Border and behind-the-border restrictionsin logistics and trade facilitation in thePhilippines: Some results of regulatory dialogues

Gilberto M. Llanto, Adoracion M. Navarro,Keith C. Detros, and Ma. Kristina P. Ortiz

Philippine Institutefor Development StudiesSurian sa mga Pag-aaralPangkaunlaran ng Pilipinas No. 2013-13 (November 2013)ISSN 1656-5266

PIDS Policy Notes are observations/analyses written by PIDS researchers on cer-tain policy issues. The treatise is holistic in approach and aims to provide useful inputsfor decisionmaking.

The authors are President, Senior Research Fellow, and Research Assistants, respec-tively, PIDS. The views expressed are those of the authors and do not necessarilyreflect those of PIDS or any of the study’s sponsors.

Policy Notes

The establishment of an ASEANEconomic Community in 2015 is envisagedto foster greater cooperation in trade amongthe ASEAN member-countries. The logisticssector1 plays a critical role in trade facilitation.The Philippines’ potential to capitalize onthe gains of regional economic integrationdepends on its resolve to address the reformgaps and challenges that undermine theefficient and effective regulation andmanagement of trade facilitation at theborder and behind the border.

This Policy Note summarizes the findings ofthe Philippine research team in a studyfunded by the Economic Research Institutefor ASEAN and East Asia (ERIA) that probed

the regulatory environment and theremaining border and behind-the-borderrestrictions in logistics and trade facilitationin the region. The study, which was releasedas PIDS Discussion Paper No. 2013-47 titled“Towards informed regulatory conversationsand improved regulatory regime in thePhilippines: Logistics sector and tradefacilitation", also covered customs servicesas these are the forefront services in tradefacilitation. The research methodologyincluded surveys, desk reviews, focusgroups, and triangulation with industry

______________1 The logistics sector consists of logistics services, maritimetransport, air transport, and land transport industries.

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observers. Based on the findings, theresearch team formulated some policyrecommendations intended to guide the wayforward. These are presented in the finalsection of this Policy Note.

Brief overview of the currentregulatory environment

Logistics servicesThe freight forwarding business componentof the logistics services industry is nothighly regulated. The primary regulatoryrequirement for service providers wanting toenter the market is accreditation by thePhilippine Shippers’ Bureau, a unit underthe Department of Trade and Industry. A firmcannot operate a freight forwarding businesswithout a Certificate of Accreditation that isvalid for two years. Prices are not regulatedand entry and exit are dictated by marketforces. Thus, the regulation of the freightforwarding business can be described aslight-handed regulation.

Maritime transportThe regulator is the Maritime IndustryAuthority (MARINA), an attached agency ofthe Department of Transportation andCommunication. The general legislation thatgoverns maritime transport industrycompetition is Republic Act (RA) 9295 or theDomestic Shipping Development Act of2004. This law also provides the legal basisfor cabotage restriction in maritimetransport. Although some regulatorychallenges persist, the sector is more

liberalized and deregulated now than it wasbefore the 1990s.

Air transportThere are two categories of regulatoryactivities in the Philippine air transportindustry: (i) regulation of commercial aircarriers and (ii) regulation of airports andenforcement of air traffic rules. The firstcategory of regulatory activities is beingundertaken by the Civil Aeronautics Board(CAB), which is mandated by RA 776 enactedin 1952 to regulate the economic aspect ofaviation and to issue Certificates of PublicConvenience and Necessity to domestic andinternational airlines that are allowed tooperate in the Philippines. The secondcategory of regulatory activities falls underthe mandate of the Civil Aviation Authorityof the Philippines. It has corporateattributes and powers by virtue of RA 9497enacted in 2008 to restructure the civilaviation system and to promote, develop,and regulate the technical, operational,safety, and aviation security functions underthe civil aviation authority.

Land transportationFor land transport services supporting thelogistics supply chain (e.g., truckingservices), the Land TransportationFranchising and Regulatory Board (LTFRB)was set up under Executive Order (EO) 202series of 1987 as the economic regulator.Economic regulation covers regulation ofroutes and issuance of Certificate of PublicConvenience or franchise to operate. The

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LTFRB also examines the appropriateness ofthe vehicle before granting approval of thefranchise (e.g., if the cargoes would beperishable goods or liquefied petroleum gas,the trucks to be used by the applicantshould be technically equipped to handlesuch items). The LTFRB also regulates themaximum age of utility vehicles (e.g., 25–30years for trucks-for-hire).

The regulation of weight limits is not coveredby the LTFRB’s mandate. The Department ofPublic Works and Highways enforces rules onweight limits, the legal basis for which is RA8794 enacted in 2000 to impose a motorvehicle user's charge or tax.

Customs servicesCustoms services are carried out by theBureau of Customs (BOC) under theDepartment of Finance. The BOC undertooksignificant reform and modernizationprograms between 1992 and 1998 but themodernization momentum was not sustainedin the succeeding years (Parayno 2004). Tosustain the improvements, acomputerization improvement program wasre-introduced in 2005. The program includesthe Electronic to Mobile Customs Project thataims to develop a dynamic and faster end-to-end cargo clearance process through theuse of mobile broadcasting and Internet/electronic data interchange connectivity(Aldaba et al. 2011).

The setting up of a National Single Window(NSW) for customs services is also another

modernization effort initiated in 2005 asdirected in EO 482. The NSW was supposedto be developed in two phases: Phase 1 forpermits and clearances required bygovernment agencies and Phase 2 for theintegration of the BOC database with theNSW. Phase 1 targets to connect 40 agenciesto the NSW. Thirty agencies responsible forthe issuance of permits, licenses, andcertificates have already been connected.The BOC aims to connect the remaining 10agencies, which serve as gateway for dataand statistical information, and integratethe BOC and NSW systems in Phase 2.

Regulatory reforms toward tradefacilitationThe regulatory environment in thepreviously described industries underwentseveral changes over the years. Brieflyhighlighted below are the reforms that arein a more advanced stage and has led tobetter trade facilitation.

The maritime transport industry experiencedsignificant progress in liberalization andderegulation. In the 1990s, MARINA and theexecutive branch of government issuedseveral rules that (i) liberalized route entryor exit and (ii) deregulated shipping rates(Llanto and Navarro 2012).

The major accomplishments in the air

transport industry had been in the aspects ofliberalization and deregulation. Theprivatization of the Philippine Airlines(formerly the national flag carrier) in 1992

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facilitated the liberalization of commercialaviation. The government no longer has anyownership share in Philippine Airlines. Theliberalization of entry and deregulation ofroutes resulted in more players in commercialaviation, especially low-cost carriers. Thereare now four low-cost carriers that have bothdomestic and international services (AirPhilippines, Cebu Pacific, Sea Air, and ZestAir). Three international low-cost carriers arealso flying to and from the Philippines(Jetstar, Tiger Airways, and Air Asia).

Remaining gaps and challengesDespite the reforms, there are still gaps andchallenges that need to be addressed.Described below are some of the remainingborder and behind-the-border restrictionsthat surfaced in the regulatory dialogues aswell as in the research team’s review ofpolicies, rules, and regulations.

Logistics servicesA major investment restriction is the 60:40rule on Filipino equity-foreign equity mixthat also applies to foreign investments indomestic freight forwarding business inaccordance with the Corporate Code of thePhilippines.

An operational restriction provided byPresidential Decree (PD) 1466 enacted in1978 persists. PD 1466 mandates that theexportation and/or importation of allgovernment cargoes, as well as privatecargoes paid from the proceeds of loans,credits, or guarantees from government

financial institutions, must be carried byPhilippine flag vessels. The term "Philippineflag vessels" as used in PD 1466 refers to aircarriers or ships duly registered in thePhilippines and are owned or controlled, orchartered by Philippine citizens or by acorporation or other entity owned orcontrolled by citizens of the Philippines.Exemptions to this restriction have to besecured on a case-by-case basis from theCAB and MARINA.

Maritime transportationForeign vessels generally cannot providedomestic services, as stipulated in RA 9295and its implementing rules and regulations.Exception to this cabotage restriction canonly be allowed under the followingconditions: (i) there is no existing vesseloperating in the proposed route/area ofoperation; (ii) there is no available localvessel to transport the cargo to meet theshipping requirement; (iii) the proposedvessel is contracted by private/publicentities; and (iv) in the case of vesselcarrying or bringing in foreign tourists,operation calls at domestic ports is part ofits itinerary.

The operation and regulation of Philippineports is another contentious issue.Regulatory activities (e.g., setting of ratesfor berthing, anchorage, docking, wharfage,ground handling, break bulk cargohandling, concessions, etc.) are usuallyconducted by port authorities who are alsoin charge of port operation.

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Air transportationAt present, the Philippines has open skiesagreements with two ASEAN countries, VietNam and Thailand. Among non-ASEANcountries, the Philippines has open skiesagreement with China and the United States(US), but both agreements have unevenconcessions for the Philippines. The use ofChinese airspace is restricted by the Chinesemilitary. Philippine carriers can haveunlimited number of flights to only fivepoints in the United States while US carrierscan have unlimited number of flightsanywhere in the Philippines.

Serious infrastructure capacity constraintsalso exist. For example, the Ninoy AquinoInternational Airport (NAIA), the primaryinternational gateway to the country, haslimited runway capacity, landing slots, andterminal space to accommodate the growingair traffic. The 7:00 a.m. to 9:00 p.m. take-off and landing slots are considered “verylimited”.

There are no legislative or regulatorylimitations on foreign aviation firms in theprovision of own or third-party groundhandling, cargo handling, and warehousingservices. The inadequate airport space alsomakes these services unattractive to foreigninvestors.

Land transportThe major behind-the-border restrictions inland transport that impede trade facilitationare traffic congestion and limits on hours of

operation of land transport services. Theserestrictions are highly interrelated becausein the effort to reduce the number ofvehicles on the road and alleviate trafficcongestion, local government units (LGUs)or authorities impose regulations on hoursof operation of vehicles. In Metro Manila,the Metro Manila Development Authority(MMDA) implements the Unified VehicularVolume Reduction Program (UVVRP) thatrestricts both public and private vehiclesfrom using all national, city, and municipalroads in the metropolitan area from 7:00a.m. to 7:00 p.m. based on the last digit ofthe vehicle’s license plate. Prohibition daysdo not include Saturdays, Sundays, andofficial public holidays. Cargo trucks areexempted from the UVVRP but they continueto be covered by specific regulationsconcerning truck bans as imposed by theMMDA and LGUs. In Metro Manila, a truckban is implemented from 6:00 a.m. to 9:00a.m. and from 5:00 p.m. to 9:00 p.m. everyday except Sundays and holidays on specificroads and highways. Although conductpasses for exemption from the truck banmay be granted, these are usually for heavyvehicles only and on a limited basis (e.g.,trucks delivering petroleum or heavyvehicles carrying perishable goods).

Customs servicesSome goods still require import licensing forphytosanitary and quarantine clearancesthat fall under the WTO general exemptionsrelated to public safety, security, publicmorals, and the like. Regulations and

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restrictions on importation do not comefrom the BOC but from other governmentagencies (e.g., Department of Agriculture,Sugar Regulatory Agency, and PhilippineDrug Enforcement Agency) that determinewhether an item is freely importable,prohibited, or regulated.

During the interviews conducted by theresearch team, the BOC representatives claimedthat their main task, in so far as regulationsand restrictions are concerned, is merely toenforce the laws and regulations issued by theagencies regulating the entry of commodities.Meanwhile, follow-up interviews with importersand exporters revealed a very complex processfor getting clearances and permits that leadsto costly delays. Though importer andexporter respondents view the governmentlicensing procedure necessary to ensure thatthe cargoes are safe and legal, they assert thatthe problem lies in the varying requirementsimposed by government agencies and thetedious and time-consuming process ofissuing permits and licenses. They considerbureaucratic “red tape” as a serious source ofdelay that makes obtaining a license complexand costly. Redundancies in requirements havealso been reported. For instance, government

licensing agencies still require importers orexporters to present certain documents thathave been already submitted to the BOC (e.g.,mayor’s permit and tax clearance). Therespondents also suggested that governmentagencies should only require informationdirectly related to the goods being applied forlicenses.

On the use of the NSW, the BOC reported thatnecessary permits from other agencies canbe obtained online but this can happen onlyif the concerned government agency isalready connected to the NSW. Follow-upinterviews with importers and exportersrevealed they welcome the NSW and thecomputerization of the lodgment of entries,which are generally viewed as importantreforms toward greater efficiency intransactions and reduced costs for importersand exporters. However, they think there arestill redundancies because hard copies ofthe documents that are lodged electronicallystill need to be submitted to the BOC. Thispractice defeats the purpose of electronicfiling.

Some recommendations on the wayforwardThe results of regulatory dialogues andanalyses revealed that some of the identifiedborder and behind-the-border restrictions,such as the restrictions related to airportcapacity constraints, traffic congestion, andoutdated customs processes, can be addressedthrough more vigorous investments in thelogistics sector. The other restrictions,

The results of regulatory dialogues and analysesrevealed that some of the identified border and behind-the-border restrictions, such as the restrictions related toairport capacity constraints, traffic congestion, andoutdated customs processes, can be addressed throughmore vigorous investments in the logistics sector.

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however, may not be easy to address andwill require amendments to existing laws andeven enactment of new laws.

Foreign equity restriction in domesticcompanies. As a long-standing challenge,addressing this will require changes in thecurrent Corporate Code of the Philippinesand in the Constitutional provision onforeign ownership. Public discussions of thisissue show how the restriction hasconstrained investments in the country.

Restriction imposed by PD 1466 on movinginternational cargoes. This is anotherobstacle that may need new legislation or atleast an amendment to the existing law. Thisprotectionist policy has led to inefficienttransport of tradable goods due to theabsence of competition. Excluding foreignflag vessels from engaging in transport ofgovernment cargo, or cargo where thegovernment has financial interest, deprivesgovernment entities and local businessmenof options to find the least-cost transportservice that competition will ensure.Competition between Philippine flag vesselsand nonflag vessels will yield better optionsto importers and exporters alike. Besides,the motivations mentioned in PD 1466 (i.e.,to conserve the country's foreign exchangeand to develop the country’s air and watertransport industries) are no longer binding.

Cabotage restriction. Lifting the cabotagerestriction in maritime transportation willalso require legislative amendment. The

cabotage policy is reflected in the Tariff andCustoms Code of the Philippines. RA 9295enacted in 2004 slightly relaxed therestriction by specifying the specialcircumstances when foreign vessels can beallowed to transport local passengers andcargoes within Philippine territorial waters.However, its implementation depends on thediscretionary action of bureaucrats who mayhave differing interpretation of the “specialcircumstances” when such foreign vesselscan be allowed to ply domestic territorialwaters. What is also needed is a clearcompetition policy in the domestic maritimetransport markets.

Independent regulator of ports. The issue of aport operator being a port regulator at thesame time needs to be addressed throughlegislative amendments. The functions of portauthorities are provided for in corporatecharters passed by legislators. There is a needto establish an independent regulator for theports and leave port operation under theresponsibility of port operators.

Infrastructure issues hindering liberal skies

policies. The government issued EO 29 in2011 that opened a few airports to foreignairlines. However, the intention to have amore liberal skies policy is constrained bythe state of infrastructure in these airports.Foreign airlines could not take fulladvantage of the liberal policy due tolimited airport space, landing and take-offslots, navigational equipment, and othercapacity constraints.

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For further information, please contact

The Research Information StaffPhilippine Institute for Development StudiesNEDA sa Makati Building, 106 Amorsolo Street, Legaspi Village, 1229 Makati CityTelephone Nos: (63-2) 894-2584 and 893-5705Fax Nos: (63-2) 893-9589 and 816-1091E-mail: gllanto@mail.pids.gov.ph; anavarro@mail.pids.gov.ph; publications@pids.gov.ph

The Policy Notes series is available online at http://www.pids.gov.ph. Reentered assecond class mail at the Business Mail Service Office under Permit No. PS-570-04NCR. Valid until December 31, 2013.

Imposition of truck bans. Truck bans adds toconveyance costs in the logistics supplychain. Policymakers have responded totraffic congestion in Metro Manila byimposing a truck ban. Traffic congestion maybe relieved and truckers spared the hugetransaction cost imposed on them byconnecting the North Luzon expressway andthe South Luzon expressway through aconnector road that will encourage truckersand freight forwarders to bypass inner MetroManila in transporting their cargoes. Strictenforcement of traffic rules and regulationsis also necessary to ensure a freer traffic flow.

Continued customs modernization. In theregulatory dialogues, a consensus emerged onthe need to do away with redundantrequirements and procedures and to rely onelectronic means of transaction. Customsmodernization should be continued andaccelerated. It will be more efficient tominimize human discretion throughcomputerization and to have various andmodern options for importers and exporters inthe release or shipment of their goods.Customs brokers are, however, wary that the

proposed bill to modernize customsadministration will marginalize their role incustoms and trade facilitation (Llanto et al.2013). This may be addressed throughinformation dissemination on newopportunities that computerization can createfor those that are adept and flexible to adjustto changing market conditions.

ReferencesAldaba, R.M., B.P. Alano, Jr., V.M. Ledda, G.M.

Llanto, and E.M. Medalla. 2011. Toward amore effective ASEAN Economic CommunityScorecard monitoring system and mechanism:Philippines summary report. Unpublished.Philippine Institute for Development Studies.

Land Transportation Franchising and RegulatoryBoard (LTFRB). http://www1.ltfrb.gov.ph/main/aboutus#1 (accessed on March 15, 2013).

Llanto, G.M. and A.M. Navarro. 2012. The impactof trade liberalization and economicintegration on the logistics industry: Maritimetransport and freight forwarders. PIDSDiscussion Paper No. 2012-19. Makati City:Philippine Institute for Development Studies.

Llanto, G.M., A.M. Navarro, K. Detros, and M.K.Ortiz. 2013. Customs brokerage services andtrade facilitation: A review of regulatorycoherence. PIDS Discussion Paper No. 2013-48. Makati City: Philippine Institute forDevelopment Studies.

Lorenzo, E. 1998. The domestic shipping industryof the Philippines: A situation report.Unpublished. Maritime Industry Authority.

Parayno G.L. Jr. 2004. Trade facilitation andcustoms modernization: The Philippineexperience. A paper delivered at the Seminaron Trade Facilitation and Customs Reform inSouth Asia organized by the InternationalTrade Department of the World Bank. http://siteresources.worldbank.org/INTBANGLADESH/Trade-Facilitation-Seminar/20210866/Guillermo%20Parayno%20Trade%20Facilitation%20and%20Customs%20Modernizat.pdf(accessed on March 8, 2013).