Inflation, depreciation and erosion – these are but a few of many reasons why Malaysians find it harder to stretch the value of their ringgit these days.
Claims of price disparity between Peninsular and East Malaysia has been a constant debate throughout the years, and one factor often blamed is shipping freight costs incurred during consumer goods’ trek to the market stalls and shelves.
To address the issue, Prime Minister Datuk Seri Najib Tun Razak last month announced the cancellation of the cabotage policy, which regulates port-to-port transport – it would be exempted or further liberalised for Sabah, Sarawak and Labuan in order to help ease the high cost of goods in the two states and federal territory.
It was guided by the Prime Minister that the exemption of the policy would come into effect on June 1 by allowing foreign ships free reign in transporting cargo domestically between West and East Malaysian ports with a limitation of domestic transhipment between East Malaysian ports.
Sarawak Chief Minister Datuk Amar Abang Johari Tun Openg believed the time was right to abolish the Cabotage Policy, which allows only vessels registered domestically to transport goods from one port to another within the country.
“In the past, maybe it was acceptable because there was lack of volume but now, we have established international trade.
“So it is time to abolish cabotage so that ships from overseas can come straight to Sarawak. In the past, we did not have Bintulu Port and our ports were not so suitable, but now there are containerisation facilities,” he said during a live interview on RTM’s TV1 on April 28.
He pointed out that abolition of the cabotage policy could lessen the prices of goods for Sarawakians.
“If materials are cheap, cost of production is cheap, and then prices will be more affordable. This is what should be happening now for us,” he said, adding that it could also ease development plans for basic infrastructure in the state as construction materials could come direct to Sarawak instead of going through Klang Port.
He also noted the need to use the latest logistics, including plans to further develop the ‘food baskets’ of the state.
Citing Bukit Sadok Agropolitan Area as an example, the chief minister said building an airstrip for air-freight services by small planes would mean that goods can be transported to ports or airports faster for export and possibly cheaper than conventional methods.
Meanwhile, the exemption of cabotage policy for East Malaysia will help to reduce the price difference of goods in rural and urban areas, said Minister of Works Datuk Seri Fadillah Yusof, who said rural folk in particular should see price reductions once the exemption took effect from June 1 onwards.
“As there will be reduction in the transportation costs, the price of the goods will be more reasonable to Sarawak, Sabah and Labuan, especially involving delivery costs to the rural area. The decision was made by the Prime Minister (Datuk Seri Najib Tun Razak) after research was done on the policy and it will surely benefit the people in East Malaysia,” he said during a function in Petra Jaya earlier last month.
Fadillah also pointed out that upon the completion of the Pan Borneo Highway, transportation prices should also become more stable.
Increased competition
When news broke of the announcement, the local populace jumped ship onto debating the pros and the cons of such a move with much vigour.
As expected, local shippers, who are anticipated to be the most affected by this liberalisation, were the most vocal against the move while exporters and some government officials were elated at the news as they had been lobbying for the change in policy for a number of years now.
The main argument for the exemption is that the move would allow foreign ships to service the route between West and East Malaysia and break the oligopoly of a few large local shipping companies currently servicing this route.
The addition of foreign ships would create completion and force shippers to lower their prices to stay competitive; this will in turn lower the costs of goods within the state which has been historically higher compared to West Malaysia due to importation and distribution costs.
On paper, the strategy is a novel one based on the simple economic theory that an industry can achieve the most cost efficiency and productivity by allowing for perfect competition with the increase of industry players.
Despite these perceived advantages, local shipping players are still apprehensive at further liberalisation of the policy as they argue the move might not be effective at all in reducing the cost of goods in East Malaysia and would rather burden the local shipping industry while imposing national security issues.
In a combined statement from the Sarawak and Sabah Shipowners Association (SSSA), the two denounced the claims of the cabotage policy being the main factor in driving up local prices. Instead, they attributed it more to the imbalanced economic development between West and East Malaysia.
Meanwhile, the Sarawak Shipping Association (SSA) and SSSA have both guided that they have received no further information regarding what exact requirements and conditions that will entail for the exemption.
All arguements from both sides begged the question, ‘So what’s driving up the cost of goods?’
Current state of the cabotage policy
Cabotage laws or policies are a norm throughout the globe as most countries employ some form of this law for reasons of economic protectionism, national security or public safety.
Similarly, Malaysia’s cabotage policy was formed for these exact same reasons as we strived to protect our shipping industry from foreign competition. This was done by barring foreign ships from undertaking domestic transhipment activities, while requiring all imports and exports to first go through Port Klang.
The policy was skewed in favour of Port Klang in order to develop it to be the container hub port in Malaysia but has since seen much criticism as importers and exporters alike in East Malaysia cite the particular section of the policy to be detrimental to the freight costs of their shipments.
In response to this, government authorities and industry figures have pushed for further liberalisation on the matter in order to offset this negative impact and their endeavours over the years have seen much success as local East Malaysian ports have been paying homage to direct foreign shipment for the past four to five years now.
Should a foreign vessel desire to undertake domestic transhipment activities, they need only to apply for a domestic shipping license (DSL) to do so.
According to the SSSA, the point of the DSL which is valid for three months is to allow foreign vessel to service some of the niche segments of the local shipping scene as some certain types or sizes of vessels are not available locally.
The association added that even the DSL which functions as an immigration work permit for maritime activities has also been voided for certain shipping routes between major West and East Malaysian ports such as Port Klang and Tanjung Pelapas to Kuching Port, Bintulu Port and Sepanggar Bay in Kota Kinabalu.
The allowances were made to facilitate more trade between East and West Malaysia but the ‘desired result has yet to be seen’ according to the SSSA.
From these observations from the local shipping association, it seems that our current cabotage policy is fairly liberalised already, yet why does shipping cost continue to be an issue in East Malaysia?
Volume, capacity causes shipping prices to surge
According to an industry source, the issue of higher costs seen in the state seems to stem from a lack of trade volume.
“From my understanding, one reason why the cost of shipping is rather high is due to a lack of trade volume which in turn bumps up shipping costs as both foreign and local vessels become reluctant to ship cargo here unless a certain threshold is met,” the source told BizHive Weekly, citing anonymity.
The insider explained that despite previous liberalisation in the cabotage policy, the state’s exports have remained low and as a result, any potential benefits from the previous liberalisation were offset as importers and exports were still left waiting for their stocks and orders to ship while ships refused to budge until a certain threshold of cargo was finally met to make the trip profitable.
“Because of this, importers and exporters within the state may sometimes need to wait until a ship has made its required cargo rate before taking off – incurring extra costs for the container and storage along the way which would further add to the total cost of freight.”
Another argument for the exemption of the cabotage policy is that is expected to alleviate this negative impact somewhat as foreign ships may now be more motivated to make trips around local shores as they may offset some of the costs of a lower cargo rate with more freedom to ply local ports while en route regional hubs without the need of incurring the cost of a DSL.
In theory this would definitely help lower the cost of freight, however, seasoned importer Lim Ah Ted, group managing director of Supreme Consolidated Resources Sdn Bhd, notes that the cost of shipping freight is much complicated as it involves many other factors as well that may easily offset the benefits of the exemption.
“It is extremely difficult to say whether or not shipping costs will see a significant reduction because there are so many factors involved in accounting for the total cost of shipping such as GST, customs, container hiring, and port handling charges.
“Sure, the exemption of the policy could very well help lower costs but at this point it’s just far too early to make any assumptions,” Lim added.
“We need to monitor the situation for longer before we can make any definite conclusions.”
On the other hand, chairman of the Sarawak Shipping Association, David Chung, is assertive that the exemption would likely have little to no effect at all on shipping rates at all, especially in small to medium ports like Kuching Port.
“In my opinion – especially for Kuching Port – whether or not the policy is further liberalised is a non-issue because our total trade would still remain far too low for us to attract the business of foreign shippers.
“With our almost non-existent exports, foreign ships shun us because they don’t want to come all the way to here and leave with an empty cargo haul.
“They would just continue to leave their cargo at Port Klang where they can pick up an abundance of exports and leave the low margin task of moving that cargo to Sarawak, to us local operators as usual.”
Due to the depressed freight market in this route and unfavourable economic environment at present, Chung pointed out that several local liners have also already exited or closed down their operations in response to this.
Most notably, national shipping line Malaysia International Shipping Corporation Bhd (MISC) exited the route and liner business in November 2011 after suffering a total financial loss of US$191.6 million that year from the segment alone.
MISC completely abandoned the segment on March 2014 with the sale of its wholly-owned subsidiary, MISC Integrated Logistics Sdn Bhd which was involved in domestic and regional liner freight management and warehousing.
Adding insult to injury, Chung went on to point out that even if foreign ships are planning more short trips between local ports, they might find the state of our ports to be highly unattractive.
“While it can be argued that foreign ships might be more willing to operate if they are able to pick up more businesses on the way, I am doubtful of that happening as the current state of our ports is rather ill equipped to accommodate towards them.”
Chung highlighted the technical difficulties some of our ports have been reporting and questioned whether the lost days of productivity might ward of foreign shippers interested in servicing domestic routes.
He added that many local small to medium ports were also unequipped to accommodate for larger sized vessels which poses another restriction to bringing in foreign ships which are generally larger in size.
“I reckon the first plan of attack to improve our shipping industry and its costs of operation to the state are to actually build up our current shipping infrastructure in order to boost their productivity and accommodativeness to all sorts of vessels.
“By providing the shipping infrastructure needed we can attract more local and foreign players to help service our routes and in turn help boost trade within the state with more attractive rates.”
When asked how Bintulu Port Holdings Bhd (Bintulu Port) would tackle to issue, group chief executive officer Datuk Mohammad Medan Abdullah stated that the port would continue its stellar performance year.
“As a port operator, we are part of the supply value chain to facilitate trade and logistics arrangement. We will continue to serve all our customers particularly the shippers and shipping lines with sufficient capacities and efficient port services.
“This will eventually reduce the port lead time and cost of demurrage. We are playing our role in making sure that there is no unnecessary cost due to delay and inefficiencies.”
Land transport also a culprit
Another factor agreed to be affecting the cost of goods within the state was the cost of land transport.
According to Lim, currently there is a lack of direct infrastructure linkages to more rural areas of the state which increase both transportations costs and time.
“One of the reasons why the cost of goods is higher in rural areas of the state is due to land transport as it can cost around 30 to 40 sen excluding GST to transport a kilo of goods from Kuching to Miri. That cost directly influences the store prices of these goods.”
Lim added that towns and villages such as Kapit and Bario were the most susceptible to cost of good increases as there is no direct land transport to them.
“To get to Bario you need to fly and to get to Kapit you need to sail. This drives up the costs of goods found in those areas by a significant amount as the costs incurred from the plane and the boat needs to be compensated somewhere.”
To illustrate the severity of the situation, Lim explained that sugar which is a controlled price good is selling at its current selling rate of RM2.95 per kilo in Kuching but can reach upwards of RM5.00 per kg in Bario.
Lim explained that while sugar is a controlled price good, there is no government subsidy to maintain sugar prices throughout the country like petrol does and as such the transport costs needs to be bore by someone otherwise importers would just all together refuse to import to remote places like Bario.
When asked whether more enforcement of price controlled goods would solve this issue, Lim said, “If these goods were sold at controlled prices, there would be no profit for the importers, leaving them with no incentive to even ship to rural areas.
“Instead it might be a better idea to instead introduce a government subsidy system for staple and price controlled consumer goods like petrol to help with the situation.”
Agreeing with this point whole heartedly, an industry source added that even subsidies for transportation costs for importers would extremely well received as it allowed retailers to offer their goods at more acceptable rates to consumers.
“Furthermore, the Pan Borneo highway project is highly proactive to this cause as the upgrade to a four lane carriage can help reduce both time and costs of our land side logistics,” said the source.
Agriculture and livestock a solution to the issue
Besides tackling the issue of cheaper transportation costs, another effective way to boost trade and in turn reduce the cost of goods is through an aggressive focus in building up our own exports.
“We previously brought in a few potential investors from China and Japan to Sarawak. The moment they stepped off the plane, they were already impressed by the potential our land holds.
“Their interest was further peaked when we brought them to the Halal Hub at Tanjung Manis, but quickly faded away when they saw logistics cost estimates for both ocean and land freight. They found the costs far too high and decided against investing due to it.
“While the state holds immense potential, investors want to see immediate results and sadly our infrastructure and trade volume just isn’t on par yet to compete with the cost savings our regional neighbours like Indonesia and Thailand are offering.”
With that said, the source believes that one way to achieve a higher trade volume in the state is through aggressive support of the local agriculture and livestock industry.
“For Sarawak, we definitely have the land for agriculture and livestock efforts. Our success in it will be highly dependent on how much support is placed into the initiative.
“In addition, concentration on this sector can also help us achieve more self-sustainability which will further help protect the state from price fluctuations in the price of consumer goods that regularly import like meat and vegetables.
“However, before that we will also need to see more infrastructure development in rural areas. One reason why Peninsular Malaysia has such an advanced agriculture business despite us having the upper hand in land is due to their infrastructure allowing them mass farming techniques and grow exponentially.”
Adding to this, Lim noted that the state government has already taken steps in achieving this through the recently announced RM100 million seed grant for agriculture businesses around the state and is eagerly awaiting results of the initiative.
The initiative was announced last month by Minister of Modernisation of Agriculture, Native Land and Regional Development Datuk Amar Douglas Uggah Embas who said that the fund would be managed by a special purpose vehicle (SPV).
The SPV would purchase equity in agriculture businesses around the state and provide funding and guidance to these businesses in order to help them grow to large producers and profitable businesses.
Once the business turns successful and achieves a sound financial footing, the SPV will divest itself of its equity in the business at a par value to cooperatives of the business organisations formed by participating farmers and land owners.
“This will help to raise the income of the rural communities. The new business models must be able to harness the financial resources and business acumen of the private sector, while leveraging on their management and technical expertise.
“This means that agriculture businesses must be developed and managed by corporate entities and by giving the corporate sector a bigger role in developing and managing commercial agriculture, we can ensure commercial viability while reducing the financial burden on government,” Uggah said.
Exchange rate the clearest culprit
While much has been said about the various factors affecting the cost of goods, Lim reminded us to bear in mind that the number one cause of higher cost of goods within the state is simply due to our weak
ringgit.
“Simply put, the reason why the price of goods seems higher nowadays in your local supermarket is because I am buying those goods in our ringgit.”
Using the humble milk product as an example, Lim explains that he often buys a litre carton of ultra-pasteurised or UHT milk for one US dollar.
“Two years ago, I was paying RM3.50 per carton of milk but now I’m paying RM4.40 per carton. The price is still one US dollar for a carton but the only difference is that our ringgit has dropped significantly to the US dollar.
“Importers and retailers are merely upping their prices to reflect this but it’s not all doom and gloom, as our economy gets stronger so will the affordability in our imported goods.”
Lim added that milk was also a great example of how strategic alliances with other countries can benefit the cost of goods and local trade itself.
“The lowest that carton of milk is being sold right now is RM4.99 in shops and the reason why that is so low is because it is a product of Australia.
“Under the Malaysia-Australia Free Trade agreement which was established in 2013, that product comes with no import tariffs at all which allows importers to offer the product to consumers at an extremely affordable price.”
Currently Malaysia has six free trade agreement partners, namely, Australia, Chile, India, Japan, New Zealand, Pakistan and Turkey.