The cabotage conundrum

This article first appeared in The Edge Malaysia Weekly, on April 17, 2017 - April 23, 2017.
The cabotage conundrum
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THERE is a lot of trepidation and confusion over the possible plan by the federal government to review or even scrap the cabotage policy for vessels carrying goods into and from Sabah.

Much of this anxiety came about in mid-February when Minister of Transport Datuk Seri Liow Tiong Lai said at the Sabah Ports Forum that the cabotage policy for the state will be reviewed “to ensure affordable cost of goods and services”.

However, at the same forum, he also clearly admitted that the policy — often blamed for the higher cost of goods in Sabah and Sarawak — is not the culprit, as shown by a study undertaken by the World Bank.

“According to the study, the high costs [of goods and services] are the result of weak distribution channels, high handling charges and inefficient inland transport,” Liow was quoted as saying in a local daily.

This raises the question of why the cabotage policy in the state is being reviewed.

Some say it is politically related. “The federal government, seen to be looking into the welfare of Sabahans, would look good, especially in an election year,” one market watcher says.

However, most people in Malaysia are not familiar with the policy, let alone those in the interior of Sabah. So, will such a move bear fruit?

According to sources familiar with the matter, studies by the Economic Planning Unit, Maritime Institute of Malaysia, Malaysia Shipowners’ Association and Performance Management and Delivery Unit — a unit under the Prime Minister’s Department — have had similar findings as the World Bank study — that the cabotage policy is not the reason for the higher cost of goods and services in Sabah.

To recap, the policy, which requires the domestic transport of goods to be conducted by Malaysian-registered or Malaysian-flagged vessels, was implemented in early January 1980. It is aimed at protecting and promoting the national ship-owning industry.

Since then, the policy has largely remained in force, although it has seen partial liberalisation. In 2009, the carriage of containerised transhipment cargo between certain ports was given the green light. Then, in 2012, passenger cruise ships were given exemption.

Is the cabotage policy the reason for the higher cost of living in Sabah?

Shipowners say the real culprits are poor road infrastructure, lack of industrialisation and the traders in the state seeking higher margins as a result of lower volumes.

“I suggest they (the Sabah traders) expand their market to Indonesia and the Philippines, both of which have larger populations. This way, they need not mark up their prices so much as there is a larger market,” says a shipowner.

Checks with shipowners reveal that the cost of freight for a 40ft container from Port Klang to Kota Kinabalu has been on a downward trend since 2012.

In 2013, the cost of freight — inclusive of bunker adjustment but excluding terminal handling charges — was between US$1,400 and US$1,500. Last year, it plunged to US$800. At present, the rates are below US$1,000.

Further checks with shipowners reveal that the shipping rates for the 1,188 nautical miles between Port Klang and Kota Kinabalu are lower than those for Singapore, which is located 993 nautical miles away; Hong Kong, 1,096 nautical miles; and Kaohsiung in Taiwan, 1,047 nautical miles.

“On average, the cost of freight from Port Klang to Kota Kinabalu is 34% cheaper for a 20ft container and more than 70% cheaper for a 40ft box,” the shipowner says.

Perhaps it is because they have had to grapple with the low prices that several local container shipping companies — Swee Joo Bhd, Hubline Bhd and, more recently, PDZ Holdings Bhd — have been financially distressed.

While Sabah may not have much investment in the maritime sector, neighbouring Sarawak — with its vast river transport network — has a thriving maritime industry. Some of the larger shipping-related companies from Sarawak are Shin Yang Shipping Corp Bhd, Sealink International Bhd and Sarawak Slipways Sdn Bhd.

“These companies have owners who are politically well connected as well. It’s not just Sabah politicians one has to deal with … think of the big names in Sarawak,” the shipowner says.

So, will the federal government risk reviewing the cabotage policy for Sabah and adversely impacting Sarawakian companies?

Meanwhile, the fact that the policy for Sabah is being reviewed is odd as Indonesia had implemented a cabotage policy in 2005 after its domestic shipping industry almost went under as a result of foreign companies dominating coast-to-coast shipping.

In the US, the Merchant Marine Act of 1920, or more popularly known as the Jones Act, requires all goods transported by water between US ports to be carried on US-flagged or US-registered ships owned by US citizens and crewed by US citizens and permanent residents.

“In times of national crises, Malaysian-flagged vessels will play a significant role, for example in delivering medical supplies or other aid, which cannot be left in the hands of foreigners,” says the shipowner.