VZCZCXRO2376
OO RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHML #1848/01 2170725
ZNR UUUUU ZZH
O 040725Z AUG 08
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1485
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS IMMEDIATE

UNCLAS SECTION 01 OF 02 MANILA 001848 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/MTS, EAP/EP, EEB/IFD/OMA 
STATE PASS USTR 
 
E.O. 12958: N/A 
TAGS: ECON EWWT EINV RP
SUBJECT: Floundering Philippine Shipping 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶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 
summary. 
 
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. 
 
KENNEY