Wednesday, December 3, 2014

The Logistics of Reform in the Philippines

The forthcoming ASEAN Economic Community (AEC) could help drive economic reform in the Philippines. But policymakers will have to embrace what could be difficult reforms and realise that ignoring them would raise the threat of being bypassed (again) by investment and foreign capital seeking opportunities in the Philippines. In particular, there are restrictions on the logistics chain and trade facilitation that stand in the way of efficient trade in goods and services. These should be lifted or removed.

The AEC commitment on logistics services liberalisation is to allow as much as 70 per cent foreign equity participation in the logistics business. This seems to be problematic for the Philippines. The Philippine Constitution’s 40 per cent cap on foreign equity participation has been raised as an important restriction to investment liberalisation. Relaxing the cap will require amending certain economic provisions of the Constitution — a tedious political process that has been attempted in the last 16 years without success. But there are many other barriers and restrictions affecting the logistics chain that could be addressed in the meantime. While these seem to be relatively easy, sufficient political will has to be mustered to introduce reforms in view of strong opposition by vested interests, sheer inertia or even bureaucratic lethargy.

The government should finalise its initial successful efforts to establish a national single window — a system to simplify the process of obtaining permits and licences for trade. Initial efforts to establish a national single window have been stymied by inefficiency at the Bureau of Customs and weak coordination with other government bureaus that are involved in providing permits or licenses to importer and exporters. It will eventually need to be linked and integrated into an ASEAN single window to facilitate and harmonise trade transactions in the AEC.

Outdated Philippine customs regulations and practices have constrained trade and commerce. Inefficient domestic regulations and permit and licensing practices constrain the efficiency of the logistics or supply chain. These regulations are restricting the free movement of tradable goods. Fortunately, there is hope that tariff and customs administration will be modernised. A proposed legislative bill, the Tariff and Customs Modernization Act, awaits decisive action by Congress. The executive branch of government should impress on legislators the crucial importance of that bill. On a positive note, moves to reform the Bureau of Customs and to erase the stigma of corruption should improve regulations and administrative practices.

In the air transport sector, stakeholders know that insufficient warehousing and ground handling capability in airports is not so much a result of the foreign equity restriction but the lack of physical space in the primary international gateway, the Ninoy Aquino International Airport. There is congestion on the runway and passenger and cargo terminals, indicating severe capacity constraints. An outdated law, Presidential Decree 1466, requires that cargo where the government has financial interest be transported by the Philippine flag air carrier or flag vessels, unless an exemption is issued by the regulators. The decree was enacted in 1978 when the air transport and domestic shipping industries were still being developed and the flag carrier, the Philippine Airlines, was owned by the government. Philippine Airlines has long been privatised and the domestic shipping industry already has numerous players. On the positive side, the revived public-private partnership (PPP) program of the government emphasises improving the quality of air transport. The project to upgrade Mactan-Cebu International Airport (south of Manila) has recently been awarded. The current PPP pipeline includes six airport development projects that are on their way to approval stage and proposed business case studies for the upgrading of the Ninoy Aquino and Clark international airports.

The port sector is also in need of reform to help attract private investment. For example, the present arrangement, where the government port regulator is also the owner and operator of major ports, should be revisited. This discourages private investments in port operation and development. Exporters complain about cabotage restrictions that give them no choice but to use costly domestic shipping options because foreign vessels are prohibited to engage in coastwise trade.

A bill proposing to amend the charter of the Philippine Ports Authority is also pending in Congress. The bills that are getting more attention in legislative discussions are the bills (with two versions at the Senate) proposing to lift cabotage restrictions for the trans-shipment of export and import cargoes within Philippine waters.

There have been efforts to introduce reforms in various areas of trade facilitation and customs administration, including investments in long-needed infrastructure. Policymakers and bureaucrats need to keep these reforms going. There is no reason to relax or procrastinate — especially because the present administration has limited time to undertake these reforms. The next national election will be in May 2016. Some of these initiatives may not be finished by the time the administration bows out of office in 2016. The AEC integration could provide enormous benefits to consumers and producers alike but the pathway to it requires a serious commitment to reform.

Gilberto M. Llanto is President of the Philippine Institute for Development Studies.

Adoracion M. Navarro is Senior Research Fellow of the Philippine Institute for Development Studies.


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