Cabotage policy an injustice to Sabah: FSI
Published on: Tuesday, September 17, 2019
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Ships berthing at Sepanggar terminal.
Kota Kinabalu: The Federation of Sabah Industries (FSI) is against the controversial Cabotage Policy being reinstated as demanded by the Malaysia Shipowners Association (Masa), saying the policy is detrimental to Sabah’s industrialisation drive. 

The cabotage policy exemption was announced by the government on May 7, and came into force on June 1, 2017.

It said Masa claimed the shipping  industry is a strategic industry that needs special attention for growth but that Sabah’s industries need even more attention since it used to contribute 33 per cent to the State’s GDP until the cabotage was introduced, wherein it dwindled to only 7.3 per cent. 

It said the State’s industries are in urgent need to catch up with peninsula industries in line with the Chief Minister’s drive to prioritise industrialisation.

FSI also noted that proponents of the Malaysia Agreement 1963, touted an international agreement filed with the United Nations, and that the Federal Government should not have imposed the cabotage policy on Sabah and Sarawak, without the approval of the respective State Governments and consent of the respective State Legislative Assemblies.

At the same time, it noted that this is within the realm of politics and law beyond representation in this petition.

FSI said its views are supported by other chambers of commerce, NGOs and the business community in Sabah as the way forward.

It noted that after nearly 40 years of cabotage, the shipping industry failed and it is only fair and timely to have a similar period of no cabotage in the interest of Sabah’s industries.

Further, it said the new industrialisation as envisaged by the Sabah Government will be hampered if the cabotage policy is reinstated due to the anti-competition lobbying by shipowners.

“For more than 30 years, the cabotage policy had, in effect, de-industrialised Sabah as most export related industries had become less viable and losing millions of Ringgits due to adverse effects from cabotage,” it said and cited the case of Datuk Seri Wong Khen Thau, the Life President of FSI and Chairman of Malaysia International Chamber of Commerce and Industry (MICCI). 

One of his companies once made cookers and air conditioners, for export to Indochina and other countries, but had to go through Port Klang due to the policy and subjected to irregular service and exorbitant shipping charges, affecting competitiveness, when direct shipment was more cost-effective if permitted.

This affected revenue collection from taxes from profitable companies and entrepreneurs for the government while the shipping companies were largely exempt from profit income taxation.

It said the excuse that the liberalisation of the cabotage policy has failed to reduce retail prices of goods was flawed. “The shipowners should understand that the forex weakness in the ringgit has great effect on prices on products that Malaysia does not produce like wheat or sugar. 

“More than half of raw materials for the construction industry are imported, creating a surge in prices for the property market when the ringgit plunged against the US dollar in recent years.”

It said for more than 40 years, Malaysian shipowners enjoy protection and yet they failed to grow their business and compete fairly. 

Thus, they are in no position to assure that if the cabotage policy is reinstated, prices will be reduced. 

“The larger public good is to protect the interests of consumers, not shipowners. If they could not for 40 years, there is no assurance that they will succeed in future.”

 Besides, the pessimistic assessment of retail price movement issue is premature as only two years have passed since the policy was suspended and prices were affected by GST regime refund delay, higher minimum wage that employers in Sabah and Sarawak have to bear a higher quantum of increase, increase in fuel and port charges, ringgit value fluctuation etc. 

The normal trend of prices increase, has seldom led to a significant drop, but nevertheless shipping cost is reducing from competition.

It said the current entry of international shipping companies like Maersk Line, the largest shipping firm in the world, after the exemption of the cabotage, have benefited Sabah’s businesses as the charges for sending containers from Peninsular Malaysia to Sabah has been reduced. 

“Unlike other shipping companies, Maersk does not charge fuel bunkering surcharge fees, hence lowering shipping costs. The price difference is almost by the thousand ringgit which is very substantial for cost-conscious businesses facing steep competition,” it said.

The first-year review of the results of the suspension of the cabotage in 2018 reported that there was a slight increase in the number of shipping vessels calling at Sabah’s ports, providing some measure of competition against cartel-like practices in the past on charges which impeded trade aggravating the imbalanced economic industrial development between East and Peninsular Malaysia. 

It is premature to expect price of goods to decrease when the freight cost of shipping only dropped marginally for the first year of cabotage liberalisation.  It said if the issue is be justified solely on the reduction of retail prices, then expert consultants’ recommendations on an effective solution is for the government to implement a freight equalisation programme like that implemented for Tasmania, Australia. That would reduce the price of goods in Sabah.

It said the opportunity cost to Sabah as a result of the cabotage policy was less manufactured or downstream processed products available for export and improved shipping load volume. This led to unemployment  among youths who migrated to work in other cities.

It said the cabotage policy created monopolistic-like shipping cartel that overcharged for irregular shipping services to and fro Port Klang. Most vessels refused to go to Thailand, Vietnam and the Philippines where Sabah manufacturers were desirous of sending goods direct instead of through Port Klang shipment. 

As a result, the import of raw material and machinery for the industrial sector were also more expensive. Higher shipping costs rendered Sabah’s industrial goods uncompetitive compared to other states and countries.

In Sabah’s case, prior to the liberalisation of the cabotage, all container and general cargo ships belonging to Sabah based shipping companies had been sold off and currently there is not one container or goods carrier vessel owned by a Sabah-based shipping company which defeats the purpose of increasing Malaysian ownership of ships to serve the local and international market. 

There were those who claimed Bumiputras in the shipping industry found it more economical to lease foreign ships for their business, which was not in line with the objectives of the cabotage policy. Ship building industry is different from shipping industry. Ship building industry is important to Sabah. The ship building industry will be more competitive and better in an environment without cabotage.

FSI said international expert opinion from the United Nations is worth considering for understanding the issue.

It said among the many expert opinions besides many universities’ thesis papers, the United Nations UNCTAD 2017 report on ‘Rethinking Maritime Cabotage for Improved Connectivity’ is prominent and it states Malaysia removed its cabotage policy for Sabah and Sarawak on June 1, 2017.

The report stated that the “belief that maritime cabotage policy had restricted transport options, resulted in a monopolised shipping industry, and increased the cost of consumer goods has motivated this change. Indeed, goods exported from Eastern Malaysia were left in transit for prolonged periods because shipping vessels travelling out of Eastern Malaysia were unable to carry a full load.

“Consequently, manufacturers in Eastern Malaysia lost their ability to compete successfully in the market. By the time their goods arrive at the port of discharge, the prices of those goods were no longer competitive.

“The delay and issue of vessel frequency also resulted in increased port charges and a risk of cargo theft. Additionally, goods transported from Peninsular Malaysia to Eastern Malaysia passed through a long supply chain before being discharged, resulting in increased freight costs.”

FSI said the lifting of cabotage laws is expected to make Eastern Malaysia ports more accessible, increase trading activities and attract more container traffic routes.

This is what FSI has been fighting for, to promote Kota Kinabalu’s Sepangar Bay Container Port as a hub port, it said, adding Sabah’s export load volumes improved after exemption of cabotage policy.


Sabah exports boom with policy suspension

COMPARING the statistics for 2016, FSI said before the exemption of the cabotage policy, and for 2017, after the suspension of the cabotage policy, showed export volumes for Sabah to West Malaysia, Sarawak and other ASEAN countries were on the increase, as more ships could transport goods on more maritime shipping trips to more ports.

It said Sabah’s export volume to West Malaysia increased by RM3 billion from RM5.6 billion in 2016 to RM8.6 billion in 2017 with imports at RM16.6 billion; while Sabah’s export volume to Sarawak increased by RM507.1 million from RM892.9 million in 2016 to RM1.4 billion in in 2017 with imports at RM200.3 million; Sabah’s export volume to Singapore increased by RM1.7 billion from RM1.6 billion in 2016 to RM3.3 billion in in 2017 with imports at RM866.7 million; Sabah’s export volume to Brunei increased by RM65.9 million from RM199.7 million in 2016 to RM265.6 million in in 2017 with imports at RM47.1 million; Sabah’s export volume to Vietnam increased by RM500 million from RM1.4 billion in 2016 to RM1.9 billion in in 2017 with imports at RM501.4 million; Sabah’s export volume to Thailand increased by RM400 million from RM1.7 billion in 2016 to RM2.1 billion in in 2017 with imports at RM776.9 million; and Sabah’s export volume to Cambodia increased by RM600,000 from RM1.0 million in 2016 to RM1.6 million in in 2017 with imports at RM20 million.

After the suspension of the cabotage policy in 2017, FSI said Sabah’s export volumes to the above destinations have increased by RM6.17 billion in 2017.

It said Sabah’s export volume to Indonesia was at RM1.5 billion in 2017 with imports at RM865.9 million; the Philippines was at RM1.8 billion in 2017 with imports at RM83 million; and Myanmar was at RM1.3 million in 2017 with imports at RM8.6 million.

After the exemption of the cabotage policy, Sabah enjoyed trade volume surplus from the increase in exports in 2017, it said. 

It said a Fellow of The Chartered Institute of Logistics & Transport Malaysia stated that it was an increase of interest from the manufacturing sectors in Sabah arising from an immediate availability of more shipping space with more ships and direct routes.

There is an urgent need to upgrade Sabah’s Sepangar Bay Container Port in the same way Port Klang and Tanjung Pelepas Port in Johor had been funded over the past decades to boost handling capacity to five million twenty-foot equivalent units (TEUs) in the port’s future development to improve the situation.

FSI said a United Nations Conference on Trade and Development (UNCTAD) study showed clearly that maritime transport connectivity is about the nature of maritime connections, including aspects such as the number of regular maritime services, their frequency and reliability. Malaysian ship owners who have enjoyed tax exempted income failed to invest in building up shipping tonnage and improving the market reach of their shipping services by expanding to regional and international destinations.

Maritime transport connectivity is an important determinant of trade costs. More so for island states like Sabah which has no other alternative mode of transport like railway in Peninsular Malaysia connected even to other parts of Asia and Europe.

According to a prominent industry player, the liberalisation was inevitable in the long run, especially if Malaysia wanted to be more competitive.

“Additionally, the move will allow the two east Malaysian states to lure international shipping lines to the country,” he said, adding that it would also benefit the ports in Sabah and Sarawak as well as to the economic development corridors there.

When international shipping lines can go directly to Sabah and Sarawak, they can take suitable cargo for the Far East and the US markets as opposed to coming to Singapore or Port Klang before they go to the Far East or China.


Suspend policy for next 35 years

FSI also said abolishing the policy could pave the way for the Kota Kinabalu’s Sepangar Bay Container Port to become a hub for the Far East and BIMP-EAGA region.

Wong urged ship owners to look forward, not backward, because with the success of the Kota Kinabalu’s Sepangar Bay Container Port as a hub port for this region there will be plenty of business for them when volumes increase.

Relaxing cabotage restrictions can, in some cases and for some products, present possibilities from the perspective of influencing shippers’ distribution strategies, which would positively impact on service quality of shipping lines, port operators and allied industries.

Relaxing cabotage restrictions can help improve maritime connectivity by linking the national, regional and intercontinental liner shipping services. This is because, in the current environment, transhipment and feedering remain key elements of liner shipping operations from the perspective of collecting cargo from spokes ports and transferring it to hub ports and a vital part of filling very large ships.

In recent years, several developing countries have relaxed their cabotage regimes as part of their broader strategies to increase competitiveness, improve connectivity and adapt to the new context and emerging trends.

It is important to highlight that, although relaxing cabotage regulation can contribute to improve a country’s liner shipping connectivity, achieving this objective is a function of several policy reform parameters related to infrastructure and hinterland development.

These include: investing in port facilities upgrade; improving the efficiency of seaport operations; encouraging port competition, including among neighbouring countries’ ports and developing connections between ports and their hinterlands through efficient inland transport networks.

On the Malaysia Competition Commission (MyCC) granting a block exemption order (BEO) for Vessel Sharing Agreement (VSA) by the Masa and the Shipping Association of Malaysia (Sam) rather than to address the problem of monopoly, envisioned to be working towards liberalising the transportation and logistics industry, FSI said a Universiti Teknologi Mara (UiTM) paper stated that the cabotage policy as a nontariff barrier has harmed the domestic economy and is inconsistent with the premise of trade liberalisation agenda.

The effect of cabotage policy limits market access and has formed monopoly in the shipping industry.

The policy might increase efficiency in terms of technology and consolidating resources in one participant of the industry but does not improve the overall welfare of the participants in the industry.

It is suggested that the committee system with members from NGO, private sector, professional and East Malaysia representatives be the primary source of policy making input and that the committee decision be binding.

The cabotage policy began in 1980 (implemented on 1 January 1980, with the Merchant Shipping Ordinance 1952 was amended and the Domestic Shipping Licence Board was established) with the purpose of developing Malaysian ownership and local shipping in general for local shipping companies to gradually expand and reach out into international waters. Since then, many trade liberalisation agreements have been signed among ASEAN countries and others. Are maritime cabotage policy hindering trade liberalisation commitments? It’s noteworthy that China and India are liberalising theirs.

In recent years, several countries have relaxed their cabotage regimes as part of their broader strategies to increase competitiveness, improve connectivity and adapt to the new context and emerging trends.

In India, cabotage regime changes were recently introduced in the context of broader reforms relate to improving logistics for trade and competitiveness, reducing costs.

Since 2013, China has gradually relaxed its maritime cabotage restrictions to boost the transhipment volumes of Shanghai.

The geographical characteristics of some countries means that it is not always possible or desirable for the government to adopt one maritime cabotage approach for the country.

Hence, a liberal maritime cabotage policy may be applied in some parts of the country while a protectionist cabotage regime in other parts of the same country.

Wong urges ship owners in Peninsular Malaysia and Sarawak with many ships, unlike Sabah, to only insist that the cabotage policy be reinstated in West Malaysia, for Sarawak, for their business benefits and leave Sabah out of the blanket cabotage policy, if reinstated will only benefit the rise of Brunei’s Muara Port.

The irony of continual harping on the cabotage policy, Wong noted, is the shipping companies’ claim that they are not making good profit and barely surviving and hence the shipping industry still needs the policy even after about 40 years of its existence.

“If the shipping industry is hardly surviving as claimed and we in Sabah are suffering, especially the industries, then who is actually benefiting from this policy?” he queried.

“Many politicians hardly understand many aspects of the technical issues as our predicament in the industries sector worsen and the adverse multiplying effects of our costing. It is always not easier for people who are not in the import-export industries to comprehend the mechanism involved.”

Experts agree that the cabotage policy as non-tariff barriers, it may have helped to shield foreign competition but it has also harmed domestic economic growth particularly in East Malaysia.

The implications of the cabotage policy causes limited market access and natural monopoly in the shipping industry.

Protectionism is supposed to allow a government to mobilise resources for infant industry to grow. Resources invested in infant industry should improve domestic firms’ learning curve, making them more competitive. After 40 years the ship owners have not grown up, and should other Malaysians’ interests be sacrificed further for their benefits?

The cabotage policy has adversely impacted on slowing down the East Malaysia export-oriented growth. The law of maritime cabotage has three principal variants, namely island cabotage, mainland cabotage and general cabotage.

Any one of these or a combination of all three may be implemented in a country depending on the maritime and geographical characteristics of the country.

Indonesia reverted to implementing a protectionist maritime cabotage law in 2008 but granted exemption to the oil and gas sector. Similarly, India and Malaysia have in the past granted periodic exemptions from their traditional protectionist maritime cabotage law.

The three forms in which maritime cabotage law is applied in different sovereign states are: protectionist, liberal and flexible approaches. Sabah for long time should have the liberal and flexible, not the protectionist approach.

For the European Union, maritime cabotage was liberalized on 1 January 1993. In the case of France, Italy, Greece, Portugal and Spain mainland cabotage was gradually liberalized according to a specific timetable for each type of transport service. Mainland-island and inter-island cabotage for these countries was liberalized in 1999. 

The alternative, which is to design a ‘one size fits all’ framework of cabotage policy, is likely to create more problems than proffer solutions, said the Federation. 

With the Sabah Government’s aim to achieve the goal of making industrialization contribution to the state GDP from 7pc to 35pc as soon as possible, it said it will not be possible if the maritime cabotage policy is reinstated.

“Cabotage policy is not solely about price reduction, but also about fair prices, healthy competition, connectivity, efficient processes and how it affects the growth of the manufacturing and other sectors of the industry,” said Wong.

He said said Sabah must be given enough time period with the implementation of meaningful support steps to realise post-cabotage exemption benefits, just as the partial liberalisation of the policy in 2009 did not yield the intended results as it was not backed by any meaningful supporting measures and there was not enough publicity disseminated regionally and internationally on the announcement and implementation of the cabotage exemption.

 If the authorities refused to totally abolish the policy in force (from 1980 to 2017) for more than 35 years, now suspended, to exempt Sabah, Labuan and Sarawak for the last two years (June 1, 2017-2019) only, he said it is only fair for the government to accord the next 35 years of no cabotage in order for Sabah to benefit optimally by boosting its industrialisation drive to the fullest potential during this period of opportunity.  


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