Transport and Logistics Facilitation as an Effective Means of Promoting Trade and Regional Integration within the SADC

Economic Development and Employment Agriculture, Fisheries and Food Transport and Logistics Facilitation as an Effective Means of Promoting Trade and Regional Integration within the SADC Working Paper

The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH was formed on 1 January 2011. It brings together the long-standing expertise of DED, GTZ and InWEnt. For further information, go to www.giz.de. Published by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH Registered offices Bonn and Eschborn, Germany Friedrich-Ebert-Allee 40 53113 Bonn, Germany Phone: +49 228 44 60-0 Fax: +49 228 44 60-17 66 Dag-Hammerskjöld-Weg 1-5 65760 Eschborn, Germany Phone: +49 61 96 79-0 Fax: +49 61 96 79-11 15 E-Mail: trade@giz.de Internet: www.giz.de/trade Eschborn 2011 Picture Credits: Govert Nieuwland fotolia.de Harald Tøstheim fotolia.de WestPic fotolia.de Kate Shepard fotolia.de

Transport and Logistics Facilitation as an Effective Means of Promoting Trade and Regional Integration within the SADC 1 Thomas Feidieker 1 This working paper, commissioned by the Trade Programme of GIZ, was prepared in the context of the author s function as an Advisor in the Trade Division of the Federal Ministry for Economic Cooperation and Development (Germany). Thomas Feidieker had been seconded for a short-term period to the World Bank Pretoria Office. He is currently working as an Advisor to the German Executive Director at the World Bank in Washington, DC.

Abstract This paper examines the costs of transport and logistics in the Southern African Development Community (SADC) from the perspective of regional integration. Logistics are pivotal for trade facilitation and the software side of logistics, i.e. administrative costs of transit and related customs procedures are crucial in determining transport prices. To this end, hurdles to transport and logistics can be reasonably seen as a quasi non-tariff barrier to trade. Major weaknesses of transport logistics within the SADC region include high port costs and processing fees, high dwell time for inbound containers, poor transport services with long transit times and unreliable service quality, as well as poor clearance and quality of transit infrastructure. This paper identifies transport bottlenecks and shortcomings and draws a revised conceptual logistics framework conducive for deeper regional integration. In this context, smoothing regional disparities can be regarded as a crucial success condition. Of particular interest is, therefore, the specific situation of landlocked countries. The driving question is how to deal with landlocked countries and how to improve the supply chain across countries. Both areas are of major importance striving to intensify regional trade, division of labor and the regional value add in international trade. The paper differentiates trade facilitation measures with regard to traditional measures, such as streamlining trade-related procedures, supporting infrastructure, reforming customs and more importantly, the new trade facilitation agenda. The latter incorporates a supply chain perspective, covering issues such as logistic processes, trade-related infrastructure, services and transport facilitation, and regulatory and commercial procedures. The approach of the paper is to analyse transport and logistics with a comprehensive view on the production and the trade supply chain. Consequently, the paper is organized along single elements of transport and logistics costs and consists of five parts. The introduction lays down the driving questions, the objectives, and the concept. Part two summarizes results of the World Bank s 2010 Logistic Performance Indicator (LPI), which are of relevance for understanding the stance of logistics in the SADC area. Part three focuses on different sources of direct transport and other logistic costs in order to identify shortcomings and options for cost reductions and efficiency gains. Chapter four is the main part of the paper and consists of seven sections. The first section analyzes the positive nexus between supply chain reliability and trade. From this perspective, the different types of process induced logistic costs are treated in six sections. The final chapter draws policy conclusions and recommendations for actions within the SADC region. In the light of a division of labor, specialisation, south-south trade, and regional value chains trade facilitation measures are a precondition for export competitiveness of SADC member states. Striving for development of the entire SADC region, policy measures need to equally provide for the needs of landlocked countries. In this context, both sides of logistics, i.e. exports and imports, should be targeted as export activities and are the main beneficiaries of improved import logistics. This helps reducing the cost of backward logistics and services and provides for economics of scale and a bigger regional market. The main finding is that process induced costs, not conventional logistic infrastructure provide the most effective leverage for reducing costs. Interestingly, a reduction of border-crossing delays has the highest impact on transport prices. Enhancing the reliability and predictability of the supply chain has the potential to substantially reduce the stock of inventories and thereby the cost of production. Hence, these measures should be a top priority of policy actions in SADC member states.

Content List of Abbreviations... 6 1 Introduction and Overview... 7 2 What Does the Logistic Performance Index Reveal about SADC?... 8 2.1 Construction of the Index... 8 2.2 LPI Performance of SADC Members... 10 3 Direct Transport and other Logistic Costs... 11 3.1 SADC Transport Costs Compared... 11 3.2 Transport Costs, Prices and Time... 12 3.3 Market Regulation and Liberalisation Experiences... 13 3.4 The North-South Corridor in Southern Africa... 14 3.5 Logistic Costs for Landlocked Countries... 15 4 Logistics Process Induced Costs... 16 4.1 The Nexus of Supply Chain Reliability and Logistic Cost... 16 4.2 Transit Systems and the Supply Chain... 17 4.3 Border Procedures, Governance, and Delays... 18 4.4 One Stop Border Post... 20 4.5 Other Logistic Costs and the Risk of Rents and Market Failures... 21 4.6 Unreliability and Supply Chain Risks... 21 4.7 Transport Deviation and Multimodal Transport Choices... 24 5 Policies Conclusions for the SADC Region and Recommendations... 25 5.1 Policy Conclusions... 25 5.2 Recommendable Policy Options... 27 List of Tables... 29 List of Figures... 29 List of Boxes... 29 6 References... 30 5

List of Abbreviations BUSA CIF COMESA DRC EAC FOB IT LDC LLDC LMIC LPI MOL NTB OECD OSBP SADC SSA TEU TIR UMIC VAT Business Unity South Africa Cost Insurance Freight Common Market for Eastern and Southern Africa Democratic Republic Congo East African Community Free On Board Information Technology Least Developed Countries Landlocked Developing Countries Lower Middle Income Countries Logistic Performance Index Mitsui O.S.K Lines Non-Tariff Barriers Organisation for Economic Cooperation and Development One Stop Border Post Southern African Development Community Sub Sahara Africa Twenty-foot Equivalent Unit Trans International Routes Upper Middle Income Countries Value Added Tax 6

1 Introduction and Overview The following paper examines the costs of transport and logistics in the SADC region. The main target of the paper is to analyse logistics costs in the perspective of negative consequences for import and export competitiveness. As logistics and trade are deeply entangled, the aim is to draw conclusions on how logistics facilitation may foster competition, trade and regional integration within the SADC region and elsewhere. Despite there being no internationally agreed upon definition, logistics can be seen as an important area of policy action when striving to facilitate trade. This becomes quickly clear when focusing on the software side of logistics. Administrative costs of transit and related customs procedures, for example, are crucial in determining transport prices. To this end, hurdles to transport and logistics can be reasonably seen as a quasi non-tariff barrier to trade within SADC. Bearing in mind the regional integration efforts of SADC, as well as COMESA and EAC, there is a need for identifying transport bottlenecks and shortcomings and drawing a revised conceptual logistics framework conducive to broader and deeper regional integration. Of particular interest is the specific situation of landlocked countries as regional disparities are high and smoothing them can be regarded as a success condition of the SADC. The driving question in the context of logistics and trade competitiveness is how to deal with landlocked countries and how to improve the supply chain across countries. Both areas are closely connected and of major importance striving to intensify regional trade, division of labor, improving the value chain and the regional value added in international trade. Major weaknesses of transport logistics within the SADC region include high port costs and processing fees, high dwell time for inbound containers, poor road transport services with long transit times and unreliable service quality, as well as poor clearance and transit infrastructure with low capacity and quality, for example. Poor logistics impose considerable extra costs, which, particularly for landlocked countries, might be prohibitively high, thereby strangling trade and concurrent growth, and excluding them from the benefits of regional and global integration. SSA countries are still heavily focused on commodities and agricultural products. Due to similarities in production and trade between the neighbouring countries and weak infrastructure and other barriers, most trade in Africa is international and not sub-regional. For instance, regional trade in imports and exports within SSA is less than 10%. Therefore, most transport is outwardoriented, relying heavily on ports and shipping. This holds particularly true for the SADC region as it contains five landlocked countries 2 (Teravaninthorn/Raballand 2009:18). Transport costs in Southern Africa are not outrageously higher than in OECD countries. Taking into account quite low wage levels in most of the SADC member countries, transport costs and prices should be much lower, partly the lowest in the world, as transport is labor intensive. However, all four African sub-regions (West, Central, East, and South) show on average higher transport costs and lower quality than other regions in the world (Teravaninthorn/Raballand 2009:14). Therefore, sources of costs need to be examined thoroughly, keeping in mind that higher than average transport costs are detrimental to investment, growth and trade competitiveness. Within the area of trade facilitation it can be differentiated on the one hand between traditional measures, such as simplifying and streamlining trade-related procedures, supporting infrastructure investment, and reforming customs and on the other hand, the new trade facilitation agenda. The latter incorporates a broader supply chain perspective, covering more comprehensively issues such as logistics processes, trade-related infrastructure, services and transport facilitation, regulatory and commercial procedures and red tape and inconsistent regulations. Aiming at regional integration and increasing world market participation, it is crucial to analyse transport and logistics comprehensively in view of the production and the trade supply chain. Consequently, this paper is organized along single elements of transport and logistics costs. Despite the lack of a formally agreed upon definition, in the context of this paper the term logistics is defined in the broader sense of the process, i.e. planning, implementing, and controlling the efficient, cost-effective flow and storage of raw materials, pre-products, in-process inventory, finished goods, and related information from point of 2 Not counting Swaziland and Lesotho. 7

origin to point of consumption or processing. Logistics costs encompass a much wider range of activities than transport costs and include transaction and process costs (related to transport and trade processing of permits, customs, and standards), financial costs (such as inventory, storage, and security), and nonfinancial costs (such as insurance). Accordingly, the total logistics costs can be broken down along the following types. Table 1 Components of Total Logistics Costs Costs = + + (1) Transportation Costs (direct costs) (2) Other Logistics Costs (direct costs) (3) Delay and Hedging Costs (process induced costs) Fees paid for actual freight and transit transportation services to truckers, rail, or ship operators (2a) transport and transit overheads such as fees, procedures, road blocks, facilitation payments. (2b) Fixed administrative costs of shipments (3a) in transit moving inventory costs (costs of goods maintained on the road, or in clearance while already paid for, e.g. cost of average transit time) (3b) induced costs to hedge time unreliability (inventory and warehousing costs), or shift to faster/more reliable and thus more expensive mode of transportation (3c) induced costs to hedge quality unreliability and transport damage (inventory and warehousing costs), or to shift to more expensive mode of transportation (3d) false in cargo composition and wrong documentation This paper consists of four chapters. It starts by briefly summarizing the results of the World Bank s recent 2010 Logistic Performance Indicator (LPI), which are of relevance for understanding the stance of logistics in the SADC region. Findings provide an overview and a contextual background of logistics performance within SADC and are helpful for the following analysis. Part three focuses on different sources of direct transport and other logistics costs, prices aiming at identifying shortcomings and options for cost reductions and efficiency gains. Chapter four can be seen as the main part of the paper, as it will reveal that process induced costs provide the most effective leverage for reducing logistics costs within SADC. The first section starts by analysing the positive nexus between supply chain reliability and trade. The different types of process induced logistics costs, such as border procedures and governance, the relevance of one stop border posts, effects of rent seeking activities and market failures, the impact of an unreliable supply chain on the stock of inventories, transport deviation and the need for multimodal transport choices is treated in six sections. The final part draws policy conclusions and recommendations regarding areas of action for the SADC region. 2 What Does the Logistic Performance Index Reveal about SADC? 2.1 Construction of the Index Facilitating trade and transport is essential for countries to compete in the global market place. Firms need to move goods and services across borders swiftly, reliably and with low transaction (logistics) costs. However, it is not only the global market place but the regional level which deserves particular attention in various perspectives. Regions provide plenty of options for enlarging often narrow national markets, thus allowing for capitalization on economies of scale. Intensifying intra-regional trade offers a lot of opportunities for improving the regional value chain as well as trade diversification. Herewith connected are advancements in the regional degree of division of labor. Furthermore, intensifying regional economic linkages and trade can often also be seen as a prerequisite and important intermediate stepping stone towards successfully entering global markets. As the World Bank s 2010 Logistic Performance Indicator (LPI) shows, trade logistics performance is directly linked with important economic outcomes, such as trade integration and regional trade. The key issue already highlighted by the 2007 LPI is that a trade supply chain is only as strong as its weakest link. This points to regional bottlenecks and potential areas of action within SADC as well as other African regions. 8

The World Bank s 2010 Logistics Performance Index summarizes the performance of countries in six areas that capture the most important aspects of the current logistics environment: Efficiency of the customs clearance process. Quality of trade and transport-related infrastructure. Ease of arranging competitively priced shipments. Competence and quality of logistics services. Ability to track and trace consignments. Frequency with which shipments reach the consignee within the scheduled or expected time. The LPI consists of two main parts based on different perspectives: international and domestic. The international LPI provides qualitative evaluations of a country in the six areas described above by its trading partners logistics professionals working outside of the country. The domestic LPI provides both qualitative and quantitative assessments by logistics professionals working inside the country. This part includes more detailed information on the logistics environment, such as core logistics processes, institutions in the respondents countries of work, and performance time and cost data. Compared to 2007, the 2010 LPI was improved, as it contains on the domestic level important new areas of assessment, such as customs valuation methods, rate of shipments physically inspected, use of electronic submissions, pre-arrival clearance and postclearance audit procedures, the transparency of customs procedures and administration, and border and cargo security. The LPI ranks the 155 participating countries along the score of 4.11 (highest value, Germany) down to the lowest score of 1.34. As the cumulative distribution of LPI scores shows (see Figure 1 below, source World Bank, 2009) participating countries are clustered in five quintiles, while the distribution of LPI scores suggests four types (thereby grouping the 3rd and 4th quintile into one type) of country logistics environments: logistics unfriendly, or severely logistics constrained countries, such as often least developed countries (bottom quintile); partial performers, such as the low and middle-income countries facing similar constraints (fourth and third quintiles); consistent performers, such as countries achieving better logistics performance than their income group (second quintile); and logistics friendly, high performers, for the most part highincome countries (top quintile). Figure 1 Cumulative Distribution of LPI Scores 9

2.2 LPI Performance of SADC Members Having an LPI lower by one point such as 2.5 rather than 3.5 implies two to four additional days for moving imports and exports between the port and a company s warehouse or e.g., it implies a rate of physical inspection that is 25 percentage points higher. Table 2 below shows the LPI distribution of 9 participating SADC members, which, in perspective of quintiles, can be split up in three groups: South Africa ranges on top as logistics friendly, the partial performer are made up of three countries (of which two landlocked) and a group of five countries ranges in the fifth quintile, of which two are landlocked. The distribution demonstrates the heterogeneity of logistics performance across the SADC. Table 2 LPI Distribution of 9 Participating SADC Countries LPI 2010 Sub rank in six categories SADC Countries LPI rank LPI score Customs Infra- structure shipment % of highest performer International Logistics quality, competence Tracking and tracing Time- liness South Africa 28 3.46 78.9 31 29 31 25 24 57 Mauritius 82 2.72 55.3 50 96 33 97 100 127 DR Congo 85 2.68 53.8 59 98 109 49 119 94 Madagascar 88 2.66 53.2 87 60 53 102 109 128 Botswana 134 2.32 42.3 126 119 152 119 99 123 Mozambique 136 2.29 41.5 145 124 87 130 135 150 Zambia 138 2.28 41.2 111 140 128 149 130 131 Angola 142 2.25 40.1 151 149 130 147 106 121 Namibia 152 2.02 32.8 152 148 145 144 144 151 Source: The World Bank Connecting to Compete 2010: 35 The results of the sub-rankings of SADC members show a considerable spread demonstrating that there are strengths and weaknesses in the six specific logistic categories. As the total sample in the LPI reveals, income alone does not explain the variation of logistic performance across countries. Most high income countries are in the top 20 percent of LPI performers, but grouping other countries by income displays that there is a considerable dispersion across all LPI performance types. Upper and lower middle-income countries, for example, are present in all five of the LPI 2010 quintiles with scores ranging from the bottom group of logistics performers to the top. Even low-income countries have LPI scores across four of the five quintiles. Vietnam for instant, a low-income country, has an LPI score broadly comparable with those of some upper middle-income countries. Plotting the average relation between country income and logistics performance in the LPI allows identifying over- and underperformers in the logistics sector. An over-performer is a country with a higher LPI score than would be expected based solely on its income level, an underperformer a country with a lower than expected LPI score. Excluding high-income countries, within the group of the ten most significant overperformers three SADC countries can be found: Republic of Congo, Madagascar, and South Africa. Within the group of the ten most significant underperformers are Angola, Botswana, and Namibia. The composition of these two groups, as well as the general dispersion in performance within income groups, suggests that national policy has a strong influence on logistics sector performance. The fact that each group, underperformers and over-performers, contains a landlocked country points also to the relevance of the policy environment. Some landlocked countries in Africa even managed to outperform their coastal neighbours in logistic cost. 10

Comparing the figures in the 2007 and 2010 LPI indices, 26 countries with statistically significant LPI change can be identified. The majority (25) of these changes are positive, while upward shifts of developing countries were partly remarkable and impressive. Overachievers, of which there are eight low income countries (LDCs), five low to middle income countries (LMIC), and ten upper middle income countries (UMIC), followed the same strategies as top high income countries. They implemented comprehensive and advanced national logistic policies aiming at enhancing their competitiveness. Tunisia, for example, established a national logistics council in 2009 - involving main public and private stakeholders - to implement a comprehensive action plan building on earlier successes. The action plan dealing with border procedures, ports, and logistics services was included in the economic competitiveness program. Morocco has developed a similar program. All in all LPI results show an improvement across the whole sample, except for the top 20 per cent. Measures taken by these developing countries provide insight and examples for possible policy action of SADC members. 3 Direct Transport and Other Logistic Costs 3.1 SADC Transport Costs Compared Taking into account low wage levels for most of the SADC members, transport costs and prices should be much lower and partly the lowest in the world, as the transport industry is labor intensive. Surprisingly, and in contradiction to the aforementioned, all four African sub-regions (West, Central, East, and Southern) show on average higher cost and lower quality in transport than other regions in the world (Teravaninthorn/Raballand 2009:14). As shown in Figure 2 (Teravaninthorn/Raballand 2009:14) transport prices are on average higher than in all other regions, while prices at the Durban-Lusaka corridor in Southern Africa are close to the price level of other world regions. The large difference in transport prices (and costs) between Southern Africa on the one hand and Central and West Africa on the other hand is clearly correlated with the level of truck utilization and the oversupply which is mainly the result of a cartelized market structure in Central and West Africa. Compared to this, the Southern African logistics industry works in a mostly mature market environment and is relatively competitive. Trucking companies in Southern Africa are able to utilize their vehicles at levels similar to European transporters with 10,000 to 12,000 kilometres per month. However, it should be noted, the price and utilization level of Southern Africa is an average figure. Keeping in mind the disparity, the LPI points to transport prices in single SADC Members that are much higher. Why Southern African transport prices, despite low wages, are not lower and more comparable to e.g. Brazil or Pakistan will be clarified in the following sections. Figure 2 Average Transport Prices. A Global Comparison in 2007 In perspective of transport quality compared to costs, Southern Africa ranges above other African regions. However, compared to other regions it still figures below Latin America. There is, as noted above, also considerable disparity in transport quality across the region. 11

Figure 3 Transport Quality Worldwide Based on LPI 2007 3.2 Transport Costs, Prices and Time Transport costs are rather similar around the world. Lower fixed costs in developing countries, that is mainly lower wages and buying second hand trucks, are compensated by higher variable cost, i.e. high fuel consumption (partly up to 50 litre per 100 kilometres) and maintenance due to the age of the truck fleet and poor road conditions. Transport prices in contrast differ widely across the African regions, whereas Southern Africa is the cheapest region. As transport time is a good indicator of quality of service it needs to be noted, that there are high discrepancies in transport time from freight arrival at the port to the inland point of destination across African regions. The highest delivery spreads can be found within West and Southern Africa. For example, transit time from ship arrival to final destination is 8-9 days from Durban to Lusaka and 9-10 days from Durban to Ndola compared to an average of 7 days in Central and East Africa. As international experiences show weak competition in the transport sector or absence of railway services creates opportunities for the trucking industry to charge monopolistic prices. This underlines the importance of intermodal transport competition in the SADC region. Importing or exporting firms benefit from more comparable or lower transport cost either generated by an efficiently operating truck fleet or a competitive rail transport service. Another important cost factor for prices charged to the producer (agent) is the utility rate of the trucking fleet, which widely varies within Africa and is linked to the transport market structure. Organized trucking companies in Southern Africa optimize the usage of their fleet and have similar rates as European firms. However, as Figure 4 (Arvis/Raballand/Marteau 2009:36) shows this does not hold for the entire SADC region, as average truck mileage of Malawi is around one third of South Africa. Figure 4 Average Truck Mileage in Selected Developing Countries Source: Arvis/Raballand/Marteau 2009:36. 12

3.3 Market Regulation and Liberalisation Experiences International experience demonstrates the benefits of fierce competition in the trucking industry. Prices charged for transportation and the quality of services depends heavily on regulatory issues and market structure. Countries which introduced substantial reforms within in the last two decades in the transport markets show broad positive results in terms of lower prices and better services. An illustrative example (Box 1, Teravaninthorn/Raballand 2009:23-25) is the case of transport liberalisation in Rwanda compared to an attempt of Malawi aiming at protecting national truckers. Box 1 African Experiences Compared: Transport Liberalisation in Rwanda and Transport Protection in Malawi Rwanda. The only deregulation experience in the African region so far took place in Rwanda in 1994, and it had a huge effect on transport prices, confirming the impact that cartelized structures have had elsewhere. After deregulation of international transport, prices declined by more than 30% in nominal terms and 75% in real terms. The impact in Rwanda was probably stronger than in most other countries, because before deregulation road freight services were a monopoly of a parastatal trucking company (STIR) (Mwase 2003). Deregulation resulted in lower prices and led to growth in the Rwandan fleet. This result is in contrast to common fears that deregulation, which liberalizes market entry, leads to eradication of the fleet owned by truckers from landlocked countries. In the case of Rwanda, the fear was even stronger given the disappearance of its trucking fleet at the height of the Civil War in 1994. Deregulation helped to achieve a rapid recovery of the domestically owned fleet. In addition, the business strategy followed by Rwandan truckers aimed at specialization in specific goods to capture niche and profitable markets, such as petroleum products. This largely explains why the current fleet is equal to the level prior to deregulation of international transport. Malawi. This was a case of attempted protection of the local trucking industry against competition from truckers from other countries, mainly South Africa. The Malawian government established surtax on domestic transport in Malawi. Under the current tax system, the domestic transporter collects the surtax on transport from the customer. The surtax in fact served no purpose, other than hurting farmers who had to pay the surtax for transport of their production, reducing their profit margins, and providing the local truckers with additional profit for their services. Market regulations in any case provided a strong entry barrier to South African truckers entering into the Malawi transport market, where the government intended to protect the domestic road transport providers. Thus, trucking deregulation is the more successful strategy, leading to more competition, lower prices, and better services, while attempts to artificially protect local transporters (Malawi) have had perverse consequences. The major positive difference is that in Southern Africa rather than in West or Central Africa there are no quotas, freight allocation schemes, or queuing systems established. These regulations have a severe market distorting effect and promote cartelizing (see Table 3, Teravaninthorn/Raballand 2009:48). The absence of these measures can be seen as one of the important reason for the relative competitiveness of the transport sector in Southern Africa. Transport to and from Southern African is settled in bilateral agreements. Direct contracting, that is a medium- or long-term contract between a shipper and a trucking company, is the normal case and one of the best signs of good logistics and developing an efficient transport industry (Teravaninthorn/Raballand 2009:33,54). However, there is some room for improvement and existing regulations should be reviewed as the case of cabotage prohibition in Malawi and the third country rule demonstrates. Cabotage prohibition leads to an underutilization of freight capacity or, putting it differently to an overall capital stock, higher than needed and lesser competition. Closely connected is the third country rule which allows operation of trucks registered in none of the two countries which are part of the transaction (origin or destination). Within the SADC region the third country rule is only applied on a reciprocal basis between Southern Africa and Zimbabwe and during a defined period of time in Malawi. Extending the third country regulation increases competition across the region. However, it should be extended only given that free cabotage in all SADC members is provided. Otherwise, as transport initiation is oriented to the point of origin and destination, limited cabotage would put landlocked transport companies in disadvantage compared to coastal shippers. The transport industry and the major corridors in Southern Africa are compared to other corridors in Africa, the most advanced in terms of regulatory regimes and efficiency of logistics services. 13

However, compared with international levels the logistic performance is poor and much needs to be done (see chapter 2). Table 3 Main Regulatory Barriers in Sub Saharan Africa 3.4 The North-South Corridor in Southern Africa For better orientation this section provides some information on the main corridor in advance. The important issue of corridor-related one stop border posts is treated more intensively in perspective of indirect logistic cost in section 4.4. Logistics in Africa are organized along main trade and transport corridors connecting the ports of entry or exit to the hinterland and via transit to landlocked countries. The northsouth corridor connects the main ports of entry, which is Durban (South Africa), Beira (Mozambique), and Dar-es-Salaam (Tanzania), with five landlocked countries (Botswana, Malawi, Zambia, Zimbabwe, DR of Congo) of the SADC region. The north-south corridor is of great economic importance as it provides a dual purpose. First, it serves an intraregional trade route between landlocked countries (Botswana, DR of Congo, Malawi, Zambia, Zimbabwe) thus potentially fostering intraregional trade. Second it connects these countries to the South African market and links them to the port of Durban for overseas imports and exports, thereby providing for supply chain needs. On the south-north axis there are two main border crossing points, Beit Bridge/Ressano Garcia between Southern Africa and Mozambique and Goblers Bridge/Martins Drift between South Africa and Botswana. With 500 trucks per day, Beit Bridge/Ressano Garcia is frequented twice as much as Goblers Bridge (Teravaninthorn/Raballand 2009:33-34). Although the port of Beira in Mozambique is much closer than Durban for most Zambian shippers, as well as shippers from the north-eastern part of South Africa, Durban is more convenient for several reasons. It can be accessed directly by reliable road infrastructure and with channel-dredging equipment. Durban is the largest port in the area, performs better in reliability and services and has a better accounting for at least three quarters of the total capacity provided by the various ports serving the corridors in the sub-region. Durban s port equipment and lower maritime transport rates make it attractive for even Zambian and Malawian shippers. Therefore, the Durban Lusaka corridor route is the most utilized corridor for Zambia. A closely connected issue with main corridors is their connectivity and potential spill over effect in rural areas, which is illustrated by the example of Mozambique. In order to reach the full potential spill over effect, there have to be adequate links to a low-volume roads network in remote/rural areas (Box 2). 14

Box 2 Investment Calculation of Feeder Roads in Mozambique Given existing road networks, only 19% of rural population in Mozambique live within one hour travel to an urban centre of more than 50,000 people and 45% live within 3 hours travel time of a city of 50,000 or more people. 3 With investment in the main northern corridor roads only, 59% of the population in all of Mozambique (and 49% of the population in the north) is within 3 hours travel time of a city of 50,000 people or more. Adding investment in existing feeder roads (10 km from the main northern corridors) to increase the speed from approximately 10 km/hour (on an earth road) to a speed of 80 km/hour on a paved, good-condition road increases the national population within 3 hours travel time of a city of 50,000 people or more by only 1.2%, to 60.5%. Considering only the five northern and central provinces where the major improvements in corridors take place, investment in feeder roads increases the share of spatially connected population by 1.4 percentage points from 48.8 to 50.2%. It becomes quite clear that without massive investments to low-volume roads, investments in corridor improvement (even if combined with feeder roads) will have a limited positive impact on rural access to roads. Given the low ratio of connecting rural population compared to invested funds this might question the efficiency and political priority of providing for low volume roads and feeder roads at all. However, completing the picture requires looking at costs of rural transport and the potential benefits of improving it. Interestingly, a study (Pedersen 2001) about Ghana shows that only 4 percent of total local and rural trucking transport contributes to almost 50 percent of total transport costs to Europe. Rural transport is almost 500 times more expensive than maritime transport in U.S. dollars per ton-kilometre. Reducing the rural transport time by 50 percent unfolds a big leverage and would reduce total transport costs by almost 15 percent. On the one hand improving the low-volume and feeder road system requires enormous financial means but it can be underlined on the other hand that it has also a significant effect on lowering total transport costs. Thus, the competitiveness of the rural area in e.g. agricultural products and concurrent potential in trade relies heavily on better logistics and an adequate small-scale road system in the rural area. As the corridors and the main routes within SADC are in a good to fair condition, the challenge is mainly to upgrade the lowvolume and feeder road system in the remote/rural areas along criteria such as distribution of population, integrated regional logistics concept, regional development targets, and potential export markets. 3.5 Logistic Costs for Landlocked Countries International figures show that 20 of the 54 low-income countries of the world are landlocked. These countries trade on average 30% less vis-à-vis coastal countries and show weaker growth rates. As the SADC region contains five landlocked countries 4, regional integration via trade and an effective supply chain management is severely hampered as dependence on transit necessarily implies higher transaction and transport costs. Being landlocked is in effect comparable to raising import prices and reducing export revenues. Radelet and Sachs (1998) pointed to the issue that a re-export model is extremely difficult to achieve in landlocked developing countries due to higher cost of intermediate products. This thought is key for understanding the challenge of intensifying regional integration within the SADC. Using the CIF/FOB margin as a proxy for transport cost, Radelet and Sachs (1998) find these costs to be about 50% higher for landlocked countries. In addition, it is more difficult for landlocked countries organizing transport and adequate infrastructure across borders and they are confronted with much higher transport and transit delays, as well as higher variation of export and import leading time. These facts are generally confirmed by the 2010 LPI as Table 4 shows. However, excessive logistic costs and missing connectivity is not only a problem of LLDC. Countries that are geographically stretched or feature an uneven distribution of population may face similar problems. For example, ocean shipping from northern Mozambique to southern Mozambique costs as much as that from Asia to South Africa (Minor 2007:16). 3 This is very different from Malawi or even southern Mozambique. Northern Mozambique is defined as the provinces in the Beira corridor and northwards, i.e. Cabo Delgado, Manica, Nampula, Tete and Zambezia provinces. Population dispersion in the North may be due to population movements related to the long civil war period. 4 Not counting Lesotho and Swaziland. 15

Table 4 Export Distance, Cost, and Time in Landlocked Countries Africa Coastal countries Landlocked countries LPI score 2.46 2.39 Export time (days) 4.82 18.10 Port or airport Import time (days) 7.21 6.99 Export cost (USD) 1,809.8 2,866.6 Import cost (USD) 2,700.6 3,059.0 Export time (days) 4.13 4.67 Land Import time (days) 6.93 8.41 Export cost (USD) 2,124.6 4,000.0 Source: The World Bank Connecting to Compete 2010, p. 35. Import cost (USD) 2,581.3 3,220.8 Given longer distances landlocked countries are often faced with the disadvantage of higher transport costs. In this regard, fuel prices and concurrent tax policies matter a lot in landlocked countries. Instead of charging high fuel taxes, an active policy of SADC Members aiming at lowering fuel prices in landlocked countries may smooth or compensate disadvantages (World Bank 2009:100, Teravaninthorn/Raballand). As the LPI 2010 shows, policy decisions of landlocked countries in the transport and logistic area matter a lot. For example, landlocked Uganda is the third best performing low-income country in the entire sample of the LPI 2010 (66th place) even doing better than its transit country Kenya (99th). Uganda s story is closely related to successful ongoing regional integration efforts with neighbouring countries and trade logistics and facilitation projects supported by the World Bank Group and a number of international donors and development agencies. In particular, the project for upgrading the Malaba border post located at the border of Kenya and Uganda is key to understanding the improvements in Uganda s logistics performance. 5 Transport costs, however, account for only a part of the costs of being landlocked. Based on extensive data collection in several regions of the world, it can be argued that exporters/importers in landlocked developing countries do face higher logistics costs. Interestingly, and against common perception, high logistics costs usually do not result from poor infrastructure but mostly from delays, rent-seeking and governance issues. These factors increase uncertainty and unreliability along logistic chains, causing additional costs for importing or exporting producers, for instant excessive inventories. This topic deserves more in depth analysis and will be discussed in the next chapter. 4 Logistics Process Induced Costs 4.1 The Nexus of Supply Chain Reliability and Logistic Cost The reliability of the supply chain is one of the most important aspects of logistics performance. A high degree of uncertainty means that exporting and importing firms and freight forwarders have to adopt costly hedging strategies, such as maintaining relatively high inventory levels. Recent research suggests that these induced costs on the supply chain can be even larger than the direct costs of freight (Arvis/Raballand/Marteau 2007). Traders are faced with a trade-off between direct freight costs and reliability, depending on imports or exports, their specific commodity (time sensitiveness), and the logistics performance of each country involved in the transport and transit process. 5 For more information on the Malaba project, see the World Bank East Africa Trade and Transport Facilitation Project (www.worldbank.org/projects). 16

Logistic cost can be structured in direct cost, such as freight, transit and transport overheads and process induced costs. The latter is comprised of transit delays, failure to deliver in the needed time window or without the necessary quality and storage cost. Whereas the reliability dimension of logistics can be further separated in cost of transit moving inventory, that is the cost of goods maintained on the road, or in clearance while already paid for, (e.g. cost of average transit time) hedging time unreliability or securing faster delivery within the promised time window, i.e. variance of the export or import lead time and predictability of actual delivery (or in absence of hedging options face inventory and warehousing costs). hedging quality unreliability and transport damage of goods and predictability of quality of goods delivered. i.e. variance of quality (or in absence of hedging options face inventory and warehousing costs). false in cargo composition and wrong documentation Unreliability has far reaching negative consequences. In particular, producers of high quality sensible manufactures, pre-products or time sensitive perishable goods are heavily exposed. Therefore, reliability and logistics costs directly affect firms competitiveness and, for developing countries, the potential to trade and to diversify from non time-sensitive commodities. 4.2 Transit Systems and the Supply Chain Transport costs are only part of the costs of being landlocked. Necessarily costs of transit delay and unpredictability have to be factored in, i.e. the value of time as a trade cost. A complete transit operation can be described as a sequence of international and national transit links. A transit operation typically involves many private and public participants and is highly fragmented and, therefore, also exposed to the risk of rentseeking activities. While port delays impact all countries, LLDCs are confronted with additional delays likely increasing with the number of transit procedures (Table 4). For importing or exporting goods, landlocked countries face the time equivalent of at least three or four clearance processes, while coastal countries face only one. On the North-South corridor for example, it takes on average 39 hours to enter Zambia from Zimbabwe at Chirundu border-post (Curtis 2009). Since many developing countries still rely heavily on tariff duties, they tend to develop redundant procedures to avoid fiscal loss associated with diversion. Transit is therefore often conceived as a chain of control rather than a freedom of transit given to compliant operators in exchange of guarantees (Arvis/Raballand/Marteau 2009:19). Some of the main reasons for the supply chain fragmentation are: The initiation of transit, often as cumbersome a process as a final clearance in the gateway country, involving officials and institutions of all countries involved. Inadequate carnets and guarantee systems or bad implementation of good transit systems (e.g. Trans International Routes, TIR) Systematic implementation of transit controls, irrespective of the principals reliability and competence. Convoy or escort systems not only on risky cargo or insecure vessels, but also on containers. Excessive controls en route, paving the way for additional illegal controls. Obsolete freight regulations. Arvis, Raballand and Marteau (2009:27) examined in an empirical application to the North Corridor in East Africa the impact of transport predictability. They show that there are gains on transport costs from corridor facilitation (2.2 days on average saved per truck, which amounts to 286 USD). However, they are modest compared to significant gains from reduced inventories. In the sample, the inventory level is halved with consequent cost savings of 800 to 1,000 USD per shipment, which amounts to 25% of the transport cost. Hence, the most powerful leverage to reduce overall logistic costs is optimizing the reliability and the smooth functioning of the transit process. 17

4.3 Border Procedures, Governance, and Delays The lead time of imports and exports is a crucial element of logistic performance. The 2010 LPI survey derived from the national level that the lead time for port or airport supply chains is twice as long in low performance countries as compared to high performers. For land supply chains the picture is even worse, as the lead time is more than five times longer. As these times are strongly correlated with distance it can be concluded that geographic hurdles, and possibly internal transport markets, continue to pose substantial difficulties (World Bank 2009:29). As Figure 5 shows, the time taken for clearance of goods (see left scale) through customs is highest in the bottom quintile, whereas clearance of imports in the bottom quintile is ten times higher than in the top performer quintile. Notably, in addition the clearance time significantly increases when goods are physically inspected. Border management reforms, therefore, need to focus on the prevalence of physical inspection, proliferation of procedures, and red tape in low performance countries. Figure 5 Median Import Lead Time and Average Clearance (in Days) Averaged by LPI Quintile 14 12 10 8 6 4 2 0 Bottom quintile (lowest performance) Fourth quintile (low performance) Third quintile (average performance) Lead time (port/airport) - import Lead time (land) - import Second quintile (high performance) Clearance time without physical inspection Clearance time with physical inspection Top quintile (highest performance) 6 5 4 3 2 1 0 Source: The World Bank Connecting to Compete 2010, p. 29. The source of underperformance can be also of exogenous nature to the supply chain, the quality of service, or the speed of clearance of goods. The LPI dataset provides information on the sources of delay not directly related to the capacity of domestic services and agencies (Table 5). There is a sharp contrast between the high performers and the average to low performers in perspective of three factors: compulsory warehousing, theft, and informal (corrupt) payments. 18

Table 5 Respondents Often or Nearly Always Experiencing Delay Factors in percent of respondents Major delays from Compulsory warehousing preshipment inspection maritime transshipment Theft Informal payments Bottom quintile (lowest performance) Fourth quintile (low performance) Third quintile (average performance) Second quintile (high performance) Top quintile (Highest performance) 39 34 30 18 36 32 23 29 19 38 32 25 24 13 33 21 28 22 9 18 2 6 4 2 3 Source: The World Bank Connecting to Compete 2010, p. 33 Customs procedures, personnel checks and also road blocks have an influence on the truck utilization level. Table 6 (Teravaninthorn/Raballand 2009:76) provides some cross country overview. Given that transit freight has to pass through several countries, which is often the case for landlocked countries, hours for border crossing might easily be a multiple. In Africa there seems to be a strong correlation between transport prices and the number of cross-border operations. Reasons for the delays are numerous, including limited parking space for trucks, limited space in the customs yard, poor cargo documentation, and duplication of processes between customs. Freight forwarders may have presented documentation in advance of crossing, despite customs officials might start to process documentation only when trucks have entered the customs yard, which leads to further delay and congestion. Table 6 Opportunity Costs of Delays According to The World Bank Connecting to Compete 2010 indicators of red tape also illustrate a lack of coordination at the border and the burden this imposes on logistics operators. Operators in the lowest performance countries typically deal with around double the number of government agencies as operators in high performance countries (Figure 6). 19