Cabotage Act: compliance in a nutshell

Introduction
Background
Why foreign companies should support the act
How to be cabotage compliant
Comment

Introduction

In 2003 the Coastal and Inland Shipping (Cabotage) Act(1) was passed in an effort to improve indigenous participation in maritime and coastal trade within the country's waters. The act restricts foreign-owned vessels from trading in Nigeria's coastal waters without a waiver, which is granted by the transport minister(2) on certain conditions.(3)

However, since its inception, the act has not fulfilled its mandate to empower indigenous shipping: more than 60% of coastal trade in Nigeria is still handled by subsidiaries of international oil companies.(4) This update explains why foreign companies should try to support the act's objectives and how they can work with their indigenous counterparts in an effort to comply with the act.

Background

'Cabotage' is the carriage of goods or passengers by a vessel 9or any other mode of transport) from a place in Nigeria or outside Nigerian waters to another place in Nigeria or outside, either directly or through a place outside Nigeria:(5)

"This includes the carriage of goods in relation to exploration, exploitation or transportation of minerals and non-living natural resources and operation by vessel of any other marine activity of a commercial nature in Nigerian waters including towage, pilotage, dredging, salvage, bunkering etc."(6)

Goods referred to in the act include crude oil, cash crops and other general cargo. Thus, international cargo destined for Nigerian ports does not fall under the act.(7)

The types of vessel that fall under the scope of the act are:

"passenger vessels; crew boats; bunkering vessels; fishing trawlers; barges; off-shore service vessels; tugs; anchor handling tugs and supply vessels; floating petroleum storage production, storage and offloading and storage and offloading units; tankers; carriers; and any other craft or vessel for carriage on, through or under Nigerian waters of persons, property or any substance whatsoever."(8)

Before a ship can be categorised as a cabotage vessel, it must be:

• wholly owned by Nigerian citizens – this excludes corporate citizenship;(9)
• built in Nigeria;
• manned by Nigerian citizens; and
• registered under the Nigerian flag.

The problem with these requirements is that there are not enough wholly owned Nigerian vessels with the capacity to carry on capital-intensive activities, and the existing shipbuilding yards do not have the capacity to build deep sea vessels. In addition, there are not enough skilled Nigerian crew and there are few ships under the Nigerian flag.

Why foreign companies should support the act

Business continuity
Although the government is currently having problems enforcing its cabotage policy, this may not be the case in the near future, as evidenced by the enactment of the Oil and Gas Industry Content Act in 2010,(10) which applies to all operations in the oil and gas sector.(11) This act gives first consideration to indigenous operators when awarding contracts for all projects, including oil lifting contracts.(12) It also gives exclusive consideration to indigenous service companies that demonstrate ownership of equipment, Nigerian personnel and capacity to execute work on land and swamp operating areas.(13) This means that preference will be given to indigenous carriers when awarding oil service contracts. Although there are few indigenous carriers with the capacity to lift crude or liquefied natural gas, preference will be given to bids which have the most Nigerian content; hence, the more cabotage-compliant a company, the greater its chance of success. Although a wavier clause is in place to handle situations where no Nigerian carriers are available, the time will come when the cabotage policy will be fully operational and waivers will no longer be issued.

Investment opportunities
The cabotage policy offers significant investment opportunities to willing investors. The four pillars of the act alone require cabotage vessels to be owned, built, manned and registered in Nigeria. Thus, there is a market for ship builders and ship repair yards that are willing to set up in Nigeria, build vessels and sell to indigenous shippers. The market is also open to ship brokers, financial institutions and ship owners involved in bareboat charters, as well as crew management and training institutions.

Corporate social responsibility
By supporting the objectives of the Cabotage Act, foreign companies can fulfil their social responsibility obligations within their area of operation. Most areas where these companies operate are fishing communities which suffer from numerous ecological problems and unemployment. The youth in these host communities are familiar with the coastal terrain and can be trained as seafarers or vessel pilots on their ships, thereby providing jobs for the unemployed and improving the local economy. By satisfying their social obligations, foreign companies also increase their chances of being awarded lifting contracts by the government.

How to be cabotage compliant

Companies should consider taking the following measures:

• Joint ventures – companies should conclude joint venture agreements with indigenous shipping companies, offering them 60% equity ownership of the vessel and 60% equity shares in the shipping company, and identify the objects of the company and outline each party's obligations. Such joint ventures will fulfil the requirements of the Cabotage Act and still have the required capacity to handle lifting contracts awarded by the government.
• Registration – companies should register vessels intended for use in coastal trade under the Nigerian Ship Registry with the Nigerian Maritime Administration and Safety Agency (NIMASA) and under the relevant cabotage register.(14)
• Licensing – if a foreign company insists on participating in coastal trade with vessels owned by other nationals and flying foreign flags, the company should apply for the appropriate waivers and licences form NIMASA.
• Crew training – companies should provide employment and training for a few indigenous seafarers and ensure that they get the required sea time and skill needed to man a vessel competently, with proper supervision from other experienced crew members.

Comment

The Cabotage Act is not the first of its kind; other developed countries have similar laws, such as the Jones Act in the United States and the Cabotage Law in Singapore. The policy has been referred to as a 'double-edged sword':(15) it could turn out to be either the saving grace or the death of the Nigerian shipping industry.

For further information on this topic please contact Mojisola Agunbiade at Bloomfield by telephone (+234 1 791 0702), fax (+234 1 4960 4666) or email ([email protected]).

Endnotes

(1) Coastal and Inland Shipping (Cabotage) Act No 5 of 2003 (known as the 'Cabotage Act').