Port tariffs and price increases

By Dean Dela Paz

The issue has been festering since the Philippine Ports Authority (PPA) allowed increases in port tariffs on various shipped goods far beyond the rates of inflation reflected in the basket of goods that comprise the Consumer Price Index (CPI). Costs of doing business, from the capitalization of an enterprise to its operating expenses, its debts, its costs of equity, the returns on these, and the fees and tariffs paid eventually impact on the vulnerable consumer.

At the end of the value chain, consumers pay the price of policies decided far above their heads. For the consumer, as vulnerable and unempowered as he his, with little to no choices in the pricing and tariff decision-making, it behooves us to ask if, by PPA’s recent upward adjustments on both minimum capitalization requirements and tariffs, the public’s interest and welfare are served.

Where costs bloat, the criticality of negative impacts on the CPI is important. While the direct impact of capitalization requirements dissipates over time and depreciation periods and are mitigated by economies of scale and asset efficiencies, the direct burden of increased capitalization is not technically recouped through prices in the CPI. This is not the case with increases in tariffs and fees. Those land on the consumer’s lap.

In the case of the increases demanded of cargo handling operators (CHO), the CPI attains double significance if policy makers identify the increase in the CPI as the catalyst. Such traipses into a Chicken-and-Egg cause and effect conundrum.

For one, the bid documents for accrediting CHOs correctly cluster the capitalization requirement as part of technical requisites, indicating its value as a measure of minimum financial wherewithal where capital investments are required of the CHO. Since capital does not necessarily mean cash, the counter-balancing entry of minimum paid-in capital typically reflects on the asset column of a balance sheet as property, plant, and equipment (PPE). Depreciation dictates that the more modern the equipment, the higher the value and this aligns qualified CHOs with a port modernization program.

The PPA seeks to modernize. That is a laudable objective however painful for relatively modest-sized CHO unable to qualify on the basis of the minimum capital required. Thus, the PPA classified port sizes and operations along various tiers. As economies of scale would have it, a highly capitalized CHO, or one joint-ventured, would be able to service multiple ports covering multiple tiers. Here, the impact of recouping capital expenditures (CAPEX) and the question of internal rates of return favor both the CHO in the immediate term and, in the long term, the consumer at the end of the value chain.

The increase in tariffs and fees is a different matter altogether. Let us look at the data and do the math.

According to one CHO, the stevedoring and arrastre tariff for non-prime commodities rose from P159.65 per ton to as much as P543 per ton, or an increase of 240% for a specific benchmark port. Others had a reported increase of P101.45 per ton, an increase of 453%. The highest reported was as much as 524%. The Philippine Chamber of Commerce and Industry (PCCI) in Tacloban calculated that such high tariff increases could bloat prime commodity prices by as much as 94%.

Paper napkin math on the foregoing reveals three things. One, CPI could not have been the impetus given the lowest reported increase was 240%. With 2012 as the base year, headline inflation straddled between 4.2% to 3.6%. Areas outside the national capital region registered slightly higher but remain within two hundred basis points. Core inflation, as always, registers lower.

Two, while there may be a causative effect from the exponential increase in tariffs, PCCI’s calculations show the impact is substantially lower. Where the least increase in port tariffs is 240%, the PCCI’s CPI increase of 94% does not show an econometric one-to-one relationship.

Finally, while the tariffs as reported, historical inflation rates and PCCI’s calculations do not align enough to show causality, PCCI’s computed 94% increase at the end of the value chain demands further scrutiny where the intervening links in the value chain from port handling to our tabletop involve infinitely more costs passed on to the already victimized consumer.

(Dean dela Paz is a former investment banker and a managing director of a New Jersey-based power company operating in the Philippines. He is the chairman of the board of a renewable energy company and is a retired Business Policy, Finance and Mathematics professor.)