The archipelagic conditions of the Philippines, similar to those of Indonesia but of lesser extent, demand a maritime transport system for people and goods that is suitable for their significant logistical challenges, hence a competitive and efficient Philippine naval industry. Currently, based on the data at my disposal, there are about 116 shipyards in the Philippines, categorized into three classes based on the type of ships they can build or repair: over 130 meters in length (Class A), between 81 and 129 meters in length (Class B), and less than 80 meters in length (Class C). Located mainly in Luzon, Visayas, and Mindanao, these shipyards, whether Filipino-owned, foreign-owned, or joint ventures, construct or repair cargo, passenger, or fishing vessels for the local market or for export. This coexists with other vessels, new or used, imported from third countries.
During the period 2017-2021, 357 ships, mostly for fishing, were locally built for domestic use, and 26 for export; while 356 new and 120 used vessels, mainly for recreation, were imported from third countries. This latter data reveals two things: first, despite the number of existing shipyards, the market is competitive and diverse enough to allow local construction to coexist with foreign imports; and second, given this situation, the opportunities to build locally with or without a Filipino partner, or to export to this market, are intriguing and deserve detailed analysis. Although this article will not delve deeply into it, I will provide a general overview, within the constraints of this format, of the upcoming regulatory framework, particularly the scope and content of bill number 8374, dated May 25, 2023.
This bill encompasses various aspects worth highlighting briefly due to their impact on the future of the Philippine naval industry and foreign investment access to it. Firstly, there is a clear political determination to recognize the essential role of this industry in the country’s economic development. This leads the legislator to set objectives such as promoting the industry by attracting private capital through creating an attractive and competitive regulatory framework on one hand; and granting incentives to facilitate its continuous growth on the other. These two elements – regulatory framework and incentives – are fundamental in any policy seeking to attract foreign investment; hence their importance at the beginning of the text as guiding principles that influence the rest of its content.
Regarding its content, one must start by referring to the definition of “Entities dedicated to shipbuilding and repair,” which includes not only Philippines entrepreneurs or companies but also those formed in accordance with Philippines regulations, whose capital is held by Philippines or foreign citizens or by companies of Philippines and/or foreign nationality, in whatever proportion. It does require that these entities for the Philippine Naval Industry be duly authorized by the Philippines administration – specifically the Maritime Authority of the Philippines (MARINA) in this case – or operate a shipyard for shipbuilding or repair or a dry dock or slipway: in the former case, for designing, constructing, launching, or equipping ships; and in the latter, for reviewing, remodeling, renewing, improving, or altering their hulls, machinery, or equipment.
The envisaged incentives include exemptions from value-added tax on purchases in the local market or imports for five years upon MARINA approval of machinery, spare parts, or raw materials destined for shipbuilding or repair; and income tax exemptions for four years for entities engaged in shipbuilding or repair meeting specific criteria such as a certain number of workers, building ships of a certain tonnage, and allocating a specific percentage of these to export (4,000/700 GT/70%) or to the local market (1,000/250 GT). In addition to these incentives, it regulates others consisting of additional deductions for labor costs, tax credits on the purchase of local equipment goods, or employing foreign workers in technical, supervisory, or advisory positions.
To conclude this concise analysis of the Philippine naval industry mentions the possibility outlined by this bill to import ships. This possibility is subject to MARINA evaluation and conditioned on local shipyards’ capacity to build new ships below 500 GT; in such cases, they would have priority over imports when it comes to registration and subsequent operation in the domestic market. At this point and in previous ones highlighted earlier, the interim conclusion – pending the bill’s consolidation into law – is that the Filipino market for shipbuilding and repair is an attractive market open to foreign competition. Although this competition is naturally subject to certain requirements compliance, it is also driven by potential agreements with local partners, always worth considering.
Antonio Viñal
Lawyer
AVCO Legal
madrid@avco.legal
