Philippine shipping industry faces turbulent times

Many barriers, inexact solutions.

While the Philippines’ shipping industry has achieved many milestones in the last decade, many more reforms are needed to make it genuinely competitive and allow it to contribute significantly to the national economy.

In a recent forum sponsored by the Philippine broadsheet The Manila Times, the many ways to strengthen the industry, and gain economic stability and growth from it were discussed.

Various factors and innate underlying conditions hampered the growth of the shipping industry (both passenger and cargo). Because of these issues, the country fails to take advantage of its strategic location in global shipping routes and archipelagic character. It lags behind Asian neighbors such as China, Japan, Singapore, Indonesia, and Korea where strong maritime industries bring massive economic gains.

Aging fleet, congestion, poor port infrastructure

Maritime Industry Authority (MARINA) Administrator Vice Admiral Robert Arugay Empedrad said most of the ships that the Philippines use are imported second-hand ships from other countries. These, he admitted, pose a great risk to safety as most are old cargo ships that were converted into passenger ships. According to Empedrad, one of the problems the domestic maritime industry faces are its aging fleet.  

MARINA is the country’s Flag State Administration. In response to the problem of old ships, the agency has been implementing a policy of phasing-out wooden-hulled ships carrying passengers. Some 60 percent of these ships have already been replaced with aluminum or fiberglass hulled ships.

“The wooden-hulled ships will be converted into recreational boats to be deployed in the many tourist destination areas in the country. We’re also imposing restrictions on the importation of passenger ships and bareboat chartering (BBC) of vessels less than 20 years old, more than 500 GT in size, and should be categorized under the International Association of Classification Societies (IACS)-classed,” Empedrad said.

Port congestion is caused by the lack of additional routes which in turn reveals the poor quality of the domestic sea transport system. To address this, the Department of Science and Technology and the University of the Philippines put together a system to estimate the number of vessels required per route, possible trips, occupancy, and perceived profitability of selected routes. Pilot testing will commence this year.

Since 2020, a total of 19 routes have been opened.

On the part of the Philippine Ports Authority (PPA), one of its directors, Atty. Hiyasmin de los Santos said that 245 seaport improvements and development projects were completed. A total of 14 completed port projects are ready to be inaugurated by June 30 this year. Some of these ports that will be inaugurated are Port of Currimao Port Expansion Project (Ilocos Norte), Port of Bulan Expansion Project (Sorsogon), Port of Banago (Negros Occidental), and Port of Mati (Davao Oriental).  

While government agencies were rattling off their achievements for the industry, other stakeholders are more critical.

The Philippine Liner Shipping Association (PLSA) and its president Mark Parco, who has more than 30 years of experience, said that the domestic maritime industry continues to contend with challenges that remain unresolved.

After highlighting the importance of domestic shipping to the economy, Parco criticized what he said was the “poor road infrastructure in and out of the ports.” He also said that government-imposed truck bans also contributed to the logistics sector’s inefficiency as the bans prevented trucks from making multiple trips using designated roads.

“Improvements in the ports are not improving the infrastructure. For instance, they don’t serve to lower logistics costs of shipping in the country. The ports mentioned by the PPA do not even carry five percent of the total volume the country needs,” he said.

“Shipowners are always ready to work with producers to bring goods to the market in a timely, safe, and cost-effective way, but more changes are needed to ensure this. The PPA has done some improvements but not in the ports where most cargoes float. No domestic line can also do fixed-day sailing simply as there are not enough berths and due to port congestion,” he said.

Port of Manila.

Regulatory challenges

Weak regulatory policies and supervisory services are also seen as factors creating an inefficient domestic sea transport system. The MARINA’s Empedrad said that they already made the move to delegate all regulatory and supervisory functions to the agency’s regional office. The central office, he said, will focus more on its oversight function. The use of blockchain for certification is also in the works.

As for the exorbitant fuel taxes that are a big burden for stakeholders, Empedrad said that MARINA provides remedies such as exempting ships from paying the 12 percent value-added tax and the excise tax for their fuel consumption.

Stakeholders however insisted that these are not enough as oil prices in the country remain among the highest in the region. Other countries also subsidize fuel for their shipping lines.

De los Santos of the PPA said that her agency now implements an online payment system in all ports nationwide.

“We’ve also streamlined the processing of private port applications for energy-related projects,” she said.

Despite all these efforts, for stakeholders like Parco, one of the primary challenges when it comes to regulations is having to deal with three agencies with overlapping functions for accreditation.  

“In countries with a rich experience in the modern shipping industry, a shipping line only needs to be approved by the Flag State Authority and then everything follows.”

Parco also voiced the concerns of stakeholders regarding the PPA’s Trusted Operator Program-Container Registry Monitoring System (TOP-CRMS) project. He said that it was “unnecessary since it merely duplicates the Bureau of Customs’ (BOC) container identification and accountability program.”

“New regulations in ports require an increase in tariff fees even when considerable improvement of services is not yet visible,” said Parco.

Some examples he cited are the 100 percent to 400 percent increase in handling charges caused by PPA’s Port Terminal Management Regulatory Framework (PTMRF). In some provinces, he said that container handling charges went up to 119 percent, causing prices of prime commodities like rice to go up by 200 percent.

Parco also slammed the PPA’s automatic escalation of tariffs based on the movement of the Consumer Price Index or CPI.

“With this scheme, whenever inflation goes up, port charges also increase automatically, adding to more inflation,” he said.

Parco said that these may be small issues but all these increase inefficiency in the industry and hike the operational costs of shipping lines.

Empedrad agreed. “To allow the industry to make more of a meaningful impact on the economy, the government should craft financial incentives for the shipping industry and implement a clear program for large-scale industries that can benefit the shipbuilding industry.” 

Roberto S Oca gate at Port of Manila.

Lack of incentives, absence of basic industries

Regarding the issues of shipbuilding and job generation, it was acknowledged that the Philippines is way behind, even though in 2015, the Philippines was ranked as the fourth largest shipbuilder in terms of vessel tonnage in the world as per Shipbuilders Association of Japan.

A closer look at the shipbuilding industry showed that it employed 48,000 workers. According to the Department of Trade and Industry (DTI), though domestic shipping lines accounted for the largest share based on the number of yards (95 percent), all exports were mainly produced by only two foreign-owned exporters – Hanjin and Tsuneishi.

The two foreign companies also accounted for 75 percent of employment and 97 percent of revenue. In this case, backward linkages were still in the budding stage and almost all inputs were directly bought overseas from sourced distributors.

“For domestic line shipping companies, shipbuilding or creating their own ships is ideal and much more advantageous in the long run. Sadly, right now we are incentivizing shipowners to buy ships from overseas instead of sourcing them locally,” Parco said.

According to reports, countries such as Korea, Japan, Singapore and Indonesia wanted to build their own ships because this will generate more jobs. Whenever shipbuilding has backward linkages from sourcing raw materials to creating the finished products, economic growth in different sectors such as trade, engineering, metalworks and the steel industry can be expected.

Empedrad was the first to admit that shipbuilding remains a pipe dream for the Philippines. “We rely on the ships built by foreign shipbuilders because buying ships costs less than importing raw materials – it’s not tax-free,” he said.

Local shipbuilders, he said, have to source for raw materials from abroad and the taxes are massive while foreign companies import raw materials tax-free from sourced distributors.

“Even ancillary items such as radio communications and engine are imported,” he said.

At the core of the problem, however, is the fact that the Philippines does not have a steel industry.  “It’s a practical concern. We have no choice but to rely on imports,” he admitted.

Instead of having an industry-building government department, just like in Korea and Japan, to oversee different but linked sectors, the country’s maritime industry, transport, and logistics sectors are treated as separate industries. This makes seamless service almost impossible, and the creation of economies of scale difficult.

Related to this challenge is the government’s failure to provide incentives and financing schemes to support local shipbuilding. Shipping companies get their loans from foreign countries instead of local banks.

“We’re trying to address this by partnering with Development Bank of the Philippines (DBP),” Empedrad said. The DBP is a government-controlled bank that formulates and designs financing programs to assist shipyards, shipping companies and other maritime-related investments.

Container trucks leaving Port of Manila.

Threats posed by 100 percent foreign ownership

Even as the government’s shipping industry agencies implemented small remedies to help industry players, the fact remains that more comprehensive programs are needed.  These much-needed reforms, however, may be far from coming as former president Rodrigo Duterte, in his last days in office, has signed into law, amending the Public Service Act (PSA), to allow up to 100 percent foreign ownership of public services in the country.

Republic Act (RA) No. 11659 or “An Act Amending Commonwealth Act No. 146 otherwise known as the Public Service Act” allows up to 100 percent foreign ownership of public services in the country. Under the amended PSA, the telecommunications, railways, expressways, airports, and shipping industries are considered public services. Businesses in these sectors are allowed to be under 100 percent foreign ownership.

The Constitution previously limited foreign ownership in these sectors. The amended law also states that an entity controlled by or acting on behalf of a foreign government or foreign state-owned enterprises is prohibited from owning capital in any public service classified as critical infrastructure.

The government said that listed shipping companies will benefit from the law, but some domestic shipping firms have expressed apprehension that it will have negative effects on their business.

Enrique Africa, executive director at think tank IBON Foundation, said that the law has serious national security implications as it promised the possible entry of more foreign investments. He explained that foreign investors make decisions according to their global objectives and often at the expense of the Philippine economy.

“If and when they decide to leave and abandon their business here for whatever reason like low profitability, they just will leave, like what Intel and Hanjin did,” he said. The two companies left without leaving any domestic capacity behind.

Africa also explained that shipping companies going after large profits will be able to wield leverage over the government because they can threaten to exit and cause the disruption of shipping services.

“They can just leave if it’s no longer profitable for them to continue operations in the country. Related to this, foreign firms are more likely to prefer their existing foreign suppliers of ships and maintenance services,” he said. This, Africa added, can harm efforts to develop the Philippines’ domestic capacity in these areas beyond its current level.

With the passing of this new law, domestic companies including shipping lines will soon find it more difficult to achieve success in the same way neighboring countries have. The already uneven playing field will become even more lopsided due to the new law.

For the maritime industry to truly be a game-changer for the Philippine economy, the government has to create favorable conditions to intelligently make use of the country’s skilled manpower, resources and archipelagic advantage.

As industry veteran Parco said, “The government should listen to stakeholders when crafting and implementing plans and programs that will usher in a strong, prosperous and globally competitive maritime industry that will truly serve the nation’s interest.” 

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