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FEATURE STORY

Why is freight transport so expensive in Central America?

February 7, 2013

STORY HIGHLIGHTS
  • Road transportation is the principal means of trading goods within the region
  • Several bottlenecks have been identified, which primarily affect small-scale producer
  • Crime and violence also increase transportation costs

In 2010, beef became Nicaragua’s second largest export item, after increased demand from countries like Venezuela, which became the largest importer of Nicaraguan processed beef.

Such promising potential, however, has brought to light the domestic challenges to market expansion. A small-scale beef producer in Nicaragua can pay up to twice as much as a large-scale producer before his cattle reaches the consumer.  The transportation of animals from the ranch to the slaughterhouse and from the slaughterhouse to market implies costs, wasted time and, above all, a negative impact on product quality.

The more time beef spends on the shelf, the less likely it will sell, resulting, indirectly, in less income for the small producer.

Transporting freight overland directly impacts on poverty, according to experts. When it works correctly, it generates millions of jobs, representing a significant share of GDP in low and medium income countries, and even results in lower food prices. When it does not, it generates a vicious cycle affecting the profitability and efficiency of economies, generating an upward pressure on prices in comparison to other countries.

According to a World Bank report, there are five reasons why transportation is exceedingly expensive in Central America:

  • High fuel prices
  • Security costs
  • Transfer of empty containers
  • Excessive travel times
  • Scarce investment and access to credits (to maintain and renew vehicle fleets)

For example, a survey of 250 transport companies revealed that fuel prices can make up between 40% and 60% of variable costs — compared to just 20% in the US and Canada. Only 34% of those surveyed have put in place fuel efficiency practices, which not only help to reduce costs, but also serve to reduce carbon emissions.

On the other hand, security represents between 3% and 4% of Central American transportation companies’ costs. “High quality beef and coffee exporters must pay a security car or armed guard to accompany vehicles during transportation,” the study indicates. Meanwhile, security costs have risen by 25% in the past four years and are susceptible to further increases as crime and violence rates grow.

The return of empty containers also explains high freight costs. The first part of the trip costs more because it must compensate for an empty return trip. In Guatemala, for example, around 77% of all containers return empty. This problem affects all Central American countries, and both large and small transportation companies.

 

Open Quotes

High quality beef and coffee exporters must pay a security car or armed guard to accompany vehicles during transportation Close Quotes

More Time, More Cost

On the border between Costa Rica and Nicaragua, there normally is a long line of trucks waiting their turn to present their paperwork. Furthermore, the parking lot opposite the customs office is full of vehicles waiting to regularize their documentation and continue their journey. Experts point out that “the waiting time on the San Jose-Managua road border crossing at Peñas Blancas — for an empty return — is 24 hours, or around 22% of the total trip duration on average.”

This scenario is common to almost all Central American border crossings. While waiting, perishable products such as milk, beef, fruit and vegetables must be kept refrigerated in trucks, resulting not only in a great loss of time, but of fuel as well. 

The time it takes to travel from one destination to another is not only affected by unpredictable customs procedures, but also by other factors: congestion in and around urban areas, the impossibility of traveling at night due to public safety concerns and poor road infrastructure. At the same time, regional roads are also vulnerable to natural disasters, which put limits on access roads, especially unpaved ones.

The report suggests that to lower transportation costs several region-wide solutions must be implemented to harmonize customs systems, invest in roads and continue the fight against crime and violence. Investing in transportation is not the end of the road, but rather the beginning.