3 Conflicted Regulatory Environment in Transportation Sector AR07wkrlDZtl2o2z

PREO Journal of Business and Management EISSN: 2945-3933
Volume 4, Issue 2, October 2023
Conflicted Regulatory Environment in the Transportation Sector: The Cases of

PPA And CAAP
Enrico L. Basilio
University of the Philippines Diliman National College of Public Administration and Governance
Quezon City, Philippines
Francisco L. Villanueva, Jr. (Corresponding Author)

City College of Angeles; Ateneo Graduate School of Business
Angeles City, Philippines; Quezon City, Philippines
francisco.villanueva.jr@gmail.com
Abstract
The Philippine Government created the Philippine Ports Authority (PPA) and Civil Aviation
Authority of the Philippines (CAAP) as transport regulatory agencies but having corporate structures
– i.e., government-owned or controlled corporations (GOCCs) imbued with
developmental/commercial functions. This regulatory-corporate structure created governance issues
– (a) conflicts of interest and (b) violation of the principle of competitive neutrality. In government,
recognizing these challenges has led to the inclusion in the 2017-2022 Philippine Development Plan
(PDP) the recommendation to ‘decouple’ the conflicting mandates of transport regulatory bodies like
the Philippine Ports Authority (PPA) and the Civil Aviation Authority of the Philippines (CAAP).
This recognition is enshrined among the recommendations to increase competitiveness, innovation,
and resilience, to wit: “Revisit the management and regulation of ports to improve the efficiency of
port operations and encourage competition among ports. The separation of the regulatory and
operational functions of port authorities and the subsequent establishment of a single entity for port
regulations may increase the efficiency and competitiveness of ports by allowing inter-port
competition and encouraging more private sector participation” (Revised 2017-2022 PDP, Chapter
9B, p. 9-26). In fact, one of the key legislative measures being proposed in the PDP is the “enactment
of a law creating independent regulatory bodies for the railway and maritime transport sectors
consistent with the National Transport Policy (NTP) to address the weak and fragmented institutional
setup of concerned transport agencies.” Through this law, “the existing dual roles of some agencies
acting as both operator and regulator of transport facilities will be effectively eliminated” (Chapter 19,
Accelerating Infrastructure Development, p. 313). This paper highlights the flawed policies that gave
rise to the conflict-of-interest problem among public enterprise-regulatory agencies, especially in the
transport sector, and the need to push for policy reform to address such flaws.
Keywords: public enterprise, government-owned or controlled corporations (GOCCs), regulation,

maritime and aviation sectors
______________________________________________________________________________
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1. Introduction
Inter-modal transportation plays an important role in providing seamless connectivity to the
Philippine archipelago necessary for economic growth and inclusive development. Thus, it is
imperative that an extensive network of transport infrastructure—roads, ports, and airports—are in
place in order to facilitate the movement of goods and people as well as catalyze economic activities
in the countryside. For this to happen, a sound policy and regulatory environment to nurture and
guide development must be established. Pre-pandemic, the domestic maritime transport sector
facilitated 98 percent of total inter-island trade and 30 percent of the country’s total passenger traffic.
Roughly 4 million containers pass through the country’s international ports annually. On the other
hand, air transport accounted for 3.4 percent of the country’s pre-pandemic output (2019 GDP)—
about USD 10.5 billion in gross value added (GVA) contribution. At present, the country’s public
port and airport networks consist of 113 major and minor ports and 85 international and domestic
airports, respectively.
Given the economic importance of the maritime and aviation sectors to the Philippine economy, the
government created regulatory agencies – the Maritime Industry Authority (MARINA), and the
Philippine Ports Authority (PPA) for the maritime subsector on the one hand and on the other for
the aviation subsector, the Civil Aeronautics Board (CAB), and Civil Aviation Authority of the
Philippines (CAAP) among others – to protect and promote public interest and the common good.
These regulatory bodies were originally created as “regular government agencies”. However, in the
cases of the PPA and CAAP, a paradigm shift was affected in terms of structure – from regular
government agencies, PPA and CAAP were converted into public enterprises. Central to the paper’s
discourse, therefore, is the question: Should regulatory bodies (PPA and CAAP) assume corporate
structures (i.e., public enterprises) that have proprietary functions? Stated differently: Is it appropriate
to vest public enterprises with both propriety and regulatory functions?
The paper will attempt to bring to light and analyze the issues and problems brought about by fact
that the transport regulators in the country – PPA (Case 1) and CAAP (Case 2) – have been vested
with both regulatory and, as public enterprises, with commercial/propriety functions. To directly
address the problem statement, it is necessary to understand the following concepts:
Dimensions of a public enterprise. Public enterprises, like private enterprises, have an ‘economic’
dimension (see Figure 1). They are commercial activities organized for the purpose of (i) providing
specific goods or services to the market and (ii) generating profits from such activities. However, the
‘social’ dimension of public enterprises is what distinguishes them from private enterprises. Having
inherent social mandates – support for national development goals and promotion of public interest
– define the ‘publicness’ of public enterprises. Of course, private enterprises could also pursue and
promote the common good through their corporate social responsibility (CSR) programs but these
are not core to the firms’ profit motivation. There is an interesting modern debate, however, regarding
the extent that private enterprise commits to the ‘common good’ (stakeholder value maximization
[STVM]) rather than “bottom-line” (shareholder value maximization [SHVM]) and not just through
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the CRS. In an article entitled Stakeholder Maximization vs the Friedman Rule: What Should Business
Schools Teach? Fabella (2021) concluded that the “message here is clear: stakeholder maximization
[STVM] is sustainable only if the ethic is universally shared.” He argued that the Friedman rule6 is
“vulnerable where the state market separation is breached — massive corporate resources can bend
political rules in their favor… In weak rule-of-law jurisdictions (like the Philippines), the firewall
between rulemaking and profit-seeking is porous…The requirements for sustainable STVM in market
economies are so onerous the ethic is utopian. The coalition of the virtuous will collapse if remnants
of villainy remain. But villainy, like death and taxes, will always be with us. Life is colorless otherwise.
This means that the Friedman rule remains properly hinged.”
Figure 1. Corporate Mandates
The need for public enterprises. Why do governments create and operate public enterprises? A
recent report published by the Organization for Economic Co-operation and Development (OECD
2015) offered the following reasons given by the national authorities (governments) to justify the
creation of state-owned enterprises (SOEs) (see Figure 2). Topping the list are (a) support for national
economic and strategic interests and (b) market failure – supplying specific public goods or services
after deeming the market cannot supply the same goods or services. Other reasons include: (c) creating
or maintaining a state-owned monopoly (or oligopoly) where market regulation is deemed infeasible
or inefficient due to lack of state capacity, and (d) ensuring continued national ownership of strategic
enterprises.
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Figure 2. Objectives Cited in SOE Ownership Rationales
The need for regulation. Why do governments regulate certain industries/markets? The simple
answer is to protect the public interest from the rent-seeking activities of private monopolists or
oligopolists – especially in a case of a natural monopoly where market competition will not work.
Regulation also prohibits anti-competitive and/or ruinous cartel behaviors of some market players.
Stigler (1971), however, warned about this phenomenon called ‘regulatory capture’. In the book The
Theory of Economic Regulation, he pointed out “that governments do not end creating monopoly in
industries by accident. Rather, they regulate at the behest of producers who “capture” the regulatory
agency and use regulation to prevent competition.” The regulator that is supposed to regulate ends
up being regulated by the very industry it is supposed to regulate. Hence, for decades, it has become
a convenient strategy for firms to simply capture the regulator.
The principle of ‘competitive neutrality’. When there is a market failure and it cannot be avoided for
government to participate in the market to deliver ‘essential’ public goods or services, the government
creates public enterprises as a ‘vehicle’ for such participation in the market. However, key to the
government’s beneficial participation in the market is the principle of competitive neutrality. OECD
defines competitive neutrality as “a principle according to which all enterprises are provided a level
playing field with respect to a state’s (including central, regional, federal, provincial, county, or
municipal levels of the state) ownership, regulation or activity in the market.” The Recommendation
on Competitive Neutrality adopted by the OECD Council (May 2021) recognized that “government
actions can sometimes prevent, restrict or distort competition within a market. They can set
procurement/tax rules or regulatory regimes putting private companies at a disadvantage compared
to state-controlled or supported firms, or yet, they can assign market regulatory functions to firms that
currently or potentially compete in the same markets. Ensuring a level playing field is therefore key to
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enable competition to work properly and deliver benefits to consumers and the wider economy”
(OECD, 2021).
In the Philippine transport sector, the government created monopolies in port and airport
development and operations. Public enterprises (PPA and CAAP) were established for these purposes.
As economic enterprises, PPA and CAAP live up to the government’s (revenue) expectations. They
belong to the so-called ‘Billionaires Club’ in Philippine parlance, members of which are public
enterprises that remit billions of pesos to the National Treasury in the form of corporate dividends
(see Figure 3). For many of these public enterprises, their ability to remit billions to the Treasury does
not necessarily mean that they are ‘real performers’ as will be explained later.
Source: Department of Finance
Figure 3. 2020 GOCC Corporate Dividend (in Billion Pesos)
The birth of conflicted regulators. PPA and CAAP, while vested with proprietary objectives as public
enterprises, were likewise vested with ‘regulatory’ functions. A ‘unique’ structure, therefore, was
created where the public enterprise-monopolists (PPA and CAAP) are, at the same time, regulatory
bodies (see Figure 4). In creating PPA and CAAP, the Philippine government justified the vesting of
commercial functions to these public enterprise regulators in order for them to generate their own
revenues and not depend on budgetary appropriations from the national government. Unfortunately,
doing this only created a bigger problem. By vesting these public enterprises with both commercial
and regulatory mandates, the Philippine government ended up with ‘conflicted regulators’ that are
susceptible to regulatory capture (Basilio 2006).
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Figure 4. Unique Structure (Conflicted Regulator)
Case 1: The Philippine Ports Authority (PPA)
The Port Monopoly

Prior to the creation of the Philippine Ports Authority (PPA) in 1974, port development and
maintenance were under the Bureau of Public Works - Ports and Harbors Division (BPW-PHD). Port
administration, on the other hand, was placed under the Bureau of Customs (BOC) mainly because
of revenue collection– i.e., tariffs, import duties, and other customs fees. In 1973, a condition for the
grant of a port development loan was stipulated by the World Bank calling for the creation of a port
authority to oversee the implementation of projects under that loan.11 Hence, a recommendation was
submitted to the Government Reorganization Committee (GRC) and Congress for the creation of a
separate government agency to integrate the functions of port operations, cargo handling, and port
development and maintenance. This way, the BOC will be able to focus on its revenue collection
function.
Regular Government Agency

On 11 July 1974, by virtue of Presidential Decree (PD) No. 505 or the Philippine Port Decree of 1974,
the PPA was established as the main port planning agency, port developer, operator, and regulator.
Under the law, the PPA was mandated to implement an integrated program of port development for
the entire country in accordance with the following objectives:
a. To streamline and optimize the planning, development, construction, maintenance, and
operation of ports, port physical plants, and facilities;
b. To ensure the smooth flow of waterborne commerce passing through the country's port in
the conduct of international and domestic trade;
c. To promote regional development through the dispersal of industries and commercial activity
throughout the different regions;
d. To foster free enterprise and sustain the growth of export and other priority industries; and
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e. To redirect port administration beyond its specific and traditional duties in harbor, cargo and
revenue operations to the broader function of total port district development, including the
full and faithful utilization of the port's hinterland and tributary areas.
The corporate powers of the Authority were vested in a governing board of directors to be known as
the PPA Council composed of eleven (11) members – Secretaries of Finance, Trade, Industry, Public
Works, Public Highways, Transportation and Communications, National Defense, Executive
Secretary, Director-General of the National Economic and Development Authority (NEDA), General
Manager of the PPA, and a representative from the private sector. The Chairman of the Council, PPA
General Manager, and private sector representative are all appointed by the President of the
Philippines.
PPA, under PD 505, was originally created as a government agency and not as a public enterprise (or
government-owned or controlled corporation [GOCC]). And like any other government agency, PPA
receives a yearly budget from the Annual Appropriations Act (now known as the General
Appropriations Act [GAA]). Furthermore, PPA was authorized to retain 50% of its collections from
fees, charges, and fines to defray any deficiency in annual appropriations, and to finance its other
projects (Basilio 2018, p. 53).
A Public Enterprise with Regulatory Powers. In 1975 (one year after PPA was created as a regular
agency of government), President Marcos issued PD 857 converting PPA into a public enterprise
(GOCC) under the Department of Public Works, Transportation and Communications (DPWTC).
As a result, PPA went through a structural transformation from a regular government regulatory
agency to a public enterprise vested with regulatory functions. PD 857 broadened the scope and
coverage of the PPA to facilitate the implementation of an integrated program for the planning,
development, financing, operation, and maintenance of ports or port districts for the entire country.
Summarized hereunder are the important amendments to the Charter of the PPA:
a. As a GOCC, the PPA will no longer receive annual appropriations but will generate and raise
its own revenues through fees/levies it will charge to port users. The PPA’s authorized capital
was set initially at PHP 3 billion;
b. Instead of a Council (with 11 members), the PPA shall be governed by a Board of Directors
consisting of seven members – secretaries from DWPTC (Chairman), PPA General Manager
(Vice-Chairman), National Economic and Development Authority (NEDA), Department of
Finance (DOF), Department of Environment and Natural Resources (DENR), Department
of Trade and Industry (DTI), and a private sector representative;
c. The PPA was given the power to own, develop, maintain, operate and regulate the country’s
public port system. Moreover, the PPA was vested with the power to regulate and derive
income (i.e., shares from fees) from private ports, especially those operating commercially;
d. The PPA is required to ensure that all income and revenues accruing out of dues, rates, and
charges for the use of facilities and services provided by it will be adequate to defray the cost
of providing the facilities and services (inclusive of operating and maintenance cost,
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administration and overhead) of the port districts, and to ensure that a reasonable return on
the assets employed shall be realized; and,
e. Section 39 of the PPA Charter amends the provisions in the Tariff and Customs Code of the
Philippines (TCCP) to the extent that all the powers, duties, and jurisdictions of the Bureau of
Customs concerning (i) port dues/collections, (ii) supervision, control and regulation of all
matters and affairs that pertain to the operation of and the issuance of permits or licenses to
construct ports, port facilities, warehouses, and other facilities within port districts, and (iii) all
such other powers, duties, and jurisdiction vested in the Bureau of Customs pertaining to every
matter concerning port facilities, port operations or port works shall be transferred to the
PPA.
In short, the purpose of the conversion of the port authority from a regular agency to a public
enterprise is to generate income for the government (a) using its regulatory powers (mainly licensing)
and (b) through commercial charges for the use of its facility and thus is not dependent of budgetary
allocation. But this public enterprise-regulator corporate structure has created a ‘moral hazard’
problem.
What is wrong with the public enterprise-regulator structure? Basilio (2018) underscored the following
sources of ‘conflict of interest’ that contributed to the dysfunctional regulatory environment in the
port sector. As a public enterprise, PPA (a) has been vested not only with commercial functions (i.e.,
to own, develop, maintain, and operate the country’s public port system) but also with regulatory
functions (as “port authority”); and (b) now has to generate its own revenues. The government used
fiscal constraint as justification for the shift from being a regular agency to a public enterprise without
realizing the consequence of such a policy decision – i.e., the creation of a conflicted regulator. To
make matters worse, a Letter of Instruction (LOI No. 1005-A) was issued in 1980 to “intensify the
collection of all port charges including the government share from all cargo-handling contractors and
port-related service operators, all back accounts, in order for them to share the burden of the
accelerated development, construction, and maintenance of the government facilities they utilize. The
government share for all cargo-handling contractors and port-related service operators shall be at a
rate not less than 10 percent taken from their gross income earned from such services” (Section 3).
While the collection was intensified (true to the objective of the LOI), it likewise fortified PPA’s
conflict of interest. In 1993, a law was passed – Republic Act (RA) No. 7656 (also known as the
GOCC Dividend Law) – which now requires all GOCCs like PPA to remit at least 50 percent of its
net earnings to the National Treasury as ‘corporate dividend.’ This requirement will likewise be used
by PPA as a convenient justification for raising port fees/rates.
Key issues
Figure 5 presents the revised scope of PPA’s mandate. From this scope emanates two (2) key issues:
a. Conflict of interest in rate-setting.
b. Competitive Neutrality issue in the issuance of a permit to develop and operate private ports
commercially.
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Figure 5. PPA Mandates
Conflict of Interest
The policy (LOI 1005-A) “provided PPA an incentive to use its rate-fixing power (through rate
increases) to generate more revenues over and above what is required for the provision of its services”
(Basilio 2018, p.53) and heightened the Authority’s conflict of interest. As a regulator, PPA approves
petitions for cargo-handling rate increases and benefits from its regulation at the same time. This is a
classic case of the regulator benefitting from its regulation. In Economics, it is what is called a “moral
hazard”. Table 1 shows the consistent upward adjustments in cargo handling rates over the years while
Figure 6 shows the Authority’s increasing share from cargo handling revenues (generated from the
rates it approved) vis-à-vis the expenses it incurs relative to the operation and maintenance of the
country’s public port system. And because of this, PPA was able to double the remittance of its
corporate dividends from PHP 8.3 billion (2010-2015) to PHP 17 billion (2016-2020). Even during
the pandemic, when Philippine trade (domestic and foreign) went down by more than 30 percent,
PPA was able to generate more revenues (due to the introduction of new port fees) and managed to
declare a PHP 3.5 billion corporate dividend to the National Treasury [CAAP made a bigger
contribution of PHP 6 billion] (see Figure 7). Given these data, the important question, therefore,
needs to be asked: Is PPA a service provider or an income-generating agency? The ‘conflict’ has
blurred the dividing line between these two functions. “If PPA is a private corporation competing
with others, its consistent profitability could be touted as a sign of efficiency” (World Bank, 2004 as
cited in Basilio, 2018). The private sector advocated for the rescission of LOI 1005-A arguing that the
Authority benefits from its regulation. The port users pointed out that any income generated by the
PPA over and above its needs to provide the service is a tax burden or a “deadweight cost” to the
economy. It was only in 2003 that action was taken on the issue. However, instead of rescinding LOI
1005-A, President Arroyo put a cap on the share of the PPA from cargo-handling revenues: 10 percent
for domestic and 20 percent for foreign cargoes (Basilio, 2018).
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Table 1. Cargo Handling Rate Increases (1989-2020)

Memorandum Domestic Foreign
Year
Circular Arrastre Stevedoring Arrastre Stevedoring
PPA MC18-1989 1989 25% 25% 25% 25%
PPA MC 13-1991 1991 10% 10%
PPA MC 15-1994 1994 10% 10% 10% 10%
PPA MC 16-1994 1994 10% 9.97%
9.13%
PPA MC 08-1995 1995 10% 9.97%
9.13%
PPA MC 29-1997 1998 25%
PPA MC 33-1997 1997 8% 8%
PPA MC 28-1998 1998 20%
PPA MC 34-1998 1998 12% 12%
PPA MC 66-1998 1998 20%
PPA MC 05-2000 2000 8% 8% 8% 8%
PPA MC 12-2000 2000 8% 8%
PPA MC 04-2001 2001 10% 10% 10% 15%
PPA MC 47-2001 2001 10% 10%
PPA MC 13-2005 2005 15% 15% 15% 15%
PPA MC 14-2005 2005 15% 15%
PPA MC 05-2008 2008 5%
PPA MC 08-2008 2008 15% 15% 15% 15%
PPA MC 11-2008 2008 7%
PPA MC 05-2009 2009 15%
PPA MC 13-2011 2011 17%
PPA MC 07-2012 2012 15%
PPA MC 04-2013 2013 10% 10% 10% 10%
PPA MC-18-2014 2014 8% 8%
PPA MC 04 -2015 2015 8% 8%
PPA MC 04-2017 2017 8% 8%
2018 8% 8%
2019 8% 8%
PPA MC 07-2018 2018 7% 7%
PPA MC 10-2019 2019 At least At least 5% At least 5% At least 5%
5% growth in CPI growth in CPI growth in CPI
growth
in CPI
2020 New cranage fee
introduced
New rates
for empties*
PPA MC 12-2021 2021 15.33%* 15.33%** 10.58% – 11% 10.58% – 11%

Source: PPA
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Source: PPA
Figure 6. PPA’s Total Revenue vs. Port Maintenance and Other
Operating Expenses (2015-2020, in Billion Pesos)
Source: DOTr
Figure 7. PPA Corporate Dividends (2010-2020)
If profitability and corporate dividends are the only metrics of performance, then PPA will be
adjudged as an outstanding and model public enterprise. The PPA and CAAP pride themselves on
being outstanding ‘corporate citizens. This is evident in the PPA’s performance scorecard – the largest
weight (35%) is given to SO2 (Financial Sufficiency – SM7 Port Revenue and SM8 EBITDA)
compared with SO1 (Enhanced Accessibility) which only accounts for 15 percent as far as the
evaluation of the Authority’s performance is concerned and SO3 (Support to National Development
Goals) 5 percent. The scorecard highlights the bias in terms of priority and focus. Every year, PPA
would remit billions of pesos to the National Treasury as a ‘corporate dividend’ and would be
complemented by the national government for its generous contributions. But in the process, this rent-
seeking activity would make the country’s cargo handling cost the highest in the region (see Figure 8),
ultimately undermining the economy’s competitiveness, and making consumer goods expensive.
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Source: AISL Presentation (01 October 2020)

Note: The information is limited to cargo handling costs at the port. It does not include freight (shipping cost which varies per
route).
Figure 8. Philippines: Highest Port Cargo Handling Cost in ASEAN
Competitive Neutrality Issue
High port revenues, low investments in ports. During the pandemic in 2020, when the country’s
foreign and domestic trade sharply contracted by more than 20 percent, PPA and CAAP still managed
to remit PHP 3.5 billion and PHP 6 billion, respectively, to the Bureau of Treasury. Sadly, the increased
revenues and profits generated by the Authority fail to improve the country’s ports (and airports) into
world-class facilities as evidenced by its low and declining ranking compared with other Southeast
Asian countries in the WEF Competitiveness Reports (see Table 2). The Philippines pales in
comparison even with Vietnam and is a little better than Cambodia.
Table 2. Philippine Infrastructure Ranking

World Economic Forum (WEF) Global Competitiveness Report – Overall Infrastructure
Ranking
Quality of Overall
Countries Roads Railroads Seaports Airports
Infrastructure
Singapore (2019) 1 1 5 1 1
Singapore (2018) 1 1 5 1 1
Malaysia (2019) 35 19 13 19 25
Malaysia (2018) 32 20 13 17 19
Thailand (2019) 71 55 75 73 48
Thailand (2018) 60 55 91 68 48
Indonesia (2019) 72 60 19 61 56
Indonesia (2018) 71 75 19 61 49
Vietnam (2019) 77 103 54 83 103
Vietnam (2018) 75 109 61 78 101
Philippines (2019) 96 88 88 88 96
Philippines (2018) 92 88 100 84 92
Cambodia (2019) 106 97 N/A 91 113
Cambodia (2018) 112 100 109 86 114
Source: WEF Reports
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From 2015 to 2020, the PPA only spent on average about 24 percent of its gross income on port
operations and development. In fact, the most recent (major) port developments in Davao del Norte
(i.e., Davao International Container Terminal and Hijo Port) were developed by the private sector.
The investment in the expansion of the Manila International Container Port (MICP) came from the
private port operator/concessionaire as part of its management contract. The development of the new
terminals in Subic Port (Terminals 1 and 2) and the Batangas International Port was financed using
borrowed funds (official development assistance) from Japan International Cooperation Agency
(JICA). In short, none of these (recent) major port developments were financed using PPA- generated
funds.17 Little investments were made by PPA in RORO ports. Figure 9 highlights the fact that Port
O&M Expenses account for less than 50 percent of Total Revenues – an average of 46 percent for
the period 2010-2014 and substantially went down to 24 percent for the period 2015-2019.
Source: PPA
Figure 9. Port Maintenance and other Operating Expenses (% Share of Revenue)
In terms of ‘competitive neutrality,’ an interesting case to discuss is the Harbour Centre port development
(see Box A). As an investment recovery mechanism, the Harbour Centre was issued a permit to handle
foreign break-bulk (non-containerized) traffic not limited to its locators. Previously, break-bulk traffic
was handled only by PPA-owned South Harbour. Harbour Centre thus became a competitor for the
PPA’s own South Harbor. Table 3 presents the shift of the market share for non-containerized cargoes
from the South Harbor (PPA-owned Terminal at the Port of Manila) to Harbour Centre (a private
commercial port). Encouraged, HCPT submitted an application to the PPA for a permit to handle
foreign containerized cargoes. Recognizing the implication of competition for containerized cargo
traffic, the request was never granted by the PPA to this day (Basilio 2018).
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Table 3. Effect of Competition in Non-Containerized Cargoes at Manila Ports (Market

Share, In %)
PORT 2003 2008 2017
South Harbor – PPA Port 80% 30% 25%
Harbour Centre – Private Port 20% 70% 75%
Source of Data: PPA and HCPT
In the case of the DICT and Hijo ports, after pouring in billions of investments in port development,
the PPA initially gave the private commercial port investor-operators a 6- month, renewable permit
to operate. This decision to ration the permit to operate is linked to the plan of the PPA to modernize
its (Sasa) port in Davao City which will become less urgent if the DICT and Hijo ports are in full
swing. This is another case that demonstrates the use of the Authority’s regulatory power to shield
itself from competition and protect its commercial interest. When the private commercial ports raised
the issue of ‘security’ of their investments, PPA reluctantly increased the validity of their ‘permit to
operate’ to one year, and later to four years (renewable). However, four years is still below the usual
20/25- year concession period for port development under PPP arrangements.
Increased private sector investment appetite in port (and airport) development. Traditionally,
port development and operation have been an assumed function of the government worldwide within
the context of ‘natural monopoly’. Over the last thirty years, however, a significant interest on the part
of the private sector has been observed. Today, there is already a demonstrated appetite on the part
of the private sector to invest in the development and operation of private commercial ports.
However, private sector participation in port development and operation remains to be limited. Of
the 120 public ports, there is only a handful of private ports that are allowed to commercially operate
- Harbour Centre (Manila), Bredco (Bacolod), DICT and HIJO Port (Davao del Norte), private ports
in Batangas that handle non-competing cargoes (against PPA Batangas port cargoes) like petroleum
and cement among others. There are many private non- commercial ports used exclusively by their private owners,
but no commercial cargoes and passengers are allowed to pass through these non-commercial ports. Again, this limited
private sector participation in commercial port ownership, development, and operation can be
attributed to the desire of the Authority to maintain its market power in port services. However, this
impedes the rapid development of vital port facilities and of competition in port services that are
critical to sustained economic growth and development.
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Box 1: Harbour Centre

In 1992, President Corazon Aquino issued Memorandum Order No. 415 directing the National Housing
Authority (NHA) to implement the Smokey Mountain1 Development Plan. The Plan involves converting
the Smokey Mountain garbage site into a housing facility for the poor. As an unsolicited PPP1 project, the
private sector will develop the housing facility on public land (Smokey Mountain area) using its resources.
As an investment recovery mechanism, the private proponent will be allowed to undertake reclamation of
the area across Road 10 almost adjacent to the Port of Manila. The PPA was directed to assist in evaluating
the port-related land issues in the reclaimed area. The initiative was continued by the succeeding
administration of President Fidel Ramos. In 1993, President Ramos issued Memorandum Circular No. 45
directing all concerned government agencies to liberalize and provide a conducive environment for
increased competition in the support service sector, particularly land, air, and sea transportation,
communication, energy, insurance, and port services. The PPA, however, was not supportive of this private
commercial port development initiative because of the possible competition it will provide against its own
terminals (i.e., MICT and South Harbor) at the Port of Manila. Hence, it took R-II Builders years to acquire
the needed permit from PPA to develop the port facility. Finally, PPA issued the permit to R-II Builders in
1996 to construct the 15-hectare private port facility (called Harbour Centre Port Terminal or HCPT) on a
reclaimed area as part of the Smokey Mountain Project. This is a case where PPA used its regulatory power
to protect itself from potential competition. The construction of the port was completed in the late 1990s.
However, to operate it commercially, another permit (i.e., permit to operate) is required. In 2001, President
Arroyo had to issue Memorandum Order No. 47 (s. 2001) to direct PPA to assist in the technical evaluation of
port-related land use in the reclaimed areas and to expeditiously process applications for the permits for private commercial ports.
As a result, PPA issued a permanent commercial permit to HCPT to operate and handle (a) all types of
domestic vessels and cargoes and (b) foreign vessels and cargoes chartered by the locators at HCPT but not
the lucrative containerized cargoes.
Source: Basilio (2018). Eight Waves of Reform Initiatives in Philippine Port Administration and Governance. Philippine Journal of Public
Administration (Vol. 62 No. 1) pp. 58-59.
A cursory look into Port Administration and Regulation in select ASEAN Port Authorities
Comparing PPA with leading port authorities (Port of Singapore Authority and Port Authority of
Thailand) in the ASEAN region indicates that none are ‘conflicted’ (see Table 4). In the case of
Singapore, two entities are performing separately the regulatory (Maritime and Port Authority of
Singapore) and commercial operations (PSA Corporation). In Thailand, the Port Authority of
Thailand (PAT)—a government agency—prepares and submits its annual capital expenditure plan to
the national government for approval. The budget is appropriated to fund the proposed port
development expenditures. PAT is allowed to collect fees to finance its operating expenses. However,
any excess revenue is remitted to the Treasury. Unlike PPA, PAT has no incentive to collect more
revenues since it is not required to remit ‘corporate dividends’ and it does not collect a share from the
revenues of port operators (such as cargo handling companies).
49
Table 4. Select Port ASEAN Port Authorities: Mandates and Structures

Philippine Ports Port Authority of Port of Singapore
Authority (PPA) Thailand (PAT) Authority (PSA)
Year Initially established In 1951, the Port Started as Singapore
Established as a regular Authority of Harbour Board
government agency Thailand was established in 1913, it
in 1974, PPA was established by virtue was replaced by PSA in
converted into a of the Port Authority 1964. Today, the Port
public enterprise a of Thailand (PAT) of Singapore which is
year later (1975). Act. The PAT being managed by PSA
was established as an is one of the leading
PPA is an attached autonomous body ‘transshipment hubs’
agency of the under the general in the Asian region.
Department of supervision of the
Transportation Ministry of
(DOTr). Transport and
Communications.
Mandate PPA owns, Port development In 1996, PSA’s
develops, and and management. regulatory functions
maintains public PAT receives a were transferred to the
ports. budget from the Maritime and Port
national government Authority of Singapore
Regulates both for its capital outlay; (MPA), which led to
public and private raises revenues only the subsequent
ports. to finance its establishment of PSA
operating expenses. Corporation Limited
Sets and approves Any surplus income in 1997.
rates generated is turned
over to the treasury. The main mandate of
Issues permits to However, in cases the now independent
(a) for the where the PAT’s and privatized
construction and income falls short, company (PSA
(b) operation of the deficiency is Corporation) is to
private commercial covered by the State. manage and
and non- commercially operate
commercial ports In 2000, the PAT container terminals
was allowed in joint and related businesses
It also shares from ventures with other at the Port of
cargo handling (private) parties Singapore.18
revenues (the rate it and/or holding
approves). shares of a limited In February 2021, the
private/ MPA began to embark
public company— on its largest project to
for the benefit of its date, the Tuas Mega
business(es). In the Port Development
50
case of forming a worth USD

limited company, 14.5 billion and is
foreign equity is expected to be
allowed and completed by 2040. It
encouraged up to a can handle 15 million
maximum of 49%. TEUs (increasing the
current port capacity
to 65 million TEUs.
Sources: PPA, PAT, and PSA.
Reforming the Port Policy and Regulatory Environment

A summary of the policy and regulatory issues in the port sector is provided in Figure 10. The flawed
policy created ‘conflicted referees’ (PPA and CAAP) and resulted in dysfunctional corporate structures
with clashing mandates, and ultimately led to government failure in terms of providing efficient
services at a reasonable cost. And because of the ‘conflict,’ the exercise of the regulatory functions
(rate fixing, issuance of permits to develop and operate private commercial transport facilities) tended
to benefit the ‘authority’ more as a revenue generator by shielding itself from market competition
which, in many ways has worked against public interest. Moreover, this violates the principle of
competitive neutrality.
1. Conflict of interest
• Rate Setting – collects revenues from the rate it approves
o Benefits from own regulation
o Has incentive to use regulatory power to raise income and contribute more
(corporate dividends)
RESULT
o Highest cargo handling cost in ASEAN
o Increases transport logistics cost, undermines Philippine competitiveness
2. Competitive Neutrality issue
• Issuance of permit to develop and operate commercially private ports
o Regulates against competition to protect commercial interest (at the expense of
public interest)
RESULT
o Public port monopoly, few private commercial ports
o Port inefficiencies, high costs from lack of effective competition
Figure 10. Summary of Port Issues
There have been efforts to correct this flawed policy in the past. But reform proved to be difficult. In
the paper entitled Why are Reforms of Government Failures so Difficult to Achieve? Fabella (2021) offered
some explanation: “Coasean bargains do not get struck and losers are not adequately compensated by
winners because… Unfortunately, in the real world, governance is saddled with frailties (benevolence-
deficit, competence- deficit, and autonomy-deficit) resulting in interventions/statutes that fail to
improve outcomes. Intervention failures result in government failures. Benevolence-deficit causes the
51
state to intervene where there are no market failures to start with (so a priori will be fail) rather but to
pursue corrupt side payments. Competence-deficit causes the state to promulgate the wrong or badly
designed statutes to a market failure due to wrong information or bad advice. Autonomy-deficit causes
the state to be swayed by side- payments to favor some stakeholders over others. All these either
singly or together produce a weak government unable to: align public behavior toward a public
purpose; make credible commitments; make tough decisions but rather to kick the bucket down the
line for the future to confront.”
Basilio (2012) contended that policymaking/ reform is difficult because (a) some participants of the
process may not necessarily be willing and supportive of the reform effort, and therefore, may work
for the preservation of the status quo because they are either captured regulator/s and/or (b) there exists
certain private incentives against the reform. And even if regulations are formulated, such may even lead
to worse results, especially when the regulator is not a neutral referee. The complexity of reforms
arising from different interest groups is a major reason why reforms are slow to materialize, or even
worse, do not happen at all. Also, the conflict between group or individual interests and the public
interest hampers the reform process. When the players put forward their interests at the expense of
the public interest, reforms can be expected to either suffer or fail. The economics of incentives theory
tells us that economic agents – with acquisitive behavior and conflicting goals–behave (or misbehave)
in reaction to certain incentives (Sonnenschein 1983 as cited in Basilio 2012).
As mentioned in the previous section, the government has formulated a National Competition Policy
that calls for, among other things, the promotion of competitive neutrality concerning GOCCs. It
highlighted the need to review the mandate of PPA and MARINA to separate regulatory from
commercial functions, as well as address anti-competitive behaviors in the shipping industry.
Moreover, in the Updated Philippine Development Plan released in February 2021, one of the key
recommendations is to “revisit the management and regulation of ports to improve the efficiency of
port operations and encourage competition among ports. The separation of the regulatory and
operational functions of port authorities and the subsequent establishment of a single entity for port
regulations may increase the efficiency and competitiveness of ports by allowing inter-port
competition and encouraging more private sector participation.”
Immediate Action. On 17 April 2020, due to the economic downturn brought about by the COVID-
19 pandemic, the business community submitted a ‘wish list’ of doable reforms (low-hanging fruits) to
the Inter-Agency Task Force on Emerging and Infectious Diseases (IATF-EID) to cushion the
adverse impact of the pandemic on the economy. One of them is the rescission of LOI 1005-A to (a)
partially reduce the conflict of PPA in rate-setting and (b) reduce the cost by 10-20% (by giving up
PPA’s share from cargo handling revenues). The industry captains assert: “While this recommendation
admittedly will cause a reduction in PPA’s revenue, we have to put a stop to this policy of sharing from
cargo handling revenues which unnecessarily increases logistics cost. The negative impact [damage]
such a policy brings to the economy is definitely greater than whatever the government does with the
revenues it generates…This [move] will have a long-lasting impact, beyond the COVID-19 crisis.”
52
The Anti-Red Tape Authority (ARTA) submitted a memorandum to the Office of the President
endorsing the issuance of an Executive Order (EO) rescinding LOI 1005-A. Unfortunately, the
President has not acted on this recommendation to date.
Long-Term Solution. Correcting the flaws in the existing port policy represents the ‘first- best’
solution. This requires amending PPA’s Charter (PD 857 s. 1975). There is a bill (House Bill No. 4317)
filed in Congress that seeks to separate PPA’s regulatory and commercial functions by converting it
to Philippine Ports Corporation and transferring its regulatory functions to the Maritime Industry
Authority [MARINA]. As envisioned in the bill, PPA will cease to be a Port Authority; it will remain
as a public enterprise (PHILPORTS) mandated to undertake the development, management, and
operation of public ports within its system and will now compete against existing and future private
commercial ports. It can even enter into partnerships with other parties. All regulatory powers and
functions of the old PPA shall be transferred to the MARINA.
This is a laudable initiative. It corrects the flaws in the port policy, administration, and governance
that stem from the conflict of interest of the Authority being both an enterprise and a regulator. The
degree of government’s resolve in improving port policy will ultimately determine the outcome of this
reform - i.e., the passage of HB 4317. A counterpart bill needs to be filed in the Senate.
CASE 2: The Civil Aviation Authority of the Philippines (CAAP)
From being mere utility providers, airports have become key economic drivers of the communities
they serve—cities, regions, and even countries. With commercial revenues accounting for the bigger
share of total revenue for many airports, it has become imperative for airports to function as
sophisticated business-oriented service providers (ACI 2016). Vogel (2019) noted that airports
throughout the world, over the last few decades, have been transforming from mere infrastructure
providers into business-oriented service providers marked by complex businesses, operating in unique
and evolving physical, financial, and regulatory environments. Moreover, Pabedinskaitėa and
Akstinaitė (2014) cited that airport in many countries have turned from state monopolies into
competing operators, and flight directions are determined by market changes. The pressure to increase
efficiency to preserve competitiveness has become more essential for competitiveness with the
emergence of low-cost carriers. Governments are, increasingly, turning to the private sectors for their
efficiency in managing the operation, financing, and development, as well as providing security for
airports.
The Creation of CAAP. Unlike PPA which had very few amendments to the original PD (505)
issued in 1974, the history of air transport regulation in the Philippines can be traced as far back as
1931 with the creation of the Office of Technical Assistant of Aviation Matters under the Department
of Commerce and Communication. Since then, the agency has undergone an evolution marked by
shifting names, mandates, and lines of authority. In 2008, Republic Act No. 9497 (The Civil Aviation
Act of 2008) was enacted into law creating the Civil Aviation Authority of the Philippines. CAAP
53
replaces the Air Transport Office (ATO). Table 5 provides a historical account of the evolution of
civil aviation authority in the country.
Table 5. Summary of Government Issuances Related to Civil Aviation

Issuances Title / Description
Act No. 3909 Created the Office of Technical Assistant of Aviation Matters under the
(1931) Department of Commerce and Communication. Establishment of
Airports as a key mandate.
Act No. 3996 An Act to amend act numbered thirty-nine hundred and nine concerning the licensing
(1932) of airmen and aircraft, inspection of the same, air traffic rules, schedules and rates of
aviation companies, and the enforcement of the law, approved on 5 December 1932
Redefined “air commerce” and minor amendments to licensing issues
and rules.
Act No. Reorganization Law of 1932. Approved on 5 December 1932.
4007 Reorganization Law of 1932. Department of Commerce and
(1932) Communication becomes the Department of Public Works and
Communication.
AO No. Office of Technical Assistant of Aviation Matters upgraded to Aeronautics

309 Division
Act No. 4033 An Act amending certain provisions of Act No. 3108, as amended, entitled, "An Act
(1932) creating a Public Utility Commission and prescribing its duties and powers, and for other
purposes," was approved on 9 December 1932.
The act created a Public Utility Commission. Aviation public services
need a franchise from Congress.
CA No. 168 Civil Aviation Act, National Assembly, 12 November 1936.
(1936) Aeronautics Division replaced by Bureau of Aeronautics
CA No. 529 An Act Amending Sections 3, 6, and 7 of CA No. 168, known as the Civil
(1940) Aviation Law, and Inserting Section 6.5 in the same, 11 May 1940.
Placed Bureau of Aeronautics under the Department of National Defense
and gave the Director Aeronautics greater power in supervising aviation
schools
AO No. 7 Creating The Civil Aeronautics Commission, 30 July 1946.

(1946) Created the Civil Aeronautics Commission to promote efficient and
coordinated development of civilian air transportation in the Philippines
with the Secretary of Public Works and Communications, as Chairman
and the Director of Aeronautics as one of the members.
54
EO No. 94 Reorganizing the different executive departments, bureaus, offices, and agencies of the
(1947) government of the Republic of the Philippines, making certain readjustments of personnel
and reallotment of funds in connection therewith, and for other purposes, 4 October
1947.
Created the Civil Aeronautics Administration (CAA) and the Civil
Aeronautics Board (CAB) to replace the Bureau of Aeronautics and the
Civil Aeronautics Commission and transferred them to the newly created
Department of Commerce and Industry.
RA No. 224 An Act to Create a Public Corporation to be known as the "National Airports
(1948) Corporation," to Define its Powers and Duties, to Appropriate the Necessary Funds
Therefor, and for Other Purposes, 5 June 1948.
Created the National Airports Corporation to serve as an agency of the
Republic of the Philippines for the development, administration,
operation, and management of government-owned landing fields in the
Philippines.
EO No. 365 Reorganizing the Civil Aeronautics Administration, abolishing the National Airports
(1950) Corporation created under RA No. 224 and transferring its functions, funds, capital,
and properties to the Civil Aeronautics Administration, creating a revolving fund for
the operation of the Manila International Airport, and for other purposes, 10
November 1950.
Abolished the National Airports Corporation, transferred its functions,
funds, capital, and properties to the Civil Aeronautics Administration, and
created the Manila International Airport Division under the CAA
RA No. 776 The Civil Aeronautics Act of the Philippines, 20 June 1952.
(1952) The Civil Aeronautics Act of the Philippines. Declared it a policy for CAB
and CAA to be guided by the same common objectives enumerated in
Section 136 of EO 94 of 1947 with the inclusion of the need for both
agencies to “promote the safety of flight in air commerce in the
Philippines
EO No. 209 Providing the implementing details for reorganization plan no. 60 relative to public
(1956) utilities’ regulation and land transportation, 19 October 1956.
Transferred into the CAA to the Department of Public Works,
Transportation, and Communications from the Department of Commerce
and Industry
PD No. 189 Amending Part IX of the Integrated Reorganization Plan by renaming the Department
(1973) of Trade and Tourism as the Department of Tourism and creating the Department of
Tourism with a Philippine Tourist Authority attached to it in lieu of Philippine Tourist
Commission, 11 May 1973.
Reconstituted and attached the Civil Aeronautics Board under the newly
created Department of Tourism and decreed the Secretary of Tourism as
its Chairman to support government efforts towards trade promotion and
tourism development
55
LOI No. 244 Letter of Instruction, 20 January 1975.

(1975) Relieved the CAA of the functions of airport construction and
maintenance and declared it the responsibility of the Department of
Public Highways, a newly created department arising from the former
Bureau of Highways created by virtue of Presidential Decree 458
[Amending PD No. 1 dated 24 September 1972 Relative to Part X of the Integrated
Reorganization Plan, 16 May 1974].
PD 1462 Amending Certain Sections of RA No. 776, 11 June 1978.

(1978) Gave CAB “more authority and flexibility to be able to meet the current
and future demands on civil aviation development by Philippine trade,
commerce, and tourism.” Transfer of Chairmanship of the CAB Board to
the Minister of Tourism, an increase in permanent personnel, greater
powers for its board, and stiffer penalties for violations of provisions of
the act.
EO 546 (1979) Creating a Ministry of Public Works and a Ministry of Transportation and
Communications, 23 July 1979.
Renamed the CAA as the Bureau of Air Transportation (BAT) and
placed it under the new Ministry of Transportation and
Communications.
EO 125 (1987) Reorganizing the Ministry of Transportation and Communications, Defining Its Powers
and functions and for other purposes, 30 January 1987.
EO 125-A Amending EO No. 125, entitled “Reorganizing the Ministry of Transportation and
(1987) Communications, Defining Its Powers and Functions, and for other purposes,” 13
April 1987.
Reorganized the Ministry of Transportation and Communication, renamed
the BAT as the Air Transportation Office (ATO), and transferred both
the CAB and ATO under the Ministry.
EO 217 (1987) Further Amending Section 5 of RA No. 776, as Amended, 10 July 1987.
Transferred the Chairmanship of the CAB from the Minister of Tourism
to the Secretary of Transportation and Communication
EO 219 (1995) Establishing the Domestic and International Civil Aviation Liberalization Policy, 3
January 1995.
Call to establish the domestic and international civil aviation liberalization
policy and mandated CAB implement this policy
RA 9497 The Civil Aviation Act of 2008, 14th Congress of the Republic of the Philippines
(2008) Emphasis on safety. Created the more powerful and autonomous Civil
Aviation Authority of the Philippines (CAAP) to replace ATO. Affirms
that CAB maintains its powers and functions
56
EO 29 (2011) Authorizing the Civil Aeronautics Board & the Philippine Air Panels to pursue more
aggressively the International Civil Aviation Liberalization Policy, 14 March 2011.
Authorized the CAB and Philippine Air Panel to pursue more aggressively
the international civil aviation liberalization policy.
Key Issue. According to the International Civil Aviation Organization (ICAO 2016), “CAAP, like
many aviation authorities throughout the world, is operating under scenarios that lead to a conflict of
interest as the regulator, operator, and investigator. These conflicts of interest may hamper effective,
independent, and impartial regulation thereby posing risks to aviation safety and security.”
Conflict of Interest
Following a survey conducted by the ICAO Secretariat in 2016, it was concluded that “it would be
useful for all States to have a framework dealing with conflicts of interest in civil aviation given the
prevalence of such situations in the civil aviation activities of States.” ICAO (2016) goes on further to
state that conflict of interest in the field of civil aviation “may arise, principally, in two different
scenarios”:
a. First, through interactions between a department of the Government or its regulatory agencies
with operating entities that are subject to regulation (such as air operators, aviation training
organizations, approved maintenance organizations, design organizations, production
organizations, air navigation service providers, and aerodrome operators). Examples of conflict
of interest situations that could arise in the course of such interactions include: (a) direct or
indirect financial interests in regulated entities; (b) movement of individuals between jobs in the
regulatory and regulated entities (also referred to as ‘revolving door’ situations); (c) performance
of regulatory duties by seconded or designated staff of the regulated entities; (d) partnerships or
arrangements between regulatory and regulated entities to advance the commercial interests of
the regulated entities at the expense of the public interest (leading to what is also referred to as
‘regulatory capture’); and (e) lobbying of policy or rule-making bodies on behalf of or in favor of
regulated entities.
b. Second, through relationships between different organs or entities of the State involved in civil
aviation activities, which could include: (a) overlap of functions between regulatory bodies and
the government or its other organs such as the military, police, customs, and investigative
bodies; (b) ownership or control of regulatory and operator entities by the State; and (c)
combination of regulatory and service provision functions in the same or related entities that
have a significant impact on safety. And this was the main reason why, in January 2008, the
United States Federal Aviation Administration (FAA) reverted the Philippines to its 1995 air
safety rating of Category 2 from Category 1 as its air safety regulations, practices and personnel
again fell below the standards of the International Civil Aviation Organization (ICAO).
Following a prompt Senate inquiry, Republic Act. No. 9497 or the Civil Aviation Act of 2008
was approved on 4 March 2008. Under the close scrutiny of a Congressional Oversight
Committee as provided for in Section 91 of the Act, CAAP was supposed to address the FAA
ruling as well as the European Commission's decision to ban Philippine carriers from European
57
airspace in 2010. It took the Philippines six (6) long years to regain its Category 1 status. On 10
April 2014, CAAP was able to have the FAA reinstate d a Category 1 rating for the Philippines.
However, while this was a welcome development for the country, there seems to be a need to
revisit RA 9497 to address issues that have emerged since the authority’s inception thirteen years
ago. As observed by Rodolfo (2017), CAAP has conflicting responsibilities as a regulator,
operator, and investigator.
Under Section 78 of RA 9497 (CAAP Law), the CAAP Board is “responsible for the planning,
development, construction, operation, maintenance, or the expansion of airports. In planning and
developing new airports, the Board shall consider: (a) the suitability of a proposed site in terms of
terrain and proximity to population center(s); (b) the projected size of the market to be served by a
proposed airport; (c) ability of a proposed airport to generate sufficient revenue to cover costs of
operation and maintenance; (d) availability of funding from both local and foreign sources for the
construction of a new airport or expansion of an existing one; (e) proximity of other airports to a
proposed new airport and the capability of such other airport to handle traffic projected to be handled
by the new proposed airport; (f) government's public service obligations, more particularly the
government's duty to ensure the availability of air transport infrastructure for remote areas far from
major population centers and that is not otherwise easily accessible by transportation via land or sea. In
such cases, the Board shall take reasonable steps to ensure that funding will be available for the
operation and maintenance of such airports; (g) ICAO best practices and recommendations concerning
the development of airports; and (h) such other considerations as the Board, in the exercise of its
reasonable discretion, may consider relevant or important.” It can be gleaned from the items listed in
Section 78 that they entail functions that are operational in nature of the airports that are (or will be
under) the regulatory control of the agency and also owned by the state. Such a situation conforms
with the first and second scenarios leading to a conflict of interest as stated ICAO Working Paper
cited above.
On the other hand, Section 42 reads: “Aircraft Accident Investigation and Inquiry Board. Pending the
establishment of an independent and separate government agency created to investigate accidents on
land, air, and water, the Director-General shall organize an Aircraft Accident Investigation and Inquiry
Board (AAIIB), to be composed of personnel of the Authority specialized in the various disciplines
of civil aviation. The Board shall appoint the head of the AAIIB.” This places CAAP in a situation
that conforms to the second scenario cited by ICAO above. While this is supposed to be just a
transitory provision pending the establishment of an independent and separate government agency
created to conduct investigations of accidents, it has remained with CAAP for 14 years now.
Benchmarking with ASEAN Aviation Authorities

Pursuant to Article 7 (4) of the international treaty, the United Nations Convention Against
Corruption of 2003 (UNCAC), that enjoins each state, in accordance with the fundamental principles
of its domestic law, endeavor to adopt, maintain and strengthen systems that promote transparency
and prevent conflicts of interest as well as ICAO and in accordance to the framework proposed by
58
ICAO based on the ICAO’s Universal Safety Oversight Audit Programme (USOAP) findings, the top
economies of the ASEAN have taken measures to address conflict of interest in civil aviation.
Singapore. In its original charter in 1984, the Civil Aviation Authority of Singapore (CAAS) performs
four broad categories of functions: regulatory, promotional, operational, and international, including
overseas ventures. The authority may appear to have been successful in fulfilling these functions as
evidenced by the substantive growth in air traffic in Changi Airport as well as accolades for service
excellence it earned by being declared as the best airport in the world by Business Traveller UK in
1988 and by SKYTRAX in 2006.
Nonetheless, in response to looming challenges brought about by the entry of new mega airports
managed by privatized entities enjoying strong government support as well as changing business
models for airport operations, the Singaporean government made a strategic decision to separate the
regulatory and business functions to achieve a “combination of enhanced commercial discipline and
more flexibility to compete aggressively for global talent, whilst leveraging on Changi Airports brand
name to exploit overseas investment opportunities.”
The Changi Airport Group (CAG) was incorporated in July 2009 to take over from the Civil Aviation
Authority of Singapore (CAAS) the following functions: (a) airport operations and management of
the Changi Airport, (b) air hub development, (c) commercial activities, and (d) airport emergency
services. CAG also manages Seletar Airport and through its subsidiary Changi Airports International,
invests in and manages airports around the world. Of CAG’s total revenue, 48% comes from rentals
and concessions, 39 percent from airport services, leaving 13 percent from other sources. Changi
Airport was declared by SKYTRAX World Airport Awards as World’s Best Airport in 2006, 2010, and
2013-2020.
Investigation of air, marine, and rail accidents and incidents in Singapore is performed by the
Transport Safety Investigation Bureau (TSIB). The TISB was created on August 1, 2016, when the
Ministry of Transport restructured the Air Accident Investigation Bureau (AAIB) to form the new
bureau.
Malaysia. In 1992, the Department of Civil Aviation of Malaysia under the Ministry of Transport was
separated into two entities namely the Department of Civil Aviation (DCA) and a corporatized
Malaysia Airports Berhad (MAB) with DCA remaining as the regulatory authority for technical, safety,
and operational standards of civil aviation for the country while MAB focused on the operation,
management and maintenance of airports in Malaysia. DCA was later transformed in 2018 into an
independent regulatory and statutory body known as the Civil Aviation Authority of Malaysia (CAAM)
under the Civil Aviation Authority of Malaysia Act 2017 [Act 788].
MAB was publicly listed in 1999 and went on to become one of the largest airport operator groups in
the world in terms of the number of passengers handled. Currently, the company is managing 39
airports across Malaysia (with five international airports, 16 domestic, and 18 short takeoff and landing
59
ports) as well as one international airport in Turkey. In 2019, about 53 percent of revenues came from
aeronautical services while the rest came from commercial operations such as rental, duty-free and
non-dutiable goods, hotels, and others.
To “promote a commercially viable, consumer-oriented, and resilient aviation industry,” the country
established the Malaysian Aviation Commission (MAVCOM) in 2015 to regulate economic matters
relating to the industry. This agency is focused on economic and consumer issues of the industry while
CAAM regulates technical and safety matters. The Ministry of Transport is the principal policymaker
in the aviation industry of Malaysia and handles all government-to-government discussions. As of
2018, about 88% of MAVCOM revenues come from the amortization of public service funds while
regulatory service charges account for most of the rest.
The Air Accident Investigation Bureau (AAIB) was established in accordance with the Cabinet
Decision dated December 14, 2011, the Memorandum of the Minister of Transport No. 1002/2011,
and the requirements of ICAO as an independent investigation entity of all air accidents and serious
incidents occurred in involving both Malaysian and foreign registered civil aircraft. The AAIB also
participates in and oversees the investigation of air accidents and serious incidents involving Malaysian
civil registered aircraft.
Thailand. In response to the ICAO report of significant safety concerns in Thailand and the
downgrading of the country’s aviation safety rating, the Department of Civil Aviation (DCA) of
Thailand was split into the Civil Aviation Authority of Thailand (CAAT) and the Department of
Airports (DOA) with the former as the regulator of the industry and the latter as the operator of 28
civil airports throughout the country pursuant to the Civil Aviation Authority of Thailand Emergency
Decree B.E. 2558 (2015).
The Airports of Thailand (AOT) was created by an act of the National Assembly to manage the
Bangkok Airport towards a more business-oriented approach. Shortly thereafter, 5 other airports have
been transferred under the management of AOT. The state-owned enterprise was converted into a
public company in 2002 using the name Airports of Thailand Public Company Limited (AOT). The
company was declared by Bloomberg in 2018 as the world’s most valuable airport operator. About
56 percent of AOT’s revenue is derived from aeronautical sources and 44 percent from non-
aeronautical sources.
The Aircraft Accident Investigation Committee of Thailand was created in 1954 in accordance with
Sec. 63 of Air Navigation Act B.E. 2494. Its mandate is to investigate aircraft accidents in accordance
with Annex 13 of the Convention of International Civil Aviation made in Chicago on 7 December
1944.
Vietnam. From what was originally a single entity, Vietnam Civil Aviation, which was founded in
1956 regulated and operated almost all facets of the aviation industry, is now several agencies and
entities that have been established through the years to meet the double-digit growth rates of the
60
country’s aviation market for the past couple of decades.
The Civil Aviation Administration of Vietnam, an agency directly under the Ministry of Transport,
performs “the function of advising and assisting the Minister of Transport in the state management
of civil aviation nationwide; directly perform the duties and powers of the aviation authorities in
accordance with the law and international treaties to which the Socialist Republic of Vietnam is a
signatory.” Air navigation services in Vietnam are provided by Vietnam Air Traffic Management
Corporation (VATM), a Single Member Limited Liability Company operating in the form of the parent
company – subsidiaries with 100 percent State-owned charter capital, belonging to the Ministry of
Transport.
The Airports Corporation of Vietnam (ACV) in collaboration with its 8 subsidiaries manages 22
airports, 7 of which are international. The company was converted from a single-member limited
liability Company with 100 percent State-owned charter capital to a joint-stock company with State-
owned controlling stakes in 2015. The government of Vietnam has been encouraging the participation
of the private sector in aviation infrastructure. The Van Don was the first airport developed under the
BOT scheme and was completed in 2018. In the pipeline now are a BOT scheme for the Phan Tiet
Airport and a proposal for PPP for components of the future Sa Pa Airport.
For investigations of aviation accidents, while there is a Transport Safety Department under the
Ministry of Transport, it seems that the Flight Safety Standard Department under CAAV remains as
accident investigation authority per ICAO records.
Indonesia. Regulatory function over the aviation sector of Indonesia falls under the purview of the
Directorate General of Civil Aviation (Indonesia), an agency under the Ministry of Transportation.
Operations of its airports are divided between Angkasa Pura I for the 15 airports in the easter region
of Indonesia and Perum Angkasa Pura II for the 20 airports in the western part of Indonesia. State
Enterprise (PN) Angkasa Pura was established in 1962 but was later changed to Perum (Public
Company) Angkasa Pura I in 1974. With the division of the commercial management of airports
divided into 2 in 1984, Perum Angkasa Pura II was created.
National Transportation Safety Committee is charged with the investigation of air, land, rail, and marine
transportation safety deficiencies. The agency was established in 1999 under the Ministry of
Transportation but was placed under the office of the president in 2012. Table 6 provides a summary
matrix of the aviation industry management regime in select ASEAN countries.
61
Table 6. Aviation Industry Management Regime for Selected ASEAN Countries

Country Regulatory Airport Accident Remarks
Functions Operations Investigation
Singapore Civil Changi Transport Changi Airport was declared by
Aviation Airport Safety SKYTRAX World Airport Awards
Authority Group Investigation as World’s Best Airport in 2006,
of (2009) Bureau 2010, and 2013-2020.
Singapore (2016) https://www.worldairportawards.co
(2009) m/airport- of-the-year-winners/
CAG income: 48% rentals &
concessions, 39% airport services,
13% others
CAAS income: 50% airport rel. fees,
28% aviation levy, 22% others
Malaysia Civil Malaysia Air Accident MAHB is one of the largest airport
Aviation Airports Investigation operator groups in the world—in
Authority Holdings Bureau terms of the number of passengers
of Berhad (2016) handled—managing 39 airports
Malaysia (1999) across Malaysia and one
(2018) international airport in Turkey.
MAHB Income: 78% airport
services, 16% duty- free shops, 6%
others.
MAVCOM Rev. Public Service
Fund 88%, Regulatory Income: 12%
Thailand Civil Department Aircraft The Department of Civil Aviation
Aviation of Airports Accident of Thailand was split into CAAT
Authority (2015) – 28 Investigation and DOA in 2015 in response to the
of airports Committee ICAO downgrading of the
Thailand Airports of of Thailand country’s aviation safety rating.
(2015) Thailand (1954) AOT was declared by Bloomberg in
(1979) 2018 as the most valuable airport
operator. AOT
Airport Revenues: 56% aeronautical, 44%
Authority of non- aeronautical.
Thailand,
CAAT Revenues: 97% fees, 3%
went public
others
as AOT in
2002) – 6 big
airports
62
Vietnam Civil Viet Nam Air Transport Airports Corporation of Vietnam is

Aviation Traffic Safety operating under the parent
Authority Management Department company – subsidiaries model,
of Corporation under the managing 22 airports nationwide, of
Vietnam Ltd. (1993) Ministry of which 7 are international airports.
(1993) Airports Transport ACV’s charter capital is
Corporation 21,771,732,360,000 VND,
of Vietnam equivalent to 2,177,173,236 stocks
(2015) with nominal value of
10,000VND/stock, in which the
State holds 95.4% shares, other
shareholders hold 4.6%.
ACV Revenues: 80% aviation
services, 12% non-aviation services,
8% sale of goods.
Indonesia Directorate Angkasa Pura National NTSC was put under the Office of
General of I (1974) Transportati the President in 2012.
Civil – eastern on Safety Angkasa Pura Revenues:
Aviation region’s 15 Committee aeronautics – 58%, non-aeronautics
airports (1999) – 42%.
Angkasa Pura
II (1986) –
western
region’s 20
airports
It is clear from the Table that the mixing of the two functions/roles was common in the earlier stage
of development when capacity building was the first-tier concern and market competition was the
second-tier concern. But as the market developed, the need to clear delineation of functions into
different agencies arose and has been addressed. The direction to address conflict of interest is as
recommended in this paper: separation of mandates by the agency to avoid conflicts. Regulation will
now decide on issues to maximize public welfare and regardless of ownership - competitive neutrality.
State promotion will continue to push the provision of services, especially in those areas where private
business is not viable.
Reforming the Aviation Policy in the Philippines

The Philippine government recognizes the need to address the conflict-of-interest issue. The concern
has been incorporated in the government’s 2017-2022 PDP. As previously mentioned, under Chapter
16 of the PDP, it is recognized that “there are a number of government agencies with legislative
charters that have dual regulatory and proprietary functions.” It is further stated that the “government
will uphold the principle of competitive neutrality and adopt policies that establish a level playing
field where GOCCs and firms compete.” In the legislative agenda under Chapter 19 of the PDP
entitled ‘Accelerating Infrastructure Development’, the “Enactment of a Law Creating an
63
Independent Body for Transport Safety and Security… that will, among others, investigate transport
accidents and provide transport safety recommendations, thereby eliminating conflicting and
overlapping functions of existing agencies or entities” was called for. Legislators are likewise cognizant
of the conflict of interest inherent in the mandates of CAAP.
There are more than 55 aviation-related bills filed in the 18th Congress of which five (5) are most
relevant in addressing the CAAP’s conflict of interest issue by decoupling its regulatory, proprietary,
and safety mandates (see Table 7):
a. House Bill 7976 / Senate Bill 1490 – seeks to create an independent Philippine Airports
Authority (PAA) mandated to develop, operate, and manage airports in the country.
b. House Bill 8700 / No counterpart bill yet in the Senate – seeks to amend CAAP’s Charter to
strengthen the organization and limit its mandate to regulation.
House Bill 9030 / Senate Bill 1077 – seeks to create an independent Philippine Transport Safety Board
(PTSB) mandated to handle transport accident investigations The good news is that after more than
a decade, these Bills have been consolidated/ratified by Congress and transmitted to the Office of the
President for signing.
Table 7. Summary of Aviation-related Bills in Congress
Code Type of Bill 18th Important Bills Status

Congress
A Establishing 7 Senate Bill (SN) No. 1077 Consolidation of
Airport and House Bill (HB) No. the approved
Authorities 09030 - An Act Creating Senate and House
a Philippine Transport bills at the
Safety Board, prescribing Bicameral
its powers and functions, Committee.
and appropriating funds
thereof
B Establishment/ 10 SB No. 1490 and HB No. SB No. 1490 was
Development/ 7976 - An Act creating referred to
the Philippine Airports Committees on
Improveme Authority (PAA), Government
nt of defining its powers, Corporations and
Airports functions, and Public Enterprises;
responsibilities, Public Services;
providing funds therefor, Ways and Means
and for other purposes and Finance.
HB No. 7976 was
referred to the
Committee on
Government
64
Enterprises and
Privatization.
C Renaming 9
Airports
D Transfer of 0
properties/aut
hority
Development 7
E of
infrastructure
around
airports
Call for 6
F investigation
/
Oversight
G Reforming 2 HB No. 8700 - An Act Bill referred to the
CAAP and Strengthening CAAP, House Committee on
CAB amending for the purpose Transportation
RA No. 9497, otherwise (February 2021)
known as the Civil
Aviation Authority Act
of 2008.
No counterpart bill in the
Senate.
H Public Safety 11
and Consumer
Welfare
I Training 2
J Others 1
Total 55
Source of Basic Data: Philippine Congress
Way Forward
An aviation industry and maritime transport industries that are competitive are key, especially for an
archipelagic country like the Philippines, to support and catalyze the economy’s growth and
development. Having a sound regulatory environment is critical to the efficient functioning of these
industries. Correcting the flawed regulatory framework, by decoupling the conflicting proprietary and
regulatory mandates of the main aviation and maritime transport regulatory bodies – CAAP and PPA,
is a necessary step and the most important reform at hand. This agendum of making the Philippine
transport referees ‘unbiased’ and ‘autonomous’ should be on the top agenda of the 19th Congress.
65
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67
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68
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69
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70
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71

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PREO Journal of Business and Management EISSN: 2945-3933

Volume 4, Issue 2, October 2023

Conflicted Regulatory Environment in the Transportation Sector: The Cases of

Francisco L. Villanueva, Jr. (Corresponding Author)

Keywords: public enterprise, government-owned or controlled corporations (GOCCs), regulation,

Figure 1. Corporate Mandates

Figure 2. Objectives Cited in SOE Ownership Rationales

Source: Department of Finance

Figure 3. 2020 GOCC Corporate Dividend (in Billion Pesos)

Figure 4. Unique Structure (Conflicted Regulator)

Case 1: The Philippine Ports Authority (PPA)

The Port Monopoly

Regular Government Agency

Figure 5. PPA Mandates

Table 1. Cargo Handling Rate Increases (1989-2020)

PPA MC 12-2021 2021 15.33%* 15.33%** 10.58% – 11% 10.58% – 11%

Source: AISL Presentation (01 October 2020)

Competitive Neutrality Issue

Table 2. Philippine Infrastructure Ranking

Table 3. Effect of Competition in Non-Containerized Cargoes at Manila Ports (Market

Box 1: Harbour Centre

Table 4. Select Port ASEAN Port Authorities: Mandates and Structures

case of forming a worth USD

Reforming the Port Policy and Regulatory Environment

CASE 2: The Civil Aviation Authority of the Philippines (CAAP)

Table 5. Summary of Government Issuances Related to Civil Aviation

AO No. Office of Technical Assistant of Aviation Matters upgraded to Aeronautics

AO No. 7 Creating The Civil Aeronautics Commission, 30 July 1946.

LOI No. 244 Letter of Instruction, 20 January 1975.

PD 1462 Amending Certain Sections of RA No. 776, 11 June 1978.

Benchmarking with ASEAN Aviation Authorities

country’s aviation market for the past couple of decades.

Table 6. Aviation Industry Management Regime for Selected ASEAN Countries

Vietnam Civil Viet Nam Air Transport Airports Corporation of Vietnam is

Reforming the Aviation Policy in the Philippines

Table 7. Summary of Aviation-related Bills in Congress

Code Type of Bill 18th Important Bills Status

. (2012). Towards a Market-Oriented Reform in the Port Sector. UP NCPAG Doctoral

IATA Economics. https://www.iata.org/en/iata-repository/publications/economic-

ICAO (2016). A39-Working Paper/77 (Conflicts of Interest in Civil Aviation)

(2013). Universal Security Audit Programme-Analysis of Audit Results, Reporting

Malaysian Aviation Commission Annual Report 2018

(2021). Updated Philippine Development Plan 2017-2022. Chapter 9B Expanding

SEPO. (2006). A Profile of Select Philippine Government-Owned and Controlled Corporations

Sonnenschein, H. (1983). The economics of incentives: An introductory account. Nancy Schwartz

World Economic Forum (2018-2019). Global Competitiveness Reports

Laws (Act, Commonwealth Act, Presidential Decree, Republic Act)

Act No. 4007 (s. 1932), Reorganization Law of 1932

Commonwealth Act No. 168 (s. 1936). Civil Aviation Act

Bills, Resolutions (House and Senate)

Letter of Instruction/Administrative Order/Memorandum Order/Circular

Letter of Instruction No. 1005-A (s. 1980)

Letter of Instruction No. 244 (s. 1975)

Flight Safety Foundation https://flightsafety.org/singapore-restructures-aaib/

House of Representatives. Republic of the Philippines Website,

Senate of the Philippines Website. Republic of the Philippines,

Downloaded from: https://www.icao.int/Meetings/a39/Documents/WP/wp_077_en.pdf

Philippine Ports Authority website (www.ppa.com.ph)

Philippine Ports Authority.