15 June, 2017
In May 2017, the Prime Minister of Malaysia, Datuk Seri Najib Tun Razak announced that from 1 June 2017, Sabah, Sarawak and Labuan will be exempt from cabotage laws insofar as the carriage of cargo between Peninsula Malaysia and East Malaysia, and vice versa is concerned. While this exemption will not apply to cargo shipment within Sabah, Sarawak and Labuan, the implications of the cabotage lift for shipments to and from these ports are far-reaching.
National cabotage laws came into effect in Malaysia on 1 January 1980, and permit only Malaysian vessels to engage in domestic shipping. Foreign vessels are allowed to discharge cargo at any port in Malaysia but are not allowed to move the cargo within the country.
Section 11 of the Merchant Shipping Ordinance defines a Malaysian vessel as being wholly owned by:-
- Malaysian citizens; or
- corporations which satisfy the following requirements
- the corporation is incorporated in Malaysia;
- the principal office of the corporation is in Malaysia;
- the management of the corporation is carried out mainly in Malaysia;
- the majority of the shareholding including the voting share of the corporation is held by Malaysian citizens free from any trust or obligation in favour of non-Malaysians; and
- the majority of the directors of the corporation are Malaysia citizens.
Move towards liberalisation
The main objective of the cabotage laws was to safeguard and protect the domestic shipping industry. Following its implementation, this protectionist policy has been liberalised through the years. In 2009, the carriage of containerised transshipment cargo between certain ports in Peninsula Malaysia and East Malaysia was allowed. In 2012, an exception to cabotage laws was made for passenger cruise ships.
Further, there were also exceptions made through the issuance of temporary licenses to allow foreign vessels to engage in domestic shipping when there were insufficient Malaysian vessels to meet shipping demands. However, foreign vessels required an endorsement from the Malaysian Shipowners’ Association before these licenses could be obtained. This often left foreign vessels at the mercy of domestic shipowners.
Lifting the cabotage policy
The lift on the cabotage policy is said to be due to the rising cost of consumer goods. Goods exported from East Malaysia are left lying in transit for prolonged periods of time because vessels travelling out of East Malaysia are unable to carry a full load. Consequently, manufacturers in East Malaysia lose their ability to compete in the market because by the time their goods arrive at the port of discharge, the price of those goods are no longer competitive. The delay and issue of vessel frequency has also resulted in increased port charges and the risk of cargo theft.
Additionally, goods transported from Peninsular Malaysia to East Malaysia pass through a long supply chain before being discharged, resulting in increased freight costs. The lack of options and a monopolised shipping industry has led to consumers having to pay the price of a cabotage policy that from the onset sought only to benefit the domestic shipping industry.
Dissenters of the cabotage policy take the position that protectionism discourages the growth of the marine industry in Malaysia and inflates the cost of goods to the detriment of the common man. It is believed that lifting cabotage laws could potentially make East Malaysian ports more accessible, increase trading activities and gain prominence.
Impact of lifting the cabotage policy
The Malaysian shipping industry is not taking well to the lift of the cabotage policy. Shipping companies are anticipating bigger losses following the lift of the ban. The Malaysian shipping industry has been faced with challenges since the 2008 financial crisis and shipping companies are worried that they will not be able to compete with foreign vessel operators.
The real consequences of the lift are yet to be seen. However, the Malaysian Shipowners Association has warned that the increase in external competition will adversely affect Malaysian vessels operating on the previously cabotaged routes. It is anticipated that that domestic shipping companies will likely close shop or relocate their businesses elsewhere.
Cabotage policies are not new and are practiced in numerous other jurisdictions around the world, including the United States. The viability of cabotage policies has consistently been debated but the lift on the policy in Malaysia sends a clear signal that it is not ideal to maintain a policy that functions largely at the expense of domestic consumers. It would be interesting to see if the lift will indeed lower the costs of goods and benefit trade in East Malaysia.
For further information, please contact:
Gerald Yee, Partner, Clyde & Co
gerald.yee@clydeco.com
