AFTA offers great opportunity to shipping business

Rikza Abdullah, Contributor, Jakarta

This Special Page is published in conjunction with the Trans ASEAN 2002 Conference and Exhibition, which opens at the Jakarta Convention Center here today.

Over 40 industry leaders in international and regional transportation-related businesses are expected to participate in the three-day event held following the Eighth ASEAN Transport Ministers' annual meeting.

This year's implementation of the ASEAN Free Trade Area (AFTA) agreement offers Indonesia a great opportunity to expand its shipping business. But various problems are hindering it from gaining greater benefits from it.

Before the full implementation of the agreement, the ASEAN member countries, under their Common Effective Preferential Tariff (CEPT) scheme, were able to increase trade among their countries by an annual average of 11.6 percent, or from US$44.2 billion in 1993 to $95.2 billion in 2000, according to the ASEAN Secretariat in Jakarta.

Bringing forward ASEAN's trade liberalization under its AFTA agreement to Jan. 1, 2002, will most likely boost trade among its members further because they will have lowered duties on most of their products.

Under the agreement, the association is committed to eliminating all import duties by 2010 for its six original members (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) and by 2015 for its new members (Cambodia, Laos, Myanmar and Vietnam). To date, about 98.3 percent of the products from the six original members are included in the CEPT scheme, of which 92.7 percent either apply no duty or up to 5 percent.

As intra-ASEAN trade increases, AFTA will make ASEAN an attractive investment location for regional and international investors, given the expected lower costs of doing business in the region.

Increased intra-regional trade in goods and services will also have a trickle-down effect on the service sector, including shipping services. An increased role of the service sector will become even more important, particularly when ASEAN becomes successful in attracting other economies -- including Japan, South Korea, China, Australia and New Zealand -- to cooperate more closely.

However, as the volume of intra-regional trade is expected to increase, Indonesia will find it difficult to take advantage of the opportunity to improve its role in shipping goods traded with its partners.

Container production at Indonesian seaports, according to data released by the United Nations' Economic and Social Commission for Asia Pacific (ESCAP), is projected to steadily increase from 2.78 million twenty-foot equivalent units (TEU) in 1999 to 6.14 million TEUs in 2011.

For example, Indonesia's capability is too low to expand its fleet for the transportation of goods into and out of the country due to the fleet's low competitive edge against other countries.

"Indonesia's shipping companies are generally low in capability to expand their fleet due to a lack of capital," said Heru Prasetyo, a spokesman for the Directorate General of Sea Transportation at the Ministry of Transportation.

He said merchant ships operated by Indonesian companies were mostly too old and small in size and they, therefore, had a low capacity and poor performance.

"Banks generally regard shipping companies as unfeasible to obtain credit because their businesses are capital intensive, slow yielding and of high risk," he said, adding that banks, therefore, set tough requirements for shipping firms to obtain credit.

The requirements, he said, included a prerequisite for shipping companies to provide collateral worth no less than 150 percent of the proposed credit, to own an equity of no less than 35 percent and to pay high interest.

He said the companies could not procure vessels through leasing arrangements because these arrangements were not supported by a law that would allow them to use leased vessels as collateral.

As a result, he said, the number of Indonesia's merchant fleet was very limited, compared to its potential to trade goods. Based on the number of vessels weighing 1,000 dead weight tons (DWT) and over, Indonesia, as of 2001, had only 592 units with a total weight of 4.36 million DWT, which is just 0.58 percent of the world's total fleet of 30,508 vessels with a total weight of 749.6 million DWT.

If calculated on the basis of ships weighing just 100 DWT and over, Indonesia had 4,262 ships, consisting of 1,287 oil containers, 523 bulk carriers, 1,971 general cargo vessels, 118 container ships and 353 others.

"It would be helpful for shipping companies if the government offered them fiscal incentives for the procurement of new vessels," Heru said.

He said because there were no fiscal incentives from the government and they found it difficult to obtain loans from both domestic and foreign banks, a number of companies prefer to have their ships fly foreign flags. Out of Indonesia's 592 ships, 98, with a total weight of 1.25 million DWT, flew foreign flags.

Heru said Indonesian vessels with a national flag still thinly dominated the share of transportation of goods within the country but they controlled only a very small portion in the transportation of goods for export and import.

In 2001, out of the 62.8 million tons of dry cargo going to and from domestic ports, 46.7 million tons (74.33 percent) were transported by vessels flying the Indonesian flag while the remaining 16.1 million tons (25.67 percent) were on vessels with a foreign flag. Meanwhile, out of the 87.1 million cubic meters of liquid cargo, 43.2 million cubic meters (49.65 percent) were transported by ships with an Indonesian flag and the other 43.9 million cubic meters (50.35 percent) were ships flying a foreign flag. This means that in total, vessels flying the Indonesian flag controlled 59.99 percent of domestic cargo transportation while vessels with a foreign flag had 40.01 percent.

For comparison's sake, out of the 203.02 million tons of dry cargo for export and import in 2001, only 22.35 million tons (11.01 percent) were transported by ships flying the Indonesian flag and the other 180.67 million tons (88.99 percent) were transported by ships flying a foreign flag.

Meanwhile, out of the 203.02 million cubic meters of liquid cargo for export and import, only about 130,000 cubic meters (0.06 percent) were transported by vessels under an Indonesian flag and 209.58 million cubic meters (99.94 percent) by vessels with a foreign flag. This means that in total, vessels under an Indonesian flag controlled only 5.45 percent of cargo transportation for export and import and vessels flying a foreign flag controlled 94.55 percent.

Heru said some of the reasons for the domination of vessels flying foreign flags was that shipping orders generally came from foreigners -- who bought Indonesian goods on a free-on-board basis or sold goods to Indonesia on a commodity-insurance-and- freight basis -- and that Indonesian shipping companies had poor partnerships or relations with foreigners.

He said another problem that hindered the development of Indonesia's shipping business was the poor networking of services between trunk ports and feeder ports, while port infrastructures and facilities were very limited. These conditions prolonged the port days or the turnaround time of vessels serving Indonesian ports.

This country, according to the Directorate General of Sea Transportation, currently has 2,109 ports, of which 140 are open for international shipping and the other 1,973 are merely for local shipping.

Indonesia also lacks skilled resources. As of the end of July, the country had only 137,345 seafarers, of whom 117,345 worked for vessels flying the Indonesian flag and the other 20,000 for ships flying foreign flags, he said.

Furthermore, he said, Indonesian waters and the Malacca Strait -- which leads to Indonesian waters -- were prone to piracy, a crime that might discourage investors from entering the shipping business. The year 2000 witnessed 119 cases of piracy in Indonesian waters and 75 cases in the Malacca Strait. These figures declined to 91 and 17 respectively in 2001.