Philippines diverting maritime traffic to reduce congestion in Manila

The Philippines lacks land borders with any other nation and spans over 7000 islands, making maritime trade the foundation of its economy. Rapid macroeconomic expansion, population growth and increased industrialisation are driving developments at the largest and busiest facilities in Manila. However, persistent congestion and rising tariffs have led the government to examine the possibility of offloading some Manila traffic to nearby facilities in Subic and Batangas.

This move will be supported by new domestic cabotage reforms, which enable foreign carriers to make domestic trans-shipments, in addition to reducing congestion in Manila and pushing shipping growth to the regional ports, which had previously been underserved by international shippers.

The reforms form part of an ongoing push by the new administration to modernise and streamline the sector, with the Department of Transportation (DoT) also moving to gradually phase out ageing roll-on/ roll-off (ro-ro) passenger ferries, creating further scope for new foreign investment.

Subic & Batangas

Although the recent launch of an electronic terminal appointment booking system has improved yard efficiency at Manila’s two international ports (see overview), lack of multimodal connectivity and congested road infrastructure in the areas surrounding the ports have led to calls for modernisation and redevelopment at two nearby port facilities in Subic Bay and Batangas.

In April 2016 former President Benigno Aquino III signed an executive order naming Subic and Batangas as extensions of Manila’s ports. This followed a deeply unpopular truck ban – first rolled out in February 2014, cancelled in September 2014 and then re-implemented during peak traffic hours in September 2015 – which has led to severe congestion in the areas surrounding port facilities in the capital city.

Ports Progress

Located about 150 km northwest of Manila by road, Subic’s port offers capacity for 600,000 twenty-foot equivalent units (TEUs) annually, but has been operating well under capacity in recent years, handling roughly 123,000 TEUs per year, according to the Subic Bay Metropolitan Authority (SBMA). In September 2016 Pantaleon Alvarez, speaker of the House of Representatives of the Philippines, told local media that modernising Subic’s port to optimise its use would have a significant impact on traffic congestion in the Metro Manila area. Alvarez called on the DoT to submit concrete proposals to reduce traffic congestion, and argued that growing cargo volumes in Subic would spur economic growth in central and northern Luzon. He cited a study by the Japan International Cooperation Agency that found that Subic could easily absorb north-bound cargoes, in addition to reducing shipping costs by $100-200 per container for shippers operating between Pampanga and Zambales.

In October 2016 the DoT announced that a cargo rail line linking Manila to Clark, and eventually Subic, is high on its priority list, which would pave the way for significant cargo growth (see analysis).

Batangas Potential

Batangas Port, located 110 km south of Manila, also has high potential for future expansion. One of its operators, Batangas Container Terminal (BCT), reported in August 2016 that it expected to handle record cargo volumes in that year, after handling over 130,000 TEUs in 2015. Total cargo volumes hit 85,000 TEUs during the first seven months of 2016, according to figures from BCT, driven by an expanding list of customers in Cavite, Laguna, Batangas, Rizal and Quezon, as well as rising demand from electronics manufacturers, food and beverage conglomerates, retailers, agricultural exporters and automotive manufacturers. With a number of ports upgrades completed or in the works, the government is next turning its attention to fleet and regulatory upgrades. Despite the near-term growing pains some of these legislative changes could bring, new measures to replace ageing ro-ro vessels, as well as critical cabotage reforms, have set the stage for a surge of new foreign investment in the maritime sector.

Upgrades

In August 2016 the DoT announced that it was examining the possibility of phasing out ageing ro-ro vessels on the Strong Republic Nautical Highway, a network of roads and ports connecting areas in Luzon, Visayas and Mindanao that opened in 2003. Ro-ro vessels are one of the most popular forms of inter-sea travel and shipping in the Philippines, and are built to allow motorised vehicles to drive on and off.

According to figures from the Philippine Ports Authority, in 2015, 62.8m people and 89.1m tonnes of goods travelled by sea domestically. In 2012 the Asian Development Bank estimated there were 42 ro-ro vessels in operation on the nautical highway, while DoT data from 2016 showed 254 domestic passenger ferries were in operation, although most of these vessels were bought second-hand from China, Japan, South Korea and Europe, with two local operators – Archipelago Philippine Ferries Corporation and Starlite Ferries – having begun to modernise their fleets.

Felipe Judan, the DoT’s maritime undersecretary, told local media in August 2016 that the department is planning a staggered phase-out of older vessels, with the first stage potentially focused on any craft older than 30 years. DoT figures from April 2016 showed that 152, or nearly 60% of the country’s total passenger ferries, were over 30 years old. There is concern that new ferries, particularly long-haul passenger and cargo vessels that cost millions of dollars, could create monopolies in the market and prevent smaller companies from upgrading.

However, the DoT’s plan presents considerable opportunities for private investment in the sector, with the department considering delivering fleet upgrades through a public-private partnership (PPP) model similar to those used for airport, rail and road projects. Under such a model, private firms would pay for the cost of constructing new boats and either lease them to local operators, or operate the new ships themselves before transferring them to the government. However, as of early 2017 a formal framework has not yet been agreed upon. Stefan Schmitz, CEO of Antrak Logistics, told OBG, “To generate a more efficient environment for logistics providers, decongestion is critical. This can be achieved by addressing infrastructure inadequacies and boosting PPPs.”

Cabotage Reforms

Further supporting new private investment in the maritime sector, authorities have also moved to reform domestic cabotage laws. Prior to July 2015 cabotage regulations were covered by the Tariffs and Customs Code of the Philippines and the Domestic Shipping Development Act of 2004, which reserved domestic coastal trade solely for Philippine vessels. Foreign vessels were prohibited from running domestic routes carrying passenger or cargo, except under extraordinary circumstances. This meant that all foreign goods brought into the country were trans-shipped by domestic carriers from their port of entry to the final destination, which drove the cost of transportation and logistics to between 24% and 53% of the wholesale goods’ final price, according to the Department of Trade and Industry.

Domestic firms, lacking any major foreign competitors, also became highly concentrated, with the lack of competition cited by policymakers as a major impediment to growth.

“A loaded container costs between $600 and $800 to ship from Manila to Cebu. From Manila to Hong Kong, the same container costs $20. From Manila to Taiwan, it is between $150 and $200. That was a clear example of why the cabotage laws needed to be amended,” Judan told OBG.

Taking Action

In July 2015 former President Aquino signed the Cabotage Act into law, thereby lifting long-standing restrictions and opening up domestic maritime trade to foreign vessels.

Under the law, foreign companies’ activities now extend to foreign cargo arriving from a foreign port to a Philippine destination, after completing entry port clearance, as well as foreign cargo from a foreign vessel travelling within the Philippines, and foreign cargo from a foreign vessel going through a domestic trans-shipment port to a foreign port of destination.

Crucially, these regulations in addition allow foreign vessels to transport empty foreign containers travelling to or from any port in the Philippines, or any empty containers being trans-shipped between two Philippine ports.

Although local vessel operators were worried about the impact of new foreign competition, the new law brings with it a number of benefits, including reducing congestion caused by a pile-up of empty containers at Manila’s ports, where imports outweigh exports.

“In Manila there are almost three containers coming in for every one that leaves, so we have to manage the empty containers. In the past, congestion was such an issue that laden containers were prioritised, which created major problems,” Daniel Ventanilla, general manager of NYK Lines Philippines, told OBG.

Taxes & Fees

One of the most significant issues with the Cabotage Act is that it exacerbates tax disparity between international and domestic shippers. Foreign shipping lines pay a 2.5% gross billings tax on gross revenues from outbound shipments.

Domestic vessels pay a 30% regular corporate income tax (CIT) on net taxable worldwide income, or a minimum 2% CIT on gross income, or whichever is higher. International shippers also pay a 3% common carriers tax and a 12% value-added tax (VAT) on outbound cargo, although they are exempted from domestic minimum CIT rates.

However, the 2.5% foreign tax was determined assuming a 90% ratio of deductions-to-Philippine gross income of international carriers, which had been equivalent to corporate tax rates for domestic shippers when they were set at 25%.

The country’s CIT rate has been set at 30% since 2009, however, meaning the foreign vessel tax should have been raised to 3%, according to a 2015 analysis of the Cabotage Act by tax consultancy PwC. International shippers can also benefit from reduced rates under income tax treaties derived from outbound cargo transport.

The new Cabotage Law did not include information regarding tax implications for the relaxed rules, with PwC reporting that it remains to be seen whether foreign shippers’ revenues will be subject to their existing tax regime, domestic corporate tax rates, the common carriers tax or VAT.

Despite these challenges, the Cabotage Law is expected to provide a significant opportunity to boost participation by the private investors in the sector’s development, and should help to further support plans to develop a more robust regional network in addition to helping to reduce congestion in Manila.