Transforming Indonesia into a maritime power

May 9, 2016, The Business Times © Singapore Press Holdings Limited - copied from http://www.iesingapore.gov.sg/Media-Centre/News/2016/5/Transforming-Indonesia-into-a-maritime-power

EDDY Logam was elected chairman of Indonesia’s Shipbuilding & Offshore Association (Iperindo) five months before Joko “Jokowi” Widodo was officially sworn into the country’s highest office in October 2014.

The timing could not be better as Pak Eddy – as he is commonly known – is fully aligned with President Jokowi’s vision of building Indonesia into a maritime power.

Indonesia ranks as the world’s most densely populated archipelagic nation with about a quarter billion people settled across some 17,000 islands. Shipbuilding in Indonesia dates back to the 1600s when the Konjo tribe, mostly residents of South Sulawesi, were known for building the phinisi, a two-mast wooden sailing boat that was a common sight throughout South-east Asia’s colonial history.

Even today, the phinisi is being adapted for trading or tourism purposes in Indonesian waters, although the country no longer commands a strong presence in shipbuilding. Despite the inherent advantage of its sprawling geography, Indonesia has far been overtaken by ChinaSouth Korea and Japan in shipbuilding might.

President Jokowi found himself working against the clock to catch up when he spelt out his vision during his October 2014 inauguration speech of re-inventing Indonesia as an international maritime power.

But the president has found a perfect ally in Pak Eddy. In May 2014, Pak Eddy spelt out, in an interview with The Business Times, his mission as Iperindo’s then incoming chairman: “God created Indonesia as an archipelago and it is God’s will that Indonesia will develop into a maritime nation.”

Right from the beginning, the Iperindo chairman – who also helms Pontianak-based shipbuilder Steadfast Marine and Logindo, an offshore support vessel (OSV) joint venture with Pacific Radiance – identified a need to push for regulatory support for the shipbuilding industry to level the playing field with the government-backed shipbuilders in China and South Korea.

As the president director of Logindo, an OSV owner-operator, Pak Eddy was keenly aware of the regulations and tax benefits the Indonesian government had put in place for local shipowners that were not extended to shipbuilders.

The preceding Susilo Bambang Yudhoyono government had rolled out a roadmap for the implementation of cabotage or Indonesian flag requirements in stages from Jan 1, 2013, in the offshore and marine sector two years after this was imposed on general shipping within the country’s territorial waters. A 51 per cent Indonesian ownership requirement applies for any vessel wanting to reflag under the Indonesian ship registry.

But the expansion of Indonesian-flagged vessels did not translate directly to additional business for the country’s shipbuilders. Since the cabotage roadmap was rolled out in 2005, between 800 and 900 vessels had been imported yearly, Pak Eddy noted.

BT understands from feedback gathered from Indonesian shipowners that Chinese shipbuilders had offered far more attractive prices – be they for newbuild or the resale of ready-built vessels that had been constructed on a speculative basis in large numbers.

The differences in shipbuilding prices between the two countries were attributed to, among other things, a 17.5 per cent tax rebate the Chinese government granted to Chinese shipbuilders. This was where Pak Eddy sought to close the gap during his first year as Iperindo chairman, by securing for Indonesian yard owner-operators a waiver on a 10 per cent value-added tax from the Jokowi administration.

Harbour craft

Even after the VAT waiver, however, Pak Eddy acknowledged that Indonesia’s shipbuilding still falls short of matching China’s on price competitiveness.

He also conceded that most yards in Indonesia are not equipped to build vessels over 20,000 deadweight tonnes, unlike their much bigger rivals in China, Japan or South Korea. Nonetheless, Indonesian yards are well-positioned to support vessels that ply the country’s territorial waters.

The Jokowi administration, in considering Indonesia’s existing shipbuilding capacity, focused initially on promoting the construction of smaller harbour craft through a series of government-sponsored tenders.

Speaking to BT on the sidelines of the Asia Pacific Maritime exhibition in Singapore in March 2016, Pak Eddy said Seacom, or the directorate general of sea communication in Indonesia, has already awarded newbuild contracts for 150 out of the 500 harbour craft to be built in phases for infrastructure support towards harbour operations across the country. These vessels are of sizes well-suited for construction by most Indonesian yards.

Some 35 newbuild vessel contracts that were due for award in 2015 have spilled over to 2016 and contracts for another 50-60 more will be tendered out in 2016. Altogether Seacom will commission the construction of up to 95 harbour craft in 2016.

This year, the ministry of maritime affairs and fisheries is set to roll out separately newbuilding tenders for 3,500 fishing vessels. Pak Eddy estimates the total value of the newbuild contracts for these fishing vessels could come up to about US$300 million – another significant step the government is taking to support shipbuilding in Indonesia.

The fishing vessels being tendered out by the central government are intended to be allocated to local fishermen through the district governments. The vessels will also be built to suit fishing operations in shallow waters off Indonesia, which have seen a resurgence in marine life.

To Pak Eddy, the returning marine life is the result of the hardline approach the government has taken against illegal fishing, to the benefit of the local communities, although this may be seen in a different light outside the country.

As part of its Independence Day celebrations last August, the government conducted a public sinking of 70 foreign-flagged fishing vessels. International media noted the nationalistic overtones in this massive sinking of vessels which had reportedly been seen poaching in Indonesian waters. The administration of Mr Jokowi maintained, however, that the clampdown was necessary to stem annual losses to the tune of US$20 billion from illegal fishing.

Pak Eddy also maintained during his interview with BT that the government does not impose any restriction on foreign direct investment in shipbuilding. He qualified this, however, by noting that most government agencies are still favourably disposed in their tenders towards Indonesia-based shipyards boasting higher local content. Local content in the Indonesian shipbuilding context covers the equipment used and Indonesian representation in the shareholder mix of the yards involved in any shipbuilding projects.

Pak Eddy also said that Indonesia is not adopting a one-size-fits-all approach when drawing up local content requirements for the country’s shipbuilding projects.

According to him, there is an understanding that up to 80 per cent of the construction of smaller vessels, including some harbour tugs, can be carried out in Indonesia. Tenders for bigger ships, especially those over 50,000 dwt, are still open to foreign shipbuilders.

The Iperindo chairman said the shipbuilders’ association aims to work with the government and local industry players to boost the average local content to 50 per cent within the next five years.

To achieve that target, Indonesia would need to build up a marine logistics supply chain, partly to ensure after-sales support for local-built vessels. This basically involves replicating the success of the Batam bonded zone in other strategic choke points of the archipelagic nation. Goods entering bonded zones in Indonesia are exempt from import tax, luxury goods tax and value-added tax.

One initiative Iperindo is undertaking to boost Indonesia’s marine logistics supply chain outside the bonded zones is to lobby for the removal of custom duties ranging from 5-12 per cent on equipment that is to be stored elsewhere. This will give Indonesian shipbuilders access to spares that can be called upon for shiprepair work, which will sustain the local industry when shipbuilding activity is slow.

Foreign partners

In this respect, Indonesia is learning from the example of Singapore in strengthening its network of stockists, or equipment suppliers that carry inventories in the shipbuilding industry.

Asked if Indonesia will be challenging Singapore’s position as a maritime logistics hub, Pak Eddy said he expects Singapore in time will move further up the value chain, with Indonesia moving in to fill the vacant space left by the island nation.

The Batam bonded zone also stands as a testament to the successful public-private partnership between Singapore and Indonesia, with many yards there being operated under joint shareholding interests with representation from the two countries.

Moving beyond Batam, Mr Jokowi had inaugurated 11 bonded logistics warehouses by February 2016, which falls in line with Iperindo’s goal of extending Batam’s success to elsewhere in Sumatra, Java and Sulawesi, according to Pak Eddy.

BT has learnt that a shipbuilding joint venture in Pinrang, South Sulawesi, between Japan’s Tsuneishi Holdings and the Kalla Group – which is aligned with the family of Indonesia’s Vice-president Yusof Kalla – may have been included under consideration as a new bonded area.

Indonesian shipbuilders realise the importance of roping in foreign partners with the capabilities to scale up the value chain. Pak Eddy named three other joint ventures in the making:

Steadfast Marine, the Pontianak yard in which the Iperindo president has a key interest, has formed a JV with a Singapore-based partner to purchase, store and assemble winches and deck equipment in Indonesia.

An Iperindo member shipbuilder has separately teamed up with a South Korean company to manufacture hydraulic steering systems in Indonesia. Another Jakarta-listed player, which has been the sole agent for a German pump manufacturer, is seeking to provide assembly for the product at its existing plant.

Iperindo has also held talks with GTT, a French membrane-type liquefied natural gas storage tank technology provider, to transfer the manufacturing expertise to yards in Indonesia. Talks between the two parties have been taking place as Indonesia looks set to take the lead among developing countries to embrace mini-LNG, or shipping and regasification of small LNG cargoes that will meet the power generation needs of small villages spread across the country’s thousands of islands.

National Connectivity a Basis toward a World Maritime Axis Country
Indonesia asks South Korea for Helping hand on industrialization