An Organisation for Economic Co-operation and Development report identified restrictions to the logistics sector in ASEAN which, when lifted, would generate a US$4.1-billion benefit to the regional economy
The report, released on Sept 9, recommends enhanced liberalization efforts to boost foreign direct investments and the lifting of sector-specific minimum capital requirements
OECD senior competition expert for Asia-Pacific Ruben Maximiano stressed the importance of improving competition in the logistics sector, especially now with the COVID-19 pandemic disrupting supply chains and trade flow
The lifting of restrictions on the Association of South East Asian Nations logistics sector would bring about annual economic benefits to the region of up to US$4.1 billion, the Organisation for Economic Co-operation and Development said in its report “OECD Competition Assessment Reviews: Logistics Sector in ASEAN” released on September 9.
In order to foster greater competition in the regional logistics sector, the OECD recommended such measures as:
- Enhancement of liberalization efforts to boost foreign direct investments, noting that in ASEAN the logistics sector is largely off limits to foreign investors;
- Lifting of sector-specific minimum capital requirements and ensuring any horizontal minimum capital requirements are the same for all businesses, regardless of whether they are domestic or foreign entities; and
- Removal of guidelines setting out rates and any requirements for non-dominant firms to price above costs.
OECD senior competition expert for Asia-Pacific Ruben Maximiano, in a virtual interview with PortCalls, said enhancing competition increases trade productivity, which in turn can lead to economic growth. It also essentially reduces prices, and helps increase income distribution.
Competition “makes markets function better, and when markets function better, economic growth comes in,” he said.
Maximiano noted the importance of improving competition in the logistics sector especially now with the COVID-19 pandemic disrupting supply chains and the flow of trade. “Really, now is the moment for change. Economic costs have been very high from COVID and we know from looking at all the work that we have done in the past that competition has shown to be fundamental for economic recovery,” he said.
The ASEAN total freight and logistics market revenues were estimated at $357.78 billion in 2019 but are expected to have dropped by 12% in 2020 to $316.54 billion due to restrictions on mobility and activity caused by the COVID-19 pandemic.
Freight transport within cities, such as courier, express and parcel-delivery services, is, however, seen to have grown by about 20% in 2020 as a result of changing consumer behaviors during the lockdown.
Undertaken within the framework of the ASEAN Competition Action Plan, the OECD report assessed the impact of regulation on competition in the logistics sector. It covers the five main subsectors of the logistics market: freight transportation, including transport by road, inland waterway and maritime; freight forwarding; warehousing; small-package delivery services; and value-added services.
The report analyzed about 500 pieces of legislation across the region and identified 475 regulatory barriers where changes could be made to foster greater competition in the logistics sector.
It said lifting a number of regulatory barriers would translate to a conservative benefit for the ASEAN economy of between $4 billion and $4.1 billion per year or 0.004% combined gross domestic product for impacted ASEAN member states. The amount is the sum of the estimated positive effects on consumer surplus in the ASEAN logistics sector as a result of removing current regulatory barriers to competition.
The report was released together with the OECD Competitive Neutrality Review of Small-package Delivery Services in ASEAN report during the virtual 53rd ASEAN Economic Ministers Meeting.
For the Philippines, the OECD and the Philippine Competition Commission launched two reports in January recommending pro-competition actions/measures to boost the country’s logistics sector and level the playing field between private and state-owned firms.
For freight transport, the latest OECD report offers these key recommendations:
- Removal of restrictive provisions setting quotas and replacing them with a license system, the licensing criteria of which should be clearly defined,
- Clearly setting out market access requirements in the law, including, for example, professional competency requirements or technical conditions for vehicles, and
- Review of regulations or provisions that limit firms’ fleet size, either by restricting new-vehicle registrations or imposing a minimum or maximum number of vehicles, while maintaining provisions that pursue a legitimate policy objective, such as safety or the protection of the environment.
Recommendations for the water freight sector include:
- Removal of excessive licensing requirements, such as vessel ownership, economics needs tests, and the submission of business plans,
- Use of open tender processes rather than direct negotiation in the selection of terminal operators and service providers. Concessions should not be extended automatically and incumbents should not be granted preferential treatment when renewing concessions, and
- Separation of regulatory and operational functions of port authorities to avoid real or perceived conflicts of interest.
The report cited burdensome requirements in the water freight sector, resulting in barriers to entry. To address this, lifting cabotage, among other measures, was recommended.
It noted prohibitions on foreign vessels transporting domestic cargo between ports within the same country prevent foreign firms from entering national freight transportation markets, which can lead to monopolies on certain routes or more broadly favor market concentration, due to restricted market access.
“Cabotage restrictions may also increase costs of products by forcing carriers to use more expensive domestic services and so lead to higher operational costs. This may negatively affect trade, and limit the quality of logistics services, for instance, in terms of weaker direct links in global trade lanes,” the report said.
OECD put forward three options ASEAN countries may consider to address issues of cabotage.
First is opening the domestic shipping market to ASEAN competition by lifting the ban on ASEAN vessels carrying domestic cargo.
Another is amending cabotage rules to allow foreign ships to carry their own cargo (and other foreign cargo) domestically; for example, allow ships to travel domestically to the port of final call after arriving at a first port of entry, subject to ex post analysis of the impact of the amendments.
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The last option is to allow international ships to operate in the domestic shipping market on specific routes where there is demand and evaluate demand every one to three years to consider whether to liberalize additional routes.
For those opposed to the lifting of cabotage on grounds of national security, Maximiano said OECD is not proposing to eliminate all rules, even as he recognized national security as “a very legitimate concern.”
He noted, however, “it’s possible to achieve the same objective without this blanket prohibition (cabotage)” by, for example, licensing or registration requirements and inspections. “We think it’s possible to do it in a less restrictive way of competition.”
For other logistics sectors, the OECD report recommends:
- Legislating requirement to grant third-party access to railway infrastructure to ensure access for new entrants on transparent and non-discriminatory terms,
- Ratification and full implementation by ASEAN member states of the ASEAN Framework Agreement on Multimodal Transport (AFAMT), and
- Removal of general minimum surface requirements for warehouses to lower barriers to entry and allow market participants to make their own business decisions.
Maximiano described the lack of ratification or implementation of the AFAMT as a “missed opportunity” for trade, for companies to prosper, and for consumers to enjoy lower prices.
The OECD report noted expansion of a transportation network as a result of enhanced multimodal connectivity improves efficiency of global supply chains by providing better links to supplies, inputs and final goods. Multimodal transport can help achieve these advantages by combining different modes of transport so that each is used for the suitable length of the haul in order to minimize costs.
Moreover, the report said implementing AFAMT “can also help support more resilient and sustainable COVID-19 recovery by facilitating freight transport across the region.” – Roumina Pablo