Logistics, Transport and Food Prices in LAC

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LOGISTICS FOR
COMPETITIVENESS:
IMPACT AND AGENDA
Jose Luis Guasch
World Bank and
Economics Professor, University of California at
San Diego
Mexico City, Mexico, July 2010
Logistics and Competitiveness?
Why?
 Logistics are one of the five key pillars of
competitiveness
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Components of Competitiveness
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Access to Markets and Trade Policy
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Productive/Exportable Supply
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Quality and Standards
Human Capital
Innovation; Knowledge and Technology Transfer
Value Chains and Clusters
Logistics and Facilitating Trade
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Tariff System
Free Trade Treaties
Hardware: Infrastructure
Software: Associated Services and Trade Procedures
Inclusion / Production of SMEs: Knowledge Transfer
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Coordination
CITEs
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Investment and Business Climate
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Institutions: Competitiveness Council, Agency for Facilitation of
Exports, Quality and Innovation
Context

I’m a SME, and I want to export.
I’ve done my homework: with my market and client identified, I’ve adapted
the appropriate production technology, and my production costs are very
competitive.
Now, I need to get my product to my client:
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Evaluation of export costs?
Through which point can I get my product out?
Permits, certificates of origin, quality and phytosanitation?
Packaging?
Product consolidation? Shipping scale?
Bill of landing?
Cold chain?
Trucking service, timelines?
Insurance?
Customs agent?
Inspections?
Export financing?
Inventories?
Multimodal Operator?
How important is all of this? Will it impact my productivity?
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How can Logistics Costs be
measured?
Macro approach
Logistics costs as
a % of GDP
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Based on national
accounts
Logistics costs as a %
of GDP
Demands some
assumptions
Quick and easy:
Provides overall
results
Example: Guasch and
Kogan (2002)
Alternative
approaches (Michigan
State Univ)
Micro approach
Logistics performance based
on firms´ surveys. Costs as a %
of product value
 Based on firms surveys
 Logistics costs as a % of
sales value
 Other logistics
performance indicators
 Needs large samples for
robustness
 Example: Peru (Guasch
1997), Argentina (1999),
LALC Observatory
 Corridor approach
(USAid’s Fast Path)
Perception
Recent Logistics
Perception Index
 New exercise: World
Bank, GFP and Turku
 Perception-subjectivefrom pooled information
provided by freight
forwarders
 Allows for a unique
indicator, which can be
correlated to others
(WEF, WB, etc.)
 Other hard data also
collected
“The logistics of international shipments is a complex combination of services and procedures
involving many public and private operations and it does not lend itself easily to measurement.”
“There is no statistical indicator that proxies the performance of the entire supply chain, or even
a major part of it.”
Source: Measuring Global Connections - Draft
A
B
Example of Structure of Logistics Costs: On the average transport costs
are between 30% and 35% of total logistics costs.
AVERAGE STRUCTURE OF LOGISTIC COSTS 1/
DESCRIPTION OF COSTS
Administrative costs and losses
20.5%
• Procedures
- Customs, phytosanitation if applicable, etc.
Warehousing
19.0%
Licenses and procedures
• Administrative costs
Inventories
(and financial costs)
10.1%
18.7%
Transport: port-related
17.8%
Transport: roads and/or railways
14.0%
-
Logistics overhead
Insurance
Security
Spoilage and losses
• Warehousing
- Costs of warehouses used
- Costs of deterioration and/or losses generated
in warehouses used
• Inventories (financial costs)
- Costs of maintaining stock
- Costs of merchandise in transit
• Transport cost
Transport Cost = 31.8%
1/ 36 interviewees responded to the question.
Source: Survey with companies using cargo transport services, 2000 – Consultation Support
- Freight
- Cost of deterioration and/or losses generated
during transport
The structure and composition of logistics costs vary according to type of
product. For mining products, the costs of warehousing and inventories represent over
45% of logistics costs. In the case of agricultural products, transport is the main
component, with 36% of the total, and for seafood products, warehousing represents 33%
of total costs. For textile products, transport costs represent 35% of the total, and
inventories, 24%.
MINING PRODUCTS
AGROINDUSTRY PRODUCTS
Warehousing
28%
Administrative costs
29%
Administrative costs
19%
Inventories (financial costs)
27%
Procedures
9%
Transport:
Port-related
12%
Procedures
6%
Transport:
Port-related
Transport roads and/or railways
5%
Administrative costs
Warehousing
33%
Warehousing
19%
23%
Procedures
9%
Transport:
Port-related
14%
16%
TEXTILE PRODUCTS
Administrative costs
Procedures
12%
Transport: roads and/or railways
20%
SEAFOOD PRODUCTS
17%
Warehousing
12%
Inventories (financial costs)
17%
Inventories (financial costs)
12%
Transport: roads and/or railways
12%
Source: Survey with companies using cargo transport services, 2000 -- Consultation Support.
Transport:
Port-related
9%
Inventories (financial costs)
24%
Transport: roads and/or railways
16%
Logistics Costs in Latin America
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On the average, 24% of product’s value
Impact of Logistics on
Competitiveness

Reduces Competitiveness/Productivity:
Generating
High transport costs
 Delays in time-financial cost
 High levels (costs) of inventories
 High percentages of deterioration
 Increases in freight-connectivity
 Eliminates development of new products and
new exports
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Elements of Logistics
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Distance to destination
Inventories
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Times
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Each day is equivalent to 0.8 tariff (Hummels 2001).
Each day is equivalent to 1 percent of trade or 70 km,
Djankov, Freund and Pham (2006).
Freight

Eliminating market power of shipping companies
would increase trade by 5-15% (Hummels, Lugovskyy
and Skiba, ).
Insufficient Infrastructure Reduces Competitiveness:
translating into high loss rates, high logistics costs,
high inventory levels, 2008
Productivity gain (percent)
30
OECD
LAC
25
20
15
10
5
0
Losses to markets.
Proportion of goods not
reaching markets (primary
sector)
Logistics cost as a
proportion of value of
products
Inventory levels
Source: Guasch (2008)
Latin America: Logistics costs are especially high for SMEs
45
42
40
35
12.7
30
25
18
20
15
29.4
18
6.28
7.31
11.36
10.63
18
11
10
5
6.9
0
Les s than US$ 5 M
US$ 5 M to US$ 50 M
US$ 50 M to US$ 500 M
Invento ry Management &Wareho us ing
Mo re than US$ 500 M
Trans po rt &Dis tributio n
Source: Centro Logístico de Latinoamerica, Bogota, Colombia. Benchmarking 2007: Estado de la Logística en America Latina
Anexo, María Rey, Logistic Summit 2008.
Latin America: Companies’ inventory levels in relation to those in
the United States
(all industries)
Raw Material Inventory Levels:
Ratio to U.S. Level by Industry (average of all available data for 2000s)
Chile
Venezuela
Peru
Bolivia
Mean
2.17
2.82
4.19
4.20
2.22
Minimum
0.00
0.30
0.10
0.11
1st quarter
0.36
1.87
1.25
Median
1.28
2.61
3rd quarter
2.66
Maximum
68.92
Source: Guasch and Kogan, 2001
Colombia Ecuador
Mexico
Brazil
5.06
1.58
2.98
0.52
0.86
0.42
0.80
1.39
1.45
2.55
1.06
1.60
2.30
2.90
1.80
3.80
1.36
2.00
3.12
3.90
4.49
2.52
5.64
2.06
3.10
7.21
31.1
34.97
13.59
20.61
3.26
7.10
PRW (Public Refrigerated Warehouse) Capacity, 2008
Source: IARW
Relation between Freight Rates and Connectivity, 2006
1
0.9
0.8
Freight rate index
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0
0.1
0.2
0.3
0.4
0.5
Connectivity Index
Source: Wilmsmeier (2008)
0.6
0.7
0.8
0.9
1
Furthermore, a study of maritime transport costs in the Caribbean Basin
suggests that freight rates are also sensitive to and can be reduced by
increases in infrastructure endowment and port efficiency.
Relationship between Port Infrastructure Endowment and Maritime Freight Rates in the
Caribbean
1
0.9
Freight rate index
Expon. (Freight rate index)
0.8
freight rate index
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0
0.1
0.2
0.3
0.4
0.5
0.6
Port Infrastructure Index
Source: Wilmsmeier (2008)
0.7
0.8
0.9
1
… However, an analysis of productive chains for high-value food
imports in Latin America and the Caribbean indicates that the costs
associated with logistics processes—in this case, maritime transport—
frequently represent the greatest portion of products’ final prices…
High-Value Food Imports: Supply Chain Analysis of Pineapples Imported into Saint Lucia
Price Decomposition
2
Retail Profits
+ Other Costs
1.8
Land
Transport
& Handling
1.6
Land
Transport
+ Storage
15%
Duties
1.4
1.2
US$/lb
15%
Ocean
Transport
+ Port SL
17%
1
0.8
Other Costs
0.6
0.4
0.2
Producer
Price
Land
Transport
Ocean
Transport
+ Port CR
Port
Miami
35%
Wholesale
Consolidated
Cost
8%
10%
0
Farm Gate
(CR)
CR FAS
Costa Rica (CR)
Ocean to
Miami
Miami Port
Miami
Miami FOB Ocean to St.St. Lucia Port Wholesale
Warehouse
Price
Lucia
------------>
Distribution Retail Price
Final
Decomposition
--------------> St. Lucia (SL)
Total Transport -Land
Total Transport - Ocean+Port
Import Duties
Retail - profits, logistics and other costs
Wholesale -profits, logistics and other costs
Source: Authors, freight forwarder and shipper interviews, and OECS Backward Linkages Study (2008).
At the same time, essential food products with a low value-to-weight
relation are not exempt from high transport and logistics costs. In this
case, however, the costs of domestic land transport is relatively more
significant.
Cost Contributions to the Average Price of Wheat Flour Sold in Quito and other Ecuadorean Cities
70.00
Price in
Am bato
Price in Tulcan
60.00
Land to
Quito
50.00
Mill's Prof it
Packing
US$ cents per kg of Wheat Flour
Price in
Huaquillas
Extr.
Losses
40.00
Other
55%
Milling
Transport
Logistics
Storage
Land to Mill
Port Manta
30.00
Rail,
Canada
Ocean
Port,
Vancouv er
Insurance
17%
W heat
20.00
10.00
28%
0.00
Farm gate, Saskatchewan
Canada
Ecuador
Mill
Custom er
Source: Authors’ calculations, data from Manifiestos, Ecuadorean millers, interviews and Winnipeg Board of Wheat.
Milling
Losses
Prof its Co
Wheat
As demonstrated by the two Intra-Regional Food Imports distribution
chains, domestic logistics costs represent as much as 25% of the total costs
of domestic shipping, inventory and loadout, as a consequence of
inefficiencies, losses, bribery and time delays.
Logistics costs for importing soybeans from Paraguay to Brazil, and chilled meats from Paraguay to Chile: “Over
Costs” Due to Inefficiencies, Losses, Time Delays and Bribery
100%
Bribes
Customs
90%
Roads
80%
Customs
Over
costs
Pre-shpmt
70%
Payments
over costs from inefficiencies: Payments
over costs from inefficiencies: Customs
over costs from inefficiencies: Road transport
60%
over costs from inefficiencies: Pre-shipment
Customs
50%
Payments
40%
Customs
30%
Road transport
Road Transport
20%
Pre-shipment
10%
Pre-shipment
0%
Soybean - Paraguay
to Brazil by truck
Soybeans
Chilled MeatChilled
- ParaguayMeats
to Chile by truck
To Brazil from Paraguay
To Chile from Paraguay
by Truck
by Truck
Impact of a 10 percentage point
reduction in logistics costs
Sector
AgroIndustry
Wood and
Furniture
Textiles
Leather and
Footwear
Mining
Increase in
Demand
Increase in
Employment
9%
5%
10%
12%
6%
12%
7%
10%
7%
2%
Increase in household earnings from improving access to markets, by rebuilding
rural roads
(in US$ annually)
500
469.7
Annual Earnings per Capita
400
347.9
300
200
100
0
Source: INEI 2004-2006
Without roads
With roads
What we must attack: Infrastructure
Platform and Related Services
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Hardware
 Infrastructure
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Software
 Associated
services
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Hardware
 Export
Corridors: highways, railway,
rivers
 Ports and access to ports-connectivity
 Regional exit points: ports and airports
 Networks of logistics terminals
 Export and/or productive special zones
 Border crossings
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Software
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Service Centers Network
Ventanilla Unica
Inspections: Dedicated-perishable lines; priority-by
profile lines
Customs
Warehousing
Cold chain
Multimodal Law and third party operators
Insurance
Single bill of landing
Transport services: Trucks, railway
Quality and phytosanitation certificates
Digitalization of Certificates of Origin
Exporta Facil
Coordination-Scale
Institutionality: Logistics Council: Public Private
… and we must not forget to
support the smaller ones!
Exporta Facil
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Export by mail
From any part of the country
Avoids all intermediation and logistics costs
Filing one page through internet
Limits in value, up to 5,000 US$
Limits in size, 30 to 50 Kilos
But unlimited sends
Insurance available
Extraordinary impact on micro and SMEs
Performance Easy Export
2 000 000
6 000
1 800 000
Valor FOB Exportaciones
1 400 000
4 000
1 200 000
1 000 000
3 000
800 000
2 000
600 000
400 000
1 000
200 000
-
0
2007
2008
2009
# Exportaciones
5 000
1 600 000
RESULTS OF EXPORTA FACIL IN PERU
2,000 new exporters
40% of provinces
60% of the greater Lima area
20 new countries
Source: Serpost
Developed by: PROMPERU
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