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Ken Gwilliam
Principal Transport Economist
The World Bank
INTRODUCTION -
1. This conference brings together the two topics of logistics and multi-modal transport.
Logistics is concerned with the progress of materials from their procurement by the firm
through the manufacturing process to the point at which they are delivered as a final product
to the consumer. Logistic costs include those of storage, inventory financing, packaging,
transpoort and administration, management and control. Multi-modal transport network
development is often seen both as a way of reducing these costs, particularly for long distance
and intercontinental movements, and as a means of reducing the impact of freight transport
on the environment.
2. It has been estimated that in the OECD countries logistics costs account for about
20% of the total costs of manufacturing industry, varying from less than 15% in the
automotive industry to nearly 30% in the food industries.(Annex Figure 1). But that
proportion varies significantly by region: a recent study undertaken at the University of Costa
Rica suggests that logistics costs accounted for between 30% and 40% of the market price of
domestically manufactured products.
3. The German Bundesvereiniging Logistiek has estimated that transport costs account
for about a quarter of the total logistic cost, roughly equally divided between transport into,
within, and away from the manufacturing process. (Annex Figure 2). For the OECD
countries it was reported that a reduction of 1% in logistics costs had the same effect on
company profitability as a 10% increase in sales.
1
I am grateful to my colleague Hans Peters both for his general comments and advice and for
permission to use tables assembled by him for an unpublished World Bank review paper.
5. This has been associated with increasingly complex production and distribution
arrangements, involving production to demand rather than to stock (just-in-time). Over 60%
of production and sales are now processed directly to order, which permits, indeed
encourages, demand volatility. Order cycle times have been reduced drastically. Philips
International, which was an early participant in this development reduced its average order
cycle time from 23 weeks to little over 5 weeks between 1980 and 1990. (Annex Figure 3)
Such performance is now commonplace. The speeding up of the whole logistics process has
occurred despite involving increasingly complex international chains (globalization).
6. The corollary of those changes is that the patterns of international trade have also
changed. Many developing countries, traditionally thought of as the sources of raw materials
for the manufactured outputs of the industrialized nations, are now heavily dependent on
their place in global production and distribution chains as a major source of growth. Already
over 50% of the exports of the low income developing countries, more than 60% of those of
middle income countries and over 90% of those of Asias newly industrialized economies are
manufactured goods. Only sub-Saharan Africa has failed to develop some kind of sustainable
manufacturing export base, despite generally favourable access to the large European market.
The consequence of this trend to global sourcing is that during the last 15 years, when total
world output has risen by little more than 50% world trade has actually double. In this sense
the world economy is becoming more transport intensive.
Globalization
8. Industrial restructuring transcends national boundaries.The initial attraction for
international outsourcing was undoubtedly the possibility of exploiting pools of cheap labour
in low income countries. Originally this occurred in traditional industries, such as textiles,
where the technology was simple and well established. But it has been extended into more
complex and higher technology products through the development of unit construction
methods which have enabled more labour intensive tasks of specific component manufacture
to be outsourced, with only basic technology and design, (and where product bulkiness is an
issue, final assembly) being retained nearer to the higher income markets.
9. That process of change has been assisted by increasing levels of technical education
in some relatively low labour cost countries which has facilitated the international
transferability of technology, and by increasing freedom of trade and capital flows, and
improvements in information and transport technology which have reduced the impediments
to the efficient delivery of goods associated with either distance or national boundaries. One
of the most striking features of the fastest growing amongst the newly industrialised
economies of East Asia is the very high commitment to basic education.i
10. A corollory of the changes has been that many of the stages of production have
become locationally footloose. Developing countries have been able to enter global
manufacturing chains without either the basis of a strong local market for the final products
or a strong local technological capability. By the same token, however, the location of such
activities has become more volatile, and the struggle to maintain position more competitive.
Keys to success
11. What then are the main keys to success in this increasingly competitive world? First,
of course, whether it be in local markets or in global chains, there must be some basic
advantage to be exploited. Increasingly this is not the access to a raw material or to a finished
product market, but the availability of a competitive human resource supply. But cheapness
labour is not enough. Competitiveness has the dual dimension of quality, or skill for the job,
and price.
12. Even when some basic advantage is established, the increasingly footloose nature of
many industrial processes means that there will be a constant struggle to maintain that
competitiveness. In addition to the establishment and maintenance of some basic advantage
within the production process it must be possible for that to be fitted cost effectively into the
longer chain of processes from raw material to marketed product. Logistical excellence is
thus the essential counterpart to process efficiency.
15. A corollory of this has been the restructuring of freight logistics involving both
vertical integration to allow the offer of a single door-to-door contracted service, and
substantial concentration in some shipping trades. The top ten carriers in the Pacific
increased their share of that market from one quarter to three quarters in the eighties. It has
also changed both the scope and the motivation of the traditional freight forwarding
specialist. For example, in the process of Emery Worldwide changing from being an air
forwarder to being a fullogistic service company the primary concern of their managers has
shifted from that of filling aircraft to that of ensuring the highest possible customer service.ii
16. The potential for cost saving and quality improvement through contracting out
logistics management is highly dependent on the capability, through modern information
technologies, to link the internal information process of a manufacturing firm with that of an
external supplier able to benefit from skill specialization in the logistic management
function, economies of scale in warehousing and stockholding, and economies of
consolidation in transport. In their turn the logistic service suppliers may themselves
subcontract their transport function to specialized carriers.
18. In practice, developments in the organization of the logistic processes have changed
the nature of transport demands. While cost remains important, the interaction between
decisions on transport arrangements with decisions on plant and depot location and on
stockholding emphasizes the qualitative characteristics of speed, flexibility, reliability and
security of supply arrangements. In particular, an ability to deliver relatively small shipments
with absolute reliability becomes critical in many cases. An EIU survey of major successful
companies in 1995 disclosed that rail was generally believed to be slower, more unreliable,
and more susceptible to theft damage and deterioration of goods.iii Above all it was believed
that rail administrations throughout Europe are less commercially minded than road haulage
contractors.
19. For transport across land masses that shifts the modal balance of advantage in almost
everything except basic raw materials towards road transport. For example, some reseach
undertaken for the International Road Union about three years ago showed that for a range of
non-bulk movements the value attached to the qualitative differences between road and rail
transport was about equal to the basic transport cost. The implication of this was that the
demand for road transport was likely to be relatively price inelastic for these commodities.
20. Those considerations also have important implications for intercontinental transport,
and for very long transports across land masses. In these cases a dimension of particular
importance is the integration of modes, not only physically (in the sense of providing for easy
transfer of goods between land sea and air transport vehicles) but also contractually (in the
sense of offering a one stop shop or single door to door contract to the client). The
specialized skills in dealing with international transport facilitation and procurement
provides another possible basis for the determination of an area of integration.
21. Even in some of the traditional raw material trades the ability to improve transport
service quality has been critical. For example, Tanzanias exports of hard fibre to Europe fell
dramatically when competing Brazilian exporters established effective demand responsive
logistic arrangements attractive to European importers. Similarly, but on a more local scale
Cote dIvoire lost international markets to Ghanaian exporters after Ghana introduced a
program of trade reforms.
23. The modal shift effects are less disputable. The tendancy for modern logistic systems
to require combinations of transport characteristics that are best satisfied by road transport
(flexibility, reliability, capability of handling small regular consignments) has already been
noted. The environmental superiority of rail or waterway transport over road transport is
widely accepted so long as traffics are dense enough to permit relatively high utilization
levels for rail equipment. So there would appear, at the least, to be an environmental concern
to answer. The possibility of countering these environmental effects through the development
of multi-modal transport is to be considered in Session 11.
MULTI-MODAL TRANSPORT NETWORKS
24. In the second session of the symposium the extent and direction of multimodal
system development will be overviewed from the user as well as the supplier viewpoint For
intercontinental transport multi-modalism is almost by definition essential. Even for transport
over the land masses the combining of modes may be preferable to single mode haulage
because of the differing relative advantage of the modes in trunk haul and in local
distribution. In fact, the present share of multi-modal transport in land freight movements is
only about 5% in Europe and 15% in the United States. The reason why much freight
transport is single mode transport is that the transfer costs (including transaction costs) of
shifting between modes exceed any benefit of using the best mode for each bit of the job.
That problem of transfer and transaction costs is particularly acute when transport is across
national boundaries. Anything which reduces those transfer or transaction costs in real terms
will assist the development of multi-modality.
25. A multi-modal transport network comprises a set of modal links joined together at
nodes with modal transfer facilities. For international traffics there are nodes representing the
transfer of traffic between international systems, often coinciding with an intermodal transfer
point. Sessions 3 and 4 are devoted to the presentation of case studies of modal interchanges
from many countries, and covering many modal combinations. It is no accident that some of
the developing countries which have made greatest inroads into global distribution chains are
the very same ones that have been progressive in port liberalization. In Malaysia, Thailand
and the Philippines container terminals developed and managed in joint ventures with
experienced international operators have contributed greatly to those countries ability to
meet the demands of global manufacturing chains.
27. Latin America has already shown what major contributions increasing
commercialization and private participation in transport infrastructure supply can contribute
to improving national economic performance. For example, the freight railways of both
Argentina and Brazil are now almost entirely concession to the private sector. In Argentina
freight rates have fallen slightly and rail market share has increased significantly since
privatization. Above all the fiscal burden of the railways has been totally eliminated. It has
been estimated that the total benefit to the economy of rail privatization in Argentina has
been around US$ 1 billion per annum. Fortunately, competition from the road sector is so
intense (rail freight market share in Argentina was only 8% at the time of privatization) that
it is not necessary to worry about any problems arising from the creation and exploitation of
private rail monopolies. By the end of the century it is likely that there will be no public
sector rail freight undertaking left in South America.
28. The port sector is equally critical. Box 1 Port Reform in Latin America
Between 1991 and 1994 the rate of growth of
port container movements in Latin America Virtually every Latin American country is
involved in port reform. In Colombia, all ports
exceeded that of Europe and the United States
that were government operated are now in private
and matched that of Asia. Seven of the top ten hands. Chile, which deregulated its ports in 1981
ports of the continent had annual growth rates is considering further decentralization of the
consistently above ten percent (see figure). remaining 11 ports under state control. Brazil and
The continents ports have some severe Argentina have decentralized and regionalized
physical limitations such as inadequate their ports and six terminals in Buenos Aires are
channel depth which prevent them handling already privatized. Mexico has also concessioned
terminals in Veracruz and Manzanillo to the
very large vessels. But despite this the growth
private sector. Uruguay, Nicaragua, Costa Rica
in trade and reforms in the port sector have and Panama are all planning reorganizations
made it an attractive sector for private which will involve a decentralization of
investment which will improve productivity. responsibilities from the state and liberalized
steps are being taken towards a more private involvement in the supply of some
commercial port sector in most countries on functions (such as stevedoring) or facilities (such
the continent (see Box 1) as terminals).
31. The reasons for this are partly institutional. Governments facing fiscal crises are
inevitably tempted to postpone what looks least immediately damaging. Road maintenacne is
one of these items. Though it has been shown by World Bank research that deferral of
maintenace substantially increases the cost of the road agency in the long term, where the
immediate opprotunity cost is perceived to be very high, and a high discount rate is implicitly
attached to future benefits, maintenance deferral can appear to be a rational response for a
financially strapped government.
32. What this leaves out of account is the impact that poor maintenance has on the
operating costs of those who are using the roads. Again World Bank research has shown that
for roads already in poor state of repair every dollar saved by the government in deferring
road maintenance in a particular year increases the costs of operation on those roads during
the same accounting period by at least three dollars. Thus what might look rational for the
road agency or the government department cannot be sensible for the economy as a whole.
33. Recognition that this is a matter of responsibilities and incentives the World Bank
has been instrumental in developing new institutional structures which will improve
incentive structures. This consists of the creation of user managed Road Boards with the
power to decide on the level of road user charges which will be devoted exclusively to road
maintenance. These are clearly distinguished from any general taxation on fuel which
remains the responsibility of the Finance Ministry and goes into the central Exchequor in the
traditional way.
35. But what is as much as possible? The evidence of the newly industrialized
economies of East Asia strongly suggests that there is an important role for government in
stimulating and assisting industrial development. For public policy makers the critical
questions concern where, and in what way they should be active, and where they should keep
out of the hair of the private sector.
37. My own answer to this question would be that because governments are typically ill
equipped to decide what are the optima or what are the true cost implications of any
interventions which they make, they should limit their interventions to operations through the
price mechanism. If they really attach a very high value to the environmental impact of road
traffic they should be setting high taxes on pollutants (or to the appropriate available proxies
for pollution such as fuel consumption). One common argument against such taxes, namely
that they would be ineffective in securing a modal shift, is in fact an implicit concession that
the real costs of the changed behaviour are very high. If that is the case, changing modes for
freight transport is almost certainly not the right solution to the perceived problem.
39. In maritime transport Box 2.. The Costs of Intervention: Maritime Transport
deregulation has already taken a Flag Protection
strong hold in Latin America.
Many governments have In the majority of developing countries, the policy
encouraged private sector to preserve transport rights for national flag carriers is
misguided. Cargo reservation for national flag carriers
particpation in finance and
shields them from competitive pressures in the international
management of ports and have ocean transport market, with the result that the cost of their
abandoned traditional flag services is higher than that of the international carriers. The
protection in shipping. As a loss to domestic importers and exporters is the difference
consequence the direct effect has between what they pay for the carriage of cargo and what
certainly been that the national they would have to pay in a free market. The gains to
share in some markets has been balance of payments from using domestic shipping are much
diminished as competition has less than their freight revenues because the maintenance and
intensified. But that is not the operation of a national fleet is usually very foreign
real test of the liberalization. exchange-intensive. Without domestic oil resources, steel
National losses from flag making and an efficient shipbuilding industry, the only
protection are usually several savings that materialize are the cost of crewing and vessel
managementassuming that these functions would be
times larger than benefits. (see
fulfilled by nationals. In a study of Venezuela, it was
Box 2). Rather one should look concluded that freight rates were about 30 percent higher
at the reduction in terminal than would have been the case in a free market. On annual
handling costs, which have been freight expenditures of US$800 million, the cost to the
up to 70% in some cases and at economy was US$287 million. Since 70 percent of the
maritime freight rates, which freight payments were to foreign carriers, the extra foreign
have fallen between 30% and exchange cost was US$187 million. The balance of
50% since 1994. These indirect payments gain from reserved cargo, once allowance was
effects benefit importers and made for all inputs purchased abroad, was only US$20
exporters, producers and million. Losses were, therefore, 9.4 times as high as gains.
consumers alike while the Loss/gain ratios for other developing countries were Brazil
= 7.4; India = 4.3; Philippines = 6.1; Turkey = 9.2.
(smaller) gains for protection are
very narrowly channelled to Source: Messerlin P. et al. 1990. The Uruguay Round-
ship-owning and sometimes Services in the World Economy. Washington, D.C.:
maritime employment groups. World Bank.
Even there , such a large
proportion of the inputs in the maritime sector are bought internationally in any case
(equipment, bunkers and even labor) that the real direct effect on the national economy is
minimal.
41. At the heart of the problem in most developing and many developed countries has
been the poor performance of parastatal telecommunications monopolies. The lack of an
adequate number of lines in service, and delay in obtaining lines was almost universal. An
IFC study in the early nineties showed international call completion rates rarely over 50%
and less than 20% in countries such as Ghana, Pakistan and Ecuador. Since then,
improvements arising from privatization, and in some countries from competition in the
telecommunications sector, have been achieved in many countries, including Chile,
Argentina and Brazil. The World Bank has contributed substantially to that revolution.
43. A number of countries have established national trade facilitation bodies. For
example, the British Simplification of International Trade Procedures Board (SITPRO) has a
mandate to disseminate modern trade logistics managements concepts, to foster interaction
between the public agencies and industrial enterprises, to identify issues and make remedial
proposals, and to organize relevant training.
45. Mexico offers a fine example of the benefits that can be achieved through customs
reform. Prior to 1989 traders were facing long processing delays and substantial
undocumented costs in clearing merchandise. Legislation was extraordinarily complex and
the Directorate General of Customs in practice exercised almost unlimited discretion in
application and negotiation of the rules. The tight limitation on customs broker licences
accentuated the arbitrariness of procedures and encouraged the discretionary payments to
customs officers. In 1989 the government radically reorganized the customs system as part of
a more comprehensive overhaul of the tax system. The customs process was simplified and
the rights and obligations of traders were widely published to enhance transparency. Customs
administration was decentralized and access to the customs broker business liberalized.
Traders made payments through the banking system rather than directly to customs officials.
Irregularities were more closely monitored and strictly punished. A World Bank survey
assessed the cost savings of this reform at over US$ 2 billion. This represented 5% of the
total value of merchandise goods trade or 1% of GDP.
Conclusions
46. Let me now conclude. The radical changes in the organization of manufacturing,
distribution and transport, which together comprise the logistics revolution, has occurred as a
consequence of trading-off between manufacturing cost, stockholding costs and transport and
distibution costs, stimulated by changes in relative costs both of factors and locations. Within
the transport sector the traditional significance to modal choice of the balance between the
higher terminal handling costs of rail transport and the higher trunk haul costs of road
haulage has been overshadowed by the new significance of reliability, flexibility, capability
of handling smaller consignments at higher frequency, and so on, which has greatly favoured
road haulage.
47. At the continental level, the result has been an increasing reliance on road haulage,
particularly in Europe, with generally adverse road congestion and environmental
consequences. The concern to stimulate multi-modal transport networks is a response to this
trend, with much of the emphasis falling on improvements in modal compatibility and
improved intermodal transfers.
48. For international, and particularly intercontinental transport where modal transfer
was necessary in any case, the emphasis lies more on reducing the non-physical impediments
to movement. These include improvements in information technology transfer
documentation and to trace and track, and in international trade facilitation procedures and
reductions in customs and other delays associated with crossing national boundaries.
49. From a policy viewpoint the critical feature is that logistic are the primary concern of
the firm which is where the trading off has to take place. Moreover, the very complexity, and
situation specific nature of the trade-offs means that it is only the firm which can determine
what is the best arrangement. Hence the role of the state must not be to decide what is the
best arrangement of transport for firms, but merely to facilitate the actions of firms in making
those commercial arrangements in a way which recognizes the social as well as the private
costs of those decisions. It seems to me that it is on that basis alone that the public agenda
should be founded.
50. As I see it, that leaves the government with the following tasks:
(a) to create an enabling environment which permits the private sector to provide
infrastructure and services efficiently on a commercial basis;
(c) to charge users of public infrastructure a price representing the full cost to
society of the resources used, including the internalisation of externalities;
(d) to identify and eliminate remaining constraints on the capability of the private
sector to respond to market and technological change;
51. The combination of pursuing increased freedom in operations and contract with the
establishment and strengthening of the framework for logistic and multi-modal transport
network development offers a very extensive agenda for learning and for change. I hope, and
expect, that this conference will dissseminate information on what is possible and assist that
process of change.
i
World Bank. The East Asian Miracle .........
ii
Financial Times. Supplement on Logistics. September 14, 1995.
iii
The Economist Intelligence Unit. The EU 50: Corporate cases in single market success. EIU,
London. 1995