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Shipping and shipbuilding sector still facing financing problem amid growing market demand.

After long being in the doldrums, the country's ship building industry begin to show that it has fresh blood to grow boosted by the government policy to adopt the cabotage principle as outlined in the Presidential Instruction (Inpres) No.5 in 2005, which gives protection to domestic shipping and shipbuilding industries.

According to the chairman of the Indonesian Ship-owner's Association (INSA) Oentoro Surya, currently Indonesian shipping lines still have a share of 65% of domestic cargoes, but foreign shipping companies almost monopolize international cargoes by dominating 95% of the transport of export and imports by the country.

The government predicted that in 2010, the country will need 654 additional ships--brand new or used ones--to be able to effectively implement the cabotage principle fully. In 2010, in line with the cabotage principle, domestic cargoes and imports by the government may be transported only by ships flying Indonesian flag.

The Inpres also rules that foreign ships may not make a call at any port in Indonesia. Foreign ships are allowed to visit only certain port in the country.

The domestic shipping companies are expected to gradually strengthen their domination of domestic shipping after the cabotage principle was announced in 2005. However, it would not be easy as the process of revitalization of the country's shipping industry has been sluggish. Based on available data, the number of ships flying Indonesian flags grew 32% to 1,400 units in 2007 from 1,065 units in the previous year and the capacity in tonnage rose from 6 million tons to 7.5 million tons in the same period.

In years before the announcement of the Inpres, credits provided by banks to the shipping industry were relatively small due to limited knowledge of banks of the potential and prospects of shipping industry. The banking industry only saw that shipping industry carries a high risk. The shiping industry needs long term credits while Indonesian banks are still reluctant to offer long term credits. Business players in the shipping industry have urged the government to help form a consortium of banks to provide credits for the industry.

So far banks, still doubting the credit worthiness of shipping industry, have demanded difficult conditions for credits proposed by shipping companies. Meanwhile, many shipping companies need large credits to buy new ship to revitalize their fleets to be more competitive. The country's shipping industry needs incentives including in credit facility. Financial problem is still one of the main hurdles hampering the expansion of the country's shipping industry.

The Shipping Law No 17/2008 in May 2008, that allows ship assets to be used as collateral is expected to provide easier access to banking credits for shipping industry. The government already ratified the international Mortgage Law with the Inpres No. 5 of 2005 but it is not effectively implemented due to poor coordination between related agencies.

The increase in credit interest rates lately have come as a new stumbling block. Credits for shipping industry is categorized as commercial credits unlike in China and South Korea where credit rates for the industry are relatively low.

Players in the shipbuilding industry have urged the government to provide the same treatment as given to shipbuilding industry in Batam where the industry is exempted from 10% value added tax (VAT). VAT has contributed to weakening the competitiveness of ships built in the country.

Transport Equipment and Telematics Director General Budi Dharmadi said the government has offered special facilities to boost development of the country shipbuilding industry. First, providing strategic locations for shipyards, where the water is at least 8 meter deep, with adequate infrastructure and skilled technicians. Second, the government will offer incentive in the form of income tax discount in line with the Government Regulation No I in 2007 for investment in shipyard industry with a capacity of more than 50,000 DWT. Third, the government will seek to find working partners and help in expanding marketing network.

However, according to the general chairman of the Indonesian Association of Shipbuilding Companies Joeswanto Karijodimejo, the statement by Budi Dharmadi contradicts the government's policy of banning shipyards from having a location in port areas amid growing orders received by Indonesian shipbuilding companies. The shipbuilding industry needs special areas especially the infrastructure available in the areas such as in port areas. So far the government has not given any incentive for shipbuilding industry. Therefore, the Inpres No. 5 of 2005 should be followed up with regional administration policy to provide special locations for the industry, Joeswanto said.

Indonesia has a number of large shipbuilding companies like PT PAL and PT. Koja Bahari, but their performances are not as expected. The growing demand for ships in the world market is expected to shore up the country's shipbuilding industry.

PT PAL Indonesia has been awarded contracts to build 9 tankers worth US$225 million from abroad including orders from Turkey for three units of 50,000 DWT, from Italy for 2 units of 18,500 DWT, ... from Germany for 2 units of double skin carrier bulk (DSBC) of 50,000 DWT and from Italy for 2 units of chemical tankers measuring 26,000 DWT. Each vessel is valued at US$25 million--US$30 million ...

According to Ship Building Director of PT PAL M. Moenir, with the order for 9 ships, the company has to operate at full capacity that it could no longer accept new order for completion in mid 2008.

The commercial division of PT PAL has a production capacity of 3 ships of large tonnage a year. However it could build up to 13 ships of small DWT a year ...

PT PAL plans to expand its capacity with an investment of Rp 10 billion in cooperation with a number of local and foreign banks including BNI, Bukopin, DBS Singapore, Bank Niaga, and Bank Internasional Indonesia (BII). Currently 70% of fund used by PT PAL to finance ship building is in US$ loan with commercial interest rate. The company puts up 30%.

This year PT Dok plans to build a shipbuilding facility in Lamongan built over a 20 hectare plot of land expected to be completed in 2009.

Investment interest still strong

According the data since 2007 there have been at least six investors interested in building new shipyards in the country with a capacity ranging from 30,000 to 100,000 DWT. An investor planned to invest US$20 million for a 30,000 DWT shipyard in the first phase.

Three of the prospective investors are domestic investment (PMDN) companies and the other three are foreign investment (PMA) companies. The projects are to be built in Batam, Karimun Java in West Java, Semarang in Central Java, and East Java.

One of the foreign investors is Dubai Drydocks World Ltd planning to invest US$500 million in Batam with a capacity of more than 100,000 DWT of tanker. It plans to produce very large crude carrier (VLCC). Other foreign investors include Sun Wo, C & Heavy Industry and 21th Century Shipbuilding from South Korea.

One of the PMDN companies is PT Daya Radar Utama (DRU) planning to build a facility with a capacity of 50,00 DWT. See the following table.

Shipbuilding credits grow 24.9%

With the growing orders received by the country's shipbuilding industry, banks begin to show interest in financing the industry. More credits have been provided and offered to the industry. Bank Indonesia also encourages banks to offer credits for shipbuilding industry ...

Deputy Governor of Bank Indonesia Muliaman Hadad said credits for shipbuilding industry has increased in the past two years especially as non performing loans (NPL) in the industry had dropped sharply. In 2007, NPL in the shipbuilding industry was only around 3% down from 11% in the previous year. Credits for shipping and shipbuilding sector in the 2005-2007 period grew 24.9% annually. In 2007, credits for the sector totaled Rp 9.81 trillion or an increase of 46.4% from Rp 6.7 trillion in 2006. Most or 80% of the credits are for shipping industry.

The total credit for the shipping and shipbuilding sector, however, was relatively small--accounting for only 0.63% of the total bank credits in December, 2006 up to 0.94% in December, 2007. Outstanding credits of banks in the country totaled Rp1.008 trillion by the end of 2007 and NPL fell from 11% by the end of 2006 to 3.8% by the end of 2007.

Based on profitability, companies operating in shipping and shipbuilding sector are quite worthy of credit. In fact a number of large banks have shown greater interest in financing the sector. Credits are offered mainly for shipping company having shipping contracts such as with oil and gas companies like Pertamina with government guarantee and international oil and gas companies. See the following table.

Banks providing credits for shipping and shipbuilding sector

Despite the improvement in bank confidence credits are not easy to come for the shipping and shipbuilding sector. Many banks still see great risk in venturing the sector although the sector has shown much bigger prospects. In addition, the bank interest rates in the country are still too high. The shipping and shipbuilding sector needs long term credits. Business players in the sector have urged the government to help form a consortium of banks and other financing agencies to finance long term credits for the sector. Credits are needed to finance the construction of vessels including container ships, tankers, tug boats and barges. More barges with a carrying capacity of 6,000 tons--8,000 tons are needed especially for the transport coal and general cargoes. INSA said a barge and tug boat will cost around US$2 million-US$3 million and a general cargo ship measuring 10,000 DWT will cost around US$19 million.

Industrialists said ideally the equity-loan ratio is 20:80 to finance shipping and shipbuilding project, but banks generally accept a ratio of 35:65 ratio. Shipping and shipbuilding companies, therefore, have to provide large investment in equity. The ratio required by banks often causes failure in the investment

As a result, foreign financers have become dominant in shipbuilding and shipping credits. Sea Transport Director General Effendi Batubara said the Japanese government through JICA offers low interest credits of US$150 million-US$200 million for shipping and shipbuilding sector. The G-to-G loan carries an annual interest rate of 1.3% to be disbursed in 2008 and 2009. Seven shipping and seven shipbuilding companies have asked for a share of the credit.

PT. Dok Perkapalan of Surabaya is seeking loans from a number of banks including Bank BRI, Bank Mandiri and BII. The company also plans to issue bond.

Among that already provided loans for shipping and shipbuilding sector incldue BNI, which disbursed a loan of US$ 150 million for PT PAL in 2005.

Bank Mandiri Tbk increased its credits for the sector from Rp 700 billion in 2006 to Rp2 trillion in 2007, mostly for cargo shipping companies.

Among the private banks, Bank International Indonesia (BII) provided Rp1.3 trillion in credit for the sector in 2007. This year the bank is a lead arranger for a consortium of three banks to provide a credit of US$24 million for the procurement of bulk ship for coal transport.

Credits needed by the sector is expected to continue to increase to reach Rp27.6 trillion in 2009. Based on a survey by the communications ministry, fund needed for the development of the country's shipping industry to support full implementation of cabotage principle will reach Rp34 trillion in 2010.
New investment planned in shipbuildinq industry, 2007

 Count of Investment
Investor origin plan Description

Dubai Drydocks Abu Dhabi US$ 500 juta Shipyard with a
World Ltd capacity of more
 than 100,000 DWT
 in Batam

Sun Wo C & Heavy Korea Selatan N.a. --

PT. Daya Radar Indonesia Total US$ 80 Shipyard with a
Utama million with capacity of 50,000
 2 other PMDN DWT

Source: Industry ministry

Credits disbursed by banks for shipping and shipbuilding
sector, 2005-2007

 Total credit
Year (Rp trillion) Growth

2005 5.22 --
2006 6.70 28.3
2007 9.81 46.4
Averaae growth 24.9

Source: Bank Indonesia
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Title Annotation:FINANCE
Publication:Indonesian Commercial Newsletter
Date:Aug 1, 2008
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