A cabotage policy is “a policy that governs the transport/shipping of goods or passengers between two places along coastal routes in the same country by a transport operator from another country”.¹ Nations implement cabotage policies in order to protect and promote the growth of the domestic shipping industry with regard to trade and logistics, minimise dependence on foreign vessels as well as the outflow of foreign exchange in the form of freight payments.
 
Cabotage Policy – Malaysian waters only for Malaysian ships?
 
The cabotage policy in Malaysia was introduced in 1980 pursuant to amendments to the Merchant Shipping Ordinance 1952 (“MSO”). Under section 65L of the MSO, no ship shall engage in domestic shipping without a licence issued by the Domestic Shipping Licensing Board. “Domestic shipping” is given a broad definition, which covers the use of a ship:
 

1. to provide services, other than shipping, in the Federation waters or the exclusive economic zone; or
2. for the shipment of goods or the carriage of passengers:

1. from any port or place in Malaysia to another port or place in Malaysia; or
2. from any port or place in Malaysia to any place in the exclusive economic zone or vice versa.

Under section 65KA of the MSO, no ship other than a Malaysian ship may engage in domestic shipping. A ship shall not be deemed as a “Malaysian ship” unless it is owned wholly by:
 

1. Malaysian citizens; or
2. Corporations which satisfy the following requirements:

1. incorporated in Malaysia;
2. have their principal office in Malaysia;
3. the management is carried out mainly in Malaysia;
4. the majority of the shareholding (51% or more) is held by Malaysian citizens; and
5. the majority of the board of directors are Malaysian citizens.

Foreign registered vessels can only engage in domestic shipping if the Ministry of Transport is of the view that Malaysian vessels are unable to meet the demands of certain sectors. Even so, foreign vessels must apply for a domestic shipping licence, and in order to do so, the applicant must first obtain an endorsement from the Malaysian Shipowners’ Association (“MASA”).² In addition, the licences granted to foreign registered vessels are only valid for a maximum period of 3 months, whereas the validity of the licences granted to Malaysian registered vessels would range from 6 months to 2 years.³
 
Developments of the Cabotage Policy – Foreign ships in Malaysian waters
 
The cabotage policy in Malaysia was gradually relaxed over time through the implementation of exemptions:
 

• In 2003, non-Malaysian ships were allowed to engage in the transport of containerised transhipment cargo for sectors between Port Klang and Port of Pasir Gudang, and between Port Klang and Port of Tanjung Pelepas.
• In 2012, non-Malaysian ships were permitted to engage in cruise services in Malaysia.
• In 2016, non-Malaysian ships could engage in the transport of containerised transhipment cargo for sectors between Port of Tanjung Pelepas to Port of Kuantan, Port of Sandakan and Port of Tawau.
• In 2017, non-Malaysian ships were allowed to engage in the transport of cargo services between ports in the Peninsular and East Malaysia.

In 2019, another exemption was issued by the Ministry of Transport to allow non-Malaysian ships to conduct submarine cable repair in Malaysian waters (“Exemption”). This Exemption was welcomed by many and was expected to increase foreign infrastructure investment and reduce the time required to conduct submarine cable repairs.
 
Present Position – Cabotage or Sabotage?
 
In November 2020, the Ministry of Transport suddenly announced the revocation of the Exemption. Those in support of the Exemption view this as a step backwards, as this may deter foreign investors from choosing Malaysia as a location for their digital infrastructure investments. Many have viewed this revocation as a cause of Facebook and Google’s recent announcement in March 2021 that they will install two new cables in Singapore and Indonesia without landing in Malaysia⁴ (although the Minister of Transport disagrees).⁵
 
Additionally, it is reported that foreign direct investments between RM12 billion to RM15 billion are currently “under review” as a result of the revocation of the Exemption.⁶ On 20 November 2020, Facebook, Google, Microsoft and Malaysia Internet Exchange (MyIX) urged the government to reinstate the Exemption. They argued that there is a scarcity of Malaysian vessels with the ability to undertake such submarine cable repair works.⁷
 
Supporters of the revocation are of the view that the revocation would reduce the outflow of foreign exchange through freight charges, and also reduce the dependency on foreign vessels, thereby promoting participation from local shipping companies. MASA emphasises that the revocation will not create a monopoly for Malaysian companies, as foreign companies would still be allowed to work in Malaysian waters if approval from the Ministry of Transport is sought.₈ In addition, MASA has also stated that allowing foreign vessels to carry out submarine cable repairs may put Malaysia’s national security in jeopardy as the foreign vessels may take possession of secured data when carrying out such repairs.⁹
 
The issue of reimposing an exemption to the cabotage policy for submarine cable repairs in Malaysian waters was reportedly brought up during the Cabinet meeting on 14 April 2021. The Ministers were instructed to discuss the impact of the Exemption on investments and to the local shipping industry.¹⁰ At the time of writing, there have been no updates on the next steps to be taken by the Malaysian government.
 
Comment
 
The implementation of a cabotage policy may be effective in promoting the growth of domestic shipping companies in the maritime industry. However, when the cabotage policy is defined broadly so as to include “the use of a ship to provide services other than shipping”, which would cover even undersea cable repairs, this may hamper Malaysia’s attractiveness as a location for digital infrastructure investments. It is important that Malaysia strikes a balance between protecting the local shipping industry and attracting foreign direct investments into Malaysian’s digital infrastructure industry.  
 
Article by Siva Kumar Kanagasabai (Partner), Trishelea Ann Sandosam (Partner) and Grace Mah Yen Ru (Associate) of the Maritime & Shipping Practice of Skrine.