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Port Development, II(September 29, 2003)
(Continued from September 15)

EO 59
In 1999, in an attempt to accelerate the modernization of the Manila North Harbor and our other domestic ports, the government issued Executive Order No. 59. The presidential issuance mandated the PPA to focus its efforts on rationalizing, modernizing and improving port services and facilities. It further directed PPA to partner with the private sector in unifying, integrating and rationalizing port services in order to encourage more investments in port infrastructure, equipment and facilities and allow labor to share in the benefits of the program.

The domestic port operators and consumer groups again objected to the implementation of EO 59 and blocked its execution by staging strikes and paralyzing operations in the ports of Manila and Cebu.

The shipping lines have had to incur increased operating costs because of the delay in the planned modernization of North Harbor.

What needs to be done?
Much has to be done to modernize our port services and facilities, increase port efficiencies, and improve vessel turn around time.

We must find ways to keep our passengers safe while efficiently servicing cargo. Concrete steps must be taken to rationalize cargo handling costs.

We need to take steps to encourage (1) the development of our ports and the creation of hub ports, (2) the investment of more capital, (3) the implementation of higher service standards, and (4) the provision of better equipment.

We must also find solutions to the socio-economic problems connected with port modernization - the displacement of present investors in cargo handling services, the retraining and employment of port labor, the relocation of informal port settlers and other similar socio-political concerns - in order to lessen resistance to port modernization.

• Development of an overall port master plan that will support the integration of our transport systems including the provision of:
• Required infrastructure for a road-roro network;
• Ports for vessel services on long haul routes between major Philippine ports, and for tramp and liner services on short routes not part of the road-roro network;
• Feeder or hub ports to service our import and export trades.
• Creation of infrastructure to support port development programs, the construction of hub ports, the integration of intermodal and multi-modal transport systems and the generation of needed economies of scale.
• Construction of passenger terminals to assist tourism programs.
• Promotion of efficiency and transparency for cargo handling operations in our ports.
• Implementation of programs necessary for environmental protection.
• Examination and unbundling of cargo handling costs and other non-transparent costs.
• Evaluation and review of pilotage policies in the domestic trade and revision of existing laws.
• Implementation of programs for the constant dredging of our rivers, fairways, ports, and harbors.
• Maintenance of a sustained vessel traffic management and security scheme for our rivers, ports and seas.
• Adoption of a uniform tariff of port fees for all domestic operators operating in the BIMP-EAGA region.

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Port Development (September 15, 2003)

Port development is a major concern of the shipping sector. However, port development and its corresponding investment programs properly fall within the jurisdiction of relevant government agencies, the powers of which cannot be supplanted by the Maritime Industry Cluster. The Cluster has identified the goals and programs that it will bring to the proper government agency for implementation.

History
The Philippine port system was originally under the jurisdiction of the Bureau of Customs (BOC). Apart from its power to collect tariff and duties from importers, the BOC was given the power to license cargo handlers and authorize them to collect cargo handling and other port fees as prescribed in the Tariff and Customs Code.

In 1974, the Philippine Ports Authority (PPA) was created. It was given the mandate to develop our port system and provide, on its own or through the services of another, the necessary cargo handling and port auxiliary services to ensure the efficient operation of the Philippine port system.

At the time the supervision of port services was turned over to the PPA, there were as many as 50 cargo handling operators in some of the busiest ports in the country. Our ports were not mechanized and cargo on our vessels were loaded and unloaded manually. Operations at the port were labor intensive, with little or no investments in equipment on the part of authorized cargo handling operators. Heavy reliance was put on vessel cranes to load and unloaded heavy cargo.

Vessel-specific service by cargo handling contractors encouraged the proliferation of numerous service providers. Vessels were serviced by gangs. Each gang was headed by a "cabo". The cabo contracted directly with the vessel owner for the loading and unloading of his vessel at a fixed price per piece of cargo loaded or unloaded.

The cabo served as an independent contractor and hired his own laborers who worked in his gang. He was paid for every piece of cargo his gang actually handled and he, in turn, paid each of his workers for every piece of cargo each one actually carried. The cabo earned his keep by pocketing the difference between what was paid to him by the ship owner and what he paid to his laborer.

LOI 1005-A
In the mid-1970s, in an effort to modernize shipping operations and reduce damage and pilferage to cargo, ship owners introduced containerized service in the domestic trade.

The cargo handlers were not prepared for this shift in service. Cargo handlers had to rely on vessel cranes to load and unload containers and shipping lines had to purchase their own forklifts in order to move containers from shipside to quay and back. In order to keep their employment, cargo handlers were engaged to operate the equipment owned by the shipping lines.

In 1980, Government issued Letter of Instruction No. 1005-A. This mandated the integration of cargo handling operators in the different ports. The integration was required in order to maximize the advantages of having streamlined operations including the achievement of economies of scale, better supervision, and control of port operations, optimum utilization of port labor, facilities and equipment, stability in labor compensation, larger capital and borrowing base, savings in overhead costs and flexibility in operations.

The integration of services was implemented by government in two stages - first, by limiting cargo handling operations at a particular port to fewer operators, then by integrating the remaining cargo handlers in the port into just one organization.

To assist these labor contractors and preserve industrial peace at the port, some shipping lines assisted these labor contractors by helping them form companies that could serve as the vehicle that would integrate port services. Several cargo handling companies were born using this scheme.

Through this integration, cargo handlers were able to obtain temporary permits from the PPA which allowed them to continue operating at piers they traditionally serviced.

Return of Investor Confidence
The change in government that occurred in the latter part of the 1980s, encouraged the entry of new and better capitalized cargo handling operators who bidded for the operations of the Manila South Harbor and the Manila International Container Port. These operators continue to operate these ports and they have put in place investments and equipment that have allowed these ports to operate at world-class standards.

The return of investor confidence in the country paved the way for the entry of new capital and increased investments in domestic cargo handling operations as well. During this period, a few of our domestic ports saw the improvement in service brought about by capital infusion from cargo handling operators.

Not all domestic ports, however, benefited from this economic upswing. Some ports, including our premier domestic port, the Manila North Harbor, continued to be operated by cargo handling operators who relied heavily on equipment provided by shipping lines.
Through the 1990s several attempts were made to develop and modernize the Manila North Harbor. However, because of continuous opposition from labor groups, the cargo handling operators, and the consumer groups, the planned modernization was never implemented.

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The Shipbuilding and Ship Repair Sector (September 1, 2003)

The Shipbuilding and ship repair sector recognizes the need to respond to the requirements of our shipping sector for new vessels built to international standards that will be used to serve our domestic, regional and international trades.

To meet the requirements, the sector has identified goals and consequent benefits to the economy if the proper legal and economic environment is provided to the sector.

History
A strong and vibrant shipping industry is required to provide steady employment for our seafarers. We should have the capability to build vessels for our own shipping industry that will serve as a base for our seafarers.

Crucial to developing a viable shipping industry is a shipbuilding and ship repair sector equipped to build and repair vessels that can meet international classification standards and safety requirements.

We have a shipbuilding tradition. Galleons that plied the Manila-Acapulco trade were built in the shipyards of Cavite and Leyte. Philippine hardwood was used to build these galleons.
The shift from hardwood to steel slowed down the development of our shipbuilding capabilities. The absence of a steel industry did little to help us improve our potential in shipbuilding.

Incentives - PD 666 and EO 226
In the mid-1970s, government recognized our inability to source steel plates and spare parts locally and created an incentives program for the shipbuilding and ship repair sector through PD 666. This law allowed the entry of foreign investments by lifting ownership restrictions in shipyards. However, in an effort to streamline incentives, government repealed this law and enacted an Investment Incentives Code (EO 226) for all industries.

An unstable currency in the decade from the late 1970s to the late 1980s contributed to the lack of success of this import-dependent sector despite the incentives given by government. The shipowners' shift to second-hand tonnage, because of the difficulty in sourcing equity capital and loans for the purchase of brand new vessels, also contributed to the decline of our shipbuilding sector.

The Entry of Foreign Investments
In the 1990s, encouraged by renewed economic activity, foreign investors through the incentives program of the Board of Investments (BOI) brought in much-needed capital to jumpstart the shipbuilding and ship repair sector. New shipyards funded by foreign investments emerged - Keppel Shipyard in Cebu and Batangas, Tsuneishi in Cebu and Subic Shipyard in Bataan. However, the recent ruling of the Supreme Court regarding limits to foreign ownership in shipyards has created a doubt in the minds of foreign investors as to the stability of economic policy that will allow long-term investments in the sector. This ruling is now under reconsideration.

The growth of the sector has been encouraging. The sector has built tankers, fast ferries, cargo vessels, passenger ships and other specialized carriers in the last decade. In 2001, the Philippines exported five classed vessels to foreign markets and built a number of fast ferries both for domestic and export markets. The bulk of the business of this sector is, however, still in ship repair.

• Enactment of a Ship Building and Ship Repair Development Act to allow ship builders and repairers to gain direct access to incentives.
• Availability of the maritime credit facility to ship builders and repairers.
• Exemption from tariff importations of the industry
• Retention of ownership requirements of shipyards by foreigners of up to 100%.
• Revision of Immigration and Customs regulations for under guarding of foreign vessels that are taken here for repair.

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Philippine Overseas Shipping II (August 18,2003)
(Continued from August 4 )

The Ship Mortgage Degree
In the 1970s, the government realized that the Philippine Overseas Shipping Act was inadequate to meet the needs of the overseas sector, and that the life span of the incentives granted by the law was about to expire. It needed to act quickly in order to save the Philippine overseas fleet.

To address the uncertainty in the Overseas Shipping Act affecting the treatment of preferred mortgage on vessels, the government enacted PD 214 and amended the Overseas Shipping act of 1955 by removing the preference given to other liens recognized by the law. It allowed the creditor holding the mortgage over the vessel to have sole preference over the proceeds of the foreclosure. Despite this amendment, ship owners were still unable to gain access to more affordable financing for the purchase of vessels.

The passage of the Ship Mortgage Decree of 1978 (PD 1521) created a conflict between the provisions of PD 214 and PD 1521 with respect to the enforcement of liens thus causing confusion in the implementation of the two laws by the courts.

Foreign banks have continued to shy away from Philippine mortgages because the ambiguity in the law has resulted in a difficulty in enforcing the mortgage and the foreclosure of the vessel.

The Bare Boat Charter Decree
In order to circumvent the problem of our defective ship mortgage law, the application of the Bare Boat Charter Decree, which was enacted for domestic ship operators, was extended to the overseas sector. This law has allowed Filipino overseas operators to lease foreign owned vessels and to register them under the Philippine registry.

The Overseas Shipping Incentives Act (RA 7471)
The tax exemptions granted by the Overseas Shipping Act of 1955 expired in 1975. New incentives were given to the sector in 1992. These incentives include exemptions from import duties and taxes for fuel, vessel spare parts and equipment, and from income taxes provided the vessel operator meets all the requirements of the law to qualify for the exemptions. If it fails to meet the conditions of the law, the vessel operator is required to pay income tax at 32% of net profits.

The law, however, has been unable to give the intended benefit to our overseas operators because of the restrictive interpretation given by the Bureau of Internal Revenue with respect to the enjoyment of the incentives.

What our competition does?
Maritime nations have traditionally given the maximum incentives to ship owners to register vessels under their flag registry.

The flag registry gives a nation the right of requisition in times of war or national crisis. It also allows it access to fees, jobs, and foreign exchange. The flag registry is also a source of national pride.

The table below will show the various incentives provided by the national registries of Singapore, Hong Kong, and Malaysia that are aimed at ensuring the growth of their overseas shipping fleet.

What needs to be done?
We need a framework that is committed to long-term development with legislation that is as clear and competitive as Singapore and Hong Kong.
The incentives granted by the Overseas Shipping Incentives Act expired in 2002 and the development of the sector still leaves much room for improvement. The sector must compete with regional operators enjoying incentives granted by their respective registries.

A new Overseas Shipping Act revising the ownership requirements for vessels engaged in overseas trade, an acceptable Ship Mortgage Law and an active campaign to attract investments, will allow the Philippines to create a dynamic service export industry that can stand side by side with successful registries like Hong Kong and Singapore.

• Renewal and amendment of certain provisions of Republic Act No. 7471 which expired in May 2002.
• Enactment of an Overseas Shipping Act encompassing an overall strategy for the overseas shipping industry and allowing our overseas shipping operators to be at par with the best competitor.
• Amendment of the Philippine Ship Mortgage Law to make it acceptable to foreign bankers and allow our overseas shipping operators to gain access to foreign currency financing from foreign banks.
• Ratification of the UNCTAD convention on maritime liens and mortgages.
• Enactment of a Ship Management Incentives Act that will provide incentives to encourage ship management companies to locate here.
• Review of the present requirements of government agencies and cut down on duplicative requirements.
• Appointment of maritime attach?s in strategic foreign ports who will be instrumental in protecting the integrity and sovereignty of the Philippine flag.
• Strict implementation of the policy that government owned cargo shall be bought FOB and sold C&F
• Exemptions from tariff importations of the industry.
• Carry a greater percentage of our intra-Asia import and export cargoes.

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Philippine Overseas Shipping (August 4, 2003)

History
Filipinos ventured into overseas shipping operations only after we had gained our independence in 1946. Govern-ment saw the need to create a merchant marine fleet that could carry the country's expanding international trade, and at the same time serve as a naval and military auxiliary in times of war or national emergency. It realized that this objective could not be attained unless the government helped the private sector by providing much needed long-term financial aid and other fiscal incentives similar to other maritime nations.

The Opportunity
The Philippines has the opportunity to become a key player carrying our import and export cargo and working oncross trades because of our abundance of seafarers and our expertise in ship management developed over the years.

Countries with strong maritime traditions like Norway, Greece, Japan, Hong Kong and China have a major part of their overseas fleets serving cross trades and offering transport services globally to those requiring international shipping services.

With the expansion of world trade, competition has become more intense, making the need to lower operating costs imperative.

International shipping competes in a truly global market. It exposes a ship owner to competition on service costs. To meet competition, it has become a practice for governments to provide incentives to ship owners who choose to serve international trade. A ship owner has several choices of where to register his vessel.

Flag of Convenience
(FOC) Registries Countries like Liberia, Panama, Vanuatu, Cyprus, and the Isle of Man, are called "Flag of Convenience" (or "FOC") registries. FOCs offer a tax free environment, confidentiality of beneficial ownership, no nationality requirement for ownership and the freedom to use any nationality of seafarers and ship managers in order to induce ship owners to register their vessels under that country's flag registry.

FOC vessels are, however, vulnerable to interference by international labor unions affiliated with the International Transport Workers Federation or "ITF" that have formed themselves into militant watchdogs tasked to ensure the
enforcement of international labor standards on ocean-going vessels especially FOCs. The ITF's mission is to equalize wage scales globally.

National Flag Registries
Traditional maritime countries, like Norway, Greece and Japan are national flag registries which customarily require national crew. Their cost base, however, have become very expensive when they engage national crew who have other employment options at home. These countries have crafted their national laws to allow the employment of seafarers from other labor-supplying countries like India and the Philippines through collective bargaining agreements of their country's unions under a special program called "Second Registry." Many second registries also offer incentives on income tax to make their registry competitive. Other developed countries, like the United States, offer subsidies to retain investments in this industry.

Vessels under National Flag registries, like the Philippines, China, India and Hong Kong are not interdicted by international labor unions because they fall under the jurisdiction of the sovereignty of their government.

It is rare for a country to have the combination of a (1) national flag registry, (2) national seafarer, and (3) management of nationals. These elements are essential to be deemed a pure national flag registry.

The Philippines has the potential to be a very successful national flag registry because it possesses all the elements needed for it to be considered a pure national flag registry. What has held the registry back from realizing its full potential is the ambiguity of laws, the lack of capital and the inability to source affordable financing brought about by an unacceptable ship mortgage law.

The Philippine Overseas Shipping Act of 1955
The Philippine Overseas Shipping Act was passed in 1955 granting incentives to the sector. It provided loans to citizens of the Philippines through the National Development Company for the acquisition of vessels at preferred interest rates and extended repayment terms. It granted income tax exemptions for a period of 20 years to overseas shipping operators provided that they invested the entire income realized during the period of exemption in the acquisition of additional tonnage or the improvement of existing vessels. The law also provided shipbuilders with incentives if they constructed vessels for the overseas trade.

Terms of the Act were a disincentive to the acquisition and disposition of vessels because it lacked the flexibility to allow ship owners to quickly purchase and dispose of vessels.

The law suffered from an ambiguity in its provisions with respect to the need for a guarantee commitment from the President of the Philippines to secure foreign loans obtained for the purchase of the vessels. The law also created an uncertainty with respect to the treatment of the preferred mortgage on the vessel that apparently subsists today as seen from the reluctance of foreign banks to accept a mortgage of a vessel registered under Philippine Law. The law required Philippine nationals to own at least 60% of the capital invested, a heavy imposition on ship
owners working in an environment lacking in resources.

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Philippine Domestic Shipping (July 21, 2003)

History
The Filipinos have always had a maritime tradition. During pre-Hispanic times, we were part of the Chinese junk rade. During the Spanish colonial period, Manila was a major trading port in the Manila-Acapulco Galleon Trade. Up to the mid-19th century, Manila was the major hub and transshipment port in the Asian region.

The Public Service Act
When the Americans came, we had a well-developed maritime industry - ship owning, shipbuilding and seafaring. The Americans sought to put some order into our maritime industry and secure the development of all islands by introducing the Public Service Act (Commonwealth Act No. 146) in 1936. This law encouraged investments in
shipping through the award of exclusive franchises that gave operators security of investments.

The Public Service Act gave incentives to ensure the viability of shipping routes with a fixed return on investments. It also encouraged liner vessels to service fixed routes and offer fixed sailing schedules. In exchange, the Public Service Commission required the vessel operator to also serve unprofitable routes. Passenger fare and cargo rates were uniformly determined per nautical mile and resulted in a cross subsidy between profitable and non-profitable routes.

The non-liner trade, or tramps, which served in bulk and break bulk cargo (both dry and oil) were not subject to the same regulations as the liner operators. They went where cargo was available and were allowed to freely negotiate their rates and contracted directly with shippers. Having freely negotiated rates, the guarantee of having a fixed return was not extended to them.

In the 1970s, containerization was introduced. This necessitated major changes in vessel technology, infrastructure and logistics. These changes required massive capital investments and came at a time when the country experienced a steep devaluation of the peso.

The crisis of the early 1980s after the Aquino assassination brought forth the continued devaluation of the peso and the imposition of high interest rates. This prevented ship owners from re-fleeting.

When investor confidence returned in the late 1980s, liner owners shifted from conventional vessels to roll-on-roll-off, or RO-RO, vessels that could carry both passenger and cargo. Opportunities opened up for non-liner trades when companies linked to the previous administration were privatized.

There emerged from this economic upturn, new vessel owners operating tankers, specialized carriers and bulk carriers. More luxurious and modern vessels were introduced in the liner trade and by, the mid-1990s, the
operation of fast ferries on short routes started. Traditional wooden hulled vessels experienced a sharp decline in patronage owing to the entry of the fast ferries and the luxury liners.

Deregulation of the domestic liner sector
In 1994, the government moved away from monopolized routes and mandated the deregulation of the liner trade. It required that each route should have at least two operators. New operators with faster and more efficient vessels entered liner routes and provided competition to the monopolies institutionalized by the franchises of the Public Service Act. International standards were imposed on new importation and classed vessels replaced our aging fleet. Three shipping firms opened up to public ownership.

Total new vessel deployments in domestic trade for the period from 1990 to 2001 (owned and chartered) is shown in the chart below.

The Asian Financial Crisis of 1997
The industry suffered greatly from the Asian financial crisis of 1997. Operators, who invested heavily in expansion programs and brought in new tonnage were suddenly burdened by an unstable exchange rate, dollar denominated loans, excessive interest rates, high taxes, rising fuel prices, and over-regulation in a "deregulated" environment.

These financial problems were further aggravated by inefficient port and cargo handling facilities that failed to catch up with the modernization of the fleet.

What needs to be done?
Changes in the legal framework of the industry are urgently required to allow domestic ship operators to improve their costs to the level of their best ASEAN competitor.

Efforts to (1) rationalize incentives so that the domestic shipping sector can gain access to the same incentives being enjoyed by overseas operators and domestic airline operators, (2) properly deregulate the industry by repealing the Public Service Act insofar as it applies to the domestic shipping industry, (3) streamline government regulatory requirements, (4) provide access to affordable financing and (5) improve trading practices, have to be pursued to make the domestic shipping industry globally competitive.

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