2015

Beyond Republic Act No. 10668:

Policy Considerations to Improve
Coastwise Trade

Department of Trade and Industry

Sector Planning Bureau

This policy paper has undergone a brown-bag session and is intended

for discussion purposes only and not for quotation.

The views and opinions reflected in this paper are those of the
researchers of the Sector Planning Bureau and do not necessarily
reflect the views of the Department of Trade and Industry.

We would appreciate receiving your comments/feedback on or before

15 February 2016 at [email protected]
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

TABLE OF CONTENTS

I. Introduction 2

II. Policy Environment: Philippine Laws and Regulations on Domestic 3

Shipping

A. 1987 Constitution
B. Tariff and Customs Code of the Philippines (R.A. 1937)
C. Foreign Investments Act (R.A. 7042, R.A. 8179, E.O. 362-
Negative List)
D. Public Service Act (Commonwealth Act 146, as amended by
R.A. 2677 s.1960)
E. Domestic Shipping Act of 2004 (R.A. 9295)

III. Issues, Concerns and Studies on Coastwise Shipping/Cabotage 5

A. Low Logistics Performance

B. High Domestic Shipping Costs
C. Lack of Competition in the Industry
D. Inefficiency and Low Level of Productivity
E. Congestion of Manila Ports
F. Concerns and Issues of Stakeholders

IV. Recommendations 12

V. Conclusion 18

References 20

1
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

Beyond Republic Act No. 10668:

Policy Considerations to Improve Coastwise Trade

I. Introduction

The Cabotage Law in the Philippines has been identified as one of the constraints to
Philippine economic growth.1 The lack of efficiencies in the maritime sector is linked
to inadequate competition due to barriers to entry, arising from the law’s provision
that allows only domestic shipping lines to serve domestic routes. 2 This has resulted
to high domestic shipping costs, lack of meaningful competition and low service
quality, which led to the clamor of the business sector to liberalize the shipping
industry of the Philippines and lift cabotage.

Cabotage is defined as “trade or navigation in coastal waters.” The provision in the

Tariff and Customs Code of the Philippines (TCCP) which states that maritime
transportation of goods and passengers within the country is reserved to Philippine-
registered marine vessels is also generally regarded as the Cabotage Law. 3

Lifting cabotage is widely viewed as an important measure to enhance

competitiveness of the shipping industry as it will liberalize coastwise trade, improve
the country’s logistics and open our sea transport to international competition.

During the 2013 State of the Nation Address of President Benigno Aquino III, he
called on Congress to “amend the Cabotage Law in order to foster greater
competition and to lower the cost of transportation for our agricultural sector and
other industries.”

As a response to the call of the President, a legislative proposal entitled “An Act
Allowing Foreign Vessels to Engage in Coastwise Trade in the Country,” was refiled
in both Houses during the 16th Congress.4 The bill was eventually signed into law by
President Aquino on 21 July 2015 as Republic Act No. 10668, otherwise known as
the Foreign Ships Co-Loading Act, which relaxes the 50-year old Cabotage law.
R.A.10668 allows foreign ships carrying imported cargo and cargo to be exported out
of the country to dock in multiple ports within the Philippines. The law, however, does
not cover carriage by foreign ships of domestic cargoes or domestic container vans
whether loaded or empty within Philippine waters. Hence, domestic shipping or
coastwise trade shall remain limited to domestic shippers.

The passage of this measure is expected to lower shipping costs for foreign cargoes
and provide a fast, safe, reliable and cost efficient shipping industry that is capable of

1Llanto, G. & Navarro A. (2014), Toward Relaxing the Cabotage Restrictions in Maritime Transport, PIDS Policy
Notes No. 2014-03, February 2014
2 Ibid
3Presentation by Dr. Enrico Basilio of USAID-COMPETE Project to the Joint Committee Meeting of NCC-

Infrastructure Working Group and EDC-Networking Committee on Transport and Logistics.

4 Cabotage bills have been filed since the 13th Congress

2
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

addressing the growing and developing demands of trade in both international and
domestic fields, thus help in significantly boosting the country’s competiveness.

II. Policy Environment: Philippine Laws and Regulations on Domestic Shipping

Full liberalization of coastwise trade in the country is impeded by several laws and
regulations that are enshrined in the Constitution and in other statutes and policies in
the country.

A. 1987 Philippine Constitution

 Article XII Section 11 states that “no franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to citizens
of the Philippines or to corporations or associations organized under the laws of
the Philippines, at least sixty per centum of whose capital is owned by such
citizens; nor shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither shall any such franchise
or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate share in its capital,
and all the executive and managing officers of such corporation or association
must be citizens of the Philippines.”

B. Tariff and Customs Code of the Philippines (R.A. 1937)

 Section 901. Ports Open to Coastwise Trade. “All ports and places in the
Philippines shall be open to vessels lawfully engaged in coastwise trade, subject
to the provisions of law applicable in particular cases.”

 Section 902. Vessels Eligible for Coastwise Trade. “The right to engage in the
Philippine coastwise trade is limited to vessels carrying a certificate of Philippine
registry.”

 Section 905. Transportation of Passengers and Articles between Philippine

Ports. “Passengers shall not be received at one Philippine port or any other port
by a vessel not licensed for the coastwise trade, except upon a special permission
granted by the Collector (Customs Commissioner); and subject to the same
qualification, articles earmarked at a domestic port shall not be transported to any
other port in the Philippines, either directly or by way of a voyage, in any other
vessel than one licensed for the coastwise trade.”

3
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

For example, the shipment of domestic cargoes from one domestic port (e.g.,
Davao) to another (e.g., Manila) should be carried only by domestic shipping
lines (emphasis on the word “domestic”).

C. Foreign Investments Act (R.A. 7042, R.A. 8179, E.O. 362 – Negative List A)

 The law restricts foreign equity to a maximum of 40% in areas of economic

activities reserved for Filipinos by mandate of the Constitution and specific laws
(R.A. 1937 or the Tariff and Customs Code of the Philippines, RA 9295 or the
Domestic Shipping Development Act of 2004).

D. Public Service Act (Commonwealth Act 146, as amended by R.A. 2677 s.

1960)

 Section 13 (b) “The term 'public service' includes every person that now or
hereafter may own, operate, manage, or control in the Philippines, for hire or
compensation, with general or limited clientele, whether permanent, occasional or
accidental, and done for general business purposes, any common carrier,
railroad, street railway, traction railway, sub-way motor vehicle, either for freight or
passenger, or both with or without fixed route and whatever may be its
classification, freight or carrier service of any class, express service, steamboat,
or steamship line, pontines, ferries, and water craft, engaged in the transportation
of passengers or freight or both, shipyard, marine railway, marine repair shop,
wharf or dock, ice plant, ice-refrigeration plant, canal, irrigation system, gas
electric light, heat and power, water supply and power, petroleum, sewerage
system, wire or wireless communications system, wire or wireless broadcasting
stations and other similar public services: Provided, however, That a person
engaged in agriculture, not otherwise a public service, who owns a motor vehicle
and uses it personally and/or enters into a special contract whereby said motor
vehicle is offered for hire or compensation to a third party or third engaged in
agriculture, not itself or themselves a public service, for operation by the latter for
a limited time and for a specific purpose directly connected with the cultivation of
his or their farm, the transportation, processing, and marketing of agricultural
products of such third party or third parties shall not be considered as operating a
public service for the purposes of this Act.”

E. Domestic Shipping Act of 2004 (R.A. 9295)

 Section 5. Authority to Operate. –“No franchise, certificate or any other form

authorization for the carriage of cargo or passenger, or both in the domestic trade,
shall be granted except of domestic ship owners or operators.”

 Section 6. Foreign Vessels Engaged in Trade and Commerce in the

Philippines Territorial Waters.–“No foreign vessel shall be allowed to transport
passengers or cargo between ports or place within the Philippine territorial waters,

4
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

except upon the grant of Special Permit by the MARINA when no domestic vessel
is available or suitable to provide the needed shipping service and public interest
warrants the same.”

III. Issues, Concerns and Studies on Coastwise Shipping/Cabotage

Notwithstanding the passage of R.A. 10668 which allowed the partial liberalization of
cabotage and whose positive effects may not necessarily be felt immediately, there
remain several issues and concerns that continue to affect our local shipping industry
and its stakeholders. These issues were identified based on existing literature and
various consultations with stakeholders in the industry.

A. Low Logistics Performance

Logistics performance is at the core of our country’s policies to boost

competitiveness, trade integration and enhance efficiency of our shipping industry by
lowering trade costs. The World Bank publishes the Logistics Performance Index
(LPI) every two years beginning 2007. The LPI summarizes the logistics
performance based on six (6) logistics dimensions:

(1) Efficiency of customs and border clearance (“Customs”)

(2) Quality of trade and transport related infrastructure (“Infrastructure”)
(3) Ease of arranging competitively priced shipments (“Ease of arranging
shipments”)
(4) Competence and quality of logistics services (“Quality of Logistics Services”)
(5) Tracking and tracing of consignments (“Tracking and Tracing”)
(6) Frequency with which shipments reach the consignee within the scheduled or
expected time (“Timeliness”)5

Based on the 2010, 2012 and 2014 World Bank Logistics Performance Index, the
Philippines emerged as one of the low performing countries among selected Asian
countries -- one of the lowest in 2010 and 2012, with only a few points ahead of
Vietnam and Indonesia, and the lowest in 2014 (Table 1). The data is indicative of
the need to improve various components in the logistics index, which encompasses
freight transportation, warehousing, border clearance and payment systems, among
others. By doing so, concerns on high shipping costs and efficiencies in the shipping
industry will also be addressed, hence contributing to our economic growth and
competitiveness.

5University of Southern California Marshall School of Business ABAC team (2011) “APEC Supply Chains:
Identifying Opportunities for Improvement.”

5
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

Table 1: Logistics Performance Index (2010, 2012 and 2014)

Country 2010 2012 2014

China 3.49 3.52 3.53
Hong Kong 3.88 4.12 3.83
Indonesia 2.76 2.94 3.08
Korea 3.64 3.70 3.67
Malaysia 3.44 3.49 3.59
Philippines 3.14 3.02 3.00
Singapore 4.09 4.13 4.00
Thailand 3.29 3.18 3.43
Vietnam 2.96 3.00 3.15
Sources: World Bank Logistics Performance Index
(http://data.worldbank.org/indicator/LP.LPI.OVRL.XQ) and Connecting to Compete 2014, Trade
Logistics in the Global Economy: The Logistics Performance Index and its Indicators

B. High Domestic Shipping Costs

A number of studies have been conducted on the issue of cabotage, in particular, and
on the shipping industry in the Philippines, in general. According to a study by the
Philippine Institute for Development Studies (PIDS), there is a close link between
high shipping costs and the Philippine cabotage policy. The protection being enjoyed
by the domestic shipping industry through cabotage restrictions results to high
domestic shipping costs, lack of meaningful competition in the industry, and weak
incentives for operators to modernize and become competitive.6 Although the
Philippines is considered as the fifth largest shipbuilder in the world next to China,
Japan, Korea and Brazil, our domestic shipping industry continues to use smaller and
even older vessels in transporting cargo, compared to those ships used by our
foreign counterparts. Moreover, the average age of our cargo vessels is11 years old
while the age of our passenger vessels range between 18 and 20 years old7 with lack
of incentives to modernize and upgrade their vessels. Other issues identified include
inadequate port infrastructure, lack of economies of scale, and uneven level of taxes
paid by local and foreign shipping companies.

C. Lack of Competition in the Industry

There is a high concentration of shipping companies and weak competition in the

industry with only a few players (WG&A, Negros Navigation, Sulpicio Lines,
Philippine Fast Ferry Corporation and Cebu Ferries Corporation). 8 In 2002, 50
percent of the primary routes in the country remained under a monopoly. Five
shipping companies controlled 90 percent of passengers and markets and almost all
of the primary and secondary routes in the country were serviced by these

6PIDS Policy Notes No. 2014-03, “Toward relaxing cabotage restrictions in maritime transport,” (2014 February)
7 Ibid.
8 Austria (2003) as cited by Aldaba, R. (2013), Case Study on Ports and Shipping Services in the Philippines and

Llanto R. & Navarro A. (2014), PIDS Policy Notes No. 2014-03, “Toward relaxing cabotage restrictions in maritime
transport,” February 2014
6
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

companies.9 According to 2013 data by the Maritime Industry Authority (MARINA),

the domestic fleet is being operated by 2,497 entities, 509 of which are corporate
entities and 1,952 are single proprietors. However, only four major shipping
companies serve the country’s primary routes while 34 shipping companies serve the
secondary routes.10

D. Inefficiency and Low Level of Productivity

Inefficiency in inter-island services (e.g., cargo handling, port and terminal handling
and customs procedures) and the resulting low level of productivity of domestic ports
likewise reduced the service quality for Philippine exports and affected the industry’s
competitiveness. Although substantial improvements have been made in terms of
reducing costs of importing and exporting, the Philippines remains one of the highest
in terms of export and import costs (Table 2). It can be gleaned from the data below
that in 2011, the Philippines ranked among the highest in export and import costs
among Asian countries and remained in that position in 2014.

Table 2: Cost to Export and Import (in US$/container)11

Export Cost
20 TEU Import Cost
Country (twenty-foot equivalent) 20 TEU

2011 2012 2013 2014 2011 2012 2013 2014

China 500 580 823 823 545 615 800 800
Hong Kong 575 575 590 590 565 565 565 565
SAR, China
Indonesia 644 644 595 572 660 660 647 647
Republic of 680 665 670 670 695 695 695 695
Korea
Malaysia 450 435 450 525 435 420 485 560
Philippines 630 585 585 755 730 660 660 915
Singapore 456 456 460 460 439 439 440 440
Thailand 625 585 595 595 750 750 760 760
Vietnam 580 610 610 610 670 600 600 600
Source: IFC Doing Business 2011 – 2014 Ranking on Trading Across Borders

Cargo handling efficiency can also lead to high level of vessel productivity, which will
translate into lower freight rates. MARINA has indicated that the productivity of our
domestic ports is only about half of the productivity of foreign ports. 12 Our domestic

9Austria (2003) as cited by Aldaba, R. (2013), Case Study on Ports and Shipping Services in the Philippines and
Llanto R. & Navarro A. (2014), PIDS Policy Notes No. 2014-03, “Toward relaxing cabotage restrictions in maritime
transport,” February 2014
10Llanto , R. & Navarro A. (2014), PIDS Policy Notes No. 2014-03, “Toward relaxing cabotage restrictions in

maritime transport,” February 2014

11 http://data.worldbank.org/indicator/IC.EXP.COST.CD. Cost measures fees levied on a 20-foot container in US$.

Fees include cost for documents, administrative fees, custom clearance, technical control, custom broker fees,
terminal handling charge and inland transport.
12Aldaba, Rafaelita (2013), Case Study on Ports and Shipping Services in the Philippines

7
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

ports’ low productivity causes significant delays in loading and unloading cargoes
which the Philippine Ports Authority (PPA) needs to address.13 Basilio (2011), as
cited by Aldaba (2013), also indicated that on the average, cargo handling costs
account for around 30% of sea transport costs.14 Table 3 shows that for 2013, among
the seven Southeast and East Asian countries identified, the Philippines shares the
second place with Thailand in terms of ports and terminal handling costs for exports
and third place for imports. In 2014, the Philippines improved its ranking in ports and
terminal handling costs placing 5th for exports and 4th for imports.

Table 3: Port and Terminal Handling Costs

Export Import
2013* 2014** 2013* 2014**
Country Time to Time to Time to Time to
Export Costs Export Costs Import Costs Import Costs
(No. of (US$) (No. of (US$) (No. of (US$) (No. of (US$)
Days) Days) Days) Days)
Singapore 6 456 6 460 4 439 4 440
Malaysia 11 435 11 450 8 420 8 485
Hong Kong 6 575 6 590 5 565 5 565
Taiwan 10 655 10 655 10 720 10 720
Indonesia - - 17 62015 - - 23 673.716
Thailand 14 585 14 595 13 750 13 760
Philippines 15 585 15 585 14 660 14 660
Sources: *Doing Business 2013 (http://www.doingbusiness.org)
**Doing Business 2014 (http://www.doingbusiness.org)

There are also voluminous documents that an exporter or importer in the country
must file as part of customs procedures, with equivalent charges to be paid and a
longer processing time.

Based on 2014 data as presented on Table 4, Malaysia has the most affordable cost
for exports’ customs procedures with Singapore charging the lowest amount for
imports’ customs procedures. China, Korea and Singapore require the least amount
of documents which are three (3) each for exports and imports compared to the
Philippines, which requires six (6) documents for exports, next to China’s eight (8),
and seven (7) documents for imports, the most number required.

Moreover, the high fuel cost, high interest rates, high insurance premium (protection
and indemnity and hull and machinery insurance of vessels) and higher taxes for
domestic shipping also contributed to the high shipping cost in the country. 17 In fact, it
is cheaper to transport cargoes from Manila to Cagayan de Oro via Hong Kong or

13 Philippine Agribusiness Competitiveness and Benchmarking Study, Component on Competition and Transport
Services, International Finance Corporation , Draft (April 2012)
14 Ibid
15Deflated US$ per container
16Deflated US$ per container
17Aldaba, Rafaelita (2013), Case Study on Ports and Shipping Services in the Philippines
Philippine Agribusiness Competitiveness and Benchmarking Study, Component on Competition and Transport
Services, International Finance Corporation , Draft (April 2012)
8
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

Kaohsiung in Taiwan than to transport cargoes directly from Manila to Cagayan De

Oro.18 Based on 2010 data from the Joint Foreign Chambers of Commerce in the
Philippines, a 20-footer shipped from Manila to Cagayan De Oro via Hong Kong costs
US$644 while shipping directly from Manila to Cagayan de Oro costs US$1,120,19
nearly double to go direct.

Table 4: Estimated Cost for Customs Procedures

Exports Imports
Country No. of Cost in US$ No. of Cost in US$
Documents Documents
China 8 620 5 615
Hong Kong, China 3 590 3 565
Indonesia 4 615 8 660
Republic of Korea 3 670 3 695
Malaysia 4 450 4 485
Philippines 6 585 7 660
Singapore 3 460 3 440
Thailand 5 595 5 760
Vietnam 5 610 8 600
Source: World Historical Data 2014, Doing Business Report 2014

E. Inadequate Port Infrastructure

In a 2012 study, the International Finance Corporation (IFC) likewise determined that
inadequate port infrastructure and facilities have also been detrimental in attaining
high vessel productivity due to longer period of unloading/loading of cargo at berth.
The current infrastructure is found to be inadequate to meet the number of ship calls
and cargo volume and this results to congestion and delays. As such, shipping lines
may impose higher shipping rates to recover cost of delays. 20 In the World Economic
Forum Competitiveness Ranking on the quality of port infrastructure, the Philippines’
rank deteriorated from 112 in 2009-2010 to 116 in 2013-2014 indicating the lack of
competitiveness of the country’s ports.

Table 5: Quality of Port Infrastructure

Ranking in the Global Competitiveness Report 2009-2010 and 2013-2014

Country 2009-2010 2013-2014 Country 2009-2010 2013-2014

Singapore 1 2 South Korea 36 21
Hong Kong 2 3 Thailand 47 56
Taiwan 16 29 Indonesia 95 89
Malaysia 19 24 Philippines 112 116
Source: Global Competitiveness Reports 2009-2010 / 2013-2014 as cited by Aldaba, 2013

18Llanto R. & Navarro A. (2014), PIDS Policy Notes No. 2014-03, “Toward Relaxing Cabotage Restrictions in
Maritime Transport, February 2014
19 Ibid
20International Finance Corporation (2012), Philippine Agribusiness Competitiveness and Benchmarking Study:

Component on Trade Facilitation and Logistics

9
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

According to Gamboa (2013), the country’s ports also lack facilities such as
warehouses and silos that will speed up the process of loading and unloading bulk
cargoes. He added that our ports need new equipment like cranes, conveyor belts,
bulldozers and other gears that will speed up the loading and discharging operations
of the carriers. It will take 10 days to load 5000 tons of corn in Mindanao whereas if
there is a silo, it will only take a day to load the same amount to the carriers which will
save both time and money. Modern suction equipment or grabs will also speed up the
discharging which will only take two (2) days.21

Efficiency is a vital component in this industry, especially since shipping is an integral

part of the logistics/supply chain. Efficient service will result to lesser spoilage,
reduced fees caused by delays and more turnaround for the ships for vibrant intra
and inter-regional trade.

F. Congestion of Manila Ports

The Port of Manila is considered as the largest seaport in the Philippines, with three
main ports, the Manila North Harbor, Manila South Harbor and the Manila
International Container Terminal (MICT). The Manila Port is considered one of the
busiest ports in the world accounting for approximately 2.7 million TEU international
cargo traffic per year (JICA, 2013a).22 In 2012, it was also ranked as the 38th busiest
port in the world with shipping lines completing an average of 20 to 30 ship calls per
week.23

To decongest the Port of Manila, JICA funded the development of Ports of Batangas
and Subic in 2007, to complement the Port of Manila. However, the utilization of
Batangas and Subic have remained low. In a study conducted by JICA on the port
utilization of Batangas and Subic, it was noted that these ports were utilized at a
mere 4.2 and 5.6 percent of their capacities, respectively. The Port of Manila, on the
other hand, continuously expands, with the completion of Berth 6 in 2012. Despite
further development of facilities and lowering of port charges, majority of the shippers
and shipping lines still prefer using the Port of Manila due to the availability of service
providers, reliability of shipping schedule, accessibility and efficiency of cargo
acceptance and release.24 The concentration of shipping activities, especially during
weekdays and the rush hours, has added to the problematic traffic in Manila.

To ease the burden caused by the traffic, City Ordinance 7570 was implemented by
the City of Manila in early 2014 banning trucks to ply Manila from 5:00 am to 9:00 pm,
Monday to Saturday. The Ordinance expanded truck ban prohibiting certain classes
of vehicles from transiting the also city from 5:00 am to 9:00 pm. Various
stakeholders and interest groups strongly expressed reservations on this policy which

21Gamboa R. (2013). Will change in Cabotage Law bring down shipping costs? BizLinks, Philippine Star,
September 10, 2013
22Patalinghug, Epictetus et.al (2015), System-Wide Study of the Logistics Industry in the Greater Capital Region,

Discussion Paper Series 2015-24, Philippine Institute for Development Studies

23Ibid
24Ibid

10
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

was eventually relaxed and temporary concession was allowed for transport groups
to transit between 10:00am and 3:00pm.

The ban has resulted to delays in the delivery of goods, accumulation of containers at
the port which aggravated the current port congestion, and reduced the number of
trucks available for hauling, which in turn increased trucking and costs and shipping
line charges.25 During the onset of the truck ban, a study by Citi Research economist
Jun Trinidad stated that the policy had adverse effects on the Philippine economy as
a whole. The analysis outlined that as a result of the truck ban policy, approximately a
million manufacturing jobs would be greatly affected, with the lack of alternative
transport linkage between the economic zones of the CALABARZON and the Port of
Manila. The report further stated that the Manila ordinance could cost the economy
from PhP61.2 billion to as much as PhP320 billion (US$1.4 billion to US$7.1 billion)
and reduce the GDP by about one (1) to five (5) percent.26

On 13 September 2014, the truck ban in Manila was lifted indefinitely but the
problems on port congestion, high trucking cost, and surcharge imposed by shipping
lines to remove large quantities of empty containers continue to loom in the
background. This was further compounded by the road repairs and rehabilitation
works being done by the Department of Public Works and Highways (DPWH) in
areas near the Port of Manila. The economic cost of the port congestion during the
seven-month period was pegged at PhP43.85 billion due to the decrease in the
Bureau of Customs (BOC) revenues, output and productivity losses and vehicle
operating costs.27

Moreover, during the consultative workshop on Trucking, Ports and Shipping

Logistics organized by the National Competitiveness Council (NCC) on 27 October
2015, the participants expressed that the presence of informal settlers along the
roads leading to and coming from the ports also cause delays in transporting goods
by trucking companies.

G. Concerns and Issues of Stakeholders

To better understand and gain perspective on the problems besetting the industry,
consultations have also been conducted with key stakeholders. The following are the
concerns that emerged during the consultations that should also be considered prior
to fully liberalizing coastwise shipping in the country:

 Economies of scale and balance of trade are very important factors to achieve
lower freight cost. Most ports in the country receive smaller volume of goods
which are serviced by small shipping lines. A larger ship would be cheaper per
unit volume than a small one. It is worth noting, though, that some ports in the

25Patalinghug, Epictetus et.al, Port congestion and underutilization in the Greater Capital Region: Unpacking the
issues, PIDS Policy Notes, March 2015
26Patlinghug, Epictetus et.al (2015), System-Wide Study of the Logistics Industry in the Greater Capital Region,

Discussion Paper Series 2015-24, Philippine Institute for Development Studies

27Patalinghug, Epictetus et.al, Port congestion and underutilization in the Greater Capital Region: Unpacking the

issues, PIDS Policy Notes, March 2015

11
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

country have smaller berthing capacity that cannot accommodate foreign and/or
larger ships. Aside from this, lack of trade in many ports that need and can
accommodate larger ships is also brought about by the scattered modes of the
supply chain, i.e., industries are not clustered. 28 This is an area that the DTI is
aggressively working on through the industry clustering program.

 Taxes paid by domestic and foreign vessels are not on a level playing field.
Domestic shipping lines pay corporate income taxes and 12 percent VAT on fuel
and generator while foreign vessels are only subjected to three (3) percent
common carriers tax. This disparity alone clearly shows that foreign ships enjoy
benefits not accorded to ships in the domestic trade. If cabotage is lifted, it may
result to domestic shipping companies choosing to transfer their registration to
other countries and returning as foreign shipping lines to eliminate payment of
income taxes and taxes on fuel imposed on domestic vessels. The uneven
playing field might result to complete decimation of the Philippine flag.29

 Threat to National Security. For an archipelagic country like the Philippines which
highly depends on its inter-island navigation infrastructure, lifting cabotage will
place the country at risk if it does not have a strong domestic Philippine flag sector
committed to serving Philippine commercial and passenger trade. Caution should
also be taken into consideration so that foreign vessels do not dominate the
Philippine coastwise trade as this might result to alien control of inter-island
navigation.30

IV. Recommendations

The above findings confirm that there are other critical issues that affect the
Philippine shipping industry and which need to be urgently addressed apart from
cabotage. Much as we would like to present more current and detailed data, we are,
unfortunately, constrained by the limited access to information.

The high domestic shipping costs are directly related to the inefficiencies in our local
shipping services which result to higher costs of export and import costs, cargo
handling, lack of productivity and delays in the transport of goods. Port congestion in
Manila ports and inefficiencies in ports outside Manila have also become concerns
that have caused losses in government revenues and incomes for our local
businesses. There are also constitutional and legal impediments in fully lifting
cabotage in the country. However, it is noteworthy that relaxation of cabotage was
made possible with the enactment of Republic Act No. 10668 or the Foreign Ships
Co-Loading Act. (See Box 1 for the Illustration of Potential Impact of RA No. 10668 on the
No. of Days and Shipping Costs for the Manila-Cebu Route and Box 2 for the Comparative
Breakdown of Time and Cost in the Domestic Transshipment – Manila-Cebu Route)

28ExportDevelopment Council – Networking Committee on Transport and Logistics (2013). Policy Brief on
Cabotage. Paper prepared for the DTI Excom.
29 Ibid
30 Ibid

12
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

Box 1

Projected Reduction with the

Enactment of Republic Act No. 10668 on the
Domestic Transshipment of a Twenty Equivalent Unit (TEU) or Twenty Foot Container
Manila-Cebu Route

Route No. of Days Shipping Cost

Before After Reduction Before After %

RA 10668 RA 10668 in # of RA 10668 RA 10668 Change
Days

Mla-Cebu 9 days 4 days 5 days PhP 55,600 PhP 29,830 46%

Note: The reduction in cost and time will come from the eliminated trucking expenses, customs-
related expenses during transit of TWU from foreign terminal to domestic terminal.

Computations made by USAID Advancing Philippine Competitiveness (COMPETE) Project

Source: USAID-COMPETE

With this newly-enacted law, foreign vessels will now be able to transport cargoes to
the final port of destination in the Philippines after being cleared at the Philippine port
of entry. They may also carry foreign cargoes intended for export from a Philippine
port of origin through another port to its foreign port of final destination. Moreover,
foreign vessels may also enter into co-loading schemes or arrangements with foreign
vessels for the carriage or transportation of foreign cargo within the Philippines.
Hence, our businesses would have more options in the transshipment of foreign
cargoes from one port to another in the Philippines.

This will help enhance the competitiveness of our exporters and importers and
reduce shipping costs of imported and exported cargoes for the benefit of consumers.
Several government agencies, such as the Department of Finance (DoF), Bureau of
Customs (BOC), Department of Trade and Industry (DTI), Bureau of Immigration (BI)
and all Port Authorities are currently drafting the law’s implementing rules and
regulations.

It is also important to mention that R.A. 10668 will be further strengthened by the
passage of R.A. 10667 or the Philippine Competition Act which levels the playing field
for all sectors operating in the country and addresses anti-competitive acts such as
abuse of dominant position and anti-competitive agreements.

13
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

Box 2
Comparative Breakdown of Time and Cost in the Domestic Transshipment
of a Twenty Equivalent Unit (TEU) or Twenty Foot Container
Manila-Cebu Route
MANILA –CEBU: BEFORE MANILA-CEBU: AFTER
CO-LOADING LAW CO-LOADING LAW

Source: USAID-COMPETE

14
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

We also wish to suggest other feasible and doable initiatives to address constraints in
our shipping industry, as follows:

 Scrutinize other aspects in the shipping environment such as transparency and

rationalization of fees (i.e., unbundling all charges for freight, taxes, fees and
cargo handling as a first step), domestic regulations, port infrastructure and cargo
handling improvements, and harmonizing taxes. These are the issues identified
by some of the studies conducted on Philippine shipping services.31

 It may also be worthwhile to review the current tax structure specifically on the
imposition of taxes for transport contractors and common carriers of cargoes to
even out the playing field of both local and foreign players in the shipping industry.

 Fast-track passage of the bill Modernizing the Customs and Tariff Administration
that would amend Section 1009 of the Tariff and Customs Code of the Philippines
to allow transshipment by simply adding the phrase “or another foreign vessel”
would substantially solve the need to liberalize cabotage principle. Section 1009
of the law would then be read as “Passengers or articles arriving from abroad
upon a foreign vessel may be carried by the same or another foreign vessel
through any port of entry to the port of destination in the Philippines; and
passengers departing from the Philippines or articles intended for export may be
carried in a foreign vessel through a Philippine port.”

 To address the operational concerns of our local shipping industry, the BOC will
need to continue speeding up its operations in order to institutionalize and
implement reforms necessary to support the thrust of government to improve
Philippine trade. The BOC’s Code of Regulations and Manuals compiling various
BOC’s regulations and processes are being drafted for publication to provide
stakeholders with a single reference for BOC transactions. Measures to enhance
the use of digital and information technology in Customs offices nationwide need
to be accelerated.32

 To anticipate concerns that would be brought about by the enactment of R.A.

10668 to our domestic shippers, the government may need to rationalize
processes of granting tax incentives to ensure that our local shipping industry is
positioned to effectively compete with their foreign counterparts. 33

 Additionally, we propose the following executive reforms/initiatives to improve the

country’s competitiveness:

31Aldaba, R. M., Case Study on Ports and Shipping Services in the Philippines, ITC
32Nava, Stephanie E., Sink or Swim: Liberalizing Philippine Cabotage, Suites the C-Suite, SGV, accessed at
http://www.sgv.ph/sink-or-swim-liberalizing-philippine-cabotage-by-stephanie-v-nava-august-10-2015/
33Ibid

15
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

A. Amending E.O. 170 series of 2003 to expand coverage to Chassis-RORO

(CHA-RO) as part of the RO-RO Service

RO-RO shipping in the country has helped improve service efficiency and service
quality in the industry. According to Basilio (2011), the implementation of the RO-RO
Transport System has led to a more cost-effective transport of cargoes as it
eliminated other costs associated with traditional shipping such as cargo handling
costs and wharfage dues.34However, the existing RO-RO policy in the Philippines
under Executive Order (E.O.) 170 limits the RO-RO service definition only to self-
powered rolling cargoes like cars, jeeps, trucks and buses. As a result, the benefits
and incentives (e.g., elimination of cargo handling and wharfage fees, etc.) provided
for under E.O. 170 will not apply to CHA-RO (cargo containers without trucks loaded
in ships). This will support and complement the establishment of the ASEAN RO-RO
project network and address issues related to the movement of natural persons,
Customs, Immigration and Quarantine Systems (CIQS), and technical operations.
CHA-RO are cargo containers without trucks, loaded in ships.

B. Issuance of an Executive Order directing the Philippine Ports Authority

(PPA) to shift cargoes originating from and destined for South Luzon
(CALABARZON Region) to the International Port of Batangas

A number of studies have shown that the Port of Manila is operating beyond its rated
capacity. Metro Manila itself is also congested by truck container traffic which results
to the delay of delivery of export goods. Moreover, with the recent imposition of a full
truck ban by the City of Manila,35 there is a need to gradually shift foreign cargoes
from Manila to the newly-developed Batangas International Port. This move will not
only decongest Metro Manila but will: (a) maximize the utilization of the port of
Batangas; (b) reduce transport cost due to proximity of the port to manufacturing
sites in Southern Luzon; and (c) lead industries that are operating in Metro Manila
(and gravitating around the Port in Manila) to relocate to CALABARZON.36

Thus, efficient and optimal utilization of the Batangas International Port will
automatically reduce transport cost especially for shippers within the CALABARZON
region, significantly increase port revenue generation, and will notably reduce its
impact on the wear and tear of the roads in the Metro Manila.

Moreover, to encourage shifting of cargoes from Manila Port to Subic and Batangas,
the government may also adopt a fine and price discount policy and/or impose a
volume restriction policy.37 The former proposal would help solve the problem in
decongesting Manila ports while the latter will improve utilization of Subic and

34Basilio, E. (2011). A Market-Oriented Policy Reform Option: the Philippines’ Roll-On/Roll-Off (RO-RO)
Experience. In Fabella, et.al. (Eds.), Built in Dreams, Grounded in Reality: Economic Policy Reform in the
Philippines (pp. 19- 37), Makati City, Philippines, Asia Foundation Philippines.
35Ordinance No. 7570, Amending Certain Provisions of Ordinance 8092, Otherwise known as the “Traffic

Management Code of the City of Manila” effective February 2014

36Export Development Council – Networking Committee on Transport and Logistics (2013). Policy brief on

cabotage. Paper prepared for the DTI Excom.

37Patalinghug, Epictetus et.al, Port congestion and underutilization in the Greater Capital Region: Unpacking the

issues, PIDS Policy Notes, March 2015

16
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

Batangas ports. However, this proposal should be complemented by staffing these

two ports with sufficient BOC and PPA personnel, as well as the provision of
necessary equipment, berth capacity and container yard capacity commensurate to
the volume of cargo and transaction.38

Relatedly, shifting of cargoes from Manila to Subic Container Port may be another
viable option for our shipping companies. With the use of the Subic-Clark-Tarlac
Expressway (SCTEX) and the Clark International Airport, the Subic Port can be made
a logistics hub and international gateway for Central Luzon. This would give an edge
to locators at the Subic-Clark corridor in terms of on-time production and delivery to
the global market. Nevertheless, to maximize efficient utilization of this port, it may be
important to study provision of incentives to shippers and cargoes to decrease vessel
costs such as consolidation, granting Subic Port tariff incentives, enticement of low
cost carriers (common feeder) and construction of needed infrastructure.39

C. An Executive Issuance amending the Letter of Instruction No. 1005-A by

deleting Instructions 3 and 4 thereof, relating to the collection of the share
of government from cargo-handling revenues generated by cargo-handling
contractors and port-related service operations

PPA oversees both public and private ports whether commercial or non-commercial.
LOI 1005-A allows conflict of interest because PPA acts as both port operator and
regulator. As a regulator, it has the power to approve port fees. As operator, it
receives 10-20% share from Cargo Handling Revenues.

Amending the Letter of Instruction 1005-A will eliminate the power of PPA to collect
its shares from the cargo handling revenues. Therefore, PPA can focus its efforts
more on improving port operations and thus lessen the cost of doing business in the
ports.
Following are Instructions 3 and 4 that are proposed to be deleted:

“(3) To intensify the collection of all port charges including the government share from all
cargo-handling contractors and port-related service operators, all back accounts, in order for
them to share the burden of the accelerated development, construction and maintenance of
the government facilities they utilize. The government share for all cargo-handling contractors
and port-related service operators shall be at a rate not less than 10% taken from their gross
income earned from such services.

(4) In order to ensure the collection of said government share, to conduct spot audit either on
its own or in coordination with such other government agencies under the visitorial power of
the state.”

38 Ibid.
39Payumo, F. (2014), Can Subic and Batangas Ports help decongest Metro Manila?, Philippine Daily Inquirer,
March 24, 2014, accessed from http://business.inquirer.net/166774/can-subic-and-batangas-ports-help-
decongest-metro-manila
17
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

D. Development of New Ports

There is also a need to design and construct new large and deep-sea ports that have
complete/world-class facilities and can sufficiently accommodate a much larger
volume of container flow in the Port of Manila. Our ports have already exceeded their
full capacity and are no longer able to adequately support increasing operations
brought forth by our rapid economic growth. With such growth projected to continue
over the next decade, this long-term solution is seen as a permanent redress to the
port congestion in Metro Manila. This should be accompanied by the implementation
of a multi-modal transport and logistics plan with emphasis on connecting the Subic-
Clark-Manila-Batangas corridor to the rest of the country.40

E. Industry Clustering Program

One of the most significant contributors to lowering transport and logistics cost is
economies of scale which can be achieved through the industry clustering program.
Industry clustering, being a value chain-based approach, has been proven to
effectively contribute to competitiveness of products as they can focus on market-
driven production.41 By clustering together the whole supply chain – providers of raw
materials, manufacturing and production processes, warehousing and storage in one
location- transport and logistics costs will be minimized, if not totally eliminated. This
value-chain approach also promotes and leads to innovation.

In addition, instead of transporting raw materials or agricultural products directly from

their source such as corn, feeds or livestocks, to the manufacturing site, value-adding
finished products such as dressed or processed poultry products will be delivered
directly to consumers and retailers, hence eliminating additional logistics cost and
enabling our products to be more competitive in the export market.

V. Conclusion

Absolute lifting of cabotage would certainly lower shipping costs and liberalize
coastwise trade in the country, thereby improving the country’s logistics performance,
enhancing the supply chain, and promoting inter- and intra-regional and foreign
trade. Moreover, lifting cabotage restrictions will also facilitate realization of the
planned ASEAN Single Shipping Market, which is part of the Master Plan on ASEAN
Connectivity under the ASEAN Economic Community 2015. The ASEAN Single
Shipping Market will progressively integrate and intensify development of the
maritime network infrastructure that will lead towards a stronger ASEAN maritime
sector, operating efficiently and delivering quality goods and services at competitive
prices.42 However, it is essential to carefully examine and study issues and concerns

40
Patalinghug, Epictetus et.al, Port congestion and underutilization in the Greater Capital Region: Unpacking the
issues, PIDS Policy Notes, March 2015
41
Presentation of Doris Magsaysay-Ho on Corn Production and Logistics Competitiveness Philippines. Presented
during the National Competitiveness Council – TWG Meeting on Agri-Trade and Logistics, 13 April 2013
42 Strategy 4- Key Strategies to Enhance Institutional Connectivity, Master Plan on ASEAN Connectivity, 2010

18
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

other than cabotage that contribute to the country’s high shipping costs and the
shipping industry’s lack of competitiveness.

High domestic shipping costs remain to be a primary concern that needs to be

urgently addressed. With the passage of R.A. 10668 which will address concerns on
the prices of goods for import and export, there may be a need to pursue other
feasible and doable options that will further lower shipping costs such as looking into
other aspects of the overall shipping environment (e.g., transparency and
rationalization of fees, domestic deregulations, port infrastructure and cargo handling
improvements, and harmonizing taxes. It is, therefore, proposed that the enactment
of executive reforms/initiatives to address constraints in domestic shipping and
improve our competitiveness, as well as legislation to amend the TCCP under the bill
Modernizing the Customs and Tariff Administration be made.

By realizing these reforms and ensuring their prompt and strict implementation, we
can expect to lower domestic and marine transport costs, improve domestic shipping
services, revitalize the domestic shipping industry, increase trade flows and improve
supply chain, thus making our shipping industry more efficient and competitive and
sustain our economic growth.

19
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

REFERENCES

Aldaba, R. (2013). Case study on ports and shipping services in the

Philippines. International Trade Center. October 2013.

ASEAN Secretariat (2010). Masterplan on ASEAN connectivity. Jakarta,

Indonesia. December 2010

Basilio, E. (2013). Usapang exports (cabotage). A presentation to the Joint

Committee on EDC-NCTL and NCC-IWG. December 02, 2013.

Basilio, E. (2011). A market-oriented policy reform option: the Philippines roll-

On/roll-off (RO-RO) experience.InFabella, et.a. (Eds.), Built in Dreams,
Grounded in Reality: Economic Policy Reform in the Philippines (pp. 19-
37), Makati City, Philippines, Asia Foundation Philippines.

Burgonio, M. (2014). Manila truck ban to cost PH economy as much as 320-b

citireport. March 10, 2014. Interaksyon website. Accessed from
http://www.interaksyon.com/business/82387/manila-truck-ban-to-cost-ph-
economy-as-much-as-p320b----citi-report

Ernst and Young (2012).Shipping industry almanac 2012, pp. 375-399. Ernst
& Young Global Ltd. UK.

Export Development Council – Networking Committee on Transport and

Logistics (2013).Policy brief on cabotage. Paper prepared for the DTI
Excom.

Gamboa, R. (2013, September 10). Will change in Cabotage Law bring down
domestic shipping cost? Philippine Star , p. 1.

Joint Foreign Chambers of Commerce in the Philippines (JFCCP) (2010).

Arangkada Philippines 2010: a business perspective. December 2010.

International Finance Corporation (2012). Philippine agribusiness

competitiveness and benchmarking study: component on competition and
transport services. Paper prepared by Center for Advancement of Trade
Integration and Facilitation. July 2012.

Llanto, G., & Navarro, A. (2014).Toward relaxing the cabotage restrictions in

maritime transport. PIDS Policy Notes, No. 2014-03.

Patalinghug, E., et.al. (2015). Port congestion and underutilization in the

Greater Capital Region: unpacking the issues. PIDS Policy Notes, No.
2015-07. March 2015

Patalinghug, E., et.al.,A system-wide study of the logistics industry. PIDS

Discussion Paper Series No. 2015-24. March 2015

20
03 February 2016 Version
Department of Trade and Industry
Sector Planning Bureau
--------------------------------------------------------------------------------------------------------------------------------------

Payumo, F. (2014).Can Subic and Batangas ports help decongest Metro

Manila?, Philippine Daily Inquirer, March 24, 2014, accessed from
http://business.inquirer.net/166774/can-subic-and-batangas-ports-help-
decongest-metro-manila

Philippine Ports Authority. (2007). Special review body on port and terminal
fees on export and import cargoes. Manila: Philippines Ports Authority.

University of Southern California Marshall School of Business ABAC team

(2011). APEC supply chains: identifying opportunities for improvement.

The World Bank (2014).Connecting to compete, trade logistics in the

Global economy, the logistics performance index and its indicators.

The World Bank (2014 & 2013). Doing business reports – trading across
borders. Accessed from
http://www.doingbusiness.org/data/exploretopics/trading-across-borders

21
03 February 2016 Version