Understanding Cabotage Laws in the Shipping Business
Cabotage gives companies the ability to trade or negotiate goods and services between two points in the same country. The word is derived from the French language which means “to sail along a coast”.
Countries such as Brazil establish their cabotage laws in order to protect domestic interests. In Brazil, domestic shipping companies can only perform activities such as offshore support, port activities, inland navigation and cargo & people transportation. These activities can only be provided by Brazilian vessels or foreign vessels chartered by Brazilian shipping firms in specific situations.
Using Cabotage Laws as a Competitive Advantage
Pacific Radiance (SGX: T8V), an offshore support services provider operating within the oil & gas industry takes advantage of countries’ cabotage laws through strategic partnerships with foreign players in order to penetrate key markets such Indonesia, Malaysia and South America. For example, Indonesia’s cabotage laws promoted by its Transport Ministry gives domestic offshore services providers priority operating within the oil & gas industry. Companies are initially required to seek Indonesian-flagged shipping companies through a tender and may only turn to foreign firms if these companies fail to get local companies within 3 rounds of bidding. Although there are attempts to lighten the stringent cabotage rules in favour of foreign-flagged vessels, regulations remain restrictive. Permits to use foreign-flagged vessels would only be granted if Indonesian-flagged vessels are unavailable and these permits can only be granted for a maximum period of three months which are insufficient for foreign players to fulfill their contracts with offshore oil developers.
Pacific Radiance created joint ventures (JVs) with their partners in PT Jawa and PT Logindo (LEAD:IJ) to conduct their offshore activities in Indonesia. Through such partnerships, the Group is able to create some form of barrier to entry against its competitors.
Such laws and regulations can work against companies if compliances become increasingly difficult and costly (i.e. new tax and other charges). Moreover, it is also difficult to expect changes in demands and assertions by the local governments.
Value in Action
Governmental laws play a critical role in shaping an industry’s competitive landscape. In this case, the presence of cabotage rules allow some companies to have a competitive advantage against their peers whilst operating within the oil& gas industry as an offshore services provider company.
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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above.
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