Numbers Don’t Lie
By Andrew J. Masigan
Malaysia-based information aggregator, iPrice, recently published a report that ranked Manila as the third most expensive city to live in in Southeast Asia. According to iPrice, the cost of living in Manila is only a fraction lower than in Bangkok but 28% more expensive, on average, than in Jakarta, Kuala Lumpur, and Ho Chi Minh. Singapore tops the list. The report says that it takes P50,800 to live decently in Manila (and key cities of the Philippines), about three times the salary of an average worker who earns P18,900.
There are two contributory reasons why the cost of living in the Philippines is inordinately expensive. The first is due to our import dependence. Unfortunately, the country’s manufacturing sector has eroded so severely in recent years that we now import the majority of our needs. These include basic food products (including rice), consumer goods, construction materials, machinery and equipment, etc. The second is due to expensive inbound freight cost.
See, international shipping lines have found a loophole to extract more revenues from local traders and manufacturers. They do this by charging what is called, “destination charges.” On top of being exorbitant, destination charges are unilaterally manipulated and controlled by the international shipping lines themselves. There are approximately 50 types of destination charges including bunker price adjustments, import release fees, container cleaning fees, and many more which the shipping lines levy upon the Filipino trader at its own discretion. None of these destination charges are transparent to the importer or the authorities.
Importers from the Philippines have no choice but to pay these destination charges, however unreasonable they may be. Not to do so will cause the shipping lines to withhold the release of their shipment. Don’t forget, the longer the cargo stays in the port with fees unpaid, the more demurrage charges accrue.
This practice is both immoral and illegal. It is immoral because it is extortive and designed to take advantage of the importer’s desperation. It is illegal because the terms, conditions, and fees that govern international shipping are standardized and enshrined in an international agreement called the International Commerce Terminology (Incoterms). Whatever costs are indicated in the Incoterms must be followed, no more, no less.
For instance, if the Incoterms indicate that the shipping arrangement is on a CIF (pre-paid cost of insurance and freight) or CFR (pre-paid cost and freight) basis, the consignee (the Filipino importer) should not be made to pay for any other charges since all costs relating to freight have been prepaid in the country of origin.
But this is not the case for cargo destined for the Philippines. When the shipment arrives at our ports, the local consignee (the Filipino importer) is made to a pay a bevy of destination charges which are arbitrarily levied upon him. So excessive are the destination charges that it is sometime exceeds the cost of freight itself. In effect, our importers pay the cost of freight twice. This is one of the reasons why landed cost of imported goods are more expensive in the Philippines than they are elsewhere in the region. This is also why locally manufactured goods that utilize imported raw materials often cost more than their imported counterparts.
Industry insiders say that it is not uncommon for international shipping lines to pay commissions or rebates to the shipper (the foreign exporter) using funds derived from the destination charges. The shipper, in effect, is able to recoup part or the whole of the cost of freight even if on a CIF or CFR basis. The scheme is manipulative in that it transfers the burden of payment to the Filipino importer whereas the shipper is contractually bound to pay for the freight cost and/or insurance.
Moreover, the freight contract, in a CIF or CFR arrangement, is between the shipper and the shipping line. To levy destination charges on the local importer is a violation of the Privity of Contract Principal.
Government is losing out on its rightful taxes too. Since destination charges are not indicated on the bill of lading, the landed cost of imported goods become undervalued. This leads to a misdeclaration in customs duties.
Exacerbating matters are the undue demurrage charges consignees must pay if they do not collect their containers within the grace period allowed. Consignees are also charged detention charges for failure to return the empty containers to the shipping line within 72 hours from time of pick up. Both charges are computed on a daily basis. They are “undue” because by law, demurrage and detention charges are forms of compensatory damage. But shipping lines charge these as a matter of course even without proving that they suffered loss or damage.
As usual, the beleaguered consignee has no power to question the demurrage and detention charges. Shipping companies impose liens or hold the release of the consignee’s other shipments unless all charges are settled. They also withhold the refund of container deposits for past transactions. These acts are illegal and akin to extortion.
It is government’s duty to curb these abuses inflicted by international shipping lines on the Filipino importer. But the problem is that no government agency has been given the mandate to oversee and regulate the charging schemes of foreign shipping lines. They basically do what they want, to the detriment of the Filipino trader.
Two bills have been filed in Congress to rectify this. House Bill 4316 sponsored by Rep. Bernadette Herrera-Dy and House Bill 4462 sponsored by Rep. Ronnie L. Ong. Although the Transport Committee in the House is already conducting hearings on the matter and a technical working group has been formed, the process is still painfully slow.
We urge congress (and eventually the Senate) to hasten the passage of these bills since it has an impact on the cost of goods for our citizens and diminishes the competitiveness of our manufacturing sector.
Andrew J. Masigan is an economist
Facebook @AndrewJ. Masigan