View all episodes on our Tell Me How: The Infrastructure Podcast Series homepage
Commerce, the exchange of goods and services, is at the heart of economic prosperity. Goods get to us because roads and rail connect us to different places, supporting supply chains. Quality infrastructure built in the right place is important. But just building infrastructure is not enough. What is equally essential is how that infrastructure is used to provide services: the trucking, haulage, rail, and other services that carry the goods. In this episode, we discuss how the market for road infrastructure services - can facilitate or, impede the functioning of supply chains.
This podcast series is produced by Fernando Di Laudo and Jonathan Davidar.
Listen to this episode on your favorite platforms: Amazon Music, Apple Podcasts, Google Podcasts, Podbean, and Spotify
Transcript
Roumeen Islam: This is the World Bank’s infrastructure podcast. In today's episode, we discuss how countries may reap the economic benefits of efficient and quality transportation and logistics. Everyone wants their goods to be delivered cheaply and as fast as possible. Those delivering your goods, want to make as much money as possible while ensuring they capture and retain customers.
The efficiency of businesses and their supply chains depends on the quality of infrastructure services that carry the goods from one place to another. As countries develop, transport services do too. 150 years ago, for example, rail and road services were under the protective wing of the United States government. In 1980, the government, seeing vast inefficiencies in the two industries, substantially deregulated both, opening them to market competition.
So, what happened? Well, trucking services got cheaper, and railroads saw higher returns to investment. Shippers and customers have gained roughly $20 billion a year in benefits. In today's world, where we're increasingly dependent on transport, logistics, and seeking to improve it. Let's find out how to do it.
Good morning and welcome. I am Roumeen Islam, host of Tell Me How. And today, I have as my guest, Matias Herrera Dappe, expert on transport economics, who will be enlightening us on how countries may support better transport infrastructure and services for growth, with a special focus on road transport. Welcome Matias.
Matias Herrera Dappe: Thank you, Roumeen. It's a pleasure to join you.
Roumeen Islam: It's a pleasure to have you with us. So, Matias, historically physical connectivity between countries has been very important to their development. And so, transportation costs and improvements have been, of course, an important determinant of how much countries can connect through trade. How would you say that has changed?
Matias Herrera Dappe: So, the first wave of globalization was between 1870 and 1914 saw a major increase in international trade flows, largely attributed to the invention of the steamship. Today's wave of globalization is a bit different. Trade costs have gone down due to technological developments in transport such as containerization, but also policy reforms, particularly tariff reductions and their various international trade agreements.
So, according to the latest estimates by the World Bank, tariffs account for only about 7 percent of average trade costs today, with the bulk of the trade cost related to transport and logistics activities, and border and customs procedures.
Roumeen Islam: Okay, so that's very interesting. What you're saying is that the binding constraint, if I might put it that way, falls and rises, depending on where the reform has been most concentrated. So that's interesting to know. Following from your response, could you explain how to think about the role of the transport sector? How should we think about the economics of it, the policies of the transport sector and influencing connectivity? Is it about looking at the quality of infrastructure investment, or are there other factors?
Matias Herrera Dappe: Connectivity is the extent lots of people and goods from a location can reach other locations either directly or indirectly through other cities or countries. And for this, you need two things: transport infrastructure and the transport services. Not everyone has a vehicle or a truck to transport goods. So, infrastructure without the services, will provide connectivity only to those who can afford a vehicle. What we look at when we assess the connectivity and the role of transport in connectivity, is the availability of adequate transport infrastructure and competitive transport services. And when I say competitive, I'm referring to the price of the service and the quality of the service. We also look at any other constraints to seamless movement of goods, such as some regulations and policies. For example, in India, and between India and Bangladesh, Indian trucks cannot enter Bangladesh and Bangladeshi trucks cannot enter India. They're not allowed. So, cargo needs to be transloaded at the border from one truck to another. This is what makes the whole process quite cumbersome.
Roumeen Islam: Yeah, there are these types of regulations in many other places of the world. So, if I hear you correctly, there are three main blocks in this discussion. We can think about the infrastructure itself, the roads, ports, and rail lines, for example. The services provided on that basic infrastructure and then the policies, regulation, or even market structure that affect the provision of services. Essentially, the final good is the transport service and many things affect that. So, you mentioned that both prices and quality matter in the provision of what you call competitive services. So, can you speak to the quality aspects of these services and how that may hinder what you refer to as seamless connectivity?
Matias Herrera Dappe: Yeah, sure. Shippers, the owner of the cargo, care about the overall cost or economic cost of moving goods from one location to another, from the origin to the destination. So that includes the price they pay for the transport service, if they hire a third party to provide that service, or the cost of operating their own trucks, for example. And the quality of the service which is usually measured in terms of the transport time, the reliability of that service, and also aspects related to safety and security of the cargo. If you ship something, you want it to arrive in the same way that you shipped it. The time and the reliability influence the decisions about inventory, for example, and therefore the opportunity cost of those goods that are being transported and stored, that is a cost, to the firm that produces export goods.
They are also influenced by decisions around supply chain: where to locate a warehouse, where to locate a distribution center, where to locate a factory, the time that it takes to move goods, and the certainty around those times determines those decisions. And so, it has a cost in in the operations of their business. And therefore, shippers care about those aspects too. It's not just how much you paid to a transportation company for moving your car.
Roumeen Islam: Yes, that's well understood. I understood you, but what I would like a bit more clarity on is what do you mean by reliability? If I were to think of that in economic terms, how would I think about that? Could you give me some examples?
Matias Herrera Dappe: Yes, reliability is the predictability of travel times, delivery times. You might know that, on average, going from one city to another, it takes 10 hours. So, you can plan that in 10 hours, the moment you ship, you will have the goods delivered there.
But if those could be instead of 10 hours, you could go from two hours to 20 hours and depending on hostile factors, judged as, the quality of infrastructure, congestion on the road, the transport carrier makes decisions that delay the shipment, or if it has to go through a port, how the port is operated, adds to uncertainty about those times, or there could be informal checkpoints on the road that can delay the cargo.
So, this is what I mean by reliability and your predictability. And to give you an example in Bangladesh, congestion and reliability are quite important drivers of the cost of transport. Firms hold inventories, in some sectors up to six months of inventories to cope with the delays and unreliable deliveries. If they need to produce garments for export, they need to have the fabric there. So, they need to have that buffer stock in case the deliveries do not take place on time as they planned.
Roumeen Islam: So, the most important point is that you can't really plan because you don't have a consistent estimate for how long the delay would be, for example. So, what are some of the key frictions that drive up the price and drive down the quality of freight transport services apart from some of the things that you just mentioned about predictability, would you like to go into this a bit more?
Matias Herrera Dappe: There are different factors that we see in South Asia and across the world. One main factor is the inadequate infrastructure, that is, in terms of the stock of infrastructure, but also the quality of infrastructure. Inefficiency in the operation of infrastructure, for example, ports. Another important friction in some countries, such as west African countries, is that markets for transport and logistics services are distorted or don't work. For example, when the truck owner cannot negotiate directly with cargo owners but have to go through intermediaries. And here, one has to go through them - it is not that it is by choice. And those intermediaries end up setting the price, and the price the truck owner receives on his volume of business is independent of the quality of his service.
He doesn't receive the incentives to provide better quality. A particular institution that will allocate the cargo to you, no matter what you do, that, distorts the whole market. So, in a sense, removing these end barriers to access business is important to bring efficiency and to let the market really work. These new technology firms are providing a match between cargo owners and truckers.
Roumeen Islam: That's right.
Matias Herrera Dappe: Firms like the Uber of logistics and trucks and others.
Roumeen Islam: We have many them.
Matias Herrera Dappe: So, in that case, first truckers and cargo owners choose that service because, as I said before, it brings some efficiency. The price, yes, might be set by an algorithm, that tries to match supply and demand. But also, there is the quality of the service: it's rewarded. There is a rating for those companies providing the service so then you could decide if you will use only companies with certain ratings or the platform will drop those companies that don't reach a certain level of quality. So then, there's an incentive to provide better quality, even if you don't influence per se the price, in that sense. Another problem, and we'll get back to digitalization here too: there's a large share of trucks or vessels traveling empty because of information asymmetries between the transport service providers and the cargo owners.
And in some cases, because of cumbersome custom processes on entry barriers. So, the information asymmetry can be solved through these platforms that we just spoke of. The issue is, why in some cases, those platforms do not arrive - are not coming up in some countries. And then, there is the issue that, as I said, some custom processes are entry barriers that allow, for example, a truck to drop cargo in a location, but they are not allowed to pick up cargo from that location. So, therefore they have to come back empty or some other restrictions that we've seen in terms of where the distribution centers can be located, where container facilities can be located, that leads to empty running trips and there are a large share of them.
So, the productivity of the trucking firms is much lower, and they need to charge higher prices in order to be able to cover costs.
Roumeen Islam: Now, let me go back to something you mentioned earlier, which is that customs clearance, and how that may add to costs. So, countries restrict border crossings through transport policies not just tariffs, right? So why do they do that? Are they just another less transparent form of trade barrier? Or are there other reasons for doing this?
Matias Herrera Dappe: It's both. So, there can be technical reasons that are not necessarily about protecting domestic services. For example, countries have different infrastructure design standards, axle load limits, emission standards and transport service standards in general, like in other service sectors. But to a large extent, these restrictions are still today, to protect the local transport industry.
Roumeen Islam: Thank you. There's been a lot written on, investments that don't amount to anything such as bridges and roads to nowhere. How should we think about transport investment? Because it's a very difficult thing to think about, actually. These things take a long time to build and to bear fruit. So, what do you say?
Matias Herrera Dappe: Yeah, it's certainly an important issue. Decisions about transport infrastructure investment need to be based on proper planning. That might sound obvious, but proper planning in the case of transport, is not that simple. Transport infrastructure brings the most value when it's part of a network. So, there are some network externalities benefits there. And building a network requires integrated planning and coordinated implementation. So if one institution, and we see this happen in some countries, is responsible for the road network and another for bridges, and the planning and execution is not done in an integrated, coordinated manner, then you can end up with a four lane highway with a two lane bridge in the middle. So, with a very limited link that it's important for the whole network.
Roumeen Islam: I've been on some of those.
Matias Herrera Dappe: Yes, most of us been on some of those that you don't know why they exist. And governments of course, need to create different institutions to manage different assets. But if they don't coordinate is when you have that problem. Integrated planning should also consider policies that influence the fleet of vehicles that meets the demand of infrastructure.
So, it's not just about thinking: where do we put the infrastructure, but it's about infrastructure that needs to be used, and how can we influence the use of that infrastructure? If you have another institution responsible for policies, then there's no way you might end up with too much infrastructure or too little infrastructure. And planning should be based on robust demand analysis, which is not simple. And there tends to be an over optimism when demand estimations are done, we are cognizant about that. But also, the planning should be based on transport modeling and consider all the economic impacts of infrastructure. It's not just about building to provide the capacity or the traffic that you are estimating will be there in the future, but the infrastructure that you put in place will influence economic activity and therefore the demand for that infrastructure. So, there's feedback loops that need to be considered so you don't end up with too much infrastructure or too little infrastructure, or as you said, infrastructure in places that it's not needed at all.
Roumeen Islam: Yeah. Those feedback loops seem very complex to think about as well. And I'm wondering, are governments uniformly good at this type of planning? There are significant capacity differences between governments. And so, I'm just wondering, can the private sector help when and where might the private sector come in?
Matias Herrera Dappe: So, it varies a lot by country, by the capacity countries have. But integrated planning of the transport network has to be done by the government with inputs from many stakeholders, including the private sector. Governments can, and they do hire consulting firms and universities to help them with planning. But the planning decisions, the policy decisions, are made by the government. The private sector can bring efficiency gains in the construction and operation of infrastructure, for example, through public private partnership. A market test would help differentiate profitable from unprofitable investment, but that is under certain conditions. And also, if the economic benefits cannot be monetized, then the market tests will leave out investments that are beneficial for society.
Roumeen Islam: So, we've been talking a lot about infrastructure and international commerce. I'm wondering what's the relative importance of transport within countries versus across countries. For example, in many of our client countries, I'm just wondering whether there's enough built to connect countries within versus transport that connects countries to other countries. I've read some recent research that's looked at how the road patterns in Africa seem to follow a pattern of radiating from points in the interior outwards for the purpose of exporting, rather than connecting points in the interior. So, what would you say about this?
Matias Herrera Dappe: Yeah. That is a pattern in infrastructure that we see in many developing countries that comes from the colonial times that infrastructure was built to extract resources. Today, for some countries, international maritime, shipping remains challenging and expensive, but for most countries, their challenge is to increase the efficiency of border crossings within country transport, which is mainly road transport. The cost of moving goods within countries are generally higher in developing countries than in the rest of the world. And this is especially true in much of Africa. It is difficult to give an exact estimate of the size and implications of existing transport costs in developing countries, especially in places where data is scarce like in African countries, but really most developing countries would say data on transport costs is quite scarce.
We are doing study that would shed light on this issue. I can tell you about recent research by David Atkin and Dave Donaldson at MIT that estimates the cost of transporting goods in a couple of Sub-Saharan African countries. And they found that the cost of transporting goods within the countries could be up to five times higher in these countries, such as Nigeria, than in the US.
And that cannot be fully explained by the available infrastructure or the quality of infrastructure. So, there is the issue of the reliability, the issue of the service, the markets, and another sub issues that increase the cost of transport beyond available infrastructure.
Roumeen Islam: Yeah. I actually was quite surprised to learn that transporting goods within countries, goods, and people, is often so much higher than crossing borders as well. How do different factors, that hinder connectivity, how much do they cost us in terms of income and growth? Do you have any estimates?
Matias Herrera Dappe: There are estimates for some of the factors. There tends to be more for infrastructure per se, related infrastructure. The soft constraints are more difficult to estimate, the impact of them. In the case of Bangladesh and India, and they're what we call full integration, that is, trucks do not need to stop at the border between India and Bangladesh, and they can use any border posts and roads in both countries. National income can increase by close to 17 percent in Bangladesh and 8 percent in India. That's based on some work that we just completed. In the Horn of Africa, improving regional corridors could increase income by one to two percentage points. And if border times are decreased by half, that can add another 3- 4 percentage point, because the constraints at the border are quite high. And then if we are looking, in that sense, at economic gains from time savings, then it boils down to where the main frictions are in slowing down the movement of freight.
For example, research done by some of our colleagues at the Bank, found that a one day reduction in inland travel times in Africa could lead to a 7 percent increase in exports, which is about equivalent to a cut of two percentage points on importing country tariffs. And, they found that this is more important than other time related frictions, at ports and other borders, for example.
Roumeen Islam: Now, we've been talking a lot about connecting across countries and infrastructure that changes the economics of the areas through which the new infrastructure and the services go, the transport services go through, so they change the opportunities. Maybe there'll be gainers and losers from these changes. So, I was wondering if you could speak a little bit about the internal income distribution impacts, and whether some of these are related to the increased trade that may have come about after you built transport infrastructure and services. So, could we speak a little bit about that?
Matias Herrera Dappe: Yes. An important insight that we got in the last few years is that spatial inequality, that's the difference in income based on where people live, is quite important. Trade has affected people differently, not only because of the skills that they have, but because of where they are located. For example, Vietnam and Bangladesh have grown tremendously in the last few years, but in both countries, those areas that benefit the most were the more export-oriented areas which tend to be close to the port or the main city. In that sense, internal trade barriers, distort the benefits of globalization and increased trade. It happens, as trade tariffs decrease and international transportation improves, the benefits from lower price and a wider variety of goods may not accrue to all people equally with remote locations, being at a larger disadvantage because of the international trade cost. And these can exacerbate regional inequalities.
Roumeen Islam: Yes. The impact on spatial inequality is something that policymakers definitely would need to consider in their longer-term planning. All kinds of structural reforms or investments can obviously have consequences like these that are negative for some and positive for others. That was really enlightening as I thought it would be. Thank you, Matias. But before we end, is there anything you would like to add to all that you already told us?
Matias Herrera Dappe: Thank you, Roumeen. This is a topic that I'm very passionate about. I just want to invite our listeners to read our recent studies on transparent and trade: one of them called Connecting to Thrive and the other, Moving Forward. They are all on the World Bank web site. They are full of interesting insights. Thank you.
Roumeen Islam: Thank you. I'm sure that our listeners will read these very promising texts. Thank you, Matias. Well listeners, we learned a number of things today. Firstly, efficient transport networks within your own country and across the borders to others are the backbone of commerce. Complex supply chains depend on them and they influence the spatial aspects of income.
Secondly, transport infrastructure, like the road and services, like the trucking services, both need appropriate policy to support their efficient development and function. Good public investment planning for the sector and good project choice are needed. But so are private sector ideas, finance, and implementation efficiency.
Thirdly, transport service markets need a regulatory framework that promotes competition among providers to ensure that customers get the best price-quality combination possible. And that the sector itself does well. Thank you, and bye for now. You can find more information about the podcast on http://www.worldbank.org/tellmehow. If you've got questions or comments, we'd love to hear from you. You can also find us on popular podcasting platforms.
This episode was recorded in July 2021. Don't forget to subscribe and thanks for listening. See you in two weeks.
View all episodes on our Tell Me How: The Infrastructure Podcast Series homepage