Will change in Cabotage Law bring down domestic shipping costs?

For many, “cabotage” is a concept beyond the realm of ordinary understanding. Thus, when P-Noy in his most recent State of the Nation Address said that there was a need to amend the Cabotage Law to lower the cost of transportation for the agriculture sector and other industries, most everyone could not help but applause.

Cabotage refers to the transport of goods or passengers between two points in the same country by a vessel or an aircraft registered in another country. The country’s Cabotage Law, lifted from the US’s Jones Act of 1920 and embodied in the Philippine Tariff and Customs Code, essentially protects the local shipping industry.

Simply put, it disallows foreign vessels to ply inter-island routes. Therefore, when a 20-foot container cargo enters the Philippine international ports (like the Port of Manila or Port of Subic), this is transferred to a local ship if it needs to go to the Visayas or Mindanao.

Cost disparity

At present though, the cost of transporting a container cargo intra-country is most of the time much more expensive than the cost of bringing it in, for example, from Shenzhen, China, despite the shorter distance of local travel.

The higher freight cost makes inter-island shipping one of the major reasons why there are many products shipped from one local port to another that have become exorbitantly expensive compared to what it actually costs from the country of origin.

In a sense, this means that the global liberalization in trade that is supposed to break down tariff barriers so that cheap goods from abroad will be enjoyed by our countrymen at relatively the same cost is not happening. Vise-versa, our exporters are not able to send their products to the international ports at competitive costs.

Other cost factors

But before we start damning the local shipping industry for inefficiencies in their operating costs, there seems to be other reasons for this inequity.

A comparison of foreign ships versus local vessels will show a number of advantages by the former over the latter. These include lower taxes on bunker fuel, lower or no income tax payments, cheaper manpower (Chinese, Vietnamese, Thai, Indonesian, Burmese or Sri Lankan), and import taxes.

Other advantages have to do with higher financing costs of operating a local ship, accountability on claims being under the strict jurisdiction of Philippine laws, and more expensive security precautions.

There are other bigger reasons that cripple the cost of inter-island shipping. For example, the shipping cost of bulk carriers, whether foreign or Philippine flag, remain relatively the same. The problem, though, lies not in the vessels but with the ports.

Poor port facilities

The country’s ports lack the facilities like warehouses and silos to speed up the process of loading and unloading bulk cargo, thus causing delays. And we all know that delays cost money.

Our ports need modern equipment like cranes, conveyor belts, bulldozers, and many other specialized gear and apparatus to speed up loading and discharging operations of bulk carriers.

For example, to load 5,000 tons of corn in Mindanao will take 10 days; whereas if there were a silo, the same amount could be loaded in a day. Due to the absence of silos, ship owners are penalized for the nine days. Conversely, if we had modern suctions or grabs, discharging could be done in just two days.

The shipping costs for general cargoes, just like bulk carriers, whether foreign- or Philippine-flagged, is the same. The problem, however, also lies with ports. Our ports lack the modern facilities and equipment to load and discharge cargo effectively.

Double handling

Container vessels are beset by double-handling problems. When a foreign-flagged vessel unloads in Manila, and a domestic container vessel loads the cargo in Manila, and then unloads it in Davao, there is double handling, and consequently, higher cost.

There is also the case of loaded containers being discharged at a local destination port, but because the containers go back to Manila without anything in them, an imbalance of trade happens. Hence, this becomes another reason why there is a higher shipping cost.

All of the other reasons, therefore, illustrate that domestic shipping companies cannot be entirely blamed for the high cost of inter-island trade. Therefore, it is important that the government, in preparing to amend the existing Cabotage Law, should have a firm grasp of the transport economics.

Indonesian experience

The local shipping industry has invested so much money of late as it tried to upgrade its vessels to be compliant to world standards. Oil tankers, for example, can now be favorably compared with other countries with their having double hulls.

To arbitrarily introduce changes that will disregard the recent investments made by local shippers could lead to the death of the industry, and induce a situation just like what happened in Indonesia when the industry almost died when foreign vessels were allowed to enter smaller ports.

Indonesia subsequently reverted back to its old shipping arrangements to protect the local industry. In the Philippines, local ship owners are also concerned that the modern facilities and strong financial capabilities of foreign ship owners will induce a rate war that would kill them.

The Maritime Industry Authority (Marina) has been cautious about the move to change the Cabotage Law, citing the Indonesian experience. Aside from the massive investments by local shipping companies, thousands of local workers stand to lose their jobs.

Address root cause of high transport cost

Prudence demands that we approach the problems of cabotage by addressing the real reasons behind the high cost of transporting products between islands. Ports need be modernized at all costs if we are to bring down inter-island shipping cost.

If the government does not have the money for it, then privatize the ports so that modern equipment may be installed.

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