Cablegate: Floundering Philippine Shipping

DE RUEHML #1848/01 2170725
O 040725Z AUG 08





E.O. 12958: N/A
SUBJECT: Floundering Philippine Shipping


1. (SBU) Summary: Despite its 7,000 islands, the Philippines has a
small and uncompetitive domestic shipping industry. Restrictive
maritime policies and inflexible financial regulations suit special
interests, but block opportunities for growth and modernization of
the sector. Initiatives to implement international standards have
been largely unsuccessful. The underdevelopment of this sector
negatively affects U.S. efforts to promote economic development
throughout the country, especially in the peripheral regions that
depend heavily on domestic shipping, such as Mindanao. End

Underdeveloped Shipping Industry

2. (SBU) The Philippine Domestic Shipping Development Act of 2004
provides operators with investment incentives that include VAT
exemption for purchases of vessels above 150 tons, carryovers for
net operating losses, accelerated depreciation to minimize taxable
income, etc. Although business leaders initially thought the Act
would bring long-sought impetus to development of the industry,
subsequently, it became clear that the legal framework of the
Philippines still seriously hinders growth of the shipping industry.
The structure of the domestic cabotage law (exclusive right of a
country to wholly regulate its coastal waters) limits foreign
investment while strengthening local cartels; banking and financial
regulations make it difficult for operators to finance new vessels,
or for new companies to enter the market; and interference from the
court system impedes maritime development projects.

Cabotage Law: Here to Stay?

3. (SBU) Like many countries, the Philippines has a protectionist
cabotage law that bars foreign-owned ships from domestic routes.
However, the effects of this law in the Philippines are particularly
damaging since only about a dozen major shipping lines control
nearly all domestic shipping, and collude with each other to divide
routes and set prices. In the Philippines, cartelization is
government policy since the government encourages the shipping
operators to meet regularly in order to collaborate on pricing
issues and division of routes. This practice has resulted in
excessive domestic shipping costs which greatly retard the economic
development of peripheral areas of the country which depend on
domestic shipping for virtually all commerce. Mindanao
businesspeople are especially hurt since most of their trade
involves heavy use of cabotage to the central and northern islands.

4. (SBU) However, the major shipping lines strongly resist changes
or liberalization of the existing regime and employ their
considerable political influence to keep the industry closed to
competition. There is also relatively little outside pressure to
change the status quo, since it is not unusual for foreign shippers
to be excluded from domestic shipping.

5. (SBU) Maritime Industry Authority administrator Vicente T. Suazo
defends the current domestic shipping regulations and told Embassy
officers that the Philippines is not ready to lift it or further
liberalize until local operators modernize their fleet to
international standards, even though it is unclear if or when this
will ever happen. Recent executive orders focus on modernization
through shipbuilding and retirement programs for aged vessels. The
current phase-in/phase-out program aims to retire 1,500 vessels
while replacing them with 625 new ones by 2010. To support the
phase-in/phase-out, new vessels can be financed through the National
Maritime Leasing Corporation under the Medium-Term Development Plan
of the National Economic Development Authority.

But Unattractive Financial Options Hamper Development
--------------------------------------------- ----

6. (SBU) The leasing terms offered by the National Maritime Leasing
Corporation include a fixed interest rate of 7% to 15% with
mandatory repayment in 7 years and no grace periods. Few local
operators find these conditions attractive and most prefer to
finance their ship purchases with loans from abroad. Josephine G.
Uranza, Vice President of Magsaysay Inc., one of the largest
maritime corporations in the Philippines, told Embassy officers that
the unfavorable financing options explained why there are few new
ships on domestic routes.

Judicial Interference Also a Problem

7. (U) Domestic port facilities also need upgrading. A new program
awards leases to private firms who plan to build new facilities to

MANILA 00001848 002 OF 002

accommodate larger vessels, cargo, and passengers. The lease allows
full foreign ownership of ports for 25 years plus an option to renew
for another 25 years. Interested firms apply to the Board of
Investments. At least two competing firms must pass the vetting
process in order for one to win the lease. Winning firms are
granted tax breaks and other incentives dependent upon the amount of
the investment and/or how pioneering their plan.

8. (SBU) However, Philippine courts interfere in the outcomes of
the lease awards. An example is the case of North Harbor port in
Manila, the Philippine's largest domestic port. Only one firm,
Harbour Centre, passed the initial vetting process therefore voiding
their bid since two firms are required. Harbour Centre then sued.
The court case is currently pending and is expected to last another
six years. Until a ruling, no further bids can be entertained,
leaving North Harbor in a neglected state. General Manager Sevilla
of the Philippines Port Authority told Embassy officers that
judicial interference is a big problem and efforts to modernize port
facilities under build-operate-transfer schemes also face the
frequent legal challenges and slow decisions that characterize the
Philippine judicial system.

9. Comment: The inability of the Philippines domestic shipping
industry to modernize hinders U.S. efforts to promote economic
growth in the Philippines, especially in peripheral regions. The
U.S. has placed particular emphasis on developing Mindanao's
agricultural base, but if Mindanao cannot ship its products at
affordable prices, the scope of business with other parts of the
Philippines will be limited. Maritime reforms could help achieve
economic growth in the periphery regions of the Philippines through
modernizing the domestic shipping industry. End Comment.


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