The Role of Infrastructure/Logistics

in Inclusive Growth: Lessons from

Latin America

Jose Luis Guasch (guaschjl@gmail.com)

Professor of Economics, University of California, USA

Senior Adviser, Growth Dialogue, GW, USA

Former Head of the World Bank Global Expert Team on PPP

XIV Regional Conference Central America, Panama and Dominican Republic

Antigua, Guatemala, November 2016

OUTLINE

Motivation

Infrastructure as key component of growth

State of infrastructure /logistics in CA, and DR

Role/Impact of Infrastructure/Logistics as instrument for

inclusive growth

Logistics, Infrastructure and Trade Facilitation as the

Lexus for Competitiveness and Trade

Logistics/Trade Facilitation/Infrastructure Platform

Agenda for Progress

Link between Infrastructure

and Growth

A large number of empirical studies show a strong linkage between infrastructure investment and economic growth and poverty impact.

Overall, of the 140 specifications from 64 papers considered, the majority of the empirical literature finds a positive and significant link between infrastructure and development outcomes. Developing country data lead to positive results slightly more often than those exercises using data from developed economies. A small fraction of the literature (6 percent) finds a negative relationship.

Critical for inclusive growth

Yet investment in infrastructure in Central America quite low about 2% of GDP versus benchmarks of 5%

Figure 1. Infrastructure Stocks vs. Economic Growth

ARG

AUS

AUTBEL

BFA

BGD

BOL

BRA

BWA

CAN

CHE

CHL

CHN

CIV

COL

CRI

CYP

DEUDNK

DOM

DZA ECU

EGY

ESP

ETH

FINFRA

GBR

GHA

GIN

GNB

GRC

GTM

HKG

HND

HUN

IDN

IND

IRL

IRN

ISRITA

JAM

JOR

JPN

KEN

KOR

LKAMAR

MDG

MEX

MLI

MRT

MUSMYS

NER

NGANIC

NLD

NOR

NPLNZL

PAKPAN

PERPHL

PNG

POL

PRT

PRY

ROM

RWA SEN

SGP

SLE

SLV

SWE

SYR

THA

TTO

TUN

TUR

TWN

TZA

UGA URY

USA

VEN

ZAF

ZMB

ZWE

y = 0.0056x + 0.0206

R2 = 0.2547

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

-4 -3 -2 -1 0 1 2 3

Infrastructure Stocks (1st. Principal Component)

Gro

wth

Ra

te o

f G

DP

pe

r c

ap

ita

Figure 2. Infrastructure Quality vs. Economic Growth

ZMB

ZAF

VEN

USA

URYUGA

TZA

TWN

TUR

TUN

TTO

THA

SYR

SWE

SLV

SLE

SGP

SENRWA

ROM

PRY

PRT

POL

PNG

PHLPER

PANPAK

NZLNPL

NOR

NLD

NICNGA

NER

MYSMUS

MRT

MLI

MEX

MDG

MAR

LUX

LKA

KOR

KEN

JPN

JOR

JAM

ITA ISR

IRN

IRL

IND

IDN

HUN

HND

HKG

GTM

GRC

GNB

GIN

GHA

GBR

FRAFIN

ETH

ESP

EGY

ECU DZA

DOM

DNKDEU

CYP

CRI

COL

CIV

CHN

CHL

CHE

CAN

BWA

BRA

BOL

BGD

BFA

BELAUT

AUS

ARG

ZWE

y = 0.0081x + 0.0226

R2 = 0.2027

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5

Infrastructure Quality (1st. Principal Component)

Gro

wth

Ra

te o

f G

DP

pe

r c

ap

ita

Increases in GDP per capita (percentage

points) due to investments and improvemenst

in infraestructure (2001-5 vs. 1991-5)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Industrial

countries

East Asia Middle

Income

excl. LAC

Latin

America

Central

America

Caribbean Andean

Countries

Southern

Cone

Infrastructure quantity Infrastructure quality (IKq)

Logistics/Infrastructure/Trade

Facilitation Framework

• Critical for enhancing competitiveness/productivity

• Critical for trade/export based growth strategy

• Critical for mainstreaming SMEs into the export and

value chain

• Critical for poverty alleviation, and for inclusive growth

(low income users and small producers)

• Need a comprehensive and integrated approach

Problematic of Central América,RD

8

Overall Central American, DR

Countries Have:

Large gaps in infrastructure

Deficient infrastructure service

High Logistic costs

Small Investments in Infrastructure and in Maintenance

and Rehabilitation

Limited inclusive growth

Evidence follows

Key Facts and Red Flags in Central America: A

Logistic/Infrastructure Quagmire Logistics is a key component for competitiveness in countries with and export-led growth

strategy

Large gaps in infrastructure needs

Logistic costs in CA: over 35% of Product Value (48% for SMEs)

Investment in infrastructure less than 2 % of GDP

Serious fiscal space constraints for investment in infrastructure and PPP predicament, while public works plagued by costs overruns (80% incidence at 75% costs increases) and delays (78% with average delays 11 months)

Energy: 20c/KW and shortages-20% Interruptions and sales lost due to power outages 5%, and poorly targeted subsidies

Average speed of Trucks in CA 11-18 Km/h (in USA 90 Km/h)

Fuel costs, 60 % vs 25% in USA of variable costs trucking

Trucking sector- informality reigns

Quality of roads: 80% of network are tertiary roads

Border crossing time: over 10 hours; delays increase transport costs by 5 to 10%; days to import and export: 19 and 17

Port efficiency below average in LAC (Panama exception), and low connectivity:

Near 50% of production of perishables do not reach markets (small producers): poor cold facilities, packaging and bad roads

Security Costs: 3.7% of product value

Slow growth, Volatile and fragile and not diversified Trade trends

Limited sub-regional (CA) integration: small countries curse-pride and control

SMEs largely not mainstreamed in to the export/value chain; scale, associativity issues

Poor Human capital; Secondary Education Degree, and quality

Very Low FDI (exc Panama, Costa Rica)

Very Low Productivity, below 50% Production Frontier

Low Savings and low Tax Collection

Impact: Very large on: trade, employment demand, poverty, etc

3432

3029

2624

21

18

9.5 9 8.5

0

5

10

15

20

25

30

35

40

Logistic Costs as a Percentage of

Product Value (Source: Guasch 2014)

Logistic Costs as a Percentage of Product value Column1 Column2

32

24

9

62

50

8

4.3 3.20.4

0

10

20

30

40

50

60

70

Central Am LAC OECD

Deteriorating and Insufficient

Infrastructure leads to Uncompetitive

Industries/Sectots:

Logistic Indicators: Central America,

Latin America, and OECD (Source Guasch

2014)

Logistic Costs Losses to Market Inventory Levels

Latin America: Average Logistics Costs by Component as % of

Sales, depending on the Total Volume of a Company's Sales: SMEs

most affected

Note: “Total Logistics Costs” as a share of Sales does not always equal the sum of the two separate cost component shares, because not all firms in the sample reported on all logistics cost components.

Source: Benchmarking 2007: Estado de la Logística en America Latina Anexo a la Presentación de Maria Rey LogisticSummit 2010,Guasch 2012

0

10

20

30

40

50

60

Les s than US$

5 M

US$ 5 M to

US$ 10 M

US$ 10 M to

US$ 50 M

US$ 50 M to

US$ 100 M

US$ 100 M to

US$ 300 M

US$ 300 M to

US$ 500 M

Mo re than US$

500 M

Invento ry Management & Wareho us ing Trans po rt & Dis tributio n To ta l Lo gis tics Co s ts

54.6

40.5

15.1

15.812.2

18.1

12.7

Limited Connectivity particularly in the Atlántic side due to the

lack of quality roads, and number of ports

Road Network in CA

The road connectivity in

SICA is still quite limited

About 80% of the road networkin SICA are terciary roads and primary roads go through cities

The main export ports in CA are in the Atlantic coast. And toomany ports (11)?

Fuente: Banco Mundial 2011

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Customs, 11%

Duties, 6%

Transport, 23%

Others 9%

Farm gate, 31%

US$/kg

Disaggregated costs incurred

by a small Central American

fruit exporter

Local exporting producers are punished by

logistics costs

Source: World Bank (2010)

0

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0.8

1

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Small exporter has a 27.5 cent extra

cost due to a less efficient logistics

system

0

0.2

0.4

0.6

0.8

1

1.2

1.4

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Tomato Exports

between

Costa Rica and

Nicaragua

Supply Chain Analysis – Trade CR/Nicaragua

Small producer effect

Tomatoes from Costa Rica

to Nicaragua

Peñas Blancas

Small

Exporter

Large

Exporter

Final Market

Mercado al Aire

libre Roberto Huembes

Supermercado

Managua

Distance to Market

445 km 525 km

Producer Margin

.05 US$/kg .10 US$/kg

Logistics Expenses

.26 US$/kg .15 US$/kg

Additional Expenses related to

border congestion at Peñas

Blancas

.15 US$/kg .14 US$/kg

Benchmarking the Logistic Performance through the World Bank Logistics Perception Index 2014 – also shows weaknesses in CA countries infrastructure/logistic performance

LPI GENERAL

CUSTOMSINFRAES-TRUCTURE

EASE OF DISPATCH-

IMPORT EXPORT

LOGISTIC SERVICES

TRAZABILITY

LOGISTIC COSTS

INTERNAL

RELIABILITY

Argentina 45 51 47 49 44 46 93 46

Panamá 54 48 48 58 61 49 26 49

México 56 60 53 53 57 48 101 51

El Salvador 66 75 68 61 78 61 74 73

Costa Rica 72 64 67 82 89 78 48 90

Honduras 80 65 79 93 91 91 86 93

Guatemala 75 87 104 73 79 90 65 64

Rep. Dominicana

96 82 97 107 108 107 54 91

El Logistics Perception Index (LPI) ha sido estimado sobre la base de la opinión de los operadores internacionales de carga; estima un “score” y un rango, para un índice principal y para 7 subíndices, en 150 países

Fuente: Connecting to Compete – The World Bank

Global PRW Capacity in 2008

Source: IARW

Relation between Freight Rates and Connectivity, Container Shipping (doubling the connectivity index, reduces freight rates by 15%)

Source: Wilmsmeier (2008)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Fre

igh

t ra

te i

nd

ex

Connectivity Index

9397

89 88 86

43

2.9 3.3 3.5 3.5 3.5 4.4

96

70 68

94

84

26

0

20

40

60

80

100

120

Nicaragua Honduras Costa Rica El Salvador Guatemala Panama

Transport and Communications

Infrastructure (SubIndex ETI) Countries-

Ranking out of 132 countries-A serious

concern

2012 Score 1-7 2008

Score

El Salvador 4.8

Panama 4.2

Guatemala 3.9

Honduras 3.4

Nicaragua 3.3

Costa Rica 2.5

Quality of road network a concern for

users

Overview of Infrastructure Stock and Quality

Source: World Economic Forum

Perception of Quality of RoadsWCI’s Infrastructure Pillar

15

29

49

60

78

173

159

131

359

138

151

322

0 100 200 300 400 500 600

Nicarag…

Honduras

Guate…

Panama

Costa…

El…

Paved Roads

Density of road networkMeters per km2, 2011

Source: , Optimal Path Analysis.

Ports Stochastic Frontier Analysis –

Infrastructure Performance Index:

Input Variables: Total area of

the port; Length of container

berths; Number of ship-to-shore

gantries and cranes

Output Variable: Annual

container throughput in TEUs

Acajutla

Balboa

Colon CCT

Corinto

Puerto Barrios

Puerto Caldera

Puerto Castilla

Puerto Cortés

Puerto Limón

MIT Manzanillo

Puerto Quetzal

Snt. Tomás de

Castilla

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

10.5 11 11.5 12 12.5 13 13.5 14 14.5 15

Po

rt In

fra

stru

ctu

re P

erf

orm

an

ce

Ind

ex

Container Throughput (in TEUs, logs)

Some container

ports must improve

operational

efficiency in order

to attract more

cargo (in the red

zone..

Ports in Central America

Ports in Latin America

Limón is able to

handle a large

amount of

throughput based

on limited

infrastructure

stock.

Score

Panama 6.4

Honduras 5.1

Guatemala 4.3

El Salvador 3.8

Nicaragua 2.7

Costa Rica 2.3

Quality of ports in CA is highly

heterogeneous24

Overview of Infrastructure Stock and Quality

Source: World Economic Forum

Percepctión of Ports QualityWCI’s Infrastructure Pillar

0 10 20 30 40

Chile

Nicaragua

Honduras

Costa Rica

El Salvador

Guatemala

Panama

2011

2004

Source: UNCTAD

Index of Maritime

Connectivity

The impacts will be huge, of deepening

… and of not deepening

0

2

4

6

8

10

12

14

16

Caribbean

Central

America Mexico

South

America

Me

ters

Average of

current terminal

depths

Average of

future terminal

depths

Panamax

Post-Panamax

Source: World Bank (2012)

SPS procedures are

expensive…

And can account for up to 40% of

overall export time (beef from

Honduras)…

Consequences of

Poor/Infrastructure and High

Logistic Costs in CA

Reduced Competitiveness/Productivity overall/Trade/inclusive growth

Higher final product costs

High levels of inventories

High percentage of goods not reaching markets

High rate of spoiled goods

Lower trade

Lower connectivity

Reduced ability/capacity to export

Stunting the development of new products and new exports

Less revenues/profits for producers

Increases in poverty

Impact of Infrastructure/Logistics on

(inclusive) Growth, Poverty/Inequality and

Job Creation

Via Access to services significantly increases household earnings

Via productivity increases in their economic undertakings

Via cost reductions

Via opening opportunities for economic activities

Via accesing markets and market information (domestic and foreign)

Small producers much more affected by poor infrastructure/and logistics

Infrastructure does create jobs

Logistics costs affect the poor

• Logistics costs are 2 to 10 times higher than import

tariffs for basic goods.

• These basic goods represent

20 to 30 % of

household income

For the poor

may

represent

up to 70

Sh

are

of

HH

Bu

dg

et

sp

en

t o

n f

oo

d

GDP per capita (log)

Source: Dessus, et al, World Bank (2008); data from household surveys.

Page 30

Poverty: Increases in Household Earnings from Access to

Infrastructure Services: Complementarities of infrastructure

Peru, 2015

Pipeline water

0%

10%

20%

30%

40%

50%

60%

% c

hang

e of

PC

HH

Inco

me

Water +

electricity

Water + elect +

phone

Water + elect +

phone + road

Source: Escobal and Torero, 2015.

Infrastructure does have a strong impact on household’s welfare

There exists complementarities in the provision of different types of infrastructure

Increase in Earnings of Households

benefiting from rural roads (in $US

annual)

347.9 347.9

121.8

0

50

100

150

200

250

300

350

400

450

500

Annual Earnings

per capita without

roads

Annual Earnings

per capita with

roads

Source: ENDES-INEI (2012)

Bringing logistics costs down (10% points)

creates demand and employment

Sector Growth in

Demand

Growth in

Employment

Agro-Industry 9% 7%

Furniture 10% 12%

Textiles 6% 7%

Leather/Shoes 12% 10%

Mining 7% 2%

Source: Guasch, (2012)

Job Creation Impact of Infrastructure Investments by type for 100+ US$ Millions

Job Creation per $1B spent in INF

326 1,220

4,4006,055

450532

3,963

5,453

1,0491,240

1,698

2,337

599

1,533

10,141

13,955

0

5,000

10,000

15,000

20,000

25,000

Wind Power Solar Power Hydro Power Highways

Jo

bs p

er

year

Induced Employment

Foreign Indirect Employment

Domestic Indirect Employment

Direct Employment

Sources: Authors calculations, World Bank project documents, RDEL (2009) and USDOT.

Job Creation per Infrastructure Project

Assuming an average of 40K direct and indirect jobs per $1B spent, no crowding-out, and a multiplier of 2, an additional US$25B/yr may create 2M total jobs per year; a very small fraction of the total number of

unemployed people in LAC (~30M for 2009).

Qualified

workers

Non-qualified

workers

Domestic

inputs

(mainly

material)

Foreign

inputs

(mainly

equipment)

Others Total

Annual Direct

Employment

(per US$1B/yr)

[*]

Transport

Colombia - Access to neigborhoods (streets) 15% 6% 49% 16% 14% 100% 22,500

Colombia - Feeder routes for Transmilenio 27% 23% 6% 99% 35,833

Brazil - Roads 3% 9% 22% 63% 3% 100% 16,577

Argentina- Rosario - highways 1.3% 0.3% 60% 38% 0% 100% 1,650

Water and Sanitation

Honduras - Improvement on water captation 28% 12% 40% 20% 100% 43,333

Honduras - Rehabilatation of water networks 30% 20% 40% 10% 100% 58,333

Honduras - Expansion of water networks 20% 30% 40% 10% 100% 66,667

Honduras - New treatment plant 10% 10% 80% 0% 100% 25,000

Colombia - Expansion of WSS networks 8% 56% 32% 4% 100% 100,000

Brazil - Rain Drainage networks 8% 16% 48% 28% 0% 100% 34,001

Brazil - Sewerage 4% 11% 68% 17% 0% 100% 21,746

Energy

US - Solar PV 3%-5% 100% 2,700

US - Wind Power 4%-6% 100% 3,400

US - Biomass 1%-2% 100% 700

US - Coal-fired 1%-2% 100% 750

US - Natural gas-fired 2%-4% 100% 1,700

Brazil - Hydropower 5%-10% 100% 4,500

Peru - Rural Electrification 14% 7% 26% 53% 0% 100% 23,000

[*] These estimates were based on an hourly wage of $3 for non qualified workers and $6/hr for qualified one for 2,000 working hours a year.

43%

95%-97%

94%-96%

98%-99%

98%-99%

90%-95%

96%-98%

Better logistics means more intra-

regional trade

33.445

54.910

100.000

66.555

45.090

0.000

0

10

20

30

40

50

60

70

80

90

100

Expected Increase in Trade

resulting from "Best CA

Adjacency Performance"

Expected Increase in Trade

resulting from "EU-like

Adjacency Performance"

Expected Increase in Trade

resulting from "EU-like Overall

Trade Performance"

Border Crossings & Customs Land Transport and Services

Central America’s Intra-Regional Trade Potential from Greater Integration

% G

row

th in T

rade

Source: World Bank (2010)

…and more extra-regional trade

To CA

To CA

To the U.S.

To the U.S.To EU27

To EU27

-

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

Eports from Central America in 2007 Potential Exports from a Spatially-Integrated Central America

53.2%

Central America’s Extra-Regional Trade Potential from Greater Integration

Source: World Bank (2013)

Components of a Successful Strategy• Macro Framework

• Trade Policy and Access to Markets

– Tariff Regime, and Non-Tariff Barriers

– Access to Markets-Free Trade Treaties

• Exportable/Production Supply (export led growth strategy)

– Basquet of Products

– Quality and Standards

– Human Capital

– Innovation and Knowledge Transfer

– Clusters and value chains

• Logistic and Trade Facilitation

– Hardware: Infrastructure

– Software: Associated Services and Trade Procedures

• Social/Productive Inclusion: Knowledge Transfer

– Articulation

– CITEs

• Financial Services and Instruments

• Institutions: Export/Trade Facilitation, Quality Agency, Innovation Agency, PPP Unit, Competitiveness Council

• Overall Investment Climate

• Objective: Growth (inclusive), productivity increases, and mainstreaming SMEs, into the productive chains and export chain

Infrastructure/Logistic Platform Hardware

Export corridors, Highways, Railways and Feeder Roads

Network of service sites, and Silos

Ports, Associated Services and Accesses

Airports Associated Services and Accesses

Connectivity, Logistic terminals-dry ports, network

Hub Markets/Warehousing

Software

Single windows

Dedicated and Privileged lines

Inspections, Licensing and Certification Platform

Customs Procedures

Digitalization of Certificates of Origin

Associativity-Scale/logistic operators market

Warehousing and Consolidation Practices

Cool Chain/Services, and Packaging

Multimodality and Connectivity Framework

Border Crossing

Transport services

Insurance services

Agenda for inclusive

growth

Lessons learned

Diagnostic map

Access to essential services and markets

Improving logistics

Mainstreaming SMEs

Energy/electricity focus

CITEs

Easy Export

PPP Program

INTERVENTIONS: A Mixture of

Active and Passive Policies

Passive policies: cleaning the wrinkles-IC type

Active policies and instruments/interventions

Institutionality

Coordination and Oversight

I. Mapping to select most

effective type of interventions

and to prioritize them

In terms of four variables and done at very local levels

(municipalities)

- productive potential

- efficiency of production

- access to markets

-poverty levels

Example:

Guatemala

Guiding Effective

Intervention

Evaluating

potential,

productuve

eficiency, poverty

and accesibility

432. Priorizando IversionesPriorizando Inversiones Rurales

II. Providing Access to

essential services

Such as water, electricity, communications and

transport

Pricing guided by affordability (trough social tariffs

when appropriate and necessary)

Cross subsidies as a second best (implementability

and information issues)

IIIa. Improving logistic

services

Overall but with special focus of SMEs and agricultural production)

Network of silos with cold capacity and mobile units with cold service (can be done as PPP and self-financing)

Selective focus of key rural and feeder roads and key corridors

Develop, Improve and rehabilitate storage and consolidation centers (centros de acopio)

Associativity (scale) initiatives

In situ services provision and licenses/permits

Improving port (and access to) efficiency

Logistic terminals

Customs and cross border crossings

IIIb.Focus on Cold Chain

IV. Mainstream SMEs into the

production and value chain

– Basquet of Products

– Quality and Standards

– Human Capital

– Innovation and Knowledge Transfer

– Clusters and value chains

– Financial Services

– Procurement

V. Energy Sector

Investments in infrastructure to expand power generation

and efficiency in distribution-reduction of losses, and revisit

pricing and subsidies policy, and advance and make effective

(SIEPAC) project, connecting Guatemala with Panama to

create a true regional integrated energy market

Revisit propely targeted social tariffs and avoid leakages

Can be done via PPPs

VI. CITEs

Centers of technology and knowledge transfer, mostly oriented to serve SMEs

In situ

Offer services, knowledge and technology transfer, conformity to standards, testing, assist in articulation and export

And training

Highly focused: leather and shoes, furniture and wood, art craft, metal-mechanic, textile, fruits, packaging, agro industry, software, logistic, new products

Privately run

Capital equipment grant, operating costs through user fees

Spain (pioneer), Peru, Croatia, Slovenia, Georgia, Colombia, Mexico, etc

VII. Easy Export Initiative

Export by post

From any part of the country

Avoids all intermediation and logistic costs

Filing one page trough internet

Limits in value to 5,000 US$

Limits in size 30 to 50 Kilos

But unlimited sends

Insurance available

Extraordinary impact on micro and SMEs

VIII. Responsible and

Apropriate PPP Program

Accounting for transparency

A core set of elements in place

Accounting fro fiscal implications

Focus in financially sustainable projects

Selection based on impact and feasibility