry cargo first to Singapore, then on to Pontianak etc. This was apparently tried between Surabaya, Kupang and Darwin. But the Darwin port authority would not allow the “non-compliant” Indonesian ship to dock in Darwin. It appears the Indonesian Cabotage provides too much domestic protection, so that Indonesian shippers are not interested to undertake international routes.
The ASEAN “Roadmap towards an integrated and competitive maritime transport in Asia” supports the “Progressive integration towards the formation of an ASEAN single shipping market.”
In order to purchase more dry bulk cargo vessels, bank finance is needed. However, it appears banks are concerned about the weak ability to enforce court decisions to secure the asset of the ship from a default loan. By the time the local harbour master enacts the court decision, the ship is likely to have sailed to another local or foreign port, and the legal paperwork needs to be restarted. The harbour master already has full control over a ship leaving the port, so an integrated approach with other branches of government is needed to be reformed and coordinated to provide better security for banks.
The MOT proposes to monitor the regulation through a new set of on line forms. It is impossible to see how this would control the shipping industry. However, there are already a well-established system of cargo superintending and royalty payments that are to be performed before a coal / CPO vessel can sail. It needs the MOT to tap into the existing system, rather than creating a parallel set of paperwork. Certainly, the harbour masters would appreciate only one set of papers!
Final.
I recently read Mochtar Lubis 1997 works on “The Indonesian Dilemma”, wherein he comments upon the nature of the Indonesian character. There are a number of character aspects that persist until today, wherein some may seem to be relevant to the governments development of MOT 28/2018. These include; “The power centre maintains very little communication with the common people. Communication is always from the top downwards and never the other way around”. “We can count on the fingers of one hand those leaders throughout our history who were brave and moral enough to accept the responsibility for the wrongdoing which occurred under their rule”.
More recently the Jokowi election slogan of “mental revolution” outlined in the Jakarta Post article of 12 May 2014, included; “that the nation needed a bureaucracy that people could depend on, a system that really served the people”.
How the Ministry of Trade deals with this regulation 82/2017 may also be a reflection on the implementation of Jokowi’s mental revolution or will the frustrations of Mochtar Lubis call for a better public sector attitude continue unabated.