Breaking Down Barriers in the Logistics Industry in the Philippines

The coronavirus disease (COVID-19) pandemic has directly affected the logistics industry in the Philippines. Travel restrictions and border closures disrupted the flow of goods, including essential medical supplies, and increased the cost of moving cargo. The slowdown in economic activity also meant lower demand.

Logistics companies in many other countries also face the same situation. In the Philippines, however, they also have to contend with challenges that beset the industry even before the current crisis.

A new report from the Organisation for Economic Co-operation and Development (OECD) conducted a competition review and found that the cost of logistics to sales remains high in the Philippines at 27% compared with other Southeast Asian countries, specifically Indonesia (21%), Viet Nam (16%), and Thailand (11%).

The report is part of a series of competition assessment reviews by OECD for the Association of Southeast Nations (ASEAN) to identify rules and regulations that may hinder the efficiency of the logistics market. Supported by the UK Prosperity Fund, the project will publish country and regional reports of its findings.

Logistics performance

The study on the Philippines noted that the country ranked 60th among 160 countries in the World Bank’s Logistics Performance Index in 2018 and 6th among the 10 ASEAN member states. Though it scored relatively well for international shipments, ranking 4th in ASEAN and 37th globally, the index indicated that the Philippines needs to improve on infrastructure, logistics competence, timeliness, and customs.

Citing the Philippine Department of Trade and Industry, OECD said delays in customs processes, congestion, and delays in cargo delivery as the three biggest issues in logistics. It also notes that the government has launched various projects to improve logistics infrastructure under its Build! Build! Build! Program.

A strong logistics sector is vital to sustained economic growth and critical to recovery from the COVID-19 crisis by keeping the supply chain moving. For one, it plays a major role in the efficient transport, storage, distribution, and handling of the temperature-sensitive COVID-19 vaccines.

According to the report, the market for logistics transport services in the Philippines is estimated at $11 billion. The industry accounts for 4% of the gross domestic product, with road transport contributing 40% and maritime transport, 35% of freight transport revenue. Road transport is used mainly for moving goods to and from ports within the country’s many islands. Maritime transport is used both for domestic and international cargo.

The industry also includes freight forwarding and warehouses, where 75% of operators are micro- and small enterprises, and small package delivery services, where demand is being driven by a booming e-commerce estimated at $970 million in 2019.

Policy recommendations

Based on its assessment of relevant Philippine laws and regulations, the OECD report recommended policy reforms and measures to reduce barriers to competition and market entry for road and maritime freight transport, freight forwarding, and value-added services.

“These policy recommendations contribute to reforms that can help the Philippine economy resume sustainable growth and job creation by enhancing competitiveness, encouraging investment and stimulating productivity in the logistics service sector, with knock-on economy-wide effects and benefits for its consumers,” said Greg Medcraft, financial and enterprise affairs director at OECD, in the report.

For freight transport, the study gave the following key recommendations:

• Clarify through legislation that freight transportation is not a public utility and does not require a 40% cap on foreign equity.
• Use a single application process for all licenses and permits for trucks for hire.
• Ensure the independence of port regulators by separating the operational and commercial functions of port authorities from their regulatory powers.
• Allow operators to carry out dry-docking requirements in standards-compliant shipyards overseas.
• Remove any overlapping requirements (e.g., safety certificates).

For freight forwarders, the recommendations include

• a single regulator for the logistics sector regardless of whether air or sea-based transport is used,
• removing indicative rates for freight-forwarding services to discourage price collusion, and
• accreditation of freight forwarders on a national level.

For small package delivery services, OECD suggests the following:

• Allow foreign players in the express-delivery services market.
• Remove minimum rates for postal services or increase transparency in calculating rates.
• Grant a license to every eligible applicant for courier services.

In addition, the study also called for the creation of an online database of all laws and regulations, lifting the capital requirements for logistics providers or imposing the same requirements for both domestic and foreign providers, and digitalization of application procedures.