The Philippine transport and logistics sector is highly concentrated with the cargo services sector lacking competition, a study found
A Philippine Competition Commission study said foreign ownership limitations imposed by the Constitution act as the main barrier to competition
Entry barriers are a complex regulatory structure and a number of licenses and permits from national government agencies and local governments required to operate
The paper recommends amending the Public Services Act to effectively allow 100% foreign ownership in some industries, including transportation
Also hindering competition is the definition of customs brokerage as a profession under the Customs Brokers Act, the paper found
The Customs Brokers Act may have to be amended to allow foreign nationals and foreign-owned corporations to provide customs brokerage services
The Philippine transport and logistics sector is highly concentrated and likely lacking competition, particularly in the cargo services sector, according to a recent paper published by the Philippine Competition Commission (PCC).
In their issues paper “Competition Policy Issues in Cargo Services”, authors Gilberto Llanto and Francis Mark Quimba identified competition and regulatory issues impacting the cargo services sector.
Cargo services, as defined by the PCC for the study, comprise freight forwarding, storage and warehousing, and customs brokerage.
“Overall, our empirical analysis shows that the transport and logistics sector is highly concentrated,” according to the paper.
At the same time it noted there is “probably a lack of competition… particularly in the cargo services sector, which is a critical segment of the industry…”
Foreign ownership limitations imposed by the Constitution was identified as the main barrier to competition.
Additionally, there are entry barriers to the industry, including a complex regulatory structure in which several regulatory agencies and governing bodies regulate the cargo services industry. This complex structure limited several players in the industry, initially to first movers then later to those that can raise resources to deal with the regulatory constraints.
Securing a number of licenses and permits from national government agencies to be able to operate is another entry barrier, the paper said.
Further, the freight forwarding and cold chain facilities (a sub-set of storage and warehousing) “remain a protected sector” that are still considered public utilities, with such protection limiting competition.
Freight forwarding, specifically domestic air transport, is subject to the nationality requirement under the 11th Regular Foreign Investment Negative List, a list of economic sectors where foreign ownership and participation in the Philippines is regulated.
In contrast, an international freight forwarder engaged exclusively in international commerce is beyond the scope of the Philippine Constitution on foreign equity limitation and the nationality requirement, the paper pointed out.
Additionally, an international freight forwarder may provide trucking services to clients in the Philippines through subcontracting to a local trucking company without having to be classified as a freight forwarder subject to the nationality requirement. Advancing freight payments, providing packing/crating, warehousing, and trucking are also among the activities international freight forwarders may engage in in the Philippines.
Outmoded Public Service Act
The paper said the Public Service Act (PSA) continues to define as public utilities obsolete and outdated modes of transport as pontines and marine railways and enterprises such as ice plants and ice refrigeration plants. This, even if these public utilities “are no longer susceptible to monopolistic behavior due to the presence of many alternatives in the market, or require the kind of massive capital outlay commonly associated with present day public utilities.”
The paper recommends amending the PSA to eliminate certain services from the list of public utilities and to effectively allow 100% foreign ownership in these industries, which will no longer be considered public services or be covered by the 60%-40% ownership principle under the Constitution
“The long overdue amendment of the Public Service Act will lead to competition in various industries by narrowing down the definition of public utilities and lifting the nationality requirement on modes of transport, technology and enterprises formerly defined as public utilities,” the paper stated.
The paper further said amending the PSA “is a sound recommendation” as the Lower House has already approved on third and final reading in March 2020 House Bill No. 78, which seeks to amend the 84-year-old PSA.
HB 78 seeks to provide a clear statutory definition of a public utility and limit it to only three services: electricity distribution, electricity transmission, and water pipeline distribution or sewerage pipeline system.To be excluded from the definition of public utility are transportation, telecommunications, broadcasting, and other public services. Its counterpart bill, Senate Bill 2094, is pending approval.
Amend Customs Brokers Act?
Another requirement that the paper said hinders competition is the definition of customs brokerage as a profession under the Customs Brokers Act, as amended, as this requirement limits the provision of customs brokerage services to Filipino citizens.
“It may require an amendment of Customs Brokers Act to allow foreign nationals and foreign-owned corporations to provide customs brokerage services,” the paper stated.
The Customs commissioner’s broad discretion to allow or disallow foreign shipments granted by law, particularly under the Foreign Ships Co-loading Act, may also “restrict competition if exercised indiscriminately.”
The paper suggests revisiting the tax treatment of domestic and international carriers to find out if it is a barrier to competition between domestic and international carriers.
International carriers are subject to the gross Philippine billings tax and the common carriers tax, a practice considered discriminatory and inconsistent with rulings of the World Trade Organization and resolutions of the International Civil Aviation Organization.
Domestic carriers are subject to income tax and value-added tax, but international carriers are not.
No integrated policy on multimodal transport
Another competition issue hounding the transport and logistics sector is the lack of an integrated regulatory framework for multimodal transport.
“Instead, there is a complex regulatory structure with different modes of transport regulated by various agencies under different laws and regulations,” the paper pointed out.
The relevant port authority where the facility is located regulates storage and warehousing firms, but facilities outside the ports are not regulated. The Bureau of Customs, on the other hand, regulates customs bonded warehouses.
Freight forwarding firms are regulated by the Department of Trade-Fair Trade Enforcement Bureau while air freight forwarders also fall under the Civil Aeronautics Board of the Department of Transportation.
The paper said the complex regulatory structure leads to high transaction costs and inefficiencies in operations and service delivery in the cargo services sector with adverse spillover effects on consumers or end-users.
New technologies and innovations also affect the landscape of competition. The paper said that at present, the country has a freight forwarding market composed of many firms, but those that can acquire and apply new technologies and innovations to their operations will become more efficient service providers in a relatively crowded market.
Based on available data, the paper said many transport and logistics firms do not have any research and development expenditure.
“This may suggest a low level of innovation in the industry, which some studies use as an indicator for a low competition level,” it pointed out.
The paper said the industry shows a high level of price-cost margin, which may imply a lack of competition in the industry despite the participation of numerous firms.
More mergers, consolidations
The paper, meanwhile, said the market structure is evolving, with vertical integration or mergers and consolidations a distinct possibility as firms move to achieve economies of scale and scope.
“Our analysis indicates that logistics firms may organize themselves as large firms offering integrated services such as freight forwarding, transport, storage and warehousing, and customs brokerage, providing value-added services to importers, producers, manufacturers, wholesalers, and distributors,” it pointed out.
Reinforcing the drive to vertical integration is likely the increasing intermodal nature of transport and freight forwarding, the paper said.
It noted, however, that the growing integration of cargo services along the logistics chain is bound to give rise to measurement issues in an effort to establish concentration or market dominance in the sector.
The paper noted few indicators are available to measure and understand a firm’s behavior. It said it will benefit the PCC to collaborate with the Philippine Statistics Authority to include firm behavior indicators in the latter’s surveys. – Roumina Pablo