What’s at stake for Sarawak with Cabotage Policy exemption — commentary by DayakDaily

Container vessels in Antwerp, Belgium. — DayakDaily.com file pic. // Photo: Pixabay

By Lian Cheng

In shipping, cabotage laws apply to merchant ships in most countries that have a coastline so as to protect the domestic shipping industry from foreign competition, preserve domestically owned shipping infrastructure for national security purposes, and ensure safety in congested territorial waters.

For Malaysia, the National Cabotage Policy which was implemented on Jan 1, 1980 governs maritime transport within Malaysia. Like any other country, the main objective of the policy is to safeguard and promote the domestic shipping industry.

To allow this to happen, the Merchant Shipping Ordinance 1952 (MSO) was amended and a new clause – Part IIB – was introduced to pave way for the Cabotage Policy.

With the introduction of the cabotage policy, foreign ships are prohibited from transporting goods from port to port domestically.


It means domestic transhipment of goods is solely handled by local vessels or ships owned by Malaysians or corporations, or majority owned by Malaysians, and are registered in Malaysia.

Policy liberalisation

The policy however, experienced two stages of liberalisation before 2017.

In June 2009, there was a partial liberalisation by opening up the domestic container trade between three ports in Peninsular Malaysia and three ports in Sabah and Sarawak.

It was believed that the lifting of the policy which allowed foreign shipping lines to operate in the two states would create healthy competition with the domestic players, and would result in “better services, lower freight rates and lower prices of goods and services”.

The impact of partial liberalisation was minimal after two-and-a-half years of implementation.

While some blamed the cabotage policy for the rising prices of goods, the then Minister of Transport Datuk Seri Ong Tee Keat expressed his view in July 2009 that the Cabotage Policy and shipping costs were not the main cause of the high prices of goods in Sabah and Sarawak.

Other factors contributing to the high prices include weak distribution channels, high handling charges and inefficient inland transportation.

In July 2010, Prime Minister Datuk Seri Najib Tun Razak said the government was willing to review the Cabotage Policy to enable Sabahan manufacturers to export directly without going through Port Klang as the National Load Centre.

The issue was not brought up again until 2012. There was another liberalisation, where passenger cruise ships were allowed to move freely from port to port.

And in cases where it is proven that there are insufficient Malaysian ships to meet domestic demand, especially in the offshore shipping industry, foreign ships were allowed to engage in domestic shipping to meet the current demand.

Endorsement from the Malaysian Shipowners’ Association (MASA) however, would be needed for the domestic shipping licence, as a means to ensure the survival of the local shipping industry, while meeting domestic demands.

The lifting of Cabotage Policy in 2017

Removing the cabotage policy has been strongly advocated by Sabahan economists, businessmen and politicians.

Following their calls, Najib announced the abolishment of the policy on May 7 that cargo vessels heading from Peninsular Malaysia to Sabah, Sarawak and Labuan would be exempted from the cabotage policy effective from June, 1.

Sarawak Chief Minister Datuk Patinggi Abang Johari Tun Openg agreed with Najib’s decision to abolish the cabotage policy as they both believed that scrapping the 30-year-old policy would “reduce the cost of goods and help weather the rising cost of living in Sarawak.”

However, after a meeting between Infrastructure Development and Transportation Minister Tan Sri Datuk Amar Dr James Jemut Masing and Transport Minister Datuk Seri Liow Tiong Lai, an announcement was made on Aug 6 that the Transport Ministry will review the newly announced new policy after a year of observation.

The shippers’ perspective

As expected, the lifting of the cabotage policy has resulted in strong objections from the local shippers through the Sarawak Sabah Shipowners Association (SSSA) and Sarawak Shipowners Association (SSA).

On a whole, they urged the state government to revisit the cabotage policy and conduct an in-depth study on the impact of the exemption before implementing permanent changes that may damage the local shipping industry without benefiting Sarawakians’ welfare and livelihoods.

1. Dispel misconception

The shippers emphasised that there has been a general misunderstanding that the cabotage policy has restrained international vessels to call only at Port Klang, from where other domestic ships will take over, and transport the consumer goods back to Sarawak and Sabah, resulting in “double handling”.

Most people, including the media and decision makers the shippers said, believed that due to “double handling”, consumer goods in Sarawak are generally more expensive than those in Peninsular Malaysia.

According to the shippers, following the two different phases of liberalisation of the cabotage policy, international vessels have been allowed to call at any port in Malaysia.

These foreign vessels, however, are not allowed to do transhipment of fast moving consumer goods (FMCG) from port to port domestically under the present cabotage policy.

The shippers said for the past 20 to 30 years or more, all logs, plywood and sawn timber have been directly shipped from Sarawak to various countries like China, Hong Kong, Taiwan, Japan and others while container carriers and other cargo ships have also been calling on Sarawak’s ports directly from these foreign countries.

In fact, the cabotage policy has been partially liberalised to allow foreign vessels to carry transhipment cargo from major ports in West Malaysia – such as Port Klang and Tanjung Pelepas Port – to Kuching, Bintulu and Sepangar Bay, Kota Kinabalu, without the need for a domestic shipping licence.

The claim of the shippers was in tandem with Masing’s report in the May 2017 State Assembly Sitting where he stated that “a total number of 1,270 foreign vessels were inspected at Sarawak ports between 2013 and 2016”.

2. The cabotage policy likened to state’s Marine and Immigration rights

Under the Malaysian Cabotage Policy, if any foreign vessel wishes to stay and operate in Malaysian waters, including transportation of cargo between Malaysian ports, they need to apply for the Domestic Shipping Licence (DSL) assigned with terms and conditions.

The approval for such DSL is only valid for three months and subject to renewal. It is just like the Immigration Law in that if a foreigner wants to work in Sarawak, he has to apply for a Work Permit.

The shippers said the cabotage policy is like Sarawak’s immigration laws which act as a protective policy against unwanted elements entering the state’s waters.

They stressed that the cabotage policy was imposed by most neighbouring countries like Indonesia and the Philippines and even developed economies such as USA and Japan to prevent foreign vessels from operating within their sovereign waters.

3. The wiping out of local shipping industry

SSSA and SSA pointed out that cargo freight rates, which have been on a steady decline, have forced at least four listed companies on Bursa Malaysia to exit the industry over the years.

Companies such as MISC Group, PDZ Holdings Berhad, Swee Joo Coastal, HubLine and Geniki Shipping were forced to exit the container shipping trade, four of which were listed companies on Bursa Malaysia, leaving only Malaysian Shipping Corporation, Harbour-Link, Shin Yang Shipping and MTT Shipping.

The associations said if the state government were to abolish the cabotage policy permanently, at the end of the one-year trial period, the remaining companies are likely to slowly phase out from the industry.

The shippers insisted that Sarawak’s maritime interests should also be protected as 85 per cent of Malaysian-flagged vessels belong to Sarawak companies or individuals.

4. Unemployment for 18,000 locals

The associations said there are about 3,000 ships registered in Sarawak and based on the minimum manpower of six crew members per ship, a total of 18,000 persons are currently serving as crew members.

They said the number of dependants did not stop there. If they were to include immediate family members, the supporting shipbuilding industry and the docking business, the wiping out of the shipping industry would be affecting more.

It was also pointed out that Sarawak offshore support vessels in the oil and gas sector would also be eliminated given the already depressed situation due to the severe drop of oil prices.

5. The adverse effect on the local shipbuilding industry

Sarawak, especially, Sibu has been known for its private sector-driven shipbuilding industry.

The fact is that out of 100 shipyards in Malaysia, 72 are in Sarawak.

SSSA pointed out that despite the small population of 200,000 in Sibu, there are three maritime related academies including Sarawak Maritime Academy, Sribima Maritime Training Centre and Pelita Academy which can be found in Sarawak.

The academies in Sarawak also produce more seafarers than Peninsular Malaysian academies. As a state, Sarawak has more to lose if the Malaysian maritime industry collapses as a result of the liberalisation of cabotage.

6. The breaking of the supply chain

The associations also pointed out that the elimination of Malaysian operators could result in supply-chain interruptions. For example, companies such as Apollo Shipping which provide important services operating break bulk services between Peninsular and East Malaysian ports carrying both big and small parcels of goods.

The exemption from cabotage will likely lead to larger shippers/exporters fixing their own charters on foreign flagged ships whenever they have bigger parcels. Over time, these break bulk operators will lose their base cargo and be unable to sustain the continuity of their service and eventually exit the trade.

When that happens, shippers will then have major problems shipping smaller parcels because they are unable to fix charters on small parcels of goods. This will result in a major interruption of the supply-chain.

The interruption of the supply-chain ecosystem will cause problems for the populations of Sarawak and Sabah, as the movement and distribution of essential consumer goods will be disrupted to smaller/remote parts of the country.

7. Reducing freight rates has failed to curb rising prices of goods

To ensure their survival and to create any edge in the face of competition from foreign carriers, the shippers claimed that they have already lowered their freight charges by 30 per cent from RM900 to RM600 per 20-foot container five years ago.

And even after the freight charges had been reduced, the move has no impact in reducing the prices of goods.

Presently, due to cabotage protection, the domestic route run by the local shippers is offering a competitive price. It is the view of the local shippers that once the route is open, the international vessels might try to offer lower freight charges to wipe out the local competitors before reverting back to their normal charges.

Therefore, it is likely that shipping costs between Port Klang and Kuching will revert to levels currently charged by foreign flagged carriers on the current non-cabotage service routes when local players are eliminated.

8. The compromising of state and national security

SSSA strongly warned the government not to put state and national security at stake by lifting the cabotage policy as such a move would result in the compromising of state and national security.

Firstly, doing away with the cabotage policy would mean no limitations on foreign ships to stay in Sarawak’s waters where the foreign crews on board can stay as long as their ships stay.

It was also pointed out that the present cabotage policy stipulated that 75 per cent of the crew on Sarawakian ships must be locals. With its abolishment, local ships and vessels would be allowed to employ 100 per cent foreign crews, which could be a possible scenario in view that foreign crews may be cheaper to hire.

Likening training of local crew members as national service training, SSSA stressed that it would be important to employ locals as crewmen who could be used as backups if war breaks out.

Seas or rivers are strategic transportation routes during war time as roads and airports could be destroyed. These trained seamen will be crucial in helping the state or nation either in rescuing, defending or transporting in time of crisis or war.

SSSA claimed that has been the rationale behind the USA President Donald Trump’s decision to revert back to the policy of having 100 per cent American crew on every US ship and vessel.

Citing the example of Indonesia, SSSA asserted that the country at one time also abolished its cabotage policy but resumed it later where its policy stipulated that 100 per cent of the crew of any vessel flying its flag must be its own nationals.

9. Smuggling of subsidised items

With the lifting of the cabotage policy, foreign ships will be allowed to call at as many ports as they want in Sarawak. Unless there is effective marine patrolling and port control in Sarawak’s waters, smuggling of subsidised goods such as sugar, rice, flour, diesel and petrol may be rampant.

Foreign ships may hop from port to port buying up subsided goods. From domestic ports, they may then ship back these commodities to their countries to be sold and make a profit at the expense of Malaysia’s heavy subsidies to standardise prices of goods between rural and urban areas.

10. Other factors influencing the prices of goods

SSA has called on the state government to ‘look at the big picture’ that affects the prices of goods before making a final decision on the cabotage policy.

There are many other factors that may influence the prices of goods. To blame it all on the cabotage policy, to the shippers, has not been an accurate deduction.

The followings are some of the factors leading to the increasing prices of goods.

1. Population distribution and consumption

Based on the statistics released by the Department of Statistics Malaysia, Malaysia has a total population of 31.2 million, and Sarawak only accounts for 8.7 per cent of the total population.

It is understandable that any importer of FMCG or businesses would choose Port Klang as their destination which is well located and connected to a high concentration of the national population.

Even with the abolishment of the cabotage policy, goods will still be imported to ports in Peninsular Malaysia first, before being ‘re-exported’ to smaller markets like Sarawak, simply because it is more cost efficient to do so.

For the case of Sarawak, with its 75 per cent of population still residing in the rural areas, goods imported would be required to be further transported to their final destinations which means more handling or transport charges.

2. The role of middlemen

It has been pointed out that even within Klang Valley itself, the same commodity may be priced differently among outlets belonging to the same chain supermarkets situated in different locations.

A walk around Kuching revealed that there are differences in pricing for the same products in different supermarkets (see chart below):

 

Comparison of prices for basic goods sold at different supermarkets (BDC area) – 19/07/2017

Items Everise H&L Upwell Boulevard
Eagles 5 kg Cooking Oil RM27.30 RM28.00 RM26.99 RM27.30
Knife 5 kg Cooking Oil RM26.85 RM27.45 RM27.45 RM26.85
Neptune 5 kg Cooking Oil RM24.70 RM26.40 RM25.89
Vesawit 5 kg Cooking Oil RM24.11 RM24.99 RM24.35
Eagles 3 kg Cooking Oil RM17.65 RM18.35 RM18.29 RM17.65
Knife 3 kg Cooking Oil RM17.25 RM17.95 RM17.25
Neptune 3 kg Cooking Oil
Vesawit 3 kg Cooking Oil RM15.65 RM16.25 RM17.65
Liansin Fresh Rice 10 kg RM42.90 RM40.50 RM39.69
Liansin Fresh Rice 5 kg RM22.70 RM23.20 RM23.20
Liansin Royal Chrysanthemum10 kg RM43.90 RM44.90 RM43.39
Liansin Royal Chrysanthemum 5 kg RM24.00 RM24.50 RM24.50
Liansin Butterfly Wangi 10 kg RM47.50 RM46.29
Liansin Butterfly Wangi 5 kg RM25.90 RM26.10 RM26.10
Liansin Padi Gedong 10 kg RM30.00 RM27.99
Liansin Padi Gedong 5 kg RM16.90 RM17.70 RM17.40
Liansin 3A Cap Amoi 10 kg RM34.50 RM34.90 RM32.89
Liansin  3A Cap Amoi 5 kg RM19.00 RM19.60 RM19.50
Flour 850 gram RM1.80 RM1.95 RM1.85
Sugar 2 kg RM5.90 RM5.90 RM5.90
Sugar 1 kg RM2.95 RM2.95 RM2.95

 

What is more astonishing is, even for the same supermarket chain, the same type of product might be sold at different prices at its stores in different locations.

For example, Jacob’s biscuits at one location belonging the same supermarket can be sold for RM13.99 per tin, while it is sold in another location for RM13.90.

To assume that abolishing the cabotage policy will result in cheaper consumer goods in Sarawak may not necessarily be accurate.

3. Sarawak road infrastructure

After importing the goods into Sarawak and Sabah, these items need to be transported to the final destination.

Sarawak has a land size of 124,450 sq km. Just for upper Rejang Basin which has yet to be connected by road to bigger urban areas like Sibu, the area has the size of 38,934 sq km, which is bigger than the biggest state in Peninsular – Pahang which has a land size of 36,137 sq km.

Due to its huge size and the fact that the rural settlements are scattered across the whole state where settlements may be found as far inland as Bario Highlands and along coastal areas as far as Kuala Lawas, many settlements are still unreachable by road.

Sarawak’s huge size and the inefficient logistics will inevitably raise the distribution cost, which results in even higher cost of FMCG.

4. Consumer Price Index (CPI)

As compared with year-on-year, March 2017 CPI rose by 4.03 per cent from 111.7 points (March 2016) to 116.2 points (March 2017).

The higher reading in March 2017 was due to higher points for the categories of transport, food and non-alcoholic beverage, furnishings, household equipment and routine household maintenance, health, recreation service and culture, education, restaurants and hotels and miscellaneous goods and services.

As for the higher CPI reading in February 2017 as compared to January 2017, which increased by 0.96 per cent, it was due to higher points for the transport, furnishings, household equipment and routine household maintenance and food and non-alcoholic beverage categories.

In general, all goods are going up because there is a rise in CPI.

5. Weaker ringgit translates into higher cost of goods and excise duty

The weaker ringgit as compared to other foreign currencies is one of the factors which cause prices of goods to be higher as the majority of businesses in Sarawak rely on the importing of products into the state.

For example, for automobile parts and machineries, the business will need to fork out more ringgit to pay for a product priced in a foreign currency which is stronger in order to obtain the product.

Subsequently, the business will incur higher cost and more expenses. As a result, the business will pass on the cost to consumers or the public.

For example, national carmaker Proton Holdings Bhd for one had said it might have to increase its car prices in February due to the rising costs of imported parts due to the depreciating ringgit.

This sentiment was further affirmed by the research wing of MIDF Amanah Investment Bank Bhd (MIDF Research) who highlighted that the weak ringgit is expected to have a more pronounced impact on sector earnings in the forecasts for financial year 2016 (FY16).

The US dollar which has been averaged at circa 3.90 to 4.00 year-to-date had a spot rate of 4.38 in February of 2016.

The analysts also attributed the rising costs of goods and services to the fact that hedges at lower rates would have expired and new hedges would reflect higher exchange rates.

Tan Chong Motor Holdings (Tan Chong) and Toyota as well Honda, the two largest non-national automobile companies with a combined 28 per cent market share, all announced a price increase, claiming it to be inevitable.

6. Goods and Services Tax (GST) and petrol prices

It is a fact that the implementation of the GST since April 2016 has been one of the main factors that pushed the prices of goods up. And every time when the prices of petrol go up, prices of goods are raised, on claims of higher transportation expenses.

In general, as GST of six per cent is imposed on most of the goods, it is understandable that prices of goods are raised.

In addition, some businesses will take the opportunity to mark up the pricing of their products although they can claim the input tax back from the Customs Department. This is done to protect their profit margin as well as generate cash flows as the refund of the input tax might take a longer period than expected.

Indonesian model

In 2005, the Indonesian government introduced its cabotage industry which was aimed at supporting the local shipbuilding industry as well as increasing Indonesian tonnage.

The move came as Indonesia’s shipping industry had been almost wiped out due to foreign vessels plying their trade in Indonesian coastal waters.

The domestic shipping industry is in a much stronger position now than it was before the cabotage. However, continued concerns over its capability to meet the needs of the oil and gas industry as well as improving the standards of Indonesian-flagged vessels will take more time to address as domestic infrastructure and capability catches up.

To facilitate this, attempts have been made to improve and streamline existing infrastructure and laws, as well as enforcement. In some situations, exemptions have been made in accordance to government policy and economic expediency, such as in the oil and gas industry and tourism industry.