The cabotage policy should not be blamed for high domestic shipping costs, according to Doris Magsaysay-Ho, chief executive officer of the Magsaysay Group of Companies.
“Cabotage is not a trade issue. Cabotage was invented as a national security issue,” Ho told PortCalls on the sidelines of Lorenzo Shipping Corp.’s recent annual shareholders’ meeting.
Cabotage, Ho explained, had its roots in England in the 17th century when Europeans were opening trade routes to Asia. England adopted cabotage for fear that the fight for emerging countries and the armadas by other European nations would cause a food shortage in the country.
“The British said, ‘Wait a minute, I’m an island-country. If I don’t have my own ships, we could be dead,’” Ho said.
Cabotage, Ho added, is “protection of all your coastal things to make sure you have a shipping industry that is controlled by your own government and can be used in case of war as ancillary.”
Repeal of cabotage
There have been several proposals to repeal the cabotage law, which is being blamed for the higher cost of domestic cargo transport compared to shipping from the Philippines to other countries.
The Philippine Interisland Shipping Association (PISA), of which Magsaysay is a member, said in a position paper that comparing domestic shipping fees to international shipping charges is not “apples to apples.”
PISA said domestic shipping lines are subject to duties and value-added tax of 12%, plus high drydocking fees, but foreign shipping lines are not.
Even so, Ho said shipping costs are only “1% to 3% of the retail cost.”
“Your cost of the shipping in one tuna can is 1%,” she said.
She also linked high shipping costs to vessel capacity. Since most international shipping lines operate ships with capacities of 1,500 TEUs (twenty-foot equivalent units) up to 18,000 TEUs, costs are spread out and shared among many consignees. In the case of the domestic industry, vessel capacity ranges from 200 to 1,000 TEUs only.
“If you take a little private jet, it’s much more expensive [than] if you take a [Boeing] 747,” Ho said.
Infrastructure is also a factor why only small vessels cater to the domestic trade.
“Why don’t we have the 13,000 [TEU vessel]? I can put a 13,000 [TEU vessel]. But why am I not doing it?” Ho said, recalling having attended the launch for such a vessel once.
She said these vessels service Asia to Europe and not to the United States because US ports “are too small.”
“For our trade, I would love to see a thousand TEU which 2Go tried to do, but they sold their ships. Why do you think? By the time you load 500 (TEUs) it’s touching the bottom,” Ho explained.
She added that MCC Transport is the only liner catering to the domestic trade with 1,000-TEU vessels “because they’re the only ones allowed to use the international port.”
Another reason vessels in the country are small is because people have limited buying capacity. The local market is more into retail than bulk buying, and the smaller cargoes equate to smaller vessels, Ho explained.
“Even if we have foreign shipping lines, they would end up putting [in] a small ship, too” due to the limited domestic market, Ho said.
She also noted that the domestic shipping trade “already has a lot of competition.”
“So this idea of more competition [coming in], no, it’s not true,” Ho said, adding that other liners even have foreign partners.
Economies of scale
Economies of scale are also a factor for the kinds of ships serving the trade.
The PISA said that “economies of scale is the most important factor to achieve lower freight costs” because “a larger ship would be cheaper per unit than a small one.”
The group also noted that trade and production practices in the country prevent shipping in larger quantities.
Ho said there is a need to increase production, either in manufacturing or agriculture, to create “substantive change” and eventually lower shipping costs.
Creating clusters
“If we want substantive change, the trade pattern has to change [where] you need to develop production clusters.
“We should create clusters around ports” so it becomes less logistically challenging, Ho pointed out.
“Instead of the PEZA [Philippine Economic Zone Authority] in the middle of nowhere, it should be near a port,” Ho said, pointing to countries like Malaysia and China where factories congregate around the port area.
Ho said the port is just a facility to make sure inbound and outbound products can be shipped.
“But the government has to say, ‘Here’s our area. Please come in here,’” Ho explained.
She cited as an example of port hubs Malaysia’s Iskandar Development Region, a special economic zone for manufacturers that includes the ports of Tanjung Pelepas, Pasir Gudang, and Tanjung Langsat.
“People are buying [in Malaysia] because they believe the plan. For us, where is the plan? People don’t know where to put their factories so they put a factory in the middle of nowhere. So of course it will be hard to bring [cargoes] from the middle of nowhere,” Ho pointed out.
Another territory with production areas around ports is Hong Kong.
“Hong Kong became a huge port because the whole production of China had to go through Hong Kong,” she said.
“One of the problems of our industry is everything is southbound. Northbound, there’s nothing,” Ho said, adding that the situation applies for both domestic and international trade.
“If you have production areas in the South, we’ll have northbound cargo too. And that will lower the cost because you’ve more to share,” Ho said.
She added that vessels can “come here in three months,” but factories take up to two years to build.
“Logistics will only work if you have factories. You need to have the trade and then the infrastructure,” Ho said.
“Shipping follows trade,” she said, adding that “transport is only the tail end of production.” — Roumina Pablo
Image courtesy of mapichai / FreeDigitalPhotos.net
