By Jose Luis Guasch, Former Head of the World Bank Global Experts Group on PPP and Logistics, Professor Emeritus University of California, San Diego
Pedro, a small farmer in the Andes, spends another sleepless night worrying about how to feed his family. He wonders how to improve the productivity of his small crop of vegetables and how to reduce time cost and losses (spoilage) in the process of taking his produce to the market. George is a small and medium enterprise (SME) entrepreneur, who exports his products. He has to face poor and bumpy roads, delays and red tape in securing permits and certifications, cumbersome custom and/or cross border procedures, lack of cooling facilities, losses due to spoilage and even theft, deficient packaging and scale consolidation, low productivity etc. That is the common plight of most SME farmers and producers in emerging economies. The costs of bringing their products to the market hover around 30% of product value, when it should and can be below 10%.
Weaknesses in transportation and logistics are a recurring theme in numerous diagnostic studies analysing the obstacles to productivity, trade and economic growth in most Latin American and African countries. Particularly burdensome are deficient trade corridors and the dismal conditions of feeder roads connecting markets, borders and ports, as well as the lack of effective logistics services.
Thus, there are two critical dimensions that affect the costs of bringing products to the market. One is the cost of hardware logistics, which refers to having the necessary physical infrastructure in terms of quantity and quality to move goods effectively, that is, roads, ports, airports, and railroads. For this, identifying which corridors need to be improved and developed, whilst considering the financial and technical constraints, is crucial. But physical infrastructure cannot solve the problem alone. The other dimension, soft infrastructure, refers to the set of associated services and processes needed to move and trade goods effectively. In the Latin American and African regions, availability and efficiency of these services, such as warehousing, cold chain services, licensing service permits and certifications, custom processes and deficient packaging technology support, remain questionable. The level and efficiency of these two dimensions translate into three logistical considerations: the costs of the various services needed to deliver products, the time required to deliver products to markets or ports and the losses incurred (spoilage, theft, etc.). Reducing these three factors – cost, time and losses – can have a significantly positive impact.
In most emerging economies, the overall logistics cost of bringing products to the market is between 25% and 30% of the product value (and even higher for SMEs), while in OECD countries it is less than 10%. And with the right measures, these costs can be dramatically reduced with an especially significant impact for small farmers and SMEs. For example, a 10-percentage point decrease in logistical costs would increase demand in the leather and shoes sector by 12%, followed by the wood and furniture sector (10%), and the agro-industry (9%). The same drop in costs would increase employment levels in the wood and furniture sector by 12%, followed by leather and shoes (10%), and textiles (7%). Ultimately, producers’ earnings would thus significantly increase and poverty levels would decline.
First, addressing the weaknesses in transportation and logistics begins with developing a map of the key production sites and their destinations, whether local or for exportation. With the right criteria, this exercise can help to identify the most critical corridors – roads with access to ports, airports and rail services – in need of improvement. The second step is to evaluate the various direct and indirect costs of bringing the product to the market, by following the product from its point of departure or production site (factory, farm, mining, fishing or service site), to its exit point, including the cost of transport (ship, airplane, rail or truck). One of the biggest problems especially for small producers and farmers is the lack of cooling facilities for perishable goods. Often spoilage rates above 30% can significantly be reduced through access to a targeted network of cooling warehouses – consolidations sites – and mobile unites with cooling capacity (this has frequently been done via public-private partnership with little cost to the government). Time delays in providing services, such as phytosanitary permits, certificates of origin, cross border procedures, inspections at ports etc., are another key issue, not to mention consolidation and merchandise packaging processes. And informality in trucking services and delays and inefficiency of most port services (arrivals, loading, storing and unloading, customs, crane services, etc.) are also compounding logistics costs.
These costs should be evaluated according to specific characteristics and categories, i.e. by size of firm, corridor, stage in the logistics chain, size of shipment, and time involved at the various stages, i.e. time to secure a certificate, a service, time in storage or in a consolidation centre, etc. Spoilage rates should be calculated as well. With this information, targeted measures can significantly reduce logistics costs. Finally and not to be forgotten are complementary measures to improve productivity, targeted at SMEs and for specific products. One effective measure is to set up knowledge transfer centres for small producers, through public private modalities, which should be located in situ, near production zones, and focused on one specific product (e.g. grapes, coffee, leather, furniture etc.).