RO-RO: AN ECONOMIC SUCCESS STORY

UNCLAS SECTION 01 OF 02 MANILA 001802

SIPIDS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON RP
SUBJECT: RO-RO: AN ECONOMIC SUCCESS STORY

REF: a) MANILA 01610, b) MANILA 1788


1. (SBU) Summary: USG policy advocacy and foreign assistance has been instrumental in bringing down the cost of inter-island
transportation in the Philippines, a key constraint to competitiveness in this archipelagic country. As a result of the
liberalization of port policies and promotion of "roll-on, roll-off" (Ro-Ro) shipping, domestic transportation costs have fallen by as much as 40% while small businesses have direct access to shipping services for the first time. The initiative has proven a bonanza for peripheral regions like strife-torn Mindanao, where the increased trade and prosperity makes a positive contribution to the peace process. End Summary.

USAID and Ro-Ro
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2. (SBU) President Arroyo highlighted the Ro-Ro system as one of
her administrations major economic successes in her State of the
Nation speech on July 29 (ref b). Although roll-on, roll-off
transportation has existed in the Philippines for decades, the
current program of promoting the expansion of Ro-Ro as a feasible
inter-island transport option to compete with the cartel of domestic shipping lines began with USAID assistance in 1998.


3. (SBU) USAID assisted a broad range of local interests, consumer groups and policy-makers at both national and local levels to advocate for key reforms for years before President Arroyo finally issued Executive Order 170 (EO 170) in early 2003. EO 170 created a nationwide network of boat terminals and roads to compete with the existing system of inter-island domestic shipping lines. Most importantly, all cargo handling charges and wharf fees were eliminated for Ro-Ro shipping and freight fees were adjusted to reflect only the space occupied by the shipment at the port. The order also simplified documentary requirements and provided incentives for privatization of public ports in the Ro-Ro system. Further policy refinements encouraged greater competition among terminal and route operators and allowed the conversion of private non-commercial ports into commercial operations.


4. (SBU) Note: The USG role in supporting the refinement,
advocacy, and execution of the Ro-Ro network is not common knowledge in the Philippines. For the future success of this and other policy reform initiatives the USG supports, it is important that we NOT promote or even acknowledge our leadership role and give the Philippine Government primary credit for the Ro-Ro program. End note.

Ro-Ro's Impact
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5. (U) The Ro-Ro system, known formally as the "Strong Republic
National Highway" consist of three major routes (the Western,
Central, and Eastern Nautical Highways),at various stages of
development. The Western Nautical Highway, which links Luzon to
Mindanao through Mindoro, Panay and Negros islands, was opened by
President Arroyo in 2003. It is the most heavily traveled route of the system and has delivered great benefits to the Philippine
economy through reduced transport costs and increased trade,
agricultural productivity and tourism. The growth in rural
investment and development due to the Western Nautical Highway is
illustrated by changes in the municipality of Roxas in Mindoro
Oriental. Since 2003, this town has boomed with new commerce and
ecotourism. New investments have generated thousands of new jobs.



6. (U) Philippines business people attribute important economic
improvements to Ro-Ro. Nestle Philippines has begun making direct deliveries to retailers via Ro-Ro connections, allowing it to reduce inventories and close 33 of its 36 distribution centers nationwide. Ro-Ro has been instrumental in the development of tourism to Boracay, and Dapitan. From 2003 to 2006, tourism receipts increased in Dapitan by 200%, in Boracay by more than 50%.


7. (U) In San Jose, an isolated city on Panay Island, small business owners told EconCouns last year that Ro-Ro has reduced their shipping costs by about 40% and made it possible for them to ship goods in small trucks rather than selling to middlemen at lower prices for consolidation into larger shipments. In 2006, the cost of moving fresh fish from Capiz to Manila fell by 31%, the cost of sending electronic components from Manila to Cebu decreased by 46%, and the cost of shipping motorcycles from Manila to Dumaguete dropped by 47%. The cost of transporting agricultural commodities such as fruit, vegetables and fresh fish from a variety of cities in Mindanao to Manila was cut by 33%.

Dramatic Changes in Domestic Trade Patterns
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8. (U) Lower shipping costs have encouraged farmers to trade in new markets and generated additional farm income. Fruits from Davao are now for the first time shipped to markets in Iloilo and Bacolod. Vegetables from Baguio are transported to Iloilo and Caticlan. Fishery product shipments from Estancia to Manila increased from weekly to daily deliveries. Seaweed from Tawi-Tawi, Sulu and Basilian in conflict-affected Muslim Mindanao now reaches the Visayas and Luzon, via the southwestern spur of the Western Nautical Highway.

New Routes to Prosperity in Mindanao
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9. (U) On April 28, 2008, President Arroyo formally opened the
Central Nautical Highway to Cagayan de Oro in northern Mindanao.
This nautical route also connects the Bicol region and Masbate, one of the poorest regions in the country, with the more prosperous and rapidly growing region of northern Mindanao. Promoting economic development in the Mindanao region is a particular focus of Ro-Ro with 17 existing terminals located there and several more planned. All three major arteries of the network land in northern Mindanao and the Nautical Highway continues on down the Sulu Archipelago through the most conflict-affected region of the Philippines to the farthest flung southern Philippine island of Tawi Tawi.

Busting Cartels
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10. (SBU) A January 2008 Policy Research Working Paper of the World Bank found a key reason for the lack of economic development in the Philippines - "inputs are expensive because of elite-capture in the traditional sectors of the economy." Only three significant shippers have traditionally plied Philippine waters. They operate under government regulations that actually mandate collusion on prices, which are then government approved. Ro-Ro is breaking down that oligopoly. As an open system requiring much less investment, barriers to entry are low. With multiple Ro-Ro routes and multiple operators on most of the routes, competition is strengthened. Government pricing policies do not extend to short-haul Ro-Ro shipping. One of the three major shippers, Aboitiz Transport Service, has restructured its business to take advantage of Ro-Ro and the growing market and increased net income on domestic shipping by 130% as a result.

Comment: Policy Advocacy: A High-Return Investment
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11. (SBU) Ro-Ro has already provided a low-cost alternative to
traditional shipping lines, and has begun to expand markets and
opportunities for some of the poorest and most conflict-affected
regions of the Philippines. The system has great potential to
transform and integrate the economies of peripheral places and is an example of what can be accomplished with a small investment in
foreign assistance and policy advocacy. The Ro-Ro success story
shows how USG support for key market reforms can contribute to
dramatic economic benefits. Post is currently focusing similar
efforts on oligopolistic constraints in civil aviation, electric
energy, and other sectors.

Kenney