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Time to rethink disruptive cabotage laws

Time to rethink disruptive cabotage laws

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The world of global supply chains has grown sophisticated beyond the comprehension of anyone, save for supply chain optimisation experts. The last mile delivery (pick any relevant distance from the last door of e-commerce distribution and your loading dock/home door) has truly arrived. The Concorde supersonic era came and went. But the laws of cabotage are still out there, straight out of the Middle Ages of transportation. They don’t protect much. They hardly benefit anybody. They add to nothing more than additional tax on consumers and the businesses. And they have a good chance of destroying whatever benefits free trade agreements can bring. The Asian enthusiasm for increased commerce, in its traditional form and e-commerce, will have to cope with legacy barriers that show no signs of coming down.

The US has to live with the legacy of Jones Act, now playing an interesting side role in stemming Puerto Rico’s attempts at getting out of the bankruptcy conundrum. You can also laugh all you want about the ‘Brazil cost’. But if you run a supply chain spanning the islands of Indonesia, the islands of the Philippines, or cities hugging the coast of India, you are probably crying looking at the additional costs of using inefficient lines, inefficient schedules, and undifferentiated customer services. Added to high and inefficient port fees, all those costs represent their own form of ‘ASEAN cost’. Cabotage laws were easy to put in place and almost impossible to abolish. For the region trying to become the new factory of the world, the spot until now occupied by China, cabotage laws will hamper that dream for years to come. And they will keep all that free trade liberalisation in check too.

The optimists among us claim the emergence of signs that the cabotage barriers are coming down. Yes, there are some signs, just here and there, and not across the whole region. A ready example can be found in India, where the government introduced a five-year moratorium on cabotage laws for specific types of vessels. Foreign operators of a few types of roro, LNG, and project cargo vessels will enjoy a short period of reprieve that might, or might not, continue after the initial period of relaxation. Where it really counts, in container and bulk trades, the inefficient laws will remain in force. Other economies that could substantially benefit from the liberalisation of shipping, including the Philippines and Indonesia, are not yet showing many positive signs of change.

For the trades allowed in India, let’s be honest, five years in shipping is nothing. It takes time to set up agreements, sign contracts, do necessary work on ports infrastructure, and devise efficient schedules and rotations. Forget making any direct investments in landside infrastructure. The ROA over the period of five years, and uncertain future beyond that, on capital assets would probably make shareholders rebel. If I recall correctly, a similar attempt by India in 1992 lasted a few years and was not renewed. The arguments of maintaining strict cabotage laws to protect strategic assets always run against business reality. Protection from competition invited reluctance to change, discouraged streamlining of operations, and instilled an overall sense of business inertia, not to mention proliferation of small scale operations without any benefit of scale.

A modified form of the same protectionist barriers involves enshrining in law the maximum percentage of foreign ownership in domestic carriers. Yes, foreign money is welcome, but it can buy only a minority stake. In shipping, just like in airlines, the assets are incredibly expensive to acquire and maintain. Operating those assets requires utmost efficiency. The best practices, necessary to achieve and maintain efficiency, take time to develop and master, and require significant investment in technology on land and on the vessels. Can you imagine a super efficient foreign operator investing in a local shipping line without any worry that implementation of those best practices and accompanying technologies can be easily blocked or squandered by the local majority stakeholder? Even if a foreign investor took such risk, a small number of efficient domestic shipping lines worth investment in any one of the ASEAN or TPPA countries would mean that the benefits could only accrue to a few domestic owners of the shipping lines. The remaining companies would be doomed to remain underfunded and inefficient, draining the resources of domestic enterprises and consumers.

Strangely enough, the out of touch cabotage laws are also bad for the governments so comfortable maintaining the status quo. Here, Indonesia provides two interesting examples of not thinking to scale.

Look at tourism. Hundreds of Indonesian islands and coastal cities are as exciting to visit as overdeveloped Bali. The government of Indonesia recognised that tourism, not just coal and agriculture, can provide a substantial stream of revenues. The geography of Indonesia provides a business-perfect environment for a cruise-based industry. The foreign operators of cruise fleets could easily offer high quality services of domestic cruises within Indonesia. Tourism revenue, roughly $1,000 per cruising tourist, should be enough to make national and state treasurers hopping with joy. But wait. The same cabotage laws, making the commercial supply chains so expensive, have equally adverse effect on the government revenue from tourism. Besides Bali, only four other ports will be open to foreign cruise ships.

Look at cargo. Maersk, the most efficient container carrier in the world, has recently announced its willingness to invest $3bn over the next five years in expanding its maritime logistics business in Indonesia. Perfect? Well, yes, subject to Indonesia relaxing its cabotage laws. Because the most efficient container carrier in the world is not going to sink $3bn in minority stakes in some borderline efficient joint shipping ventures controlled, by law, by Indonesian companies. Malaysia provides a good guidance on a smart approach to cabotage. Relaxation of cabotage laws in 2009 resulted in an immediate increase of container traffic of about 50%. Today, thanks to this decision, Tanjung Pelepas is considered a significant threat to Singapore and a major source of government revenues.

With the ‘protective’ layer of cabotage laws being clearly disruptive, the obvious question is if it can be disrupted. As much as I dislike the term ‘uberisation’, is there a way for some form of disruptive services appearing on the market that could unhinge the restrictions? Let’s forget the irrelevant technology promise of cloud and big data so dear to market ‘disruptors’. Let’s think realities.

The key competition to irrelevant cabotage laws normally comes from coastal road and rail networks. India’s congested roads and rail are hopelessly discouraging. Indonesia, Philippines, Malaysia, and Vietnam are not even in the picture. On the other side of the TPPA pond, Mexico and Peru have no alternatives as well. Abandon all hope. Or maybe not.

Did anybody consider circumnavigating cabotage laws with autonomous seaborne vehicles (or should we still call them vessels?). Could they get around the restrictions and give the cabotage enthusiasts a run for their money? Sounds like an unexpected disruptor to me.

If that disruption happened, a second disruption must take place at the sea-shore interface. A port partially or whole owned or funded by the government does not have incentive to make significant improvements to accommodate types of vessels enabled by the first disruption. Maybe laws governing that interface can be challenged and changed, if necessary. Far easier than fighting the cabotage laws.

The third disruption can still come from another direction. Could the establishment of special ASEAN/TPPA free trade zones governed outside of the system — similar to what China did with the Shanghai Free Trade Area — be a good example of how to experiment with different policies?

For commerce, facilitated by ASEAN and TPP agreements, to move and to grow unimpeded, we need to re-think the cabotage laws. The longer they stay in place, the more obstructive, but also they’ll become more vulnerable to disruption. The past wisdom cannot remain the same, because the world around the ‘past’ has changed forever. Bring on the change, or … Uber.

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Kris Kosmala

Kris Kosmala is vice president for Quintiq Asia Pacific. Quintiq is the fastest-growing provider of optimization software solutions for supply chains and logistics.

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2 Comments

  1. Tom Williamson
    October 22, 2015 at 9:48 pm

    It is convenient that the author chooses to write an article beyond the scope of his trade, but which benefits his customer base. Pounds, Yen, Euro,Dollars – it doesn’t matter where you get your money,but what about the seafarers? What about the locals?

  2. Kris
    October 23, 2015 at 4:55 am

    Hello Tom. Removal of barriers in Malaysia increased the volumes, so there the market has not shrank, but in fact increased. The pie has grown, existing shipping companies became more efficient, and the seafarers gained.

    So, I would venture to say that the locals will gain employment with new companies entering the open market, they will learn new vocational skills from them, and gain new employment opportunities. The local companies will have to become efficient, thus reducing the cost of logistics for domestic & international companies, which in turn will stimulate the trade requiring shipping, and increase the overall size of the maritime pie, for locals and for foreign shipping companies alike.

    Let’s remember that the original fight against the AirBnb was that it will destroy the hotels (not to mention sources of revenue for the government from hotel regulation). The results are in: the hotels are where they were (both local and international chains), but they improved services for the travelers choosing to stay there and kept their prices in check, the AirBnb caused more people to travel, & the overall tourism market grew, which then increased the government revenues, just not from the licensing and protectionism of the existing players.