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1 United Nations Economic and Social Council E/ESCAP/MCT.2/10 Distr.: General 22 August 2011 Original: English Economic and Social Commission for Asia and the Pacific Ministerial Conference on Transport Second session Bangkok, March 2012 Item 3 (i) of the provisional agenda Emerging issues in transport: Inter-island shipping Inter-island shipping Note by the secretariat Summary International maritime shipping across the Asia-Pacific region has developed at a rapid pace, yet provisions for the efficient, reliable and affordable shipping services to, from, between and within island and archipelagic developing countries present a number of unique constraints and challenges. These include long voyage distances, imbalanced cargo flows and low unit values of exports as well as challenges in matching ship size, service speed, port capacity, safety and comfort with low and often irregular traffic volumes. This document considers selected issues and challenges in inter-island shipping as well as some of the means for addressing them. It submits proposals on the work that could potentially be undertaken in collaboration with other development partners to create a better understanding of how to meet the challenges. Contents Page I. Introduction...2 II. Issues and challenges in inter-island shipping...2 III. Addressing issues and challenges...3 IV. Issues for consideration...7 DMR A TP MCT2_10E
2 I. Introduction 1. Efficient, reliable and affordable transport infrastructure and services contribute significantly to economic and social development as well as regional cooperation, integration and cohesion. This applies not only to countries that are located on the same land mass but also to those countries that are separated by water masses or have viable alternative water transport options between them. 2. For island member countries of the South Asian Association for Regional Cooperation (SAARC) including the Maldives and Sri Lanka, for many of the member countries of the Association of Southeast Asian Nations (ASEAN) and for the island developing States of the Pacific, international maritime connectivity is of vital importance. 3. Similarly, at the national level, for countries comprised of many islands including Indonesia, the Maldives, the Philippines and most of the Pacific island countries, domestic maritime transport is the lifeline for local communities. 4. However, many archipelagic and island developing countries are experiencing difficulties in providing regular, reliable and affordable shipping services at the domestic, subregional and international levels. 5. This paper considers various challenges facing archipelagic and island developing countries in providing the shipping services, as well as the interventions used in addressing these challenges. It then submits a number of issues for consideration of the meeting. II. Issues and challenges in inter-island shipping 6. The overall objective of transport policy is to ensure an economically efficient, environmentally friendly, socially acceptable and spatially equitable transport system for the benefit of all the people and businesses located within the jurisdiction of the policymaker. 7. The achievement of this objective is of particular importance to archipelagic and island countries, many of which face a number of specific constraints and challenges related to the demand for and supply of shipping services, as well as the institutional and organizational framework within which the inter-island shipping industry operates. 8. On the demand side, some segments of inter-island shipping can be characterized by low and often irregular traffic volumes, long voyage distances, 1 imbalanced cargo flows and low unit values of exports. On the supply side, there are considerations of ship economics (ship size in relation to volume of cargo, required service frequency, route length, ship speed, physical constraints to ship size at ports and time in ports) and indivisibilities in associated seaport infrastructure, superstructure and 2 1 Many domestic inter-island voyages would represent a major international voyage in other parts of the world and some inter-island voyages in the Pacific region are longer and potentially more hazardous than many intercontinental voyages. Williams, I. and Hoppe, H., Safety Regulations for Non-Conventional Vessels: the IMO Approach; available from (downloaded 27 July 2010).
3 equipment. The consequences of these demand and supply considerations are high transport costs and low profits or chronic losses on shipping operations. 9. These constraints and challenges lead to a vicious downward spiral of events. The inability of ship operators to make adequate profits leads, in turn, to a further deterioration in shipping services, entailing difficulties in securing financing, low levels of investment, inadequate maintenance, ageing fleets, inability to attract seafarers and qualified shipping company management staff, low productivity, poor service quality (frequency and reliability) or unavailability of services, and compromised safety standards. 10. The challenge in addressing these supply and demand issues is to find an entry point in the vicious circle where intervention could be made to turn it into a virtuous circle. 11. These difficulties can be further compounded by constraints in the ship repair industry, including: lack of adequate repair facilities, particularly in remote locations; difficulties in obtaining spare parts, especially for aged equipment and machinery; high costs of repairs and low standards of workmanship in ship repairs. 12. In addition, there are various institutional, organizational and cultural constraints that impact the sector, including: maritime legislation failing to meet international standards; the legislative environment not being conducive to enforcement of ship mortgages or maritime liens; ships being uninsured or uninsurable; limited enforcement of safety standards; inadequately trained seafarers; lack of transparency in the operation of government-owned fleets and in awarding and monitoring of route licenses and contracts for subsidized shipping services. III. Addressing issues and challenges 13. In recent years, significant progress has been made in addressing many of the issues and challenges related to the maritime transport in island and archipelagic countries. 14. For many years, inter-island shipping of archipelagic countries such as Indonesia and the Philippines was highly regulated. This, in turn, reduced the efficiency and quality of inter-island shipping services. However, in the Philippines, Republic Act No of 3 May 2004 authorized domestic ship operators to establish their own domestic shipping rates and in Indonesia, Presidential Instruction (INPRES) No. 4/1985 effectively allowed shippers and operators to fix freight rates on a mutually agreed basis. 15. In the Philippines, a 919-kilometer road-cum-sea highway or Strong Republic Nautical Highway has been developed which connects land and sea routes using roll-on roll-off (RO-RO) passenger and cargo vessels, ferries and fast craft, and in Indonesia there have been calls to extend the concept of ASEAN connectivity to domestic inter-island shipping services. 3
4 16. At the subregional level, ASEAN was able to state in its Roadmap towards an integrated and competitive maritime transport in ASEAN that ASEAN Member Countries have further developed what has for some time been a fairly open market for shipping services to, from and within ASEAN. With the exception of cabotage limitations, there are few restrictions on where ASEAN (or non-asean) ship owners may operate, or what cargoes they may carry In the Pacific, the Regional Maritime Programme (RMP) of the Secretariat of the Pacific Community (SPC) has, since 1987, been providing technical advice and capacity-building services in the areas of maritime law and legislation, maritime policy, maritime training, maritime security, compliance monitoring, strengthening national maritime institutions, upgrading maritime training curricula, information and knowledge dissemination and the development of a regional integrated maritime database. Specific activities have included audits of Maritime Training Institutes for STCW-95 (International Convention on Standards of Training, Certification and Watchkeeping for Seafarers) and ISPC (International Ship and Port Facility Security Code); drafting of maritime legislation 3 and the development of the RMP regional generic Pacific Maritime Laws (PIMLaws) The Pacific Islands Forum Secretariat (PIFS) has also been active in the maritime transport sector and, among other things, initiating the Pacific Regional Transport Study, the follow-up Forum Principles on Regional Transport Services, the Pacific Plan for Strengthening Regional Cooperation and the Integration and the Small Islands States Shipping Service Initiative, which established an agreement to provide regular shortterm shipping services using Kiribati Shipping Services Limited vessels to Fiji, Kiribati, Nauru, Tuvalu, Wallis & Fatuna. 19. The transport advisory services previously connected with the Pacific Islands Forum Secretariat (PIFS) became part of the Regional Transport Sector Programme of the SPC from January 2010, replacing the SPC s Regional Maritime Programme (RMP). 20. More recently, the Pacific transport ministers endorsed the Framework for Action on Transport Services (FATS) and the Transport Services Implementation Plan (TSIP) at their meeting in Noumea, New Caledonia in April The TSIP includes a set of activities at the regional and national levels to address the transport issues and challenges facing the Pacific island countries. It also assigns responsibilities for various activities as well as indicates their priority and specifies whether funding is available. 22. For many activities in the areas of governance, maritime safety and security, climate change, data collection, and monitoring and evaluation, Roadmap towards an integrated and competitive maritime transport in ASEAN, adopted by the Thirteenth ASEAN Transport Ministers (ATM) Meeting, Singapore, 1 November See University of the South Pacific School of Law, Pacific Islands Legal Information Institute ; available from (accessed 27 July 2010). PIMLaws consist of four volumes covering administration, ports, pollution and shipping. Importantly, the PIMLaws are consistent with International Maritime Organization Conventions, customary international law and state practices.
5 organizations such as SPC, the International Maritime Organization and the International Civil Aviation Organization, as well as international financial institutions and bilateral donors have comparative advantages arising from their proximity, areas of specialization and availability of funds to undertake resource intensive projects. 23. Consequently, the secretariat has examined the TSIP and identified a number of economic policy entry points where interventions could be made to turn the vicious circle into a virtuous circle. These entry points have been found in areas that were underfunded or not funded at all, were not mentioned in TSIP but were included in other mandates or were solely national responsibilities that could have benefited from the sharing of experiences at the regional level. 24. The areas considered included franchising of domestic shipping services, regional cabotage and regulation of entry into international trade. Franchising of domestic shipping services 25. At the national level, theme four of the TSIP includes, as national responsibilities, activities on a Maintenance fund for promotion of sustainable subsidies and to Examine franchise or subsidy schemes for uneconomical routes. The issues related to these activities are common not only for Pacific island countries but also for other archipelagic and island developing countries. Indonesia, for example, has a system of Public Service Obligations and Pioneer Services. Consequently, the secretariat could assist in the sharing of experiences in franchising of domestic shipping services. Regional cabotage 26. The FATS, developed under the aegis of SPC, is underpinned by the Forum Principles on Regional Transport Services and the Pacific Plan. 27. The Pacific Plan, endorsed by the Leaders at the Pacific Islands Forum meeting in 2005 and subsequently revised in 2007, is based on a concept of regionalism, meaning that countries should work together for their joint and individual benefits. As noted in FATS, the Pacific Plan calls for a more coordinated approach in order to enhance economies of scale and effectiveness in addressing regional transport services Further, the Forum Principles on Regional Transport Services, adopted by the Forum Economic Ministers in 2004, declared a number of principles as central to improving the efficiency, effectiveness and sustainability of air and maritime services. Among other things, these included that Increased efforts should be made to implement regional or subregional solutions to problems in the transport sector through, for example: (a) strategic alliances; (b) liberalization of the economic regulatory environment; (c) agreement by Forum Island Countries to regional cabotage, where they could benefit from more services and greater competition. 5 The Pacific Plan also noted that the economies of scale must be balanced against diseconomies of isolation. The best approach may in some instances be subregional or a grouping of a few countries. 5
6 29. Maritime cabotage, or reservation of domestic trade of countries to carriers of that country, has become a complex and sometimes emotional issue. The principle reason for its complexity is that it has significant impact on stakeholders with contradictory vested interests. Shippers and consumers have an interest in service quality and low prices; ship owners have an interest in profitability; workforces have an interest in income, employment levels and working conditions; providers of services to the shipping industry (including shipbuilders and repairers) have an interest in profitability and employment; and governments have various economic, social and national security responsibilities and interests that they are expected to address. Given the conflicting nature of these interests, considerable difficulty is experienced in reconciling them. 30. While maritime cabotage is a complex issue, recently, a number of subregions have shown a willingness to at least consider, if not implement, regional cabotage policies. 31. The most notable region is the European Union, where regional maritime cabotage has been in place since ASEAN has also adopted a Roadmap towards an integrated and competitive maritime transport in ASEAN which, among other things, included in its policy agenda a Single Shipping Market that presumably contained a consideration for a regional cabotage policy. However, a decision on the subject was postponed, when the thirty-first ASEAN Senior Transport Officials Meeting, held at Siem Reap, Cambodia from 24 to 26 May 2011, agreed to exclude domestic shipping and cabotage from the scope of a Master Plan Study and Feasibility Study on Global/ Domestic Shipping together with a Feasibility Study on an ASEAN RORO Network that had been proposed in the Brunei Action Plan (ASEAN Strategic Transport Plan) Some subregions have shown an interest in the potential benefits of regional cabotage, however, there is still a lack of an empirical basis upon which to base policy decisions. Depending on the availability of the necessary data, the secretariat could undertake studies to assess the impact of regional cabotage policies on various stakeholders thereby providing policymakers with a framework for future policy decisions on the same issues. Regulation of entry into international trade 34. At the international level, the main economic shipping policy of Pacific Island Countries has been regulation of entry. One example of this is the Micronesian Shipping Commission (MSC) of the Republic of the Marshall Islands, the Federated States of Micronesia and the Republic of Palau (Saipan and Guam are nonvoting members). The Central Pacific Shipping Commission (CPSC) comprised of Kiribati, the Marshall Islands, Tuvalu and Nauru was also officially launched on 4 August The reaction to these Commissions has been mixed with, on the one hand, SPC suggesting that, in their absence the very close collaboration amongst shipping companies render little or no competition and on the 6
7 other hand, studies by AusAID and the Asian Development Bank have questioned the need for such arrangements. 6,7 36. Other approaches, especially for the small Island States, have been considered, including the development of hub ports in Fiji, Papua New Guinea or the Solomon Islands. As mentioned above, the Kiribati Shipping Services Limited signed an agreement with the governments of Nauru, Tuvalu, Kiribati and Wallis and Futuna on 13 May 2009 to provide regular feeder shipping services to those countries. There is also a similar proposal for the Samoa Shipping Corporation Ltd. (SSCL) to provide services to Tokelau, Niue and the Cook Islands. 37. As with all regulatory regimes, there is a need to maintain a careful balance between competition within the market and contestability for the market. In this regard, there is a need to effectively monitor both the demand for and supply of shipping services in order to ensure that maximum benefits to consumers of such services are realized. For these reasons, there may be merit in undertaking studies to assess the effectiveness of such regulatory regimes, as well as to investigate other means of developing shipping services such as hub-and-spoke systems. IV. Issues for consideration 38. The provision of efficient, reliable and affordable shipping services to, from, between and within island and archipelagic developing countries presents a number of unique constraints and challenges. These include long voyage distances, imbalanced cargo flows and low unit values of exports as well as challenges in matching ship size, service speed, port capacity, safety and comfort with low and often irregular traffic volumes, In some cases, these challenges lead to unprofitable routes or cherry-picking of the most lucrative or profitable shipments leaving the less attractive shipments to others. This results in a vicious downward spiral as the regularity, reliability and affordability of services deteriorates. These challenges can arise domestically, subregionally and internationally. 39. Governments are invited to provide guidance on the following elements suggested for inclusion in the Regional Action Programme for Transport Development in Asia and the Pacific, phase II ( ). Immediate objective: to assist in identifying possible approaches to enhancing the regularity, reliability and affordability of the shipping services of archipelagic and island developing countries. 6 7 On the routes, operators are required to provide a specified number of voyages during the contract period. The route also includes calls at nominated destinations although the order of rotation is not specified. Vessels in the size range of 220 to 300 gross tons are considered acceptable in terms of safety, comfort and carrying capacity. Proposed call frequencies were between one and two voyages per month. As part of the service monitoring system, vessels will be required within a set period after the completion of a voyage to submit details of the voyage, including passenger lists and fare revenue collected; freight and tariffs collected; logbook entries showing vessel positions, arrival and departure times; and fuel use. A record will be required of each call at a specified location, counter signed by an authorized signatory, usually a nominated individual such as teacher, post master, health worker or local government official. 7
8 Outputs: 1. Studies, capacity-building activities and policy recommendations on effective strategies for securing regular, reliable and affordable inter-island shipping services for the consideration of archipelagic and island developing countries; 2. Advisory services and technical support to member countries, upon request, regarding the implementation of policy measures to support inter-island shipping. Indicators of achievement: 1. Measures taken by member States to incorporate recommendations on inter-island shipping in line with the secretariat s proposals and policy advice. 8
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