PHILLIPINE INSTITUTE FOR DEVELOPMENT STUDIES Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
May - June 2003
Vol. XXI No. 3
ISSN 0115-9097
RP domestic shipping industry: Still berthed?* By Myrna S. Austria, Ph.D. PIDS Senior Research Fellow
I
n 1987, MV Doña Paz collided with an oil tanker off the island of Mindoro and more than 4,000 lives were lost. Almost every year after that, sea disasters became frequent news. These accidents have imperiled the traveling public and also put into question the efficiency of the Philippines’ shipping industry.
development. Being an archipelago, ships and boats have been the people’s primary means of interisland transport. An efficient shipping industry that can assure the safe and fast movement of passengers and cargoes to their destination at a reasonable cost can thus pave the way for a better economy for the Philippines.
Unfortunately, such is not the case for the local shipping transport industry, which has been regarded as inefficient for a long time now. This is rather unfortunate as the industry The shipping transport industry plays has a large number of shipping a very important role in the country’s operators where competition is expected to be a powerful force to eliminate inefficiency. Past studies suggest the underlying explanation 9 E-commerce to change Filipino shopping ways has much to do with 10 More jobs in RP due to e-commerce the regulations and 11 The Corporate News: Llanto in the international setting policies of the govern12 Economist relates...RP's persistent mass poverty ment affecting the industry. with inconsistent population policy
What's Inside?
12 BSP urged to reconsider bank branching moratorium to boost microfinance
During the 1990s, the government gradually implemented policy
reforms to address the continuing inefficiency of the industry. In particular, passage and freight rates were deregulated and route entry was liberalized. The effects of these reforms on competition and market structure are examined in this short paper. However, the paper is limited to the interisland liner shipping industry because this is the sector of the industry where regulation is highly concentrated and whose viability is highly sensitive to government policy. In addition, the scope of the analysis covers only shipping transport, which refers to the actual transportation service performed once the commodity or passenger is on board a ship until the ship reaches its destination. Issues on other shipping services, namely auxiliary services (like cargo handling, storage and warehousing, freight forwarding, etc.) and port services (like pilotage, towing ✒3 and tug assistance, navigation * This paper is condensed from the first semester 2003 issue of the Philippine Journal of Development and also appears as PIDS Research Paper Series 2003-02.
DEVELOPMENT RESEARCH NEWS
DEVELOPMENT RESEARCH NEWS Vol. XX1 No. 3 May - June 2003 ISSN 0115 - 9097
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May - June 2003
Editor's Notes For a long time, the Institute has been wanting to feature an article on the country's
DEVELOPMENT RESEARCH NEWS is a bimonthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights the findings and recommendations of PIDS research projects and important policy issues discussed during PIDS seminars.
shipping industry. The need was answered when a study on the industry was under-
PIDS is a nonstock, nonprofit government research institution engaged in long-term, policy-oriented research. This publication is part of the Institute's program to disseminate information to promote the use of research findings.
This issue features a condensed version of her study, which will be also published in
The views and opinions expressed here are those of the authors and do not necessarily reflect those of the Institute. Inquiries regarding any of the studies contained in this publication, or any of the PIDS papers, as well as suggestions or comments are welcome. Please address all correspondence and inquiries to: Research Information Staff Philippine Institute for Development Studies Room 304, NEDA sa Makati Bldg., 106 Amorsolo Street, Legaspi Village, 1229 Makati City, Philippines Telephone numbers 892-4059 and 893-5705 Telefax numbers (632) 893-9589 and 816-1091 E-mail address: publications@pidsnet.pids.gov.ph Reentered as second class mail at the Makati Central Post Office on April 27, 1987. Annual subscription rates are: P200.00 for local subscribers; and US$20.00 for foreign subscribers. All rates are inclusive of mailing and handling costs. Prices may change without prior notice.
taken by one of the female research fellows in the Institute, Dr. Myrna Austria, whose fields of expertise include trade and investment, and development economics. Dr. Austria is currently on leave from her post as Project Director of the Philippine APEC Study Center Network (PASCN).
the first semestral issue of the Philippine Journal of Development (PJD) and as the second title of the Institute's Research Papers Series for 2003. Dr. Austria focuses on the shipping transport subsector of the industry because of its high sensitivity to government policies as well as its being the most protected subsector. She cites that policy reforms have increased competition in the industry but there are still remaining issues which need to be addressed. She also recommends certain measures for the MARINA to ensure that the gains from the reforms will not go to waste. On the other hand, the Corporate News features Dr. Gilberto Llanto, PIDS vicepresident, who has been invited to join a prestigious international network. This recognition reinforces the Institute's image in both the national and international environments as well as boosts the confidence of the Institute's research staff. We are encouraged by Dr. Llanto's personal achievement and share in his accomplishment. Also included in this issue are three short stories on e-commerce, population and microfinance based on the previous studies and presentations of the Institute's affiliated and inhouse researchers. â??
Editorial Board: Dr. Mario B. Lamberte, President; Dr. Gilberto M. Llanto, Vice-President; Mr. Mario C. Feranil, Director for Project Services and Development; Ms. Jennifer P.T. Liguton, Director for Research Information; Ms. Andrea S. Agcaoili, Director for Operations and Finance; Atty. Roque A. Sorioso, Legal Consultant. Staff: Jennifer P.T. Liguton, Editor-in-Chief; Genna J. Estrabon, Issue Editor; Sheila V. Siar, Jane C. Alcantara, Claudette G. Santos, Ma. Gizelle R. Gutierrez and Edwin S. Martin, Contributing Editors; Valentina V. Tolentino and Rossana P. Cleofas, Exchange; Delia S. Romero, Galicano A. Godes, Necita Z. Aquino and Alejandro P. Manalili, Circulation and Subscription; Genna J. Estrabon, Layout and Design.
DEVELOPMENT RESEARCH NEWS
aids, etc.) are not included as these shipping activities have separate issues of their own. Policy environment before the reforms Regulation has a long history in the country’s shipping industry. For liner rates, regulation began in 1928 to protect the public from indiscriminate charging by shipping companies and to protect the investment of liner operators from destructive competition. On the other hand, regulation for route entry was introduced in 1972 to bring capacity and demand to balance. At that time, major routes were overtonnaged while many of the other routes were inadequately served or not at all. The government fixed the rates, commonly called as tariffs. Prior to the reforms, the basic structure of the tariffs remained largely unchanged. Likewise, the revenue deficiency method used in the upward adjustment of the rates guaranteed operators of earning profits, regardless of their performance. Thus, even inefficient firms earned profits. Worse, the method made the level of rates too high over the years. Although government fixed the rates, enforcement was weak. With rates too high and enforcement weak, discounting became the rule. On the other hand, there was a deliberate policy of limiting competition by restricting entry. This was implemented through the “grandfather rules� in the granting of license to operate, namely, prior operatorprior applicant and protection of investment. In general, these rules imply that if demand warrants additional fleet in a route, priority is given to the existing operator to put
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in additional vessel to meet the demand; but if there are several existing operators in the route, priority is given to the first applicant. If there is no existing operator in a route, entry is allowed and the new entrant is protected in his investment by not allowing another operator until he has recovered his investment. Under these rules, however, the past service records of the operator or the new applicant were not taken into consideration.
uniform rate formula for all routes was inappropriate, as it did not consider both cargo inflow imbalances and cargo mixes. Finally, since the passage rates were not permitted to increase in response to inflation, cargo services subsidized passenger services
Impact of prereform regulations How did regulation affect the industry? Several studies have shown the adverse impact of regulations on the industry and the economy. In general, the studies show that the tariff structure suffered from major flaws. First, the rate differentials between passenger or commodity class did not reflect differences in the cost of providing the services for each group; thus, resulting in the discrimination of some commodities and particular routes in the provision of shipping services. Second, the commodity classification was also problematic as rates for some commodities were set too low, thus failing to ensure the availability of sufficient service at all times; while rates for other commodities were set too high to permit them to bear the charges. Third, the application of a
Liberalization and Deregulation Given the adverse impact of the past regulatory system, policy reforms were instituted through the deregulation of rates and the liberalization of route entry. The change in policy was meant to introduce and/or enhance competition in terms of the rates being charged and the quality of service being rendered, and to attract new shipping investments by leveling the playing field for existing and new operators.
The adverse impacts of the flaws in the tariff structure and rate setting have fallen disproportionately on the producers and traders of agricultural commodities. The very low rates for these commodities have limited the appropriate shipping services for them. In turn, the unavailability of sufficient services inhibited the growth of interisland trade and agricultural diversification; and resulted in high storage costs, commodity value losses resulting from deterioration and high charges from the alternative and limited services of trampers and air transport.
Deregulation of shipping rates Deregulation of shipping rates started in 1989. The series of Memorandum Circulars (MCs) issued since then include the following: ) MC No. 46 (1989) Charging of ad valorem rates was abolished; basic commodities
DEVELOPMENT RESEARCH NEWS
were reclassified as Class C; and second-class passenger rates were deregulated (first-class passenger rates were deregulated in 1983); ) MC No. 57 (1990) – Freight rates for refrigerated cargos, transit cargos, and livestock were deregulated. Regulated freight and passenger rates were determined using the fork tariff system where rates were allowed to fluctuate between upper and lower limits from a given reference rate, thus providing some flexibility. The reference rate was +/- 5 percent; ) MC No. 59 (1991) – Reference rate for the fork tariff system was increased by 12 percent for passage rate and by 8% for freight rate; ) MC No. 66 (1992) – Reference rate for the fork tariff system was increased to +10/-15 percent. A mechanism for automatic fuel adjustment whenever prices of fuel increased or decreased by 10 percent was instituted; ) MC No. 71 (1992) – Class A and Class B cargos were deregulated; ) MC No. 80 (1993) – Fruits and vegetables in ventilated containers were deregulated. Vessels accredited by the Depart-
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ment of Tourism were exempted from allocating 50 percent of their passenger capacity to 3rd Class passengers; ) MC No. 117 (1996) – All freight rates were deregulated, except for noncontainerized basic commodities. Deregulated rates were however determined through consultations and negotiations in the Domestic Shipping Consultative Council (DOSCON) composed of shippers/consumers, operators and government representatives; and ) MC No. 153 (1999) – DOSCON process was abolished.
In general, the deregulation of shipping rates has been a slow process. It took the government more than 10 years to gradually deregulate the rates. It was only in 2000 when government intervention
May - June 2003
in rate setting was lessened. With deregulation, shipping companies can now consider traffic imbalances and cargo mixes in setting their rates. The areas that remain regulated can be strategic areas for modernizing the industry. For example, shipping companies can upgrade their vessels and facilities and be accredited with the DOT to qualify them for exemption from allocating 50 percent of their passenger capacity to 3rd Class and enjoy deregulated rates. Also, the exception of noncontainerized basic commodities from deregulation should encourage the use of other shipping technology (like roll-on roll-off or RORO vessels) in transporting these commodities. Route liberalization Route liberalization was first introduced in 1992 based on two principles. One, public interest shall prevail over the “grandfather rules.” Two, presumption of public need is deemed in favor of the applicant for a license while the burden of proof that a proposed service is not needed is with the existing operators. MC Nos. 71 and 80 (1992) opened routes to at least two operators. Monopolized routes were opened to additional operators. In developmental routes, operators were accorded protection for their investment for a maximum of five years, after which, same route was opened to at least one additional operator. This was in stark contrast to the previous regula-
The areas that remain regulated can be strategic areas for modernizing the industry. For example, shipping companies can upgrade their vessels and facilities and be accredited with the DOT to qualify them for exemption from allocating 50 percent of their passenger capacity to 3 rd Class and enjoy deregulated rates.
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DEVELOPMENT RESEARCH NEWS
May - June 2003
companies operate together in eight routes, all originating from Manila (Manila to Cagayan de Oro, Cebu, Davao, Dumaguete, General Santos, Iligan, Iloilo and Tagbilaran).
...When an additional vessel chartered from a franchised operator increased capacity, the original franchise of the vessel was revoked. This policy is again a big contrast to the previous regulation where the license of a replaced vessel was not revoked and, hence, can be rerouted elsewhere.
tion where an operator’s investment in a developmental route was accorded protection for an indefinite period until he had recovered his investment. The change in rule was assumed to encourage the operator to increase his efficiency to recover his investment before competition from additional operator set in. MC No. 106 (1995) further strengthened the initial liberalization efforts. In particular, all routes that had been serviced by an operator for a period of at least five years were opened to additional operators. Also, any operator who pioneered in the provision of a certain technological level of shipping service in a developmental route was allowed to charge freight and passage rates different from the fork rates. When a vessel was replaced to increase capacity, the license of the vessel was revoked to ensure that it would not be used anywhere else and hence, not result in increased tonnage in the routes. Similarly, when an additional vessel chartered from a franchised operator increased capacity, the original franchise of the vessel was revoked. This policy is again a big contrast to the previous regulation where the license of a replaced vessel was not revoked and, hence, can be rerouted elsewhere. Impact of policy reforms on market structure Passenger service To analyze the market structure, the 1998 annual traffic reports of ship-
ping companies were used. These latest data are available and complete. The Herfindahl-Hirschman Index (HHI), measured as the sum of the squares of market shares, is used as an indicator of market structure. The HHI shows that the domestic shipping industry is highly concentrated, with the five largest operators accounting for 90 percent of the total number of passengers. The inverse of HHI shows that out of the 37 operators plying the primary and secondary routes, less than five are effectively competing. The five largest operators are Negros Navigation Company, WG&A, Sulpicio Lines, Philippine Fast Ferry Corporation and Cebu Ferries Corporation. These companies operate in most of the primary routes. However, there is not one route where they operate together. On the other hand, the top three
Fifty percent of the primary routes have at least two operators and the other 50 percent only have one operator (Table 1). Nonetheless, the presence of at least 2 operators does not guarantee competition. Of the 26 primary routes with at least 2 operators, substantial competition existed only in 7 routes while 5 routes were effectively monopolized, as there was only 1 effective competitor. The rest of the primary routes only have mild competition. An example is the Cebu-Bohol route where there are 9 operators but only 3 were effectively competing for the passenger market. Another is the Cebu-Dumaguete route where there were six operators but only three were effectively competing. In the secondary passenger route, 59 percent was monopolized, 13 percent had substantial competition, another 13 percent had mild competition and the remaining 15 percent was dominated by one operator (Table 1). Monopoly, meanwhile, was present in almost 78 percent of the tertiary routes. One operator effectively
Table 1. State of competition, passenger service, 1998a Route classification
Secondary
Tertiary
(%)
Number
(%)
Routes with only 1 operator
26
50.0
27.0
58.7
166
77.6
Routes with at least 2 operators
26
50.0
19
41.3
48
22.4
5
9.6
7
15.2
10
4.7
Routes with only 1 effective operator Routes with substantial competition Routes with mild competition Total number of routes a
Primary Number
Based on Table 4 of the Journal version.
Number
(%)
7
13.5
6
13.0
18
8.4
14
26.9
6
13.0
20
9.3
52
46
214
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DEVELOPMENT RESEARCH NEWS
dominated operation in about 5 percent of the routes. Substantial competition was found in only 8 percent of the routes.
Table 2. State of competition, cargo service, 1998a Route classification
Two-thirds of the primary and secondary routes had at least 2 operators but less than 15 percent experienced substantial competition (Table 2). On the other hand, 77 percent of the tertiary routes were still monopolized. Findings common to passenger and cargo The top five companies in both passenger and cargo services effectively control the primary and secondary routes. Thus, a strong monitoring
Primary Number
Cargo service The cargo service is also highly concentrated. The five largest operators divide 91 percent of the total revenue among themselves. Out of the 66 operators, less than five are effectively competing. The five major players are: WG&A, Sulpicio Lines, Lorenzo Shipping Corporation, Solid Shipping Corporation and Negros Navigation. These companies operate together in only 3 routes, all originating from Manila (Manila to Cagayan de Oro, Dumaguete and General Santos).
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Secondary Number
Tertiary
(%)
Number
(%)
Routes with only 1 operator
25
36.2
16
34.8
444
76.7
Routes with at least 2 operators
44
63.8
30
65.2
135
23.3
Routes with only 1 effective operator
7
10.1
9
19.6
39
6.7
Routes with substantial competition
10
14.5
6
13.0
38
6.5
Routes with mild competition
27
39.1
15
32.6
58
10.0
Total number of routes a
(%)
69
46
579
Based on Table 6 of the Journal version.
is appropriate to ensure that there will be no abuse of market power given the fact that the percentage of routes with substantial competition is relatively small. Likewise, substantial competition is expected in routes common to the top five or three players. However, this is not the case and only mild competition is present in the routes. Furthermore, the substantial competition expected in the major ports because of the large passenger market and volume of cargoes did not occur. Most of the routes originating from Cebu or Manila were either monopolized or had only mild competition. Shipping operators, regardless of size, have their own niche markets. The high concentration in the tertiary
routes does not pose a problem because these are “thin routes� where traffic is insufficient to attract more than one operator. The Maritime Industry Authority (MARINA), however, should monitor said routes to make sure that operators do not abuse their market power to the detriment of passengers and shippers. Intermodal competition The market power in the passenger service is now constrained by competition from both air and land transport. The air transport industry has captured part of the first- and second-class passengers because of the budget airfares particularly during off-peak season. Also, the development of roads and infrastructures in the southern part of the country has made land transport from Manila to the Visayas and even to Davao increasingly popular. The cheaper bus fare provides competition to the Manila-Tacloban, ManilaCatbalogan or Manila-Davao shipping routes. Nonetheless, market power in the cargo service still lies in the hands of the shipping industry. Impact of policy reforms on competition The policy reforms increased competition in the industry. However, this
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DEVELOPMENT RESEARCH NEWS
was only felt in the primary and secondary routes. The increase in competition was a result of the entry of additional operators. Passengers and shippers now have several choices of shipping lines to accommodate the services they need. The immediate result of competition was the improvement in the quality of service. New facilities and amenities on board were introduced while passenger accommodation and ticketing and booking facilities were upgraded.
because it punishes operators who follow regulations. At the same time, overloading puts the safety of passengers at risk.
For cargo services, improvement in quality means the availability of sufficient and appropriate services, which was achieved through improved technology like the use of RORO vessels and containerization or shipment of goods by containers as against shipment by bags. Services in the tertiary routes, on the other hand, remained unimproved because of the lack—if not absence—of competition. Old vessels and motorized bancas are still utilized, thus endangering the lives of passengers. Deregulation has corrected what otherwise were very low rates due to previous regulations. However, during off-peak season, cut-throat competition leads to fare diving. This is true even for regulated rates because enforcement is weak. But the worst-case scenario is when a shipping operator practices fare diving and yet still earns profits by overloading. Discounting of this form adversely affects competition
ally be driven out of the market. Only the efficient ones remain. For instance, there were about 103 shipping companies that operated during the period 1990-1998, 76 of which were established before the reforms were instituted (Table 3). By the end of 1999, only 49 percent of the 76 companies still existed. The remaining number may have either discontinued their operations due to
Competition drives shipping companies to become efficient. Companies whose quality of service is poor, whose costs are high or whose profit margins are excessive will lose their customers to their rivals and eventu-
Table 3. Entry-exit of firms, domestic shipping industry (1990-1999) Year
The introduction of fast craft vessels enabled passengers to crisscross islands and regions in shorter periods. These vessels have also linked their operations with airline companies and big shipping companies through a hub-and-spoke pattern. The latter carry passengers through the primary routes while the fast craft vessel bring the passengers to their secondary routes.
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Companies established before the policy reforms
Companies established after the policy reforms
Grand total
1990
75
75
1991
75
75
entrants
0
0
exit
1
1
74
74
1
1
1992 entrants exit 1993
0
0
0
exit
2
0
2
entrants exit
69
0
69
0
11
11
2
0
2
67
11
78
entrants
0
1
1
exit
0
0
0
67
12
79
0
5
5
1995
1996 entrants exit
9
1
10
58
16
74
entrants
0
5
5
exit
7
2
9
51
19
70
0
3
3
1997
1998 entrants exit
8
7
15
43
15
58
entrants
0
2
2
exit
6
1
7
37
16
53
1999
Sources:
4 71
entrants 1994
Total
4 71
MARINA Route Inventory, MARINA Vessels with Valid Authority per Link, MARINA List of Authorities Issued, Table 15 of the Journal version.
DEVELOPMENT RESEARCH NEWS
stiff competition brought about by reforms or they have been merged with or acquired by other new companies and carried new names. Liberalization of route entry also enabled 27 new shipping companies to enter the industry during the same period. By the end of 1999, however, only 16 or 59 percent survived. What should MARINA do? Under a deregulated and liberalized environment, MARINA should change the manner by which it regulates the industry so as to create the much needed competition and contestability in the market. This is crucial because less competition has been realized, even after the reforms. Instead of just responding to applications for new or expanded shipping services, MARINA should be proactive where the unavailability of services is concerned. It should identify underdeveloped routes, unserviced routes or even those routes where there is shortage of vessels. It should then facilitate investments for these routes by publicly inviting investors. MARINA should also strengthen its developmental functions, particularly its monitoring capabilities. Monitoring should be on a regular basis and not only done when complaints are filed. This is to ensure that the interest of the passengers and shippers are given utmost impor-
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tance and that companies do not abuse their market power. However, for MARINA to exercise its monitoring functions effectively and identify routes requiring adequate shipping services, it must establish a database that is easily accessible to everyone, including shipping operators, investors, researchers, policymakers and the public. The database, at the very least, should include passenger/cargo traffic and freight/passage rates by shipping company and by route, number of operators per route and vessel capacity for route. Conclusion Competition policy should complement deregulation and liberalization. This is to ensure that competition and other benefits arising from the reforms will not be eroded by possible development of market power among shipping lines. One area for competition policy relates to merger and acquisition or consolidation. The country’s shipping industry has seen the onset of mergers and consolidations due to reforms. So far, these have not resulted in the increased market power of merged companies but the real change may occur when consolidation is finally completed. Hence, a policy on merger and consolidation should be defined in such a way that this would not result in reduced service and less competition. In addition, tertiary Source: Marina.gov.ph
May - June 2003
routes should be developed. However, the system of providing government incentives to shipping operators developing tertiary routes should be designed in a way that efficiency as a result of intermodal competition will not be distorted. Another major issue to be resolved is the deregulation of the third class passenger service. It is a fact that 70 percent of the passengers take the third class service, majority of whom are from the C-D crowd. The regulated rate for this service is very low and cannot cover costs. Operation is thus subsidized by cargo revenue. Because most of the cargo rates are already deregulated, passenger-cargo vessels are placed at a disadvantage against pure cargo vessels because cross-subsidization is no longer feasible under a deregulated environment. Given the sensitivity of the issue because of its social implications, any attempt to deregulate the third class passenger service should be carefully looked into. A balance should be struck between social objectives and economic efficiency. Two other significant areas for reforms are the ceiling on the return on investment (ROI) and the application of the revenue deficiency method for upward adjustment of regulated rates. Both of these are anticompetitive. The ceiling on ROI serves as a disincentive for efficient shipping companies because the return may not be commensurate with the level of service rendered. On the other hand, the revenue deficiency method awards inefficient companies because it guarantees returns regardless of the level of efficiency. Finally, the persistent questions are— when can the shipping industry rise to these challenges? When can it prove that it can safely and efficiently sail the Philippine waters? When can it leave port? â??
DEVELOPMENT RESEARCH NEWS
P
icture this. You want to buy a bestseller novel but do not wish to leave the comfort of your home. So you log on to the internet and go to several websites selling books like amazon.com or barnsandnoble.com. When you find the book, you order it online, pay for it with a credit card and have it delivered to your home or office by postal mail. This is the scenario that involves electronic commerce, more commonly known as e-commerce. The transactions are strictly done online and the purchased merchandise is sent by mail—in the United States.
In the Philippines, however, ecommerce will be slightly different. According to Dr. Roberto de Vera of the University of Asia and the Pacific (UA&P),1 e-commerce will have to adapt to the availability of technology and quality of services. Add Filipino culture in the equation, too. The Philippines has one of the lowest number of personal computers (PCs) in Asia, with only 1.1 million PC users (a mere 1.5 %) out of its 75 million population as of 1999. In the same year, there were only 420,000 internet users in the Philippines or less than one-tenth of South Korea’s number. In addition, only 0.9 percent of Filipino internet users shop online compared to 40 percent in Singapore. There is also low credit card usage among Filipinos, poor parcel delivery service, and low teledensity or availability of telephone lines per person or household all over the country, all of which are obstacles to the development of e-commerce in the country. De Vera, however, looks at these barriers in a different light and
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E-commerce to change Filipino shopping ways
predicts that e-commerce in the Philippines faces substantial growth. He cites a report by the accounting firm Merrill Lynch which predicted that “…the Philippine Internet industry could become a major center for e-commerce” owing to its large English-speaking population and its affinity for Western culture. De Vera’s study stated that e-commerce may not have to follow the American model of online shopping, at least in the early stages. One reason is that the Filipino shopping behavior does not only involve search and purchase of goods. A large part involves strolling, eating a meal with family or friends and looking at brightly decorated stores in the airconditioned and pleasant atmosphere of malls. Filipinos also like to touch and smell the items they wish to buy. Another reason is the Filipinos’ fondness for calling and texting using mobile phones. A study by the Taylor Nelson Sofres (TNS) Interactive in 2001 which appeared in the Philippine Daily Inquirer showed that 26.5 percent of the adult population in the Philippines have mobile phones, higher than the 17 percent of the population who have PCs. But the study also cited the limitation of mobile phones to participate in e-commerce because Filipinos use it mainly for communi-
1 Based on his study titled The Employment Impact of Business-to-Consumer E-Commerce on the Philippine Worker presented in a symposium sponsored by the Philippine Institute for Development Studies. The study is funded by the Philippine APEC Study Center Network (PASCN).
cation. It also mentioned the Filipinos’ lack of confidence in Internet shopping due to security concerns. Still, De Vera hopes that the eventual acceptance of mobile phones to access the Internet will help in the adoption of m-commerce using mobile phones to order merchandise online. De Vera also mentioned the increasing trend among young professionals, based on news stories, to purchase goods online as well as the growing popularity and affordability of credit cards. In recent years, there has been an influx of credit card companies lowering their charges to entice a growing market. In order for Philippine e-commerce to flourish, De Vera stated that it may seem to follow the Japanese model because of similarities between Filipino and Japanese buyers. Like their Filipino counterparts, the Japanese are fond of using mobile phones and prefer to use cash over credit cards. Filipinos and Japanese also buy goods from neighborhood stores—the Filipinos from sari-sari stores and the Japanese from the local 7-11 convenience stores. Dr. de Vera revealed that the Japanese engage in e-commerce by setting up e-commerce kiosks in 7-11 branches. They order the products at the ecommerce terminal, wait for the delivery after a week , return to inspect the goods and pay for the items in cash in the store. De Vera said the vast network of drugstores and even sari-sari stores in the country may allow Filipinos to shop and use these stores for the delivery and payment for goods ✒ 11
DEVELOPMENT RESEARCH NEWS
10
More jobs in RP due to e-commerce
A
n estimated 317,734 additional jobs or a 50 percent increase in projected employment levels will be generated in the period 2000-2005 for eleven industries as they cater to the growing market of Filipino consumers who engage in ecommerce or use the Internet to buy goods and services. For the period 1995-2000, these industries were estimated to have generated some 310, 000 additional jobs. These figures were based on a study by Dr. Roberto de Vera, a professor at the University of Asia and the Pacific, which seeks to help policymakers in the formulation of programs that will prepare Filipino workers for the changes that ecommerce will bring. He belies “overly optimistic or pessimistic projections on any new technology” as was in the case of telephones, computers, and automated teller machines. E-commerce consists of transactions where the Internet is used to gather information, order goods and services and make payments. Transactions among firms are called business-to-business (B-to-B) transactions while those between suppliers and customers are called business-toconsumers (B-to-C) transactions. De Vera’s study and projections are based on B-to-C transactions from 11
industries in the country, namely: 1) printing/publishing newspapers, periodicals and books, 2) electrical communication equipment, 3) office/school supplies retailing, 4) dry goods, textile and wearing apparel retailing, 5) tour/travel agencies, 6) forwarding, packing and crating, 7) telephone services, 8) mail/express services, 9) securities dealers/brokers, 10) engineering and technical services, and 11) advertising agencies. The study calculated that as ecommerce continues to grow, total ecommerce-related revenues for the 11 industries will amount to approximately at least P15 billion in 2005. But this figure is very small compared to other countries in Asia (51 times higher) and the United States (325 times higher). De Vera estimates that 2005 revenues from ecommerce will account for only 1.4 to 2.1 percent of gross domestic product (GDP) growth. The figure may be small but Dr. de Vera is optimistic about the strong potential of e-commerce to eventually contribute significantly to the economy. To achieve this, De Vera stated that the 11 cited industries will have to do their business differently in order to expand as the full impact of ecommerce sets in. Among such changes are the way goods and services are transferred because ecommerce allows manufacturers to sell directly, thus eliminating intermediaries or middle men. This will
The study titled “The Employment Impact of Business-to-Consumer E-Commerce on the Philippine Worker” is funded by the Philippine APEC Study Center Network (PASCN) and presented during a symposium sponsored by the Philippine Institute for Development Studies.
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apply especially to the industries in newspaper/periodical publishing; office/school supplies retailing; dry goods, textile and wearing apparel retailing; tour/travel agencies; mail/ express services; securities dealers/ brokers; and advertising agencies. Companies engaged in these services may have to hire more technicallyskilled workers rather than bluecollared workers. Those in the electronic communication equipment; forwarding, packing and crating; telephone services; and engineering and technical services will have to hire both production and managerial workers to meet increased demand for their services as e-commerce gains widespread usage. Dr. de Vera concluded that because e-commerce will benefit the entire economy in the long run, policies that will promote and advance its implementation are needed. He cited the passing of Republic Act 8972 or the E-Commerce Act of 2000 as a first step in that direction but he lamented the fact that almost three years after, lack of infrastructure such as adequate telephone lines remains one of the major barriers to ecommerce. Another is the prohibitive cost of personal computers (PCs). But this may be augmented by the use of alternative means such as cellular phones. In this regard, the continued deregulation of the telecommunications industry should be pursued and more players should be enticed to provide greater competition in order to push the cost of services down. The entry of internet service providers (ISPs) and establishment of cybercafes should also be encouraged. Likewise, investments in information technology should be supported by the government. ❏
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— By Barbara F. Gualvez, Executive Assistant III, Office of the Vice-President
DEVELOPMENT RESEARCH NEWS
THE CORPORATE
News Llanto in the international setting
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May - June 2003
The Corporate News section includes brief accounts of inhouse PIDS activities, staff training and workshop results. It is intended to inform both the readers and PIDS staff members of the various activities participated in by the latter. There are stories that document the staff's effort to improve their knowledge and skills through trainings. Other stories highlight the personal interaction among the staff in the process of carrying out their individual tasks. Most of the time, the stories focus on serious matter while on certain occasions, they simply talk about the PIDS staff having fun. Whatever the topic is about, the objective is to show that each activity is meant to help the staff become better persons and performers in their respective fields so that they can contribute more to the attainment of the Institute's overall mandate.
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IDS Vice-President Dr. Gilberto M. Llanto’s contribution to the fields of agriculture, resources and rural development was recognized early this year by his peers in the international research community. In March 2003, he was invited to join the newly established Rural Development Research Consortium (RDRC) at the University of California, Berkeley as a Research Fellow. The consortium is an international network of scholars and policymakers with the mission of furthering the rural development research agenda. As an RDRC Research Fellow, Llanto will be a priority candidate for collaboration on RDRC research programs and sponsored activities. He will likewise help in the implementation of the consortium’s research priorities. Llanto is currently back in the Institute doing research on microfinance after a fruitful one-year stint as Deputy Director-General at the National Economic and Development Authority (NEDA). ❏
Looking the part: Dr. Gilberto Llanto during one of the Institute's technical workshops held last March 2003. He welcomed the participants to a technical workshop jointly sponsored by the Institute with an international organization.
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ordered online. He also said that buyers can send a text message through their mobile phones to a virtual store for movie tickets, dinner reservations and other goods and services. With this model, the Philippine e-commerce can hurdle the barriers to the growth of e-commerce earlier cited. Equally important in the adoption of the model is the foreseen effect of e-commerce on employment such as reduced loss of jobs once it is fully implemented. The implementation may even create other jobs that will fulfill the needs of online shopping as it becomes more popular among Filipino consumers.
Even so, De Vera stressed that with the penchant of Filipino shoppers to go to malls not only to shop but to relax, e-commerce in the Philippines will be more of a complement to traditional shopping rather than the preferred mode. And only when the level of incomes rises to a level that allows greater use of credit cards does De Vera foresee Philippine e-commerce to begin to resemble the American model. For now, the malls reign. ❏ — By Barbara F. Gualvez, Executive Assistant, Office of the Vice-President
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DEVELOPMENT RESEARCH NEWS
Pernia maintains that the single most important challenge for the Philippines has been, and continues to be, high poverty incidence. He notes that while some observers may point to problems of he lack of clear and consistent poor governance, corruption and population policy starkly sets the political economy or to the shocks Philippines apart from the rest of brought about by trade liberalization and East and Southeast Asia and partly explains its anemic economic growth and WTO rules as the culprit for this high poverty incidence, a counterargument is persistent mass poverty. that other Asian economies, similarly beset by the same problems or circumThis is the major observation of Dr. Ernesto M. Pernia, lead economist at the stances, have nonetheless managed to consistently perform better than the Asian Development Bank, in his policy Philippines. He then explains that in paper with the Philippine Institute for other East and Southeast Asian countries, Development Studies (PIDS) titled Population: Does it Matter—Revisiting an Old sharp reductions in poverty have ocIssue. He adds that, given its soft state and curred as a result of rapid and sustained growth, attributable to sound economic hard church, the Philippines has nepolicies coupled with a strong population glected the population problem, practipolicy. These countries, he says,have been cally just sweeping it under the rug.
Economist relates...
RP's persistent mass poverty with inconsistent population policy
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he Bangko Sentral ng Pilipinas (BSP) should reconsider its policy of general moratorium on bank branching in order to enhance the efficiency and sustainability of microfinance institutions (MFIs). Dr. Mario Lamberte, president of the Philippine Institute for Development Studies (PIDS), states that limiting the entry of microfinance-oriented banks, which is the current policy of BSP, failed to make cooperative rural banks (CRBs) more efficient. He explains that CRBs have a tendency to be more cost-efficient in a more competitive environment where bank density is high. Specifically, Lamberte, in his study, found out that CRBs operating in a province where bank density is low tend to be less costefficient. “It appears that lack of competition does not motivate CRBs to improve their efficiency,” Lamberte points out. Aside from implementing a more comprehensive liberal bank entry and
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This paper appears as PIDS Policy Notes 2002-16.
May - June 2003
benefiting from a demographic bonus resulting from an increasing share of workers relative to young dependents. The Philippines, on the other hand, continues to be burdened by a demographic onus, that is, having a large share of young dependents relative to workers. Recent studies show that economic growth is the key to poverty reduction. Poverty reduction could be further hastened or reinforced by addressing other factors that improve the well-being of the poor through income distribution. Among the critical ones are rural infrastructure, human capital investment, agricultural price incentives and agrarian reform. And “in the Philippine case, which has among the highest fertility in all of Asia, it can be further argued that dealing with the demographic factor will have a direct positive effect on the poor’s welfare apart from the indirect effect via economic growth,” Pernia concluded. ❏
BSP urged to reconsider bank branching moratorium to boost microfinance branching, Lamberte's study also recommends that the BSP should play a more active role in monitoring MFIs that have greater diffusion of ownership because agency problem is likely to occur in these institutions. “Concentration of ownership induces managers to be more efficient since major stakeholders have stronger negotiating power when they face managers and have better incentives to keep track of decisions made by the latter. Conversely, widely diffused ownership of an institution such as a CRB could induce managers to become inefficient,” Lamberte states.
“This seems to be contrary to common belief but it is to be noted that CRBs that received financial assistance from the government have significantly improved their cost efficiency. These were the CRBs which BSP monitored closely,” Lamberte explains. Finally, Lamberte cites the importance of creating efficient and sustainable MFIs because these institutions play a key role in helping alleviate poverty in the Philippines.
“Through microfinance, poor families are able to have access to financial services like savings, credit and insurance facilities. These will give them the Likewise, close monitoring of the CRBs by opportunities to smoothen their conthe BSP, regardless of whether they obtain sumption, manage their financial assistance from the government microenterprises, enhance their incomeor not, can also help in improving the earning capacity and enjoy an improved former’s efficiency. quality of life,” Lamberte maintains. ❏