Indonesia’s Port and Shipping Sector – Highlights and Recent Updates

Indonesia's maritime sector is undergoing transformative regulatory and commercial changes. The development of new shipping regulations—encompassing the evolvement of concession regime, international partnerships, cabotage policies, and tariff regulations—is shaping the future of port and shipping operations. As Indonesia continues to attract global investment, these developments are expected to enhance its status as a key player in the international maritime industry. With the implementation of recent regulations, strategic concessions, and international collaborations, Indonesia is poised for significant growth in the maritime and logistics sectors. However, challenges such as regulatory compliance, investment bottlenecks, and global market competition will continue to shape the industry’s trajectory. In recent years, Indonesia has enacted significant reforms through the Omnibus Law (Law No. 11 of 2020), with a major update in 2023 aimed at improving the ease of doing business, particularly in sectors like shipping and port management. The Omnibus Law centralizes the licensing and certification process, consolidating authority under the Online Single Submission (OSS) system. This simplifies the process for both domestic and foreign investors, reducing bureaucratic obstacles and improving regulatory efficiency. The Omnibus Law also introduces provisions regarding the use of foreign-flagged vessels. While the Cabotage Policy remains intact, the Omnibus Law allows foreign vessels to engage in specific activities that are crucial for Indonesia’s maritime development, such as offshore operations, dredging, and subsea construction. These provisions offer flexibility, allowing Indonesia to access specialized services not readily available through domestic vessels. Furthermore, Government Regulation No. 31 of 2021 on port operations has redefined the Concession Regime, encouraging private sector participation in port management. This shift is designed to enhance operational efficiency, reduce congestion, and improve service standards across Indonesian ports. This reform aligns with Indonesia’s broader efforts to streamline its port infrastructure and management, creating a more attractive investment climate. In 2024, Indonesia introduced the third amendment to Law No. 17 of 2008 on Shipping, further refining the regulatory framework governing port operations. This latest amendment clarifies the legal framework for port concessions, enhances private sector participation, and strengthens regulatory oversight to ensure fair competition and operational efficiency. The 2024 amendment underscores the government's commitment to fostering a competitive and transparent maritime sector, balancing public and private sector interests while supporting economic growth. Additionally, the merger of Pelindo in 2021 was also played a significant milestone in Indonesia’s port industry, consolidating four state-owned port operators (Pelindo I, II, III, and IV) into a single entity. This integration aimed to improve efficiency, reduce logistics costs, and enhance Indonesia’s competitiveness in the global maritime sector. The unified Pelindo now operates under a centralized management structure, allowing for better resource allocation, streamlined investment strategies, and enhanced operational synergies across Indonesia’s port network. This article highlights these key developments, focusing on their commercial impact on port operators, shipping companies, and logistics providers.

Port Development and Operation

The port sector in Indonesia has undergone significant transformation over the years, particularly with the shift from a state-controlled port management system to a more structured regulatory framework that emphasizes the role of the Port Authority (Otoritas Pelabuhan or OP). This article examines the evolution of the port authority regime and the implementation of concession mechanics in the development and operation of ports in Indonesia, highlighting relevant regulations that govern these aspects. Prior to the enactment of Law No. 17 of 2008 on Shipping ("Shipping Law"), port operations in Indonesia were largely dominated by Pelindo Group (PT Pelabuhan Indonesia), a state-owned enterprise (SOE) that functioned both as a port regulator and operator. The introduction of the Shipping Law brought about a fundamental change by separating regulatory functions from commercial operations. The law mandated the establishment of a Port Authority in major ports and a Port Operator Unit (Unit Penyelenggara Pelabuhan or UPP) in smaller ports. These entities are responsible for overseeing port operations, ensuring compliance with regulations, and supervising private sector participation in port development. Under Government Regulation No. 61 of 2009 on Ports, as amended by Government Regulation No. 64 of 2015, the Port Authority is responsible for supervising port operations to ensure compliance with national policies, coordinating with private port operators to ensure efficiency, and enforcing safety and security regulations. This regulatory shift allowed private sector participation through concession agreements, enabling a more efficient and commercially viable port sector. The implementation of concession mechanics has been a critical aspect of Indonesia’s port sector reform. A concession is a contractual arrangement where a private entity is granted the right to develop and operate a port facility for a specified period in return for investments and service obligations. The Shipping Law (Law No. 17 of 2008) establishes the legal basis for private sector involvement in port operations and mandates that commercial port operations must be carried out through concession agreements. Government Regulation No. 61 of 2009 on Ports, as amended by Government Regulation No. 64 of 2015, regulates the licensing and concession mechanisms, including the criteria for private sector participation. Minister of Transportation Regulation No. PM 48 of 2021 on Concession and Other Forms of Cooperation in the Port Sector provides detailed provisions on concession agreements, including their structure, scope, and duration. Under the existing regulatory framework, a concession can be granted to private entities, state-owned enterprises (SOEs), regional-owned enterprises (BUMD), and cooperatives that meet the technical, financial, and operational requirements established by the Port Authority. The concessionaire must demonstrate the capability to develop, operate, and maintain the port infrastructure in accordance with the approved master plan and regulatory standards. Foreign investment in general port operations is now open to 100% foreign ownership under Government Regulation No. 5 of 2021 on Risk-Based Business Licensing, removing the previous requirement for joint ventures with local entities. This allows foreign investors full control over port operations, subject to compliance with regulatory and operational requirements. While the legal framework permits 100% foreign ownership, in practice, most foreign operators enter the Indonesian port sector through joint ventures or strategic partnerships with local entities.

Key Elements of Port Concessions and Considerations for Enhancing Private Involvement

Concessions are granted through a contractual agreement between the Port Authority and the concession holder, defining the rights and responsibilities of both parties. Typically, concessions are awarded through a competitive tender process managed by the Port Authority to ensure transparency and efficiency. However, in certain circumstances, a concession may be granted without a tender through direct appointment (penunjukan langsung) as permitted under Minister of Transportation Regulation No. PM 48 of 2021. This applies when an extension is sought for an existing concession by a holder who has fulfilled all obligations, when the port development is deemed crucial for national interests or involves specific security concerns, when there is only one capable or qualified entity to undertake the concession, or when a new concession is necessary to ensure seamless operations with an existing port facility already managed by a particular operator. A concession agreement defines the private entity’s responsibilities, including port construction, maintenance, equipment procurement, and service provision. Concession periods vary based on project scale and financial viability, typically ranging from 25 to 50 years. The concession agreement also outlines performance obligations, requiring concessionaires to meet specified operational standards, efficiency benchmarks, and service quality metrics. Additionally, environmental and social responsibility provisions may be included to ensure that port operations align with sustainability goals. Compliance monitoring is enforced through periodic audits, performance evaluations, and penalties for non-compliance. The agreement may also include mechanisms for contract extensions, dispute resolution, and the transfer of assets at the end of the concession period. In the dynamic landscape of port infrastructure development and operation, the concession regime has emerged as a key instrument for attracting private investment. It plays a crucial role in facilitating the participation of private entities in the growth and management of port facilities. Through the concession regime, governments can leverage private sector expertise, capital, and innovation to develop and operate ports, which in turn can enhance efficiency, expand capacity, and improve service quality. This regime is instrumental in attracting private sector capital to port development, particularly in countries where public resources for infrastructure development are limited or where efficiency improvements are needed. By granting a concession, the government can focus on regulation and oversight while allowing the private sector to bear the operational risks and drive innovation. While the concession regime offers numerous advantages, certain aspects require careful attention to ensure optimal private sector participation. Regulatory consistency is key to fostering investor confidence, as a stable policy environment will help private entities plan long-term investments effectively. Modifications to concession terms or unexpected regulatory shifts can disrupt investment plans and deter long-term commitments. Ensuring a stable and transparent regulatory environment is essential for fostering investor confidence. Strategic land acquisition planning and infrastructure improvements are also essential to facilitating seamless port expansion efforts. Securing land for new port facilities often involves bureaucratic hurdles, legal complexities, and community resistance. Delays in land procurement can stall critical infrastructure projects, affecting overall industry growth. Moreover, inadequate hinterland connectivity, such as insufficient road and rail networks, limits the efficiency of port operations. Without seamless connections between ports and inland logistics networks, the benefits of modernized ports cannot be fully realized. Ensuring financial viability in concession agreements is vital for attracting sustained investment in port operations. Private operators are required to share revenues with the government, a condition that may impact profitability, especially in ports with lower traffic volumes. Balancing revenue-sharing obligations with operational sustainability is critical for ensuring the long-term success of privatized port terminals. Investors must carefully assess financial risks associated with concession agreements to determine their feasibility.

Pathways for Private Sector Participation

Private companies can participate in port development and operation under the concession regime in various ways, each suited to their specific strategic goals, capabilities, and market conditions. The most common routes for participation include:

1. Direct Concession Acquisition

The most straightforward path for private involvement is obtaining a concession directly from the government. This typically involves a competitive bidding process, where companies submit proposals to manage and operate port facilities. The winning bidder, often based on factors such as financial capacity, technical expertise, and proposed plans for port modernization, is granted the rights to develop, operate, and maintain the port for a specific period. For instance, in regions with underdeveloped or expanding port infrastructure, governments may invite private players to build new terminals, upgrade existing ones, or manage port operations. This allows private companies to benefit from port revenues, such as docking fees, cargo handling charges, and storage fees. Direct participation through a concession is ideal for large, experienced companies with the necessary capital and technical expertise to undertake significant infrastructure projects. It also enables them to assume greater control over port operations, fostering long-term growth and profitability.

2. Joint Ventures (JVs) with Local Companies

In some markets, especially where regulatory barriers or market conditions favor local players, international companies may choose to enter into joint ventures with local companies. These partnerships allow foreign firms to leverage local expertise, navigate regulatory frameworks, and reduce risk associated with cultural and operational differences. Joint ventures can be structured in various ways, depending on the goals and strengths of the partners. The foreign company might bring in the technical expertise, financial resources, and global network, while the local partner provides knowledge of the market, relationships with stakeholders, and regulatory familiarity. This collaborative approach can also increase the likelihood of securing a concession, as local partnerships are often preferred by governments keen on fostering local economic development. Through joint ventures, private entities can gain access to port concessions while sharing the risks and responsibilities of the project with a trusted local partner. This strategy is common in countries where the local partner holds specific regulatory advantages, such as access to government incentives or preferential treatment in bidding processes.

3. Cooperation with Existing Concession Holders

Another pathway for private involvement is entering into cooperation agreements with existing concession holders. In many cases, the current concessionaire may be seeking additional capital, expertise, or operational support to expand or improve port services. In such cases, private entities can partner with the concession holder to provide the necessary resources or expertise to optimize the port's performance. Cooperation with existing concession holders is often an attractive option for companies looking to invest in a well-established port but without the need to undertake the entire project themselves. These arrangements can include financial investment, operational management support, or technical assistance, enabling both parties to benefit from the enhanced capacity and improved profitability of the port. This approach is particularly viable when private companies are interested in specific segments of port operations, such as terminal management, cargo handling, or port logistics, and do not wish to assume full responsibility for the entire port facility. In light of these possibilities, collaboration with Pelindo, the state-owned port operator, presents an opportunity for private entities to engage with an established player in the industry. Although Pelindo no longer acts as the port authority, its continued role as a state-owned enterprise provides a strong foundation for the development of Indonesia’s port sector. By leveraging Pelindo’s extensive infrastructure and operational experience, private sector participants can benefit from strategic partnerships that enhance efficiency and expand port capacity. Pelindo’s role, as the concession holder, includes establishing agreements with private investors to enhance efficiency, optimize cargo handling, and improve overall port services. These agreements allow private operators to introduce advanced port management systems, invest in automation, and implement the best practices in logistics and supply chain management. Such partnerships are critical for expanding port capacity, accommodating increasing trade volumes, and integrating Indonesia’s port network with global maritime routes. For private corporation, such collaboration with Pelindo provides the opportunity to integrate their operations within the broader port ecosystem by working closely with Pelindo, ensuring seamless connectivity and operational synergies. A key example of private participation is the partnership between Pelindo and Mitsui & Co. at Tanjung Priok Port, Indonesia’s busiest maritime gateway. Through a joint venture, Mitsui invested in New Priok Container Terminal 1 (NPCT1), enhancing operations with automated cargo handling and digital logistics solutions. This cooperation improved port efficiency, increased container handling capacity, and strengthened Indonesia’s logistics sector, attracting more international shipping lines. Another example is Pelindo’s partnership with DP World at Belawan New Container Terminal (“BNCT”) in North Sumatra. DP World introduced advanced port management systems and automation, improving container handling and reducing turnaround times. By integrating BNCT into DP World’s global network, the cooperation positioned Belawan as a competitive transshipment hub, boosting Indonesia’s trade connectivity and port competitiveness. While these cooperative arrangements facilitate private sector involvement, they remain subject to regulatory oversight by the Port Authority. Private operators must adhere to service performance standards, safety regulations, and contractual obligations outlined in the concession agreement. The revenue-sharing mechanism established between Pelindo and private operators is also regulated to ensure fair competition and prevent monopolistic practices. Additionally, the government encourages Public-Private Partnerships (PPP) under Presidential Regulation No. 38 of 2015 to further incentivize private investment in port infrastructure and services.

Cabotage Policy in Indonesia and Its Impact on the Shipping Sector

Indonesia’s Cabotage Policy, as outlined in Law No. 17/2008 on Shipping, mandates that only Indonesian-flagged vessels can transport cargo between domestic ports. The primary goal of this policy is to protect and support the growth of the domestic maritime industry by ensuring that foreign vessels cannot operate in the domestic shipping market. This is particularly important for an archipelagic nation like Indonesia, where shipping is vital for connecting its many islands and boosting economic development. Government Regulation No. 85/2015 also provides technical details on foreign and domestic vessel operations, including shipping routes and vessel eligibility for engaging in domestic shipping. Foreign vessels can temporarily operate on domestic routes under a Cabotage Waiver granted by the Ministry of Transportation. The waiver is issued when no suitable Indonesian-flagged vessels are available for specific operations, such as offshore oil and gas projects, requiring specialized ships. The company must apply, justifying the need based on the unavailability of domestic ships, and the waiver is granted on a temporary and regulated basis to ensure compliance with the Cabotage Policy. The key regulatory references for obtaining the waiver include Ministerial Regulation No. 106/2015, Law No. 17/2008 on Shipping, and Government Regulation No. 85/2015.

The Importance of Transshipment in Indonesia

Transshipment, the process of transferring cargo from one vessel to another before reaching its final destination, is essential for optimizing shipping routes and reducing costs. Given Indonesia’s geographical advantage, its ports serve as natural points for transshipment, connecting the Pacific and Indian Oceans. Several key ports, including Tanjung Priok, Tanjung Perak, Belawan, and Makassar, are integral to Indonesia’s transshipment strategy. The development of new deep-sea ports, such as Kuala Tanjung and Patimban, further enhances the country’s capacity to handle transshipment traffic. Transshipment remains a key activity in Indonesia’s port sector, particularly at major international ports like Tanjung Priok. While foreign vessels are allowed to offload cargo at these hubs, they are restricted from transporting goods between domestic ports. Transshipment occurs when foreign vessels unload their cargo at a port like Tanjung Priok, and the goods are then transferred to Indonesian-flagged vessels for onward transport to other domestic locations. This mechanism ensures that foreign vessels do not participate in domestic shipping while still enabling Indonesia to serve as a critical hub in global trade routes. Foreign vessels are thus allowed to offload and reload goods but must adhere to Cabotage regulations when operating within Indonesian waters, meaning they cannot engage in domestic transport. Given these restrictions, foreign shipping lines seeking to serve Indonesia’s domestic market must establish a local presence. The primary approach is to set up an Indonesian-incorporated shipping company that meets local regulatory requirements. Foreign investors must establish a limited liability company (Perseroan Terbatas Penanaman Modal Asing or “PT PMA”) under Indonesian law, subject to foreign ownership restrictions. Under the current Positive Investment List, foreign ownership in domestic shipping is generally capped at 49%. The PT PMA must be incorporated under Indonesian law and registered with the Ministry of Law and Human Rights. Additionally, the company must meet minimum capital requirements as stipulated by Indonesian regulations and secure approval from the Investment Coordinating Board (BKPM) before commencing operations. A foreign-owned shipping company must acquire or lease vessels that will be registered under the Indonesian flag. The vessel registration process must comply with national ship registration and operational regulations under the Directorate General of Sea Transportation. The company must also adhere to Indonesia’s safety and environmental standards applicable to maritime operations. Operating a shipping company in Indonesia requires obtaining a Sea Transportation Business License (SIUPAL) from the Ministry of Transportation. Additional operational permits, including port clearances and navigation permits, may also be required, depending on the specific shipping activities undertaken. The Third Amendment to Law No. 17/2008, enacted through Law No. 66/2024, further impacts the joint ventures arrangement between foreign and local shipping companies. Previously, foreign companies wishing to enter the Indonesian shipping market had to partner with domestic firms and maintain at least one Indonesian-flagged vessel with a capacity of 5,000 gross tonnage (GT). The amendment raises this requirement to 50,000 GT, aiming to encourage larger, more efficient vessels and boost the country’s capacity for handling larger-scale operations in the shipping sector. Given such conditions, many international shipping lines choose to enter joint ventures with an established local shipping line to establish an operational foothold in Indonesia. A joint venture allows a foreign company to participate in the domestic shipping market while complying with local regulations. The agreement structure must align with Indonesia’s foreign investment regulations to ensure smooth operation and revenue-sharing arrangements with the domestic partner. For foreign shipping companies that do not wish to establish a fully-fledged domestic entity, leasing or chartering Indonesian-flagged vessels from domestic operators is another viable option. This arrangement ensures compliance with cabotage rules while allowing foreign shipping lines to continue operating in Indonesian waters. However, these leasing agreements must comply with Indonesian tax and import regulations to avoid legal complications.

Summary

Indonesia’s strategic location combined with its rapidly growing economy, offers substantial potential for international players in the port services sector. Its extensive archipelago and position on major international shipping routes provide a natural advantage, making it an ideal hub for transshipment and regional logistics. With a burgeoning middle class and increasing industrial output, domestic trade and exports are on the rise, supporting a higher demand for efficient port services and advanced logistics infrastructure. The Indonesian government has been prioritizing infrastructure development, including the modernization of ports and logistics networks. These efforts, coupled with public-private partnerships, create opportunities for international firms that bring in technical expertise and innovation. Additionally, there is significant potential for integrating digital solutions such as smart port management systems, automated logistics, and supply chain transparency. International players can leverage these technologies to streamline operations and reduce inefficiencies. While the prospects are promising, challenges such as bureaucratic hurdles, regulatory uncertainties, and local competition remain. International investors will need to adapt to local market conditions, understand regulatory frameworks, and possibly invest in relationship-building with government bodies and local partners. Despite these challenges, international players can find strong opportunities by bringing in advanced technology, forming strategic local partnerships, and effectively navigating the regulatory landscape.

Author:

Melissa Butarbutar Partner melissa.butarbutar@tjajolaw.id TnP Law Firm - www.tjajolaw.id

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