Reforming the port sector

The author is an economist at the University of Asia and the Pacific and director of Center for Research and Communication’s Transport and Logistics Center.

In its drive to be globally competitive, the government should spare no
effort in upgrading the country’s port services and facilities. Among
the areas it should take a closer look at are alternative and more
efficient modes and routes of sea transport as well as the need to
redefine the functions of the port authority.

The archipelagic makeup of the Philippines makes domestic inter-island
shipping a vital mode for transporting goods and people. Efficient
shipping and port operations are vital in:

  • ensuring that the productivity gains in the modernization of the
    agri-fisheries sector are not lost because of inefficiencies in the
    distribution network
  • developing the countryside through increased regional trade and promoting tourism
  • promoting global competitiveness (since most export and import products are transshipped domestically)

Efficient shipping and port operations support and complement the
government’s poverty alleviation thrust, food security program as well
as efforts in making Mindanao the country’s “food basket.”

Unfortunately, shipping and port operations in this country are a far
cry from the ideal. And this inefficient setup is being nurtured and
perpetuated by a policy that promotes a particular mode of sea
transport, that is, the conventional lift-on/lift-off (LO-LO) to the
exclusion of other alternative modes, such as roll-on/roll-off (RO-RO).

Existing port policy

Under the Charter of the Philippine Ports Authority (PPA)…the
government share from all cargo handling contractors and port-related
service operators shall be at a rate not less than 10% taken from their
gross income earned from such services. This policy involves several
issues.

Bias in favor of multiple cargo handling in port operations. For
maximum income from cargo-handling operations, PPA awards contracts to
the bid that gives the highest share in revenues.

This practice has encouraged multiple cargo handling in order to
justify the relatively high handling charges. In some cases,
cargo-handling operators remit to PPA a share as high as 30% from their
cargo-handling revenues.

Heeding the call of the private sector to reduce transport and
logistics costs, President Gloria Macapagal Arroyo announced during the
recent 11th Mindanao Business Conference (MBC) the fixing of the PPA
share from cargo-handling revenues to 10%, which is the mandated
minimum under PPA’s Charter. This move, however, only produced a
“cosmetic” effect for two reasons.

First, while sea transport cost goes down as a result of the fixing of
PPA share to 10%, PPA wittingly or unwittingly excluded in its
Memorandum Circular the two biggest cargo-handling operators – the
International Containers Terminal Services Inc. (ICTSI) and the Asian
Terminal Inc. (ATI) – thereby negating the desired impact.

Second, the “conflict of interest” (i.e., PPA benefiting from its own regulation) remains and was simply reduced to 10%.

This prompts one to ask the question – Is the PPA a corporation
concerned with generating income and profits or is it a
service-oriented government agency?

The succeeding discussion tries to provide an answer.

Huge revenues from cargo handling. Of the total revenue generated by
PPA from port operations, its share from cargo handling accounts for
roughly 18%. This figure, however, does not reflect the cargo-handling
component of ICTSI’s income that is remitted to PPA.

While Philippine industries are struggling to post a positive net income, PPA’s net income from 2000 to 2001 grew by 681%.

Moreover, its net income for the first nine months of 2002 has already
surpassed the net income for 2001 by P480 million, representing a 29%
growth.

This phenomenal growth can easily be explained by, among others, the
10% increase in charges PPA granted to ICTSI (operator at Manila
International Container Terminal) and ATI (operator at the South
Harbor) January of this year.

Rate setting for public utilities has been greatly influenced by political considerations rather than economic realities.

In the case of PPA’s regulation of cargo-handling rates, political and
economic considerations had lesser impact on this regulatory function
since it benefits from any increase in rates.

The higher the rate, the more PPA earns. Therefore, it is not
surprising that almost all petitions for rate increases are normally
approved by PPA.

Increasing cargo-handling cost. There is an ongoing debate on the
magnitude of the cargo-handling cost in relation to the total sea
transport cost. The Coalition for Shipping and Ports Modernization
claims that the cargo-handling cost accounts for as high as 46% of
total sea transport cost. In a study done by Myrna Austria of the
Philippine Institute for Development Studies (PIDS) on the State of
Competition in the Philippine Shipping Industry (2002), mention was
made of a 30% cargo-handling cost as a percentage of transport cost.

By any standard, a 30% to 46% cargo-handling cost is high. As a result,
various concerned groups, such as the Philippine Inter-island Shipping
Association, Mindanao Business Council, Domestic Shipowners
Association, Philippine Chamber of Commerce and Industry, exerted
efforts to unbundle the sea transport cost (freight and cargo handling).

Around August last year, PPA created a task force composed of
representatives from the shipping industry, cargo handlers, cargo
shippers and private sector.

The task force was mandated to develop a cost-based methodology for
tariff setting. The work of the task force is now being transferred to
the newly created Tariff Committee under the National Port Advisory
Council.
{mospagebreak}
Regulatory capture

The regulatory agencies in the country are, in most cases, under some
form of regulatory capture. A regulatory agency is said to be captured
when it exhibits any of the following:

  • It furthers the industry’s interests at the expense of consumers;
  • It is more responsive to the industry pressures;
  • It has become too identified with the industry;
  • It has become overly protective of the regulated firms;
  • It is passive, largely rubber-stamping the firms’ decisions; and
  • It adopts the regulated utilities’ objectives as its own.

Simply put, when a regulatory agency brushes aside the common good in
favor of private interest or some special group, then it is guilty of
capture. George Stigler theorized that governments do not end up
creating monopoly in industries by accident. Rather, they regulate at
the behest of producers who capture the regulatory agency and use
regulation to prevent competition. There are many examples in the PPA
that demonstrate this phenomenon. For this paper, the recent PPA
Administrative Order (AO 01-2001) is more than enough to show the close
relationship between the PPA and the cargo-handling operators.

As part of PPA’s “heal and build” policy, AO 01-2001 Guidelines for
issuance of probationary and long-term contracts to cargo-handling
companies with expired and expiring cargo-handling contracts was issued
last year. Under this order, a cargo-handling company may be initially
given a two-year probationary contract and, later on, a long-term
contract (eight to 10 years) without the benefit of public bidding.

The PCCI immediately objected to this, citing the benefits one could
derive from competition, transparency and greater private sector
participation through public bidding. Despite the objection, PPA
proceeded with the implementation of AO 01-2001.

In an opinion sought by PPA this year, the Office of the Government
Corporate Counsel (OGCC Opinion 234 s.2002) confirmed the private
sector’s contention that the cargo-handling service is covered by
Executive Orders 40 and 109, which require competitive public bidding
in the contract award. The PPA has requested the OGCC to reconsider its
opinion on the matter. Why PPA is trying to circumvent the law,
regulatory capture is the answer.

Policy reform. Reforming the port sector requires the issuance of an
Executive Order as well as the passage of a bill amending the Charter
of the PPA.

EO on RORO. First, various studies (conducted by Japan International
Cooperation Agency, Shipdeco and US Agency for International
Development) identified and accepted the operation of RORO (roll on,
roll off) vessels as a workable alternative to the conventional
operation of cargo and passenger vessels, more so with the so-called
containerized service. Second, RORO vessels have been with us for over
a decade now but we do not have the RORO shipping service. Why? The
answer is simple. RORO shipping service does not require cargo handling
since vehicles (trucks, cars, buses, etc.) simply roll on and off the
RORO vessels. Therefore, PPA stands to lose its revenue from the 10%
share in cargo-handling income.

In fact, in the PPA-designated RORO ports, port users still pay
cargo-handling charges even when no service is provided. Finally, the
large shipping companies have already gone into cargo-handling
operations. Their question: What happens to our investment in
cargo-handling equipment?

The proponents of RORO shipping are not saying that RORO and LOLO
shipping services are mutually exclusive. Both shipping technologies
can be allowed to operate simultaneously. What they are asking for is
to provide the shippers with an alternative mode of sea transport and
simply let the market decide by which way it wants the cargo to be
shipped – RORO or LOLO.

Among the major advantages of RORO shipping are: (a) total elimination
of cargo handling at the ports; (b) faster turnaround of vessels; (c)
reduced effort in collecting usage and freight charges; (d) lesser
investments in and maintenance of port facilities; and (e) elimination
of the need to inspect and verify quantity of cargo at the ports. These
advantages could result in substantial reduction in the cost of sea
transport and could eventually lead to a viable operation of brand new
tonnage.

The policy reform can be done at the levels of the PPA, Department of
Transportation and Communication (DoTC) and the Maritime Industry
Authority (Marina) through the issuance of appropriate Administrative
Orders. However, for reasons already explained earlier, the issuance of
a Presidential Executive Order may be warranted. For the EO to be
effective, efficient and fair, it must have the following features:

  1. National road network system. The RORO links are to be considered
    as part of the national road network system. Vehicles passing through
    these “moving bridges” must not be burdened with transport procedures
    not required of them elsewhere in the system, such as the cargo
    manifest requirement and payment of wharfage dues;
  2. Lane meter-based tariff. Since RORO vessels are extensions of
    national highways, rates should be based on lane meter of self-powered
    vehicles rather than nature of cargo. No cargo-handling charges (i.e.,
    arrastre and stevedoring) or any costs that are not actually incurred
    should be imposed on passengers, cargoes, and vehicles passing through
    RORO vessels.
  3. Private commercial ports. Private investments in RORO berthing
    facilities must be encouraged and allowed to operate as commercial
    ports. In order to attract investments in private RORO ports, the
    Philippine Ports Authority (PPA) shall not share from the revenues they
    will generate from berthing and usage fees. The PPA shall prepare
    pre-feasibility studies for all potential RORO systems to encourage the
    private sectors and local governments (LGUs) to undertake their
    development and operations on a non-exclusive basis.
  4. RORO Ferry Terminals. DENR shall facilitate applications for
    lease or sale agreements and environmental clearances for private port
    development projects in the most expeditious manner. The LGU concerned
    shall also facilitate of various local permits.

The Development Bank of the Philippines (DBP) is currently implementing
a Sustainable Logistics Development Program (SLDP) aimed at reducing
transport cost, especially of agricultural products, from Mindanao to
Luzon through a P30-billion RORO port and ferry system from Mindanao
through the Visayan islands to Luzon. However, the successful
implementation of SLDP requires the formulation of a policy that would
define the provision of RORO shipping service and investment in private
RORO ports. Without the RORO policy in place, no private investor will
access the DBP facility and invest in “pure” RORO shipping operation.
{mospagebreak}
PPA Chacha

The administration of the Philippine port system is highly centralized.
All government ports (with the exception of the Port of Cebu which is
under the Cebu Port Authority and a handful of ports located in the
Special Economic Zones) scattered in various parts of the country are
being managed by a centralized port authority, the PPA.

In contrast, none of the successful and well-managed ports cited in the
world is administered by a centralized system of port administration.
Each port has its own authority, whether under the jurisdiction of the
national or local government. A decentralized system of local port
authorities each operating independently creates the environment for
inter-port competition, thereby satisfying one of the important
conditions for an efficient market in the port sector.

In addition, policy formulation in well-managed ports worldwide is
carried out by a Board dominated by the private sector, with a degree
of government participation. In the Philippines, the PPA Board is
composed mainly of government representatives, with only one coming
from the private sector.

Finally, the structure of the PPA is monolithic in the sense that it
owns, develops, operates, and regulates the ports. At the same time,
PPA collects shares from revenues derived from port services like cargo
handling.
Against this background, there is an urgent need to amend the PPA
Charter to make it more dynamic and responsive to the needs of the port
users and the economy in general.

The following principles may be considered in amending the PPA Charter:

  1. Separate the regulatory and development functions of the port
    authority. Port administration requires redefining the regulatory as
    well as the developmental functions of the port authority. The
    development of general port plans as well as the formulation of broad
    policies and guidelines in port administration may be given to the
    DoTC. However, the interpretation and implementation of these general
    directions will have to be the domain of the independent port
    authorities.
  2. Establish independent port authorities. To promote inter-port
    competition and to decentralize port administration, independent port
    authorities must be established and managed mainly by Boards composed
    mostly of representatives from the private sector.
  3. Increase private sector representation and participation in the
    Board of the port authority (see Table 4). International best practice
    clearly shows the bias toward greater private sector involvement in
    port administration.

The President included in her seven-point program for the next six
months the improvement of transport and logistics. For his part,
incoming National Economic Development Authority (NEDA)
director-general Romulo Neri announced that he will put high priority
on agriculture and transport. As a starting point, maybe the EO on
RO-RO can be issued by the President and then certify as “urgent” the
proposed bill in Congress filed by Sen. Manual Villar (SB No. 2270)
seeking to amend the PPA Charter.

Table: Existing and Proposed PPA Board

Existing (9 members) Proposed (11 members)
Secretary, DoTC (chairman) Same
PPA GM (vice-chairman) Same
MARINA Administrator Same
Secretary, DTI Same
Director General, NEDA 6 private sector representatives
Secretary, DA (cargo shippers, ship owners,
Secretary, DENR exporters, cargo-handling companies,
Secretary, DPWH private port operators & consumer sector)
Secretary, DoF Private Sector Representative
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