PHL navigates rough waters of Asean logistics industry

By Bernadette D. Nicolas, Business Mirror, Nov 8, 2018

THE Philippines is blessed with thousands of beautiful islands. This is a blessing that comes at a huge cost: the cost of moving.

Pundits have pointed out that one of the factors attributed to the Philippines having the highest logistics cost among the members of regional bloc Association of Southeast Asian Nations (Asean) is the fact that the country is an archipelago.

It also doesn’t help that this disadvantage is coupled with the country’s long-overdue infrastructure gap and regulations that were deemed inconsistent and burdensome.

In the Philippines, logistical costs account for 24 percent to 53 percent of wholesale prices.

Shipping costs and port-handling costs cover 8 percent to 30 percent relative to the routes used to transport and roughly 5 percent of the retail price of goods, according to a separate report by the Department of Trade and Industry.

Despite this, the country jumped 11 notches to 60th out of 168 countries in a 2018 ranking by the World Bank. Called Logistics Performance Index (LPI), the world’s biggest lender claims it created the LPI as an interactive benchmarking tool to help countries identify the challenges and opportunities faced in trade logistics.

In 2016, the country ranked 71st among 160 countries.

However, compared to its Asean neighbors, the Philippines ranked in the middle as it placed sixth out of 10 member-states.

Low competitiveness

ALTHOUGH there was a significant improvement in the country’s LPI, experts agree more still needs to be done to remove the roadblocks for the Philippines to have a robust logistics market.

One of these is Australian-based logistics expert Jose L. Tongzon. He told the BusinessMirror that nowadays companies compete not just in product quality but also in logistics cost and efficiency as consumers increasingly buy online.

Tongzon also warned that slow and expensive logistics because of delays or bureaucratic red tape could lead to much higher transaction cost and lower competitiveness.

“Overall, logistics flows because of trade. If there is a lack of exports or shortage of exports or we can’t export as much as we like, well, we don’t have the competitiveness because, you see, logistics now is the source of competitiveness,” said Tongzon, who is also a logistics professor at an established branch of Inha University in Tashkent. “So if we don’t have that [logistics], our trade will decline.”

Worse, local logistics providers may soon be out of business if the Philippines cannot become competitive in providing efficient logistics services, he added.

“Because our logistics performance is poor, definitely we need to improve logistics in order to export more,” Tongzon explained. He added that improving logistics is “definitely a crucial part” of how the country can benefit from the Asean integration.

Overall results

HOWEVER, everything is easier said than done in this case as the Philippines is not alone in ensuring the seamless flow of transport of goods.

While the country embarks on massive infrastructure projects through the Duterte administration’s “Build, Build, Build” program, other Asean member-states such as Thailand and Vietnam are also working double time to enhance theirs.

Thailand and Vietnam jumped to the top two and three spots, respectively, among Asean members based on the latest overall LPI results.

The Philippines’ LPI is low “because our infrastructure is not progressing as much as we like and so definitely infrastructure is something that we want to improve,” Tongzon said. “In addition to infrastructure, we also need to improve our regulatory framework, the quality of these regulations, [and] we need to introduce more competition in our coastal shipping.”

Among the six LPI components measured by the World Bank, the Philippines recorded its highest score in international shipments, where it placed 37th.

Timeliness was, however, the country’s weakest link—it ranked 100th in this category.

In infrastructure, the Philippines ranked 67th, while it placed 69th in logistics quality and competence.

Other components include tracking and tracing (57th) and customs (85th).

Good ideas

BASED on World Bank data, Vietnam lagged behind in 2010 and in 2012 compared to the Philippines in overall LPI. However, starting in 2014 and up to 2018, Vietnam has already outperformed the Philippines in overall LPI.

Aside from better port infrastructure, Vietnam now also boasts of a regulatory framework, owing to its move to fully liberalize foreign ownership of up to 100 percent, especially for logistics companies, Tongzon noted.

Meanwhile, through the years Thailand has since exceeded the country’s logistics performance since the index started in 2007. The Thais have also continuously improved their infrastructure, such as building railways that helped them solve the problem of congestion, said Tongzon.

The latest results of the World Bank LPI came as the Philippines’ ports still cannot handle bigger ships, prompting the country to rely on transshipment to other ports in the regions.

This adds up to the logistics cost and also affects the timeliness of the delivery of goods, Tongzon noted.

“If we can attract bigger ships to our port then it will lead to sure lower cost and lower lead time, transit time,” he added. “And that would be good for exporters and importers.”

Moreover, a lot of shipping lines also complain of the difficulty of getting permits, so he said it is a good idea for the government to streamline regulatory procedures.

Interisland

TONGZON said the efficiency in logistics services was also affected by the lack of competition in the market, which he attributed to the foreign-ownership restriction in the Constitution.

According to the Charter, foreign ownership of public utilities, which include shipping, is limited to a maximum 40-percent foreign equity.

Thus, bills seeking to amend the Public Service Act to open up the competition for public services were filed and are still up for scrutiny by lawmakers. The measure also aims to give a clear definition of public utility and public services.

House Bill 5828 was approved on third reading by the lower chamber and was transmitted to the Senate in September last year. Several bills were also lodged in the upper chamber.

In theory, infusing more competition in the market, such as logistics, should bring down prices, said Enrico L. Basilio, an assistant professor of Public Administration at the University of the Philippines-National College of Public Administration and Governance.

Basilio was also appointed in 2010 as Alternate Philippine Representative to the Asean High Level Task Force on Connectivity.

The Task Force was behind the Asean Master Plan on Connectivity that identified the Asean RoRo network as one of its 10 flagship projects.

Intermodal transport

AS one of the prime movers of the roll-on roll-off (RoRo) policy, which provided an alternative mode of transport that has been emulated across Asean, Basilio still believes that most of the logistic bottlenecks are in infrastructure.

To connect the country’s many islands, Basilio pointed out that the government must focus on improving intermodal transport to transport goods.

Aside from investments being hindered by policy constraints, Basilio lamented that several regulatory offices are also conflicted in their interest since they serve both sides of the fence for being both a regulator and operator.

He explained that regulatory agencies, like the Philippine Ports Authority (PPA), Civil Aviation Authority of the Philippines and the Philippine Amusement and Gaming Corp., cannot wear two hats at the same time since it is inevitable that they will tend to benefit from their own regulation.

“It is not surprising, therefore, why PPA always approves petitions for increase even when there are no petitioners, no public hearings conducted and/or no financial statements evaluated to ascertain the economic or financial justification for the rate increase,” read the separate research paper written by Basilio in 2003. That year he was still director of Transport and Logistics Center for Research and Communication at the University of Asia and the Pacific.

Solution

ASKED if there were bills being filed to address conflicts of interest, Basilio cited House Bill 8005 filed by Rep. Arthur C. Yap (Third District of Bohol). It is still pending in the lower chamber.

The measure proposes that PPA’s regulatory functions be transferred to the Maritime Industry Authority (Marina) while its operator functions could be handled by a new agency called the Philippine Ports Corp.

Basilio noted such initiatives as proof that the government is also doing something to solve the problem of overall infrastructure. This was his reaction to the drop in ranking for such category—one notch to 113th place—at the Global Competitiveness Index 2017-2018 of the World Economic Forum.

Basilio said the government’s action of addressing the infrastructure bottleneck is like hitting two birds with one stone because cargoes are also in the bellies of planes used to transport passengers.

In fact, he said the country is launching two more Asean RoRo links under the Asean RoRo shipping network aside from the Davao-General Santos-Bitung link. The latter was launched by President Duterte and Indonesian President Joko Widodo in April 2017.

Trade bloc

THE Davao-General Santos-Bitung link began at the tail end of then President Gloria Macapagal-Arroyo’s term and was carried over to the next administration.

This was supposed to be the country’s first RoRo link with Indonesia.

However, operations for this RoRo link have since been temporarily stopped. A report said it only had two trips after its launch.

According to Lowell Elim, business development manager of Asian Marine Transport Corp., the operations were suspended since May or June last year because there were no real cargo. Elim said this reflects low trade levels.

He said the issue lies with the Indonesian government not issuing a permit for particular cargo coming from the Philippines. These include animal feeds, flour and steel products that will be entering Indonesia.

Since the operations were suspended, it remains a mystery why Indonesia took this option, according to Elim. He added the company’s 55 containers are still at the Bitung port.

“[The containers are still there] until now, because we are hoping that it [Davao-General Santos-Bitung link] will still continue but, sad to say, it seemed like we have waited for so long. For us, there is no problem, we will still serve as long as there will be real cargo within that route,” he said. “That’s why our problem is if it will not push through, what will happen to our containers? That’s our risk there.”

Indonesia issue

ELIM said they have already reached out to the government about their concern, “but all we got as response is, they will look into it.”

Nonetheless, he said they remain optimistic the Davao-General Santos-Bitung link operations would be revived. Elim added the company is also open to operate in future Asean connection routes.

Basilio said the Mindanao Development Authority is already in discussions with officials representing the BIMP-Eaga (Brunei Darussalam-Indonesia-Malaysia-Philippines East Asean Growth Area) as well as their Indonesian counterparts regarding the matter.

“Our Philippine representatives to the Asean Business Advisory Council are also taking up the matter during the meetings,” he said.

Amid this hiccup, Basilio said he is still optimistic the Davao-General Santos-Bitung link will be operational again and soon.

He added more international shipping routes will also soon be opened by the government to connect the Philippines in the global value chain.

Basilio added the Transportation department is working on the launch of the second Asean RoRo link between the Philippines and Malaysia via the Buliluyan (Palawan)-Kudat route.

Moreover, Filipino proponents have also expressed their interest to establish the Batangas (Philippines)-Humen (China)-Da Nang (Vietnam) RoRo link after a proposal has been made.

Consistent inconsistence

BASILIO noted an inconsistency with what is happening on the ground and the Duterte administration’s pronouncement of more public-private partnerships (PPP) for the infrastructure program as stated on its 10-point socioeconomic agenda.

In a separate paper on his assessment of Duterte’s second year in office, Basilio said a cursory look at the 61 “Build, Build, Build” projects indicated that only 17 will be implemented through PPP modalities.

“As mentioned earlier, five airport O&M [operation and maintenance] projects were taken out of the PPP list in 2017, leaving the actual PPP projects under the BBB Program to only 12 projects [20 percent],” he said.

Basilio said almost all of the existing PPP projects (expressways like Calax and Tplex, Light/Metro Rail Transits like MRT 7 and LRT 1 South Extension) were already there before Duterte assumed the presidency nearly three years ago.

“There is hardly any new PPP project in the market.”

Meanwhile, official development assistance (ODA) loan availments have gone up by $1.47 billion in 2017 from $10.8 billion.

“Leading the country’s ODA sources are Japan (Jica), World Bank and Asian Development Bank (ADB). Other foreign ODA lenders include France, South Korea and the AIIB (Asian Infrastructure Investment Bank),” he said in the paper.

Basilio noted that PPP would have been the key for improvements in the logistics performance of the Philippines since the government may be able to seek help from the private sector for its infrastructure projects to solve the bottlenecks and challenges that have hounded the country for years.

“Therefore PPP is one good avenue because you are now mobilizing not only the expertise of the private sector in nation building especially for development but also their resources,” Basilio said.

Slower PPP

BUDGET Secretary Benjamin E. Diokno demurred, saying the government is still doing many projects under PPP financing mode. Still, Diokno conceded the latter takes too much time compared to tapping ODA.

“Realization of projects through PPP is slower and, besides, the previous administration didn’t have ODA before because they were not in good terms with China before,” Diokno told the BusinessMirror in Filipino. “But the President has been pushing for more agreements with Japan, China and Korea.”

Diokno gave assurances the government is doing its part to improve the country’s competitiveness in its logistics performance by focusing on airports and seaports. He agrees that Filipinos should not be happy where the Philippines is right now in terms of its logistics performance.

“[The Philippines is] not that competitive in logistics,” he said. “We can stand more improvement.”

Handed down

OF course, having more PPP is not a one-size-fits-all solution as there are more challenges in terms of alleged “excessive” international shipping charges imposed by foreign shipping companies.

Basilio said this costs the Philippine economy an estimated $2 billion to $5 billion in losses a year.

The issue was also the same subject of the joint study he co-authored as chairman of the joint committees on Transport and Logistics of the Export Development Council and the National Competitiveness Council.

The Department of Trade and Industry (DTI) has already asked the Philippine Competition Commission (PCC) to specifically look into the “questionable” destination and origin charges imposed on local importers and exporters.

In the case of imports, freight accounts for an average of only 39 percent of the total amount paid to international shipping lines, while the “destination charges” levied on Philippine imports by the carriers account for 61 percent, the document noted.

For exports, freight costs account for an average of 25 percent of the total amount paid to international shipping lines, while the “origin charges” imposed on Philippine exporters account for 75 percent.

With this scheme, local importers who get their raw materials abroad to export their products suffer two times as much compared to foreign importers in other countries. Therefore, this may cause importers to later on pass the excess shipping costs to their consumers.

“Because if you are an importer, then you export; that’s a double whammy because you already paid for a destination charge then you still need to pay origin charge. If you are an importer [of materials] for local manufacture, consumers will be affected because what you paid there will be passed to them,” he said in a mix of English and Filipino. “If you import finished products for consumption, then it’s the same, you will still pass it to them. The SMEs [small and medium enterprises] are at a disadvantage.”

Under study

PENDING results of the PCC study, Basilio hopes the issue would be sorted out as soon as possible for them to know what course of action they will take. But first, they want to know the nature and purpose of these charges and if these are reasonably imposed.

“You have to tell me what is the nature of the cost and then if they determined that it’s valid, then my next question is, if it is reasonable or if the weight is correct. I’m questioning; we are making them explain. Then that is what PCC is trying to do now,” he said.

But for former Tariff Commissioner George N. Manzano, the Philippines is better compared to lower developing countries except on the timeliness of delivery of goods as there is still congestion in the airports and seaports leading to higher cost.

“If you are not going to deliver on time, then the next country that depends on your intermediate goods will not be able to operate. If you are part of that network, you have to guarantee that you know you are able to be on time, otherwise, the whole system will suffer and if you are not dependable, then you will be cut off from the trade of goods,” he said. “In this way, you can’t take advantage of opportunities.”

Boosting confidence

NEVERTHELESS, Manzano expressed support for the government’s initiative to mainly improve infrastructure; however, he noted that both the hardware and the software side of logistics should be addressed.

“Many times infrastructure takes time to build, and there are many issues involved like right of way, so maybe that is something that has hampered Philippine competitiveness,” he added.

No matter how uncertain the country will go as far as logistics is concerned for now, Manzano said this does not mean that the country is not ready yet to participate in the Asean integration or in the Regional Comprehensive Economic Partnership, the proposed free-trade agreement among 16 nations in the Asia-Pacific region, including the 10 Asean member-countries.

The country can simultaneously tread the path toward improvement of its logistics performance, as well as actively do its part in Asean integration.

Though the archipelagic nature of the Philippines may come as a challenge, this gives the government more reason to work harder and be more efficient in its logistics performance.

“We cannot connect one island to the other, so we need to be more efficient and be more creative,” he said.