Report No. 105363-PH Public Disclosure Authorized ENHANCING COMPETITION CONDITIONS AND COMPETITIVENESS OF PHILIPPINE DOMESTIC SHIPPING September 2014 Public Disclosure Authorized 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 Enhancing competition conditions and competitiveness of Philippine domestic shipping services1 Contents Executive Summary ..................................................................................................................................... 4 The need for clarity and simplicity ...................................................................................................... 5 Direction forward ................................................................................................................................ 6 Creating a level playing field ............................................................................................................... 7 Facilitating greater competition between operators ......................................................................... 8 More efficient and cost effective logistics .............................................................................................. 9 Promoting better decisions ............................................................................................................... 11 Summary of recommendations ............................................................................................................ 11 Introduction .......................................................................................................................................... 16 Indicators of competitiveness ............................................................................................................... 17 Objective of the study ........................................................................................................................... 18 Methodology ......................................................................................................................................... 19 Inefficiencies in the Philippine shipping industry ..................................................................................... 20 Significance of the industry ................................................................................................................... 20 High cost of shipping ............................................................................................................................. 22 Low quality of service ........................................................................................................................... 26 Poor safety record and high frequency of maritime accidents ............................................................ 26 Underlying reasons for the industry’s inefficiency ................................................................................... 30 Oligopolistic market structure .............................................................................................................. 30 Increased competition yet low profitability ......................................................................................... 32 Lack of investment in ships ................................................................................................................... 37 Lack of market scale .............................................................................................................................. 37 Exacerbated by the lack of connectivity, network planning, and consolidation .................................. 39 Lack of port and road infrastructure ..................................................................................................... 40 Conflict of interest in the Philippine Ports Authority ........................................................................... 41 Domestic shipping reform......................................................................................................................... 42 1 This note was prepared by a team from the World Bank Group Trade and Competitiveness Global Practice Group led by Gerlin Catangui (Operations Officer), Lito Supangco (Consultant), Georgiana Pop (Economist, Competition Policy), Steve Meyrick (Consultant), Roberto Galang (Operations Officer), with valuable inputs from Martha Martinez Licetti (Senior Economist, Competition Policy) and Tania Begazo Gomez (Economist, Competition Policy). This report was prepared under the guidance of Hans Shrader (Trade and Competitiveness Global Practice). 2 Maritime Industry Authority (MARINA) ................................................................................................ 42 Domestic market structure ................................................................................................................... 44 Concentration on individual routes ...................................................................................................... 44 Complementary passenger operators .................................................................................................. 45 The RoRo system ................................................................................................................................... 45 Economic regulation of domestic shipping ........................................................................................... 46 Deregulation of rates and fares ........................................................................................................ 46 Liberalization of entry ....................................................................................................................... 48 The importance of further liberalization .......................................................................................... 50 The need for clarity ........................................................................................................................... 51 Certificate of Public Convenience (CPC) ........................................................................................... 52 Chartering foreign vessels for deployment in the domestic routes ................................................. 57 Restrictions on inputs ........................................................................................................................... 59 Restrictions on vessel importation for domestic trade ..................................................................... 59 Requirement for drydocking of domestic vessels in domestic shipyards .......................................... 59 MARINA’s monitoring capacity of domestic market ............................................................................ 60 The way forward ....................................................................................................................................... 61 Creating a level playing field ................................................................................................................. 61 Remove opportunity for incumbents to object to granting of the CPC ............................................. 61 Focus CPC conditions on quality standards ....................................................................................... 61 Facilitating greater competition between operators ........................................................................... 62 Streamline the CPC process ............................................................................................................... 62 Use a single form of CPC ................................................................................................................... 62 Allow greater flexibility within a CPC ................................................................................................ 62 More efficient and cost effective logistics ............................................................................................ 62 Remove requirement to drydock in the Philippines .......................................................................... 62 Remove restrictions on vessel importation for domestic trade ........................................................ 63 Facilitate the use of chartered foreign vessels .................................................................................. 63 Remove nexus between PPA revenue and cargo handling charges .................................................. 63 Promoting better decisions ................................................................................................................... 63 Improve information on cargo flows and current services ............................................................... 63 Freely disseminate information to actual and potential market participants .................................. 64 Conclusion ............................................................................................................................................. 64 3 Executive Summary Introduction 1. For the economy to attain its full potential, the Philippines requires an efficient water transport system. However, this is presently not the case. The domestic shipping industry is characterized by high costs,