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Policy Options for Liberalizing Philippine Maritime Cabotage Restrictions

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Policy Options for Liberalizing Philippine Maritime Cabotage Restrictions Report No. 105364-PH Public Disclosure Authorized POLICY OPTIONS FOR LIBERALIZING PHILIPPINE MARITIME CABOTAGE RESTRICTIONS Public Disclosure Authorized July 2014 The World Bank and International Finance Corporation Philippine Country Office East Asia and Pacific Region Public Disclosure Authorized A project of the World Bank, with the support of the Australian Government through the Australia-World Bank Philippines Development Trust Fund Public Disclosure Authorized Document of the World Bank Group 1 Policy options for liberalizing Philippine maritime cabotage restrictions1 Contents Executive Summary ....................................................................................................................................... 4 Introduction ................................................................................................................................................ 11 Inefficiencies in the Philippine shipping industry ....................................................................................... 12 Significance of the industry ..................................................................................................................... 12 High cost of shipping ............................................................................................................................... 15 Low quality of service ............................................................................................................................. 18 Poor safety record and high frequency of maritime accidents .............................................................. 19 Underlying reasons for the industry’s inefficiency ..................................................................................... 21 Oligopolistic market structure ................................................................................................................ 21 Increased competition yet low profitability ........................................................................................... 24 Lack of investment in ships ..................................................................................................................... 27 Lack of market scale ................................................................................................................................ 28 Exacerbated by the lack of connectivity, network planning, and consolidation .................................... 30 Lack of port and road infrastructure ....................................................................................................... 30 Conflict of interest in the Philippine Ports Authority ............................................................................. 32 Cabotage liberalization ............................................................................................................................... 32 Cabotage regime in the Philippines ........................................................................................................ 33 Cabotage regimes in other countries...................................................................................................... 35 Scope for liberalizing cabotage in the Philippines .................................................................................. 36 Arguments for liberalization of cabotage restrictions ........................................................................ 36 Arguments against cabotage liberalization and remedies.................................................................. 38 Options for reform ...................................................................................................................................... 42 1 Prepared by Karl Kendrick Chua, Marianne Juco, Kevin Cruz, Anthony Sabarillo, Wael Mansour, and Christine Ablaza (all of the Macroeconomics and Fiscal Management Global Practice), Nonong Dato (Transport and ICT Global Practice), Robby Galang, Gerlin Catangui, Melanie San Luis, and Tess Lacerna (Trade and Competitiveness Global Practice) with valuable inputs from Steve Meyrick. The report was prepared under the guidance of Rogier van den Brink (Macroeconomics and Fiscal Management Global Practice) and Hans Shrader (Trade and Competitiveness Global Practice). 2 Approach to liberalization ....................................................................................................................... 42 A swift and radical approach to reforms ................................................................................................ 43 Gradual approach ................................................................................................................................... 43 Three-stage approach to liberalization ............................................................................................... 44 Possible provisions of the new shipping law ...................................................................................... 46 Managing resistance ............................................................................................................................... 52 Annex 1. Summary of issues and proposed recommendations outside cabotage ..................................... 55 Annex 2. Legal basis for Philippine cabotage restrictions ........................................................................... 58 Annex 3. Cabotage regimes in selected countries ...................................................................................... 63 Annex 4. Cabotage liberalization in New Zealand ...................................................................................... 70 Annex 5. Liberalization and de-liberalization in the Indonesian shipping industry .................................... 72 Annex 6. Gradual liberalization of the Philippine banking industry ........................................................... 75 Annex 7. Gradual liberalization of the Philippine retail trade industry ...................................................... 76 Annex 8. Gradual liberalization of the Philippine aviation industry ........................................................... 77 Annex 9. Constitutionality of cabotage liberalization ................................................................................. 79 Bibliography ................................................................................................................................................ 82 3 Executive Summary Introduction 1. Being an archipelago, the Philippines requires an efficient water transport system. However, this is presently not the case. The domestic shipping industry is characterized by high costs, low quality of service, and a poor safety record (Table 1). Logistics costs account for 24-53 percent of wholesale price, while shipping and port handling cost around 8 percent of wholesale price and 5 percent of retail price.2 Philippine domestic shipping is generally more expensive than in Malaysia or Indonesia—2 other archipelagos. Moreover, it is more expensive to transport goods between 2 Philippine ports than between 2 Philippine ports via an international port. In the East Asia region, the Philippines trails behind its neighbors in various logistics performance and connectivity indices. For instance, in liner shipping connectivity, the Philippines ranked 66th out of 157 countries in 2013, and performs the worst among a group of East Asian comparators.3,4 Delays in shipment, slow cargo handling, and frequent accidents are the top complaints of businesses. In the East Asia Region, the Philippines has the highest absolute casualty rate, which is 40 percent higher than the second-ranked country, Indonesia.5 On average, there are 228 ships involved in accidents and 303 casualties per year in the Philippines. 2. Among the probable causes of the poor state of the domestic shipping industry is the lack of competition from more efficient foreign shipping companies. More competition can serve as a disciplining force or an incentive to be more efficient. However, the country’s laws restrict foreign shipping companies from serving domestic routes. This is known as cabotage.6 3. Cognizant of these issues, the President has given priority to the reform of the country’s cabotage provisions. In his July 2013 state-of-the-nation address, President Aquino identified cabotage liberalization as a priority reform and asked congress to amend the cabotage provisions. Aside from cabotage reform, the government is also looking to enhance competition among domestic shipping firms and improve the efficiency of the ports system. 2 These prices are averages based on a sample of goods. See Tables 6 and 7 for a list of references for these goods. 3 The Liner Shipping Connectivity Index captures how well countries are connected to global shipping networks. It is computed by the United Nations Conference on Trade and Development (UNCTAD) based on 5 components of the maritime transport sector: number of ships, their container-carrying capacity, maximum vessel size, number of services, and number of companies that deploy container ships in a country's ports. 4 It can be argued that Philippine ships serving domestic routes are less efficient than Philippine ships serving international routes, given the high rate of maritime accidents and complaints from businesses. In this case, the liner shipping connectivity score for the Philippines provides an upper bound for the performance of domestic ships. 5 The Philippines also has the highest relative
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