Liberalization: The Only Way Out

Many obstacles challenge foreign trade in Ethiopia- Logistics and transportation being the major bottlenecks. As much the logistics and transportation sector has undergone reforms, the sector continues to pose a critical challenge for the country’s foreign trade. In this exclusive interview, Berihun Mekonnen, Ethiopian Business Review’s senior editor sat down with Kassahun Abberu (PhD), Director of Transit, Shipping and Transport at Akakas Logistics PLC, a company which he cofounded in December 2000, to discuss the challenges and remedies for the complications in the sector, among other issues.Born in Dessie in 1958, Kassahun received his PhD in Transport Economics from Budapest University of Economic Sciences and Public Administration in 1992. His decades of portfolio include responsibilities at technical and managerial levels at the Federal Express, Hungary, Nib Transport Company, Ethiopian Amalgamated Ltd and others.Kassahun argues that liberalizing the Logistics and transportation sector would solve the current logistics problems, which has been exacerbated as the government monopolized the sector: Excerpt:

EBR: Briefly, what are the main problems with the Ethiopian international trade logistics?

Kassahun (PhD): International trade logistics is the movement of goods from any point in the world to anywhere in the world. This needs to pass through government procedures, businesses with regard to transactions, boarder processes, customs formalities and others.

Any logistics structure has to strive and achieve two goals: save actual transport and delivery time and cost of transport to the consumer and producer. To achieve both the reduction of transport time and cost of logistics, trade in general needs to be facilitated, simplified and harmonized. This calls for the facilitation of operational improvements between governments and businesses, banks, insurances, increase the efficiencies of boarder procedures, increasing efficiencies of customs procedures, simplification of documentation for the movement of goods, means of payments especially on import of goods. Therefore, the lack of efficiency and competitiveness are the main challenges.

Can you mention some specific policies that are problematic regarding the logistics sector in Ethiopia?

Well, you know through the years, the sector has not been seen as a decisively contributing element to the overall economic growth of the country as compared to other sectors, like the agricultural sector (especially the horticulture segment), the manufacturing sector and tourism sectors and the leather industry, which enjoys unrestrained incentives and support from the government. I can fairly assume that the reason for the support to all the stated sectors has one denominator: the assumption of generating foreign currency. The question is: at what cost?

The cost of international trade especially the cost related to logistics should be taken seriously by the government and all other stakeholders involved. Adamant questions need to be asked and resolute measures taken to enhance Ethiopia’s international trade and make sure our products are competitive in the global market and our imports do not induce inflation.

Why are we not competitive in our international trade? Why does a coffee trader earn higher profits selling his coffee locally than exporting it? Why do meat exporters earn more if they were to sell their produces locally? What percentage of our cost is related to the cost of logistics? Our cost of international trade needs a serious examination.

The cost of logistics in our inputs directly affects the cost of our exports too. All are interrelated. Though, I do not have a definite figure, the cost of logistics on most of our imports is about 40pct of the price we pay for the product. Likewise, the cost is similar in our exports.

What do you think the government should do, regarding policy shifts?

At policy level, the government acknowledging the important role of the sector, should make sure that it is competitive, both locally and internationally. Competition enriches efficiency. This is not a new discovery. In business, no competition no efficiency; no efficiency, no saving in time or cost. First measure in this area is therefore the placement of competition. No amount of dedication, political will or simple bravado replaces competition. So, I urge the government to take bold measures towards realizing competition in the sector.

Any support and incentive to this sector will have a multiple effect on all other sectors. The positive impact in all other sectors compared to the cost invested to the transport sector is minimal. Reduce tax on tyres and spare parts. Provide funds for the purchase of additional trucks. These are important moves if we really decide to reduce the cost of logistics and have our deserved place in the global economy. All basic things being equal, because of high taxation on initial purchases of trucks and spare parts, Djiboutian trucking companies enjoy more favorable benefits than Ethiopian trucking companies.

Two years before, the government has introduced a new Multimodal Transport System. Was the system able to mitigate the problems?

With the introduction of containerization and the globalization of trade, the logistics sector has grown to meet the insatiable demand for the movement of goods. Maersk (a shipping line) has a vessel with a capacity of hauling 18,270 TEUs (20 foot equivalent units). Handling equipment like port cranes, telescopic cranes, forklifts, grouping of cargo, pillarization, modern container freight stations, bonded warehouse, commercial warehouses, IT supported information systems are also continuously being developed to meet and excel the demand. Globally, the provision of logistics is so high and advanced that the sector profits are volume based.

Under such global situations, going from Unimodal to Multimodal transport system can only be a positive move to the right direction. Yet again, we need to see why the world is moving to multimodal transport system. It is to save time and money. Nothing more and nothing less.

After burning our fingers with a huge cost, we have somehow succeeded in moving cargos faster from Djibouti to the Mojo Dry Port. At least we have reduced storage costs in Djibouti. This is a success. Now, we have internalized our problem at Mojo. Containers after containers are stack in Mojo. We are still constructing other dry ports I fail to understand the logic and benefits.

Some years back, I have had the opportunity to visit a flowers warehouse in Amsterdam. It is run by a company called Van De Put. An area of 10,000sqm. All through the day and evening, flowers were coming from different countries. At 10:00 pm it was all full. When I went back at 8:00 in the morning the workers were cleaning the place! All the flowers were through the night transported to auctions and were on their way to Germany, France and Russia.

If we want to succeed in our international trade, reduce the cost of logistics, have an efficient system, the logistics sector should be set free. Multimodal transport system is not only about reducing storage costs in Djibouti.

There are arguments on the government side that the sector needs a huge investment and it is too big to be handled by the private sector?

Look, our company Akakas Logistics PLC is an agent for Kuehne Nagel, a German company. This company provides sea freight and air freight forwarding with a focus on providing IT based solutions.

Kuehne Nagel does not own or run a single Vessel nor does it have a single Truck. Yet, in 2010, it was the leading global freight forwarder accounting for nearly 10pct of the world’s air and sea freight business. It has 1,000 offices in over 100 countries with over 63,000 employees.

One does not need to own a vessel or a truck to operate as a multimodal transport operator. This is globally accepted system. I again do not understand the argument which goes like — You have no capacity. This stems from the lack of understanding the role of the forwarder. The forwarder’s business in to contract with different carriers on the movement of cargo and save time and money for the consignee. Support his activities with the latest IT setups. If it does not act, he will be out of business. Competition, not protection will put us ahead on the global trade.

What are the impacts of the new multimodal system on the companies that are engaged in the transit business?

Initially, they have affected importers negatively. Containers were stuck in Djibouti. Manufacturing sector has suffered. Many contracts have been affected because of untimely deliveries. It had caused collateral damage to many sectors. Some businesses formerly handled by the private sector forwarding companies have gone to the amalgamated company. This has hurt their businesses. Naturally, Akakas, could have handled more volume than we are handling now. The monopoly has also affected transport rates. It has pushed it higher than otherwise. This stems from the fact that a monopoly by definition does not react to costs. Because there is no competition.

There is a deficiency of trucks. What is the problem with importing more trucks and with all the investment regarding trucks?

This is a multi faceted problem. For one thing, the country has been developing but the sector didn’t keep pace with it. We also have structural problems. If I remember correctly, there has not been a time when the sector was given any privileges. I know, banks have provided loans a few times. That is even scares now. Transport business, especially freight transport is not really a profitable business under the current circumstances. Trucks are expensive, so are spare parts and tyres because of the heavy taxes levied on them. The waiting time is also long. You wait to load; you wait on boarder checks. You wait for scanning; you wait on weigh bridges; you wait in customs premises; you wait for unloading. For all the waiting you don’t get paid. Only in some situations you are paid truck detention charges. Therefore, I don’t think people would want to engage in this business unless backed with long term contracts or use the trucks for in-house capacity.

How many trucks are needed to improve the problem in the logistics and transportation sectors?

On the Djibouti corridor, we need an additional 2,000 – 2,500, 40ton capacity trucks. We need to take into consideration that internal (local) transport demand has increased. Besides their limited number; nearly 60pct of the trucks working on the Djibouti corridor are over 10 years old. They have been giving service for more than ten years.

What measures can be taken to improve the situation without a change in the existing policy framework?

I don’t think such kind of cosmetic changes will bring about a noticeable change. To lure investors to the sector, there must be support and incentives. People who have been operating one or two trucks in the past have been either kicked out of business all together or have changed their business to other sectors.

Are there any theoretical shortfalls as to why that the sector is not doing well?

Basically, transport should be a profitable business. There are certain areas of the sector where transport is a necessity but not profitable. In some countries mass transit transports like city buses and public railways are subsidized by governments. These are generally accepted principles as the effective mobility of the population impacts the economy of the country that the subsidies provided to these mass transistors. Unlike other sectors, trucking business depends on the well functioning of the support entities. Any delays as described above hamper the movement of cargo and this adds cost for the transporter. The road infrastructure, regulations over the usage of roads, the traffic flow, customs, warehouse and inspections, the port, etc, all have impacts in the sector.

What do you say about developments in the Ethiopian Revenues and Customs Authority?

The last ten years have shown improvements. The ASYCUDA++ system implemented has helped us declare cargo from our offices. This is a big positive change. At the same time there is a high changeover of employees at Customs. Decision making is lacking. No accountability if you do not perform. People are afraid to decide. There is a lack of orientation and education. Instead of continuous meetings and meetings, clear cut manuals and procedures need to be placed and proper direction given to employees. As long as directives and procedures are in their skeletal form, decisions are subject to interpretations and are subjective. The pace of development in these last years need to be reflected in and matched by the provisions of quality services from the civil service.