LOGISTICS FOR COMPETITIVENESS: IMPACT AND AGENDA

1. 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

2. Logistics and Competitiveness? Why? Logistics are one of the five key pillars of competitiveness

3. Components of Competitiveness • Access to Markets and Trade Policy • Tariff System • Free Trade Treaties • Productive/Exportable Supply • Quality and Standards • Human Capital • Innovation; Knowledge and Technology Transfer • Value Chains and Clusters • Logistics and Facilitating Trade • Hardware: Infrastructure • Software: Associated Services and Trade Procedures • Inclusion / Production of SMEs: Knowledge Transfer • Coordination • CITEs • Investment and Business Climate • Institutions: Competitiveness Council, Agency for Facilitation of Exports, Quality and Innovation

4. 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: • 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?

5. A How can Logistics Costs be measured? B Macro approach Logistics costs as a % of GDP Micro approach Logistics performance based on firms´ surveys. Costs as a % of product value Perception Recent Logistics Perception Index • 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) • 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) • New exercise: World Bank, GFP and Turku • Perception-subjective- from 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

6. 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 • Procedures • Customs, phytosanitation if applicable, etc. Administrative costs and losses Warehousing • Administrative costs 20.5% 19.0% • Logistics overhead • Insurance • Security • Spoilage and losses Licenses and procedures Inventories (and financial costs) • Warehousing 10.1% • Costs of warehouses used • Costs of deterioration and/or losses generated in warehouses used 18.7% Transport: port-related • Inventories (financial costs) Transport: roads and/or railways 17.8% • Costs of maintaining stock • Costs of merchandise in transit 14.0% • Transport cost • Freight • Cost of deterioration and/or losses generated during transport Transport Cost = 31.8% 1/ 36 interviewees responded to the question. Source: Survey with companies using cargo transport services, 2000 – Consultation Support

7. 28% 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 Warehousing Administrative costs 12% Administrative costs 29% Inventories (financial costs) 19% 17% Inventories (financial costs) 27% Procedures Procedures 6% Transport roads and/or railways Transport: roads and/or railways 9% Transport: Port-related Transport: Port-related 5% 16% 12% 20% SEAFOOD PRODUCTS TEXTILE PRODUCTS Administrative costs Administrative costs Warehousing 17% Warehousing 23% 19% 33% Procedures Procedures 12% 9% Transport: Port-related Transport: Port-related Inventories (financial costs) Inventories (financial costs) 24% 12% 9% Transport: roads and/or railways 14% Transport: roads and/or railways 16% 12% Source: Survey with companies using cargo transport services, 2000 -- Consultation Support.

8. Logistics Costs in Latin America • On the average, 24% of product’s value

9. 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

10. Elements of Logistics • Distance to destination • Inventories • Times • 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, ).

11. Insufficient Infrastructure Reduces Competitiveness: translating into high loss rates, high logistics costs, high inventory levels, 2008 Source: Guasch (2008)

12. Latin America: Logistics costs are especially high for SMEs Source: Centro Logístico de Latinoamerica, Bogota, Colombia. Benchmarking 2007: Estado de la Logística en America Latina Anexo, María Rey, Logistic Summit 2008.

13. 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)

14. PRW (Public Refrigerated Warehouse) Capacity, 2008 Source: IARW

15. Relation between Freight Rates and Connectivity, 2006 Source: Wilmsmeier (2008)

16. 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 Source: Wilmsmeier (2008)

17. … 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 Source: Authors, freight forwarder and shipper interviews, and OECS Backward Linkages Study (2008).

18. 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 Source: Authors’ calculations, data from Manifiestos, Ecuadorean millers, interviews and Winnipeg Board of Wheat.

19. 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

20. Impact of a 10 percentage point reduction in logistics costs

21. Increase in household earnings from improving access to markets, by rebuilding rural roads (in US$ annually) Source: INEI 2004-2006

22. What we must attack: Infrastructure Platform and Related Services • Hardware • Infrastructure • Software • Associated services

23. 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

24. Software • 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

25. … and we must not forget to support the smaller ones!

26. Exporta Facil 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

27. Performance Easy Export

28. 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