Island hopping for greater trade in the Philippines
Roll-on roll-off terminal systems can increase inter-island trade and economic growth in archipelagic nations.
The Philippines is an archipelago of over 7,000 islands and internal connectivity is a major challenge. Domestic maritime trade costs are high. In the early 2000s, moving a twenty-foot container equivalent from Davao City in the south of the country to Manila costs $1.50 per nautical mile compared to 50 cents when shipped from Hong Kong, China or Bangkok, Thailand.
Against this backdrop, the Philippine government introduced the Roll-on Roll-off (RORO) Terminal System (RRTS) in 2003 as a means of reducing maritime transport cost. The RRTS is a transport system that integrates land highways with sea routes through RORO ships. Cargo vehicles can directly board into RORO vessels with their cargoes and skip cargo handling, which is one of the most expensive and time-consuming processes in maritime trade. This transport system also makes direct deliveries to institutional buyers possible, which implies savings on inventory costs.
There were RORO ships prior to the new terminal system. However, burdensome regulations prevented its wide adoption. For example, in the 1990s, cargo trucks had to pay tariffs when moving from one island to another. Moreover, RORO ships were charged cargo handling fees even when the process is unnecessary.
The Roll-on Roll-off Terminal System introduced reforms that made RORO transport commercially viable, including waiving of cargo handling and wharfage dues; changing freight charging from product classification to ‘lane meter’ — vehicle size and distance traveled; payment of fixed registration fees to port authorities in lieu of revenue shares; providing credit for vessel acquisition and development of ports; and simplifying documentary requirements.
RORO systems are effective in reducing trade costs because economies of scale are very important to the shipping industry, according to my research. The cost of operating a ship drops dramatically as the volume of cargo carried rises. But very few areas in the Philippines outside hubs such as Metro Manila and Cebu City have sufficient volumes to fill container ships on a regular basis. ROROs are better suited to small-scale island trading and can afford to offer more frequent trips with faster turnarounds. Compared to domestic container ships with a median capacity of 375 twenty-foot container equivalent units, a typical RORO ship carries a load of 150 such units when full.
A newly constructed dataset that tracks the development of the Roll-on Roll-off Terminal System over time shows a dramatic growth in routes serviced by RORO ships. There were 34 routes when the program started in April 2003. The network had grown to 113 by 2014 with the largest expansions occurring between 2004 and 2010.
RORO systems are effective in reducing trade costs because economies of scale are very important to the shipping industry.
The system is estimated to have increased inter-island trade by an average 35% in connected ports. Moreover, this growth did not come from displacing trade from neighboring ports not serviced by RORO ships. An important source of the trade growth comes from RORO ports trading a more diverse set of products and exporting to new destinations.
Connected port pairs trade 37% more kinds of products and have 1 percentage point greater probability of shipping to a new trading partner. For example, the port of Dumaguete started shipping tuna, sardines, and cod after RORO connection in 2003. It also started exporting to other ports in Misamis Occidental outside of Ozamis City, its traditional trading partner in the province.
Agricultural products benefited substantially from the Roll-on Roll-off Terminal System. Serviced port pairs trade 60% more types of agricultural products and transact these 56% more frequently compared to their non-RORO counterparts. The lane meter charging modality also confers advantage on higher value products because transport costs do not change with the cargo being shipped.
Forty-five percent more types of products in the highest quartile of the value distribution are traded in RORO pairs, and these are transacted 65% more frequently. The greater frequency of transactions happens because RORO reduces the ratio of trade to inventory cost, making it cheaper to ship more frequently instead of stocking up on inventories. This is a beneficial feature for products that are perishable in nature, and for high-value goods for which the opportunity cost of liquidity is high.
Finally, the integrated land-sea transport nature of RORO implies it is most suited to short distance routes. On the other hand, large container-carrying liners have an advantage in long haul journeys. This suggests potential complementarities between the two modes of shipping. Indeed, trade between liner routes where both origin and destination ports are also serviced by RORO is higher by 52% compared to itineraries where RORO feeder service is missing at one or in both ends.
The Roll-on Roll-off Terminal System is consistently associated with increased inter-island trade. The greater diversity of products and expansion to new trade partners suggest that the program was instrumental in spurring dynamism and growth in connected ports.
Savings in inventory costs are substantial as evidenced by more frequent trade in RORO connected ports. These savings appear to be largest for agricultural products and high value goods pointing to potential benefits in terms of rural development and income diversification. These findings provide insights into alleviating connectivity issues for small island economies.