ENHANCING MARITIME SUPPORT SERVICES IN MALAYSIA : A STRATEGIC APPROACH

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1 ENHANCING MARITIME SUPPORT SERVICES IN MALAYSIA : A STRATEGIC APPROACH Nazery Khalid Research Fellow Center for Economic Studies and Ocean Industries nazery@mima.gov.my Abstract The importance of maritime support services in supporting the major components of maritime transport, namely ports and shipping, cannot be overemphasized. Without ancillary activities such as logistics, financing, law and insurance, ports and shipping cannot grow, hence neither can the country s trade. For a country like Malaysia, which depends heavily on maritime transportation to facilitate its international trade, it is essential to develop the maritime support services to ensure that its maritime sector can facilitate the country s growing trade volume and to enhance its competitiveness as a trading nation. While Malaysia has done well to develop various maritime support services, it must do more to enhance the scope and capacity of these services to enable the practitioners to serve the international market and to capitalize on growing global trade volumes and growing demand for maritime services. To enhance the competitiveness of its maritime ancillary services sector, Malaysia would do well to adopt a strategic approach to allocate available resources optimally, to nurture human capital and to leverage its existing strength as a maritime and trading nation and to elevate its maritime support services to be at par with other leading maritime nations. This is crucial in the context of the emphasis given by the Third Industrial Master Plan (IMP3) to enhance the growth of the nation s ports throughput and its logistics sector to serve the nation s growing needs for maritime services and rising trade volumes. This paper argues for the case of adopting a strategic approach to develop the nation s maritime service sector to meet these aspirations and recommends a set of strategic thrusts towards enhancing Malaysia s trade and maritime competitiveness in the maritime support services sector. 1. The importance of maritime support services to facilitate Malaysia s trade The maritime industry plays a pivotal role in facilitating Malaysia s growing trade, leading to it being ranked among the world s major trading nations. 1 The importance of its maritime sector is underlined by the fact that an estimated 95% of the nation s trade is carried via ocean-going vessels. 2 Given the nation s reliance on maritime transportation as 1 In 2006, Malaysia was ranked by the World Trade Organization as the 19th largest exporter, accounting for 1.3% of global merchandized exports that year. Malaysia s trade reached an all time high of RM1.3 trillion in 2006, moving more than 300 million tons of cargo. 2 Retrieved from on 3/6/

2 an indispensable enabler of its international trade, it is not an exaggeration to state that the maritime industry serves as a backbone to its economic prosperity. Maritime support services such as logistics, banking, insurance, law, ship classification and IT provide crucial support to the operations of ports and shipping the main pillars of maritime transportation - to facilitate Malaysia s growing trade. Without these supporting activities, the country s maritime infrastructure would not be able to handle the country s increasing trade volume efficiently. In addition, its trade and economic growth would be hampered by an inefficient trade supply chain. 3 This, in turn, could erode Malaysia s competitiveness as a trading nation and its attractiveness as an investment destination. Amid increasing competition among nations to attract foreign direct investments (FDI) and among ports to lure shipping lines and their cargo, countries which could not provide the spectrum of services needed to facilitate trade in a smooth and effective manner would be shunned by investors, and their ports would be bypassed by international shipping lines. With the growing importance of the maritime sector to facilitate Malaysia s everincreasing international trade and to propel its economic growth, the role of services supporting this sector has become more pronounced. The patterns and dynamics of production and the globalization of trade have shaped the demand for materials and goods like never before. Goods and materials of a stunning variety are moved in increasingly huge volumes, across further distances and in shorter time and lower cost to meet growing global demand and reach consumer markets quickly and efficiently. In meeting these objectives, more than just vehicles, infrastructure and systems are required to physically move goods far and wide at the lowest cost and shortest time possible. This gargantuan task requires a whole new approach in moving goods and in the management of the supply chain. Crucial to meeting this task are supporting activities such as the handling of administrative, legal, insurance, financial, tax, logistics and Customs matters to facilitate the trans-boundary movement of all kinds of cargo via maritime means. Given the growing competition in an increasingly borderless international trading environment, many business organizations have subcontracted the functions of distribution of finished goods and final products to companies offering integrated, one-stop logistics solutions covering all aspects of transportation of goods. Amid this global trend, there is growing emphasis by companies on managing their supply chain and emphasizing on logistics to gain strategic and competitive advantage. More and more, supply chain management is playing a crucial role for companies to gain the business edge and for nations to enlarge their international trade. To this end, companies focused on reducing the cost of delivering goods and materials to their markets have dramatically changed the landscape of international trade and the processes involved. The increasing obsession of producers and manufacturers to reduce the lead-time for inventory replenishment and to shorten the cycle of production - as underlined by concepts such as zero-inventory and just-in-time production has redefined the way goods are delivered to consumers. The focus on speed and efficiency require highly integrated processes and specialized companies to plan, organize, execute and control the challenging task of delivering goods efficiently worldwide in huge quantities and at low costs. 3 The trade supply is a network of organizations involved in the upstream (supplier end) and downstream (user end) linkage of trade. This link involves different processes and activities that link producers of raw materials and manufacturers of goods with the ultimate consumers which use those materials and goods. 2

3 Therein lies the critical importance of ancillary services supporting the maritime sector which carries much of Malaysia s international trade. To ensure goods are exported across boundaries within the stipulated time and conditions, businesses and nations require that there are minimum obstacles and maximum efficiency. This requires that barriers to trade and cumbersome processes in the trade supply chain are kept to a minimum to ensure that goods are delivered speedily, efficiently and economically. The availability of a spectrum of ancillary services - and efficient ones at that helps to ensure that trade is facilitated in a smooth manner, hence underscoring their critical role in facilitating international trade. This is even more so for a country like Malaysia whose trade volume exceeds 200% of its Gross Domestic Product, forming the largest part of its economy. 4 To underline the importance of developing the maritime support services for a trading nation like Malaysia, the Third Industrial Master Plan (IMP3) has set a target for the country s seaports which are expected to handle a total volume of 36 million TEU by 2020, triple the current capacity. 5 This is in line with the forecast of the IMP3 for the nation s trade to grow more than double its current value, from RM1.3 trillion in 2006 to RM2.8 trillion in In line with these bold projections, Malaysia s maritime sector should grow in capacity and scope of services to support the optimistic forecast of the nation s trade volume. Without the availability of a wide range of services to support the maritime sector which facilitates much of Malaysia s trade, it would be difficult for the nation s ports to achieve the ambitious target set in the IMP3. It would not augur well with efforts to reduce the outflow of foreign exchange and the deficit in the balance of payment if Malaysia continued to rely on the services provided by foreign companies to support its maritime sector and its growing trade. Continued dependence on foreign players in crucial maritime support services such as insurance, financing, transport, supply chain management and offshore services transportation will not help in nurturing local companies to develop the skills and capacity in these activities. The lack of local capacity and capability in these crucial activities will not augur well with Malaysia s aspiration to become a self-sufficient, competitive maritime nation. The IMP3 also spells out a target for the enhancement of Malaysia s position as a major trading nation towards attaining global competitiveness. To meet these goals, much needs to be done to beef up the nation s maritime infrastructures such as ports and services as well as shipping, and also to boost the capacity of the supporting services sector. Aware of the need to integrate Malaysian companies into regional and global business and trade networks as a means to attain global competitiveness, the Government relentlessly undertakes efforts to help develop the maritime industry and the maritime support services activities. 2. Issues in maritime support services In the maritime industry, developments such as the consolidation of shipping companies, security imperatives, growing size of vessels, focus on door-to-door transport and supply chain management and a host of other changes have given rise to new challenges to 4 Governor s Speech at the Investors Conference : Malaysia : Opportunities in an Evolving Environment. Kuala Lumpur. 22/6/2005. Retrieved from on 15/1/ Malaysia s ports handled a total container throughput of 12.3 million TEU in

4 maritime support service providers. Other external factors such as the globalization environment and liberalization further exert pressures on these companies to remain competitive to survive and thrive in their respective businesses. From literature review, several issues are found to be prevalent in the maritime ancillary services sector, and some of them can be found in Malaysia as well. The major ones include: Barriers to accessing foreign markets. Various types of technical barriers exist in several countries, and these barriers pose obstacles for foreign companies from freely entering into and operating in the markets of those countries. For example, several countries require license for foreign companies planning to operate in maritime ancillary activities such as freight forwarding and shipping in those countries. There are also protectionist policies intended to safeguard the interest of local companies, for example in shipping. Many countries including Malaysia impose cabotage restrictions to foreign shipping lines to operate in the domestic shipping market, except in cases where no local vessels are available. This is done in the interests of protecting the local players and to promote their involvement in the maritime services sector. In order to circumvent obstacles such as restrictions to obtain licenses, foreign companies resort to forming partnerships with local companies or appoint intermediaries to conduct their business. This takes time and does not lead to a very efficient process, and it also limits the scope of activities of the foreign companies. Such legal discrimination practice is seen as imposing a barrier to the promotion of seamless trade and prevents the smooth movement of goods across boundaries. Preferential pricing of certain types of ancillary services. For example, multimodal transport operators in certain countries impose high charges for users who are not shareholders of the companies. This imposition reduces equal market access and creates a less than favorable impression of those countries among foreign companies. Despite the good intention of those policies to protect the interests of local players, the imposition of preferential pricing practices can be seen as being unfriendly to foreign companies. Underdeveloped ancillary services catering for multimodal transport and a lack of integration in the services provided by supporting players. A small road transport operating company in Malaysia, for example, almost always finds it difficult to get a partner willing to haul its goods in the final leg of their journey into neighboring countries like Singapore and Thailand. Therein lies the need for a framework conducive to the matching of services for carriers of goods to promote multimodal transport in the country to enhance its trade competitiveness. Quantitative restrictions on the importation and exportation of products. For example, some countries still impose import quota on certain controlled goods and materials to protect the interests of local manufacturers and producers. Although 4

5 allowed under certain exceptions, 6 such restrictions distort trade as they ignore market forces and affect the competitiveness of the prices of goods and materials. These restrictions to smooth the flow of trade are among the issues affecting the maritime support services sector. It is imperative for maritime trade, one of the most international of human endeavors, to minimize - if not altogether dismantle - barriers that frustrate the smooth facilitation of international trade to ensure that trade among nations can continue to flourish. Without an international trade system that can support huge volumes of trade, the world economy, which is increasingly reliant on trade to fuel its growth, would find it difficult to prosper. 3. Maritime support services in Malaysia : An overview The maritime industry plays a crucial role in facilitating international trade as an estimated 90% of world trade is transported via maritime means. 7 For this reason, the importance of the activities supporting the maritime sector is equally crucial to global trade and its economic prosperity. These services combine to meet the demand for exporters to deliver a wide variety of goods in huge quantities, to markets far and wide, in the shortest time possible and in the most cost-efficient manner. The ancillary services supporting the seaborne transportation of much of the world s goods also enable importers to obtain raw materials for their consumption, components for their manufacturing activities and merchandize goods for their consumers in a similar fashion. These services, without overstating the fact, combine to act as indispensable enablers to maritime transport, international trade and global economic prosperity. For a country like Malaysia, which is so dependent on trade to power its economic engine, the importance of having in place an efficient maritime transport service to facilitate its trade is absolutely essential. Hence, it is in the nation s interest to have in place adequate and quality maritime support services to support its growing international trade and its corresponding increase in its reliance on maritime transport. Given this, there is a strong case for Malaysia to adopt a strategic approach to develop its maritime supporting services sector in a systematic, coherent manner to ensure effective allocation and utilization of resources and to enhance its competitiveness as a maritime nation. As Malaysia s reliance on trade as a critical component of its economic growth increases, it has gradually worked towards integrating its economy to the global economy. From being an economy which was dependent on commodities and agriculture only a few decades ago, Malaysia has transformed into a manufacturing-based, export-driven economy. It is today a major player in international trade, contributing 1.2% share of world trade in terms of value. 8 Befitting its status as a major trading nation, Malaysia is committed to observing the rules in the services sector, including allowing foreign companies providing services to operate in the country. It is therefore not surprising that Malaysia ranks highly as an easy place to do business, as evidenced by its ranking as the eighth most competitive nation overall 6 Under the World Trade Organization rules, exceptions to quantitative restrictions include limited conditions such as critical shortages of goods and problems in balance of payments. 7 Estimate by United Nations Conference on Trade and Development (UNCTAD). 8 Review of Maritime Transport Geneva : UNCTAD

6 among the world s nations in This is not an insignificant achievement for a relatively small trading nation, especially at a time when nations worldwide are working hard at increasing their competitiveness to attract FDI and handle greater volumes of trade. 10 This accolade stands testimony to its pro-business policies and its attractiveness as a popular destination for foreign investors. Although Malaysia s economy is not as open as that as Singapore and Hong Kong, its government has undertaken many measures to open up the nation s economy and enhance its reputation as an attractive place to do business. And despite rising competition from other aspiring trading nations, Malaysia has done well to maintain its high ranking as a major trading nation, as evidenced by its ranking among the top 10 of the most overall competitive countries to do business in. There is a wide variety of maritime support services in Malaysia focusing on providing support to ports and shipping companies and facilitating maritime trade. A number of companies are involved in these activities, as shown in Table 1. Table 1 Number of companies offering ancillary services Service No. of local companies involved Cargo handling 165 Fright broker 13 Cargo clearance 52 Logistics management 50 Shipping agencies 733 Stevedoring contractors 24 Storage 28 Freight forwarding 1,084 Customs clearance 71 Warehouses 222 Source : (Retrieved on 20/8/2007) Malaysia s resolve to attract foreign participation is clearly evident in the maritime sector. Although the Malaysian government is committed to develop the maritime industry and encourage local participation, Malaysia very much welcomes the involvement of foreign players in the sector. Aware of the fact that the maritime sector is one of the most international of activities, Malaysia acknowledges the need to welcome the participation of foreign companies, many of which have greater capacity, experience, skills and knowledge than local players, in the maritime sector. The presence of foreign companies in activities such as logistics, shipping, ship classification and ship management underlines Malaysia s openness to foreign investment, resources and talents to help develop its maritime industry. Malaysia s openness is also evidenced by the privatization exercise of Federal ports, and by allowing foreign companies to hold equity stake in local ports and by 9 IMD World Competitiveness Yearbook Malaysia s position in the four key competitiveness factors in the IMD was fifth in Government efficiency, sixth in economic performance, sixth in business efficiency and 11 th in infrastructure. 6

7 granting foreign shipping lines permission to provide services in the domestic shipping under certain conditions. These are a mark of commitment by Malaysia to liberalize its economy and integrate it with the global economy in order to enlarge its share of the global trade. The General Agreement on Trade in Services (GATS) 11 under the aegis of World Trade Organization (WTO) has delineated six main support services in the maritime industry. These activities, also termed as maritime ancillary services, are as follows : Cargo handling Storage and warehouse Customs clearance Container station and depot Maritime agencies Maritime freight forwarding Although many local players are involved in these activities, the development of the maritime support services sector is not backed by a coherent strategy and by a structured, long-term development approach. This results in non-linkage between the activities with one another and also between the maritime sector and other production sectors of the economy. In order to recommend an overall strategy to develop these activities, it would be useful to assess the respective activities by outlining the regulatory structure; the players involved; their role in supporting the maritime sector; and the inherent problems, challenges and prospects. The discussion of these activities will provide the platform towards building a case for a strategic approach to develop the maritime support services in a cohesive manner towards enhancing the maritime industry in Malaysia and its maritime competitiveness. A strategic approach to develop the maritime services sector should be drawn to provide a structural inter-relationship between these ancillary activities and the maritime industry. This would help greatly in further developing and promoting maritime activities in the country. 3.1 Cargo handling services Cargo handling services is one of the key elements in the trade facilitation process. With the nation s trade volume growing year after year, this activity has assumed a more prominent and important role in enabling the nation s trade. The management of the logistics chain, which cargo handling services are part of, involves integration of various service providers offering total supply chain solutions to shippers. In Malaysia, players in cargo handling include those who are front line service providers such as freight forwarders and logistics providers as well as the ancillary service providers such as financial institutions, insurers, IT companies and classification societies. The vital role of the freight logistics sector is evident when one observes the broad range of activities involved in facilitating cargo handling in Malaysia. 11 GATS is a treaty enforced by WTO since 1995 to extend the multilateral trading system to services in the manner that the General Agreement on Tariffs and Trade (GATT) provides a system for trading of merchandize goods. 7

8 Various cargo handling services are listed under Division 74 Supporting and Auxiliary Transport Services of Section 7 - Transport, Storage and Communications Services of the International Standard Classification of Industry. Services auxiliary to all modes of transport include cargo handling services, storage handling services, freight transport agency services and other services. 3.2 Storage and warehouse services There are many warehouse and container depot operators in Malaysia providing storage, warehousing and handling services for customers, while public warehouses are situated near ports or industrial areas. Some of these warehouses are bonded, where Customs services are provided to allow for pre-clearance of cargos before they reach ports. These warehouse and depot operators also provide services such as cargo consolidation and distribution, and value-added services such as packaging, repackaging and labelling. There are also distriparks in the major ports such as Port Klang and Port of Tanjung Pelepas where multinational corporations can liaise with the ports to move cargo door-todoor for local and regional customers. The development of distriparks at ports is in line with the Government s policy to promote distributive trade in the country. 3.3 Customs clearance In Malaysia, the Royal Malaysian Customs allows for pre-clearance of imported cargo based on the Kyoto Convention on the Simplification and Harmonization of Customs Procedures Upon the payment of duty, cargo can be physically released out of the port gates. This underlines the Malaysian government s commitment to facilitate trade at local ports in a smooth manner as a means to enlarge the nation s trade volume. Customs has been at the forefront of meeting this target by continuously improving its delivery system to enable maritime trade to be carried out with minimal fuss. 12 However, there are several issues in pre-clearance of imported cargo in Malaysia. For starters, Customs requires the Expected Time of Arrival (ETA) of vessels to facilitate preclearance but the release of cargo is only effected based on Actual time of Arrival (ATA), whereas shippers and shipping companies would prefer ETA to be accepted for preclearance. Another point of contention is the documentation involved in pre-clearance of imported cargo. Customs accepts only manifest from mother vessels and House Bill of Lading (HBL) which is prepared by forwarding agents and contains detailed information about the ships and cargo,) instead of Ocean Bill of Lading (OBL) which carries only general information. Shippers and shipping lines are of the view that the manifest from feeder vessels and OBL should be sufficient for pre-clearance. Pre-clearance is not given to importers who have bad records, but Customs allow pre-clearance for their Golden Clients which consist of multinational companies shipping huge volumes of cargo. Shippers complain that this practice borders on discrimination as they feel that such service should be provided equally to all shippers. 12 According to Royal Malaysian Customs officials, the agency takes on average only a little under 13 hours to clear cargo at Port Klang, a considerably short period for such a busy port. The agency takes an average 3.2 days to clear imported cargo at local ports. 8

9 3.4 Container station and depot services There are various container stations and depot services in major economic regions in Malaysia. More known as Inland Container Depots (ICD) or dry ports, the development of these stations and the accompanying services was initiated by the Malaysian Government to provide an extension of port facilities into the hinterland. ICD enable inland-based traders to make use of the facilities and logistical services that are available at seaports. An example is the Ipoh Cargo Terminal (ICT), Malaysia s first dry port, which is served by a network of rail and roads to all major ports and points of exit and entry in Peninsular Malaysia. ICT and other ICD in Sungai Way in Selangor, Nilai in Negeri Sembilan and Segamat in Johor act as gateways for most of the major and small scale industries located within the hinterland where they are located. The ICD in the country provide space for storage of containers in transit, connectivity between different modes of transport and between ports and their hinterland. They also provide other services, such as customs clearance and inspection, packaging and repackaging, and container leasing and repair. The introduction of ICD has planted the seeds for the promotion of an integrated transport concept as espoused by multimodal transport. ICD allow cargos for import and export to be consigned for inspection by Customs. They can be specified as the origin or goods in transit with a multimodal transport document and for transfer between transport modes to take place. In addition to ICD, there are also freight and container terminals in Malaysia that provide services in cargo handling and consolidation, open storage, customs documentation and clearance and container cleaning, inspection and repairs. 3.5 Maritime agencies Maritime agencies in Malaysia include shipping agents and sales representatives of shipping companies. Among the common services they provide include ship agency operations, ship and crew management, crew training and liner agency. Some also offer freight forwarding, air freight, total logistics services and project management services, either by sea, rail, truck or air, or a combination of any of these. Maritime agencies also undertake sales and marketing of maritime transport services and related services. They act on behalf of companies organizing ship calls and can take over the handling of cargo when required. Established agencies like Barber International and Barwil Agencies carry liability insurance underwritten by the International Transportation Intermediaries Club (ITIC). They often offer direct agency representation with uniform services and operate in the ports where their principals ships call. 3.6 Maritime freight forwarding services Freight forwarding plays an essential role in the production process of goods and in enhancing efficiency in the supply chain. Its importance is due to the fact that the production, processing and manufacturing of raw materials and the end users of the produced goods are geographically scattered. As transportation costs contributes to the final cost of goods, the importance of freight forwarding in linking the elements together along the supply chain cannot be underestimated. 9

10 Freight forwarding companies represent the largest portion of the local maritime ancillary services sector. They provide a wide variety of services to cargo owners in the process of shipping goods, including : Advising on the best routes, relative shipping costs and compliance with letters of credit. Booking the necessary space with shipping lines or airlines. Arranging with exporters for packaging and marking of goods. Consolidating shipment from different exporters. Handling customs clearance and arranging marine insurance for shipments. Preparing shipping documents. Like the haulage sector, the freight forwarding sector in Malaysia is highly fragmented and overcrowded with players. Underlining this problem, there is an absence of an authoritative figure on the number of freight forwarders operating in the country. 57 The Ministry of Finance has in its registry 240 freight forwarders involved in the transportation of Government cargo, but the Federation of Malaysia Freight Forwarders (FMFF) captures only companies registered as its members. To compound the problem of ascertaining the exact number of freight forwarders, companies in the sector are not required to be a member of any association. 3.7 Other support services In addition to the six services supporting the maritime industry as delineated by GATS, there are various other activities which are no less crucial in facilitating Malaysia s maritime trade and its two major components, shipping activities and ports operations. They include, in no order of importance : Financing Law Insurance Classification Registry Surveying (i.e. hydrographic, ship, marine cargo) Cartography Maritime education and training Construction (i.e. ports, cranes, infrastructure works) Consultancy (i.e. port design, feasibility studies) Dredging Salvaging Towing Crewing / manning Bunkering Ship brokers Ship chandlers Shipyard services (including shipbuilding, ship repairing, maintenance, refurbishment, retrofitting and conversion) 10

11 Information technology (i.e. DagangNet, the national portal that facilitates the business-to-business handling of trading exchange via electronic means and interfaces with the Customs e-clearance platform, Sistem Maklumat Kastam). Equipment and spare part supplies (i.e. cranes and vehicles such as stackers for ports, engines and onboard equipment for ships) Support services for offshore activities (i.e. fabrication, transportation, supplies for oil and gas exploration and production) Underwater / diving services Maritime security and safety The activities listed above and a host of other activities have grown over the years in Malaysia in correspondence with the country s rising demand for ocean transportation to facilitate its growing trade. With the nation s economic growth expected to continue to be powered by trade both external and international in the years ahead, the prospect for growth in the maritime services sector is bright indeed. 4. State of play in the Malaysian maritime support services sector The maritime sector is not a standalone sector but one which embodies a number of subsectors and activities. In recommending a strategic plan to develop Malaysia s sector in an orderly and systematic fashion, it is essential to assess the state of play in the sector to develop a clear overview. Doing so will enable us to gain a comprehensive view and understanding of the vast layout of the maritime sector and will make the task of devising a strategic plan to develop the maritime supporting service sector more manageable. Malaysia s maritime sector consists of a wide spectrum of economic activities which include fishing, oil and gas extraction, ocean / coastal shipping and transportation, leisure and tourism activities, shipyard works, defense and many others. These activities are supported by an array of ancillary services covering transport, distribution, freight logistics and specialist services such as IT, communications, legal, banking, insurance, education/training and consultancy. Given the importance of the maritime sector to the socio-economic well-being of the country, it is important that the sector is adequately and efficiently supported by those services and many more. The maritime support services sector is pivotal in supporting the transportation of goods using maritime transportation in an efficient and cost-effective manner. It is therefore not an exaggeration to state that the competitiveness of Malaysia as a trading nation relies to a large extent on the availability of a wide array of maritime support services of some capacity and competency. The following is an assessment of the various elements and factors that shape and influence the maritime support services sector. The assessment is by no means exhaustive, but it contains some of the most critical components and factors related to the sector. Reviewing the elements and factors is an important exercise leading to the identification of the strengths, weaknesses, adequacy and efficiency/inefficiency in the sector before specific strategic recommendations can be formulated. It is therefore important to assess the state of play in the sector by looking at several major areas namely legal framework, manpower, IT, level of integration of the sector with the nation s economy, competition and prospects. This exercise would help identify the areas 11

12 of strengths to leverage and improve on, weaknesses to remedy, threats to face and opportunities to capitalize amid booming global maritime trade. 4.1 Institutional and legal framework The Malaysian Government spares no effort to develop the country as a maritime nation capable of enhancing shipping and ports capacity, optimizing human resource, ensuring the safety of ships and navigation, and providing efficient ancillary services. Aware of the importance of the maritime sector to the nation s trade and economic growth, the Government actively promotes the sector by putting in place the institutional and legal framework to support the development of the maritime industry. Through the Maritime Division of The Ministry of Transport (MOT), the Government is committed to build a modern, efficient and a safe maritime sector and carry out inter-sectoral activities towards making Malaysia a successful maritime country. These are achieved via the fulfilment of the roles of the Maritime Division to : Formulate policies relating to shipping and maritime safety, as well as development and operation of sea transportation, ports and shipping. Plan, co-ordinate and monitor projects relating to ports and also projects under the Marine Department. Study, review and prepare new laws relating to ports and shipping and to ratify international conventions under the International Maritime Organization. Process domestic shipping license. The introduction of the Merchant Shipping Ordnance (Ordinan Perkapalan Saudagar) in 1952, a legislation which governs commercial shipping in the country, marks a milestone in the development of Malaysia s shipping industry. There are over 20 laws and acts governing various maritime aspects and activities in Malaysia, covering areas such as pollution and environmental management, security, navigation safety, port operations, training of seafarers and workers safety. 13 Through its membership in the International Maritime Organization (IMO), Malaysia is also engaged with the international community in matters concerning maritime safety, efficiency of navigation and prevention and control of marine pollution from ships. 14 It has thus far ratified several regulations governing shipping such as the International Convention for the Safety of Life at Sea (SOLAS), United Nations Convention on Law of the Sea (UNCLOS) and more recently the International Ship and Port Facility Security (ISPS) Code. The ratification of such regulations underlines Malaysia s seriousness in complying with international shipping rules in its efforts to become a maritime nation of global stature. To achieve the objective of enhancing the competitiveness and attraction of Malaysian ports, the Government has undertaken the following: 13 See a list of maritime laws in Malaysia in Malaysian Maritime Yearbook Malaysia became a member of the IMO in

13 Ensuring a supply-driven environment by providing ample capacity in ports to mitigate congestion and reduce waiting time. Developing services such as feedering and bunkering at local ports, and other ancillary services such as banking, insurance and legal. Facilitating supply of adequate facilities to accommodate large vessels and increasingly larger types of ships. Creating a commercially competitive environment to provide value-added logistics services and infrastructure to encourage transshipment traffic. Creating conducive environment to attract Main Line Operators such as offering shipping lines to buy into equity of ports. Promoting ship financing by setting up financial institutions to assist the maritime community via competitive financing. Designating Port Klang as the national load center in 1993 to serve a hinterland with large cargo base. Designating Port of Tanjung Pelepas as a transshipment hub port. In addition to port development, efforts have also been undertaken to facilitate and promote trade. Free commercial zones have been created at ports to simplify documentation processing and procedures for cargo consolidation and to attract value-added services. Several ports use community-based EDI systems and a nationwide electronic trade declaration system allowing users to link to the Royal Malaysian Customs information system which is in place and is continuously enhanced to facilitate more efficient trade. Beside the MOT, various other government agencies also play central roles in safeguarding and promoting Malaysia s maritime interests. They include the following : Marine Department - responsible for safeguarding the safety of shipping navigation and marine transportation in Malaysian waters. Economic Planning Unit of the Prime Minister s Department - oversees the privatization of Federal ports in Malaysia. Malaysian External Trade Development Corporation - undertakes promotional activities to sell Malaysian ports and the maritime sector to the world. Department of Environment oversees the implementation of local and international regulations and laws on maritime environment in inland waters. Department of Survey and Mapping Malaysia - maps out Malaysia s maritime boundaries Malaysian Maritime Enforcement Agency (MMEA) - provides constabulary patrolling to ensure that Malaysia s maritime assets within its Exclusive Economic Zone are protected. Royal Malaysian Customs provides Customs clearance for Malaysia s international trade going through its ports. Royal Malaysian Navy protects Malaysia s interests in the blue water and high seas. 13

14 Beside the above agencies, five Federal port authorities and a port commission administer and regulate the ports under their jurisdiction, in addition to the state port authorities in Sabah and Sarawak. 4.2 Manpower The maritime industry is growing in its stature and importance as a source of employment and a major contributor to the Malaysian economy. 15 However, the sector is beset with shortage in skilled manpower in various maritime support services activities. Jobs requiring highly technical know-how and soft skills such as in maritime engineering, training in sophisticated areas such as ship handling simulations, naval architecture, cartography, hydrographical survey, maritime law and ship financing are dominated by foreign experts. The same situation is seen in sophisticated maritime operations such as in deepwater oil and gas exploration and production in which foreign companies are heavily involved. In the field of maritime insurance, international P&I Clubs, 16 especially the UK P&I Club based in London, dominates the industry, and most Malaysian insurance companies have to deal with brokers in London for the underwriting of personal and indemnity insurance for Malaysian shipowners. 17 In shipbuilding, local shipowners continue to commission newbuilding orders and shipyard services of their vessels at foreign shipyards due to the lack of capacity and technical ability of local shipyards to undertake big and sophisticated jobs at competitive prices. The lack of local manpower in the local maritime sector could be detrimental in the long run for Malaysia s overall competitiveness as a maritime and trading nation. The continuous shortage in adequate and skilled human capital in the maritime services sector would not augur well for the country to meet its objective to become a self-sufficient maritime nation. It would also not help in enhancing Malaysia s cause to attract MLOs to its ports as they would shun countries which lack adequate and trained manpower to facilitate the speedy, efficient and costcompetitive handling of the huge volume of cargo carried by shipping lines. As it stands, demand for manpower in the sector far outstrips supply. This is especially glaring in shipping, which is one of the main pillars of maritime transport. With the boom in the country s maritime trade and the corresponding 15 Figures of the contribution of the maritime sector to the nation s total employment are difficult to come by. IMP3 stated that the marine transport sub-sector segments employed 25,250 workers in Taking into account the wide spectrum of other activities in the maritime industry, it can be stated that the industry as a whole provides a significant number of jobs to many in Malaysia. 16 P&I Clubs are mutual marine protection and indemnity organizations that provide specialized and highly sophisticated insurance coverage for the shipping industry. These clubs have no shareholders and no financial links with other organizations and are directed by the members of the clubs themselves. As at end of 2007, there were 13 P&I Clubs with offices in Malaysia. 17 Protection and indemnity (P&I) coverage is given in respect of third party liabilities and expenses arising from owning ships or operating ships as principals. P&I insurance is often required by a loan provider as a minimum covenant to protect a loan. P&I insurance, usually underwritten under the auspices of P&I Clubs, which provide mutual coverage for their members, cover assets belonging to shippers (i.e. cargo), loss of earnings and third party claims such as oil pollution, war and injury to crew members. No Malaysian insurance companies are involved in P&I underwriting as P&I insurance is offered to only P&I Club members. Local shipping companies usually pay premium to the P&I associations via one of the clubs through local insurance brokers. 14

15 rise in the demand for shipping services, Malaysia has not been able to attract a satisfactory number of locals to pursue careers in the maritime support service sector. Currently, Malaysian shipping companies are highly dependent on foreign crew and there is an urgent need to address the need to recruit and train local seafarers to correct the imbalance. Among the problems stated in getting locals to consider seafaring as a viable career include lack of berths offered by local shipping companies for practical training and shipping companies perception of high sponsorship costs of local seafarers. Without practical training on board of ships, cadets find it difficult to obtain skills and experience and to foster their careers further. Therein exists a vicious cycle : shipping lines view Malaysian cadets in a negative light and are not interested to train them and prefer to recruit cheaper foreign labour. In turn, the difficulty of getting training berths for local seafarers on board ships results in low level of interest among locals to pursue seafaring careers. In other areas beyond shipping and throughout the maritime transport chain, there is also an apparent lack of local manpower, know-how and skills that the industry can depend on. These include support services in logistics and supply chain management, IT, law and financial services. Innovation and adaptation of international best practices are lacking in an industry which is fragmented and unevenly developed. To address this manpower issue, it would be ideal for players in the maritime industry to voluntarily contribute towards providing job opportunities and training to Malaysians. However, if such spirit of voluntarism is not forthcoming, legislation may have to be put in place to compel companies involved in maritime support services to provide employment and training opportunities to the locals. Any attempt to enhance the competitiveness of the maritime sector must take into account the human resources availability and requirements of the sector. It would be futile to put in place a policy on maritime transportation without focusing on the human and manpower requirements of the industry. Systematic recruitment drive that matches available jobs with available skills, providing ample training and development program, favourable employment conditions, safety of working environment and career growth prospects are among the factors that must be taken into account in designing a strategy to develop the maritime support services. 4.3 Technology Technology has emerged as a strategic tool in the business operations and management of many activities in the maritime sector, which facilitates much of international trade. Advanced technology is increasingly used in a multitude of activities and a labyrinth of sub-sectors in the maritime supply chain. More than ever, technology has emerged as a strategic tool for maritime service providers to gain comparative advantage in their business. Without technology, it would be impossible for hundreds of millions of containers to be transported in a speedy, safe and efficient manner around the globe yearly. Underlining the immense role of technology in maritime operations today, the world s premiere commercial ports and modern ocean-going merchant ships are characterized by less dependency on labour and higher reliance on cutting-edge 15

16 technology and state-of-the-art IT systems and applications. Images of the past of longshoremen crowding along ships lifting sacks do not fit today s reality of ports having to deal with increasingly sophisticated ships of ever-growing size and capacity. These ships require fewer personnel to man, thanks to the increasing sophistication of the technologies, onboard equipment and complex IT-driven systems to run these vessels. Technology has long ceased to become an afterthought in the minds of maritime industry players as its use has become indispensable throughout the long chain of maritime transportation. On the shore side, huge cranes backed by impressive IT controls are used to cater to equally sophisticated ships, and are scheduled to ensure the most optimal productivity of the cranes and the shortest waiting time for ships. On the yard side, the use of technology and IT is essential in the planning and management of container storage to optimize space, the use of containerhandling equipment and manpower utilization. Technology is also important in enabling the sharing of information between maritime transport and other transport modes and with the entire supply chain beyond the maritime network. While Malaysia has made great strides to leverage the use of technology and IT applications in its maritime sector, much remains to be done to fully utilize them as a strategic tool towards gaining comparative advantage. Several sub-sectors in the maritime support services sector are still using outdated technologies and adapting labour-intensive approach in their operations. For example in shipbuilding, many small yards lack a hi-tech approach in their business due to lack of capital to invest to upgrade their technologies. 18 In the logistics sector, many players are still technologically ill-equipped to undertake anything beyond the traditional activity of delivering cargo and venturing into more value-added sophisticated operations such as third party logistics (3PL) or fourth party logistics (4PL). 19 Not many local players - bar the big ones like Century Logistics, Konsortium Logistik and the likes have the technological capacity to meet increasing demand for logistics and supply chain management by shippers and to offer their services abroad. With the increasing integration of various transportation modes, as propagated by the concept of multimodal transport, the maritime supply chain has extended beyond the seas and ports to encompass a large number of transport service operators and components on the landside. Companies involved in the maritime support services sector which do not have the technological capacity to meet the increasingly sophisticated need for logistics services at cost-competitive costs will remain sidelined in capitalizing on the global boom in maritime trade, and could well become obsolete someday. 18 Malaysia s shipbuilding industry has the capability to produce vessels of up to 30,000DWT and its shipyards can undertake repair works of vessels of up to 400,000 DWT. 19 3PL players provide integrated or total logistics services. In the Malaysian context, they mostly own core resources namely people, infrastructure and systems enabling them to take on the entire logistics activities outsourced by their customers. 4PL operators are usually formed via the alliance of 3PL providers, technology providers and management consultants. Often referred to as lead logistics players, 4PL operators provide wide range of logistics services that greatly reduce operating cost for shippers by utilizing their combined assets and resources in an optimal manner. 16