Logistics and Transport: A Long Road to Travel in Central America
February 8, 2013
- Across the region, trade as a share of GDP grew 8% between 2000 and 2011
- Small-hold farmers are the most affected by bottlenecks associated with transport, customs clearance and rural roads
- Public-private sector cooperation is crucial for overcoming these obstacles
Why is it more expensive shipping tomatoes from San Jose, Costa Rica, to Managua in Nicaragua than it is to San Jose, California, which is 10 times the distance?
According to Google, the distance between the Costa Rican capital and Managua is 430 kilometers, whereas 5,400 kilometers separate San Jose from the Californian city. According to World Bank figures, the cost of transport in Latin America and the Caribbean is between two and four times higher than that in OECD countries.
Transporting tomatoes from Costa Rica to neighboring Nicaragua should be as easy as moving the hundreds of tons of this fruit that are shipped from Spain to France each week. But the reality is very different.
The case of exporting tomatoes from Costa Rica to Nicaragua clearly illustrates the logistical challenges facing Central American countries to improve their trade competitiveness. Costa Rica produces over 60,000 metric tons of tomatoes annually. While domestic consumption is high, a large share of this production is shipped to its northern neighbor.
But transporting Costa Rican tomatoes to Nicaragua often entails expensive logistical operations. For large tomato producers, transport and customs clearance expenses can represent more than 30% of the final cost of their exports. These expenses are even higher for small-scale tomato growers, exceeding 50% of the final cost.
Efforts must focus on shortening distances in Central America
“For a region that has advanced so much in free trade [by unifying external tariffs and signing agreements such as the DR-CAFTA, for example], internal trade still has a long way to go,” said Hasan Tuluy, Regional Vice President for Latin America and the Caribbean.
Tuluy considers that what is holding back the countries in the region, especially in Central America, is what he calls "battle of productivity". Central America countries "are small markets and therefore they have to be open economies and for them to be open they need to be competitive; for them to be competitive they need much more productivity. And that comes through much better education of quality, much better infrastructure and logistics and these factors are the ones that create growth and the opportunities needed to distribute more equitably the wealth".
According to Tuluy, this issue was a key incentive for the logistics meeting in Central America - The road to competitiveness - celebrated in San Jose, Costa Rica on February 8. The event was sponsored by the World Bank, INCAE and the Costa Rican Ministry of Foreign Trade.
Transport is largely responsible for the high and varied costs: for large-scale producers, transporting tomatoes from their farms to the borders represents 7% of the sales price whereas for small-hold farmers, transport costs account for 23%, in other words, three times more than for larger producers. The poor condition of secondary roads, the long distances and production scales largely explain this difference.
Another key factor driving up the logistics cost of tomatoes is processing through customs. Together, payment for customs services in both countries, and losses due to long waiting times, represent 10% of the final sales cost. On a busy day at the Peñas Blancas border crossing between Costa Rica and Nicaragua, it may take up to 10 hours for a truck transporting tomatoes to its final destination. This is in part due to the fact that phytosantiary controls for perishable products are implemented on both sides of the border.
“Although bottlenecks affect costs in all segments of the logistics chain, border procedures and road quality have a major impact on competitiveness in Central America, particularly on small-hold farmers,” said Felipe Jaramillo, World Bank Director for Central America.
For a region that has advanced so much in free trade [by unifying external tariffs and signing agreements such as the DR-CAFTA, for example], internal trade still has a long way to go.
Central America has yet to reach its trade potential
Trade in Central America has grown significantly over the past decade, especially after the negotiation and signing of trade agreements among countries and as a regional bloc with other markets. As a result, trade in the region grew 8% (as a share of GDP) between 2000 and 2011. Intra-regional trade has also increased. For most Central American countries, the isthmus is now the second leading export market.
However, economic studies indicate that logistics and transport obstacles still limit Central America’s trade potential. Several World Bank studies have shown that the high costs of domestic transport, together with bottlenecks at border crossings, are the main obstacles for trade among Central American countries and with other markets around the world.
According to this research, the lack of quality secondary roads, costly land transport services and lengthy customs clearance procedures are the main hindrances to trade. These logistics factors negatively affect the competitiveness of Central America.
One World Bank study analyzed five trade corridors in Central America. It found that logistics bottlenecks can increase the time needed to transport a product from the storage center to the nearest port on the Atlantic coast. This additional time can total 21% in Panama and up to 60% in Nicaragua and El Salvador.
For example, taking into account the road network and geography, to cover the route between Nueva Guinea in Nicaragua and Puerto Limón in Costa Rica should take 10 hours by truck. Nevertheless, delays resulting from the poor quality of the roads, detours to avoid bridges in poor condition and traffic in urban areas add an hour and 40 minutes to the trip. The wait to cross the border requires at least another two hours, which means that a truck can take up to 13 1/2 hours, rather than 10, to reach its destination.
When products are exported to other markets, the extra time can affect the possibility of connecting with shipping routes. For trade among Central American countries, delays can have an impact on the quality of goods, especially perishables.
“Central America needs to address these logistics barriers – mainly at border crossings – through joint efforts between governments. Measures to facilitate trade and improve the competitiveness of the region should not entail high fiscal costs,” said Jaramillo.
Countries can reduce costs at border crossings by increasing customs’ efficiency and capabilities, as well as by improving border infrastructure. At a regional level, there are ample opportunities to improve coordination, information exchange and the standardization of regulations, control mechanisms, health procedures and operating hours at border crossings.