It is almost a year since a presidential instruction was issued on the empowerment of the local shipping industry, also known as the "maritime cabotage policy", but the industry still faces various problems, which are hampering business growth.

Protracted issues related to policy inconsistency and a lack of commitment to providing the industry with easier access to financial resources have always been the industry's greatest problems.

The implementation of the cabotage policy has seen a 10.7 percent increase in Indonesian vessels used for domestic cargo delivery, to 6,689 vessels last year from 6,041 in 2004.

However, the capacity of local liners to tap into the huge market potential of domestic cargo delivery is still limited.

For example, last year, only some 75 vessels with an installed capacity of around 400,000 dead-weight tons (DWT) were available to serve container cargo.

The low penetration of local shipping lines is mainly attributable to difficulties in seeking working capital from banks. If available, banks often charge interest rates that are too high as they still categorize the industry as a high-risk investment.

"Local banks still don't understand the shipping business well, and its huge potency, despite the fact that they have ratified the mortgage regulation that allows vessels to be used as collateral (for loans)," said Oentoro Surya, chairman of the Indonesian National Shipowners Association (INSA).

Oentoro said several local banks had actually provided loans to shipping companies but charging a high interest rate of over 18 percent annually for rupiah loans and over 10 percent for dollar denominated.

INSA said local shipping companies could only afford an interest rate level of below 14 percent for rupiah and below 7 percent for dollar loans.

Some shipping companies have turned to the capital market to seek cheaper funds for expansion. One example is publicly listed shipping company PT Berlian Laju Tanker, which is planning to raise US$125 million to expand its fleet by selling and listing its shares in the overseas capital market.

However, not many shipping lines have a capability like Berlian, who has been in the business for more than 20 years.

"The government should seek a breakthrough effort for providing soft loans in order to help accelerate the development of the shipping industry at home. It is not only for shipping lines but also for shipyard companies," said Oentoro, who is also president director of publicly listed shipping company PT Arpeni Pratama Ocean Line.

He suggested that the government push state-owned financing firm PT Pann Multi Finance to focus more on financing the maritime shipping industry, rather than dealing with other non-focused sectors deemed unprofitable.

The government, however, has played down the scale of financing problems faced by the local shipping industry, arguing that a presidential instruction was issued to push banks to provide loans to the industry.

"I think shipping companies are no longer facing difficulties in seeking loans since banks have accepted their vessels as collateral. I think it will take some time for banks to study the shipping business (before lending the money)," said Transportation Minister Hatta Radjasa.

Lack of working capital is also plaguing the local shipyard industry, which is supposed to be the main supplier of vessels at affordable prices for the domestic shipping lines.

At present, there are 67 shipyards in Indonesia with a capability to build 40,000-50,000 DWT cargo vessels. However, only 11 of the companies are fully operational.

Demand for new vessels is estimated to reach two million DWT annually, but, for now, local shipyards can only supply 300,000 DWT, due primarily to a lack of working capital and higher operational costs.

Around half of the projects are handled by state-owned shipyard company PT PAL Surabaya.

INSA estimated the bulk shipment market this year would grow by at least 8 percent from 450 million tons last year, while container shipment by between 2 and 3 percent from around 5.5 million twenty-feet equivalent units (TEUs) last year.

According to the Transportation Ministry, local industry players are estimated to have lost a potential revenue of around US$15 billion last year from the shipment of goods within the country, as well as those of export and import.

The estimation is made based on the condition that foreign shipping lines still control 46 percent of the domestic shipment market, which had a volume of 206.33 million tons last year, and 94 percent of 492.97 million tons of overseas shipments.

Under the "maritime cabotage policy", the government has since last year obliged all domestic shipments of rice, sugar, crude palm oil, wood, fertilizer, cement and general cargo to use local liners. By 2007, agricultural produce such as vegetables and fruit must also be shipped using Indonesian vessels, with corn, soybeans, coal, oil and gas following by 2009.

The government expects that by 2009 all shipments of 13 essential commodities -- from the present six commodities -- will be served by local vessels, although shipments of coal, oil and gas may still be excluded from the policy as the government will honor any existing long-term shipping contracts.

However, Oentoro said that in practice, foreign shipping lines were still taking a large share of the market as the government did not sanction companies unwilling to use the services of local shipping companies.

"There should be a sanction for foreign lines or companies that are not complying with the cabotage policy. Local shipping lines are actually capable of transporting their goods. The government should be consistent on its policy," he said.