CHALLENGES OF LOGISTICS IN LATIN AMERICA

Between 2003 and 2012, Latin America grew by an average of around 4% per year. During this period, the representativeness of exports increased.

Traditional producer of raw materials, the region has seen the participation of this group of products grow significantly. To give you an idea, in 2011, exports of raw materials represented 60% of total exports from Latin America, compared to 40% in 2000. This higher volume moved exposed the shortcomings and logistical bottlenecks on the continent. Congested ports, lack of rail capacity and poor roads are problems common to many countries in the region.

Another no less important point is the difficulty of transporting goods between Latin American countries. The lack of unique documentation and the different legislation mean that many companies have high transport costs and, therefore, lose competitiveness.

This article aims to present some of the difficulties of logistics in Latin America and how this can negatively contribute to companies.

 

The importance of infrastructure

Good infrastructure is essential for economic growth. When the infrastructure is not suited to the economic needs of the region, it can negatively contribute to the costs of companies. Just to cite an example, a road trip of 500 kilometers can be done in one day if we are traveling on the Presidente Dutra Highway (BR-116) between Rio de Janeiro and São Paulo, but it can also take days if we are talking about 500 kilometers on roads in the interior of Pará or Amazonas.

In addition to affecting distribution in the domestic market, an inadequate infrastructure also harms the competitiveness of products to be exported. The lack of investment in other modes has made road transport the most used in Latin America, which contributes to transport costs in the region being above the world average. An example of the inappropriate use of this modal is the export of Brazilian soy from the state of Mato Grosso. This soybean has an internal transport cost to the port about 5 to 6 times higher than North American soybeans. This happens because Brazilian soy travels up to 2.000 kilometers on highways, while a large part of soy in the United States practically travels all the way to the port by waterway.[1].

The low quality and availability of infrastructure is not unique to Brazil. In a study released every two years, the World Bank shows that the average for countries in Latin America and the Caribbean is well below those recorded in the regions of East Asia and the Pacific and Europe and Central Asia.

Appointed by the World Bank as the country with the best transport infrastructure in the region, Chile stands out in the ranking of 160 countries only in 41st place in terms of infrastructure, ahead of Mexico (50), Panama (52), Brazil (54) and Argentina (63)[2]. In general, these countries are extremely dependent on road transport, with few kilometers of railways and congested ports. As a consequence, economic growth may encounter difficulties, be limited and threatened.

Part of the difficulty encountered today is explained by historical factors. Latin America was explored for years by colonizers, and a good part of its logistical infrastructure was initially designed to export production. There was no thought of circulating the goods on the continent, but sending them to Europe.

As an example of this distortion, it is possible to cite the construction of railroads. Unlike Europe, where railroads were designed to interconnect the continent, in Latin America, railroads do not connect, having been planned only to flow production from the production center to the ports. Furthermore, each country has a different gauge (in all there are seven different types of gauges, three of which are in Central America), which does not allow fluidity in intercontinental transport.

Road interconnection, although simpler, also faces problems, both due to the geography of the region, which has the Andes Mountain Range and the Amazon Forest as natural barriers, and the lack of a unified policy that allows, in a simple way, the movement of trucks between countries.

Latin American countries rely heavily on road transport. In Brazil, around 60% of the TKU are handled by highways; in Colombia this number reaches 77%, and in Mexico, 90%. That is, road transport is used a lot, which, in general, is not the cheapest and, in some cases, not even the most appropriate. For comparison purposes, in China only 21% of the TKU passes through the roads and in the United States, 31%.

Road transport also tends to be slower, especially when road quality is poor. The low investment in road infrastructure over time reflects the low percentage of paved roads in Latin America, which is around 20%. In addition to being unpaved, many roads have traffic restrictions on bridges and viaducts. Another problem is access to major cities and major ports. The lack of ring roads compromises traffic and ends up congesting the roads even more, making traffic heavier and slower.

Table 1 - Percentage of paved roads versus percentage of kilometers of roads

Source: ILOS, IDB

 

In addition to hampering the interconnection of the region, natural barriers such as the Andes Mountains and the Amazon River Basin lead to sinuous routes, which end up affecting the average speed on roads in Latin America. The region is also hampered by the lack of conservation of its roads, which leads to an average speed between 10 and 60 km/h. It is estimated that on the road that connects Brazil to Chile, passing through Argentina, in the section known as “Los Caracoles”, a 15 km route with 28 curves in the form of an elbow, the speed of the trailers is between 5 and 20 km /H. On the stretch of BR-319, in the state of Amazonas, the average speed is below 10 km/h due to the poor condition of the road. Muds and holes are part of the daily life of those who need to go through this Brazilian federal highway.

It is clear that the fact of walking more slowly contributes to the increase in the cost of transportation. It is no coincidence that the average representation of transport costs in relation to GDP in Latin America is 6,4%, while in the US it is 4,8%. For companies, not only does the cost of transport increase, but also the cost of stock, since, to minimize uncertainties in displacement and guarantee supply, many increase the level of safety stock.

Table 2 - Participation of transport in GDP

Source: ILOS, IDB

 

The problems that affect road infrastructure are not the only ones present in Latin America's transport infrastructure. As previously mentioned, it is also possible to identify bottlenecks in other modes.

Although the 90s were the period of privatization of railroads in Latin America, with large investments in subsequent years, the situation of the modal is still worrying. Delays in expanding the network and renewing the fleet of wagons and locomotives in several countries hamper the expansion of Latin American railroads. Until today, there are very few rail connections between the countries and, when they exist, they often have different gauges, which complicates and makes the operation more expensive. Another existing problem is that in some stretches there is no capacity for the rails to support the weight of the trains when they are at maximum occupancy.

Differently from Europe, in Latin America, railroads are mainly focused on chains involving the movement of bulk. Some lines are dedicated exclusively to serving large customers with their own cargo facilities and operate in private ports, such as iron ore in Peru, Brazil and Chile, pulp in Chile and coal in Colombia. In the case of grains, there is a greater diversity of terminals and operators in both Argentina and Brazil.

Like the railways, several ports were also privatized in Latin America in the 90s. Privatization brought an increase in productivity in several terminals, although it is still common for some to lack adequate depth in the access channel or berths. Another point common to ports on the mainland is the difficulty in land access. Many cities grew up around the ports, making expansion difficult and contributing to greater congestion of accesses by land.

 

The lack of a single transport regulation

Institutional and regulatory aspects also hinder the fluidity and development of transport and trade in Latin America. With very particular characteristics, each country operates in a unique way. As an example, it is possible to cite the different documents that need to be completed and delivered each time a product crosses the border of a country. In some countries, the border systems themselves are unreliable. In Bolivia, this lack of confidence means that companies spend more time. Another example that can be mentioned is the organization of the public agents involved, which varies from country to country, with some customs operating 24 hours a day and others only during business hours.

Examples of institutional and regulatory aspects:

Figure 1 – Examples of institutional and regulatory aspects

Source: ECLAC

 

In general, in Latin America, moving cargo is slower and more complex. The rules in force prevent a truck from traveling in several countries. Thus, it is faster to drive a truck in Brazil to the border with Argentina, change the load to an Argentine vehicle, cross the border and take the load to the final destination.

It is worth remembering that customs policies on the continent are very volatile and change frequently based on relations between countries. That is, what is worth today may not be worth tomorrow and this instability ends up scaring away potential investors. It is no coincidence that some industries maintain idle production capacity in Brazil or Argentina, allowing for faster adaptation when there are changes in exchange rates, fiscal policies, or when there are border issues.

Apart from these institutional and regulatory aspects, there are still problems with security, such as theft of equipment, cargo and accidents. This problem is greater in Brazil and Mexico, not by chance, countries that record the highest rates of GPS use.

The lack of security harms the operation and contributes to the loss of competitiveness of companies, due to the increase in the value of insurance and, consequently, in the costs of the operation. It is estimated that companies in Mexico spend between 15% and 20% of their investment in logistics on security alone. In Argentina, the losses originated from thefts to trucks correspond between 4% and 9% of the volume handled.

The fact is that an inadequate infrastructure, associated with institutional and regulatory deficiencies, makes the logistical cost of countries in Latin America higher than in more developed markets. In fact, several studies indicate that logistics costs in Latin America vary between 10% and 15%.

Table 3 - Representativeness of logistics cost in relation to GDP

Source: ILOS and Armstrong

 

Conclusion

There are many challenges for companies operating in Latin America. Currently, poor infrastructure has contributed to higher logistical costs and consequent declines in the competitiveness of products in the region.

The government of each country plays a fundamental role in the development of logistics in Latin America, as it is responsible for investing in infrastructure.

It is also necessary for the countries of Latin America to work together to eliminate or minimize bureaucratic issues, which make it difficult for goods to circulate on the continent.

Transiting between countries more easily will not only help to boost internal trade, but also facilitate the flow of exports. An exit via the Pacific Ocean is interesting for Brazil, just as it is for Peru an exit via the Atlantic Ocean.

Figure 2 – Summary of main challenges by country

 

Literature review

World Bank – LPI – Connecting to Compete – Trade Logistics in the Global Economy - 2014.

Inter-American Development Bank – “The Impact of Transport Costs on Latin American and Caribbean Trade”.

ECLAC – “Infrastructure for regional integration” and “Economic prospects for Latin America”.

MIT – “Infrastructure for regional integration”.

 

 

[1] Source: United Soybean Board

[2] Source: World Bank – Connecting to Compete – Trade Logistics in the Global Economy – 2014

To reference the article in your publication, use:

BARROS, M. Logistics challenges in Latin America. Tecnologística Magazine, São Paulo, Year XX, n. 231, p. 62-66, Feb. 2015.

Monica Barros

Market Intelligence Manager

Institute of Logistics and Supply Chain - ILOS

mbarros@ilos.com.br

Tel .: (21) 3445-3000