LOGISTICS PERFORMANCE INDEX 2010: CENTRAL ASIA Kazkhstan, Kyrgyzstan, Tajikistan

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1 LOGISTICS PERFORMANCE INDEX 2010: CENTRAL ASIA Kazkhstan, Kyrgyzstan, Tajikistan Findings based on the World Bank Report Connecting to Compete 2010: Trade Logistics in the Global Economy

2 CONNECTING TO COMPETE IN CENTRAL ASIA 1 Logistics encompasses an array of essential activities for trade including transport, warehousing, cargo consolidation, border clearance, distribution, and payment systems. Competitive trade logistics is a fundamental building block of trade and economic development, and more so in a global economy that has become increasingly interconnected and interdependent. Better logistics have a greater effect on trade promotion than tariff cuts. They lower prices for consumers and support diversification into higher value-added exports. Global production chains also depend on a robust logistics sector. Coordinating the various stages of product development, component production, and final assembly requires the ability to move goods across borders quickly, reliably, and at low cost. THE LOGISTICS PERFORMANCE INDEX 2010 The World Bank s Logistics Performance Index (LPI) 2010 is a comprehensive index of logistics performance in 155 countries. The LPI covers the entire supply chain and is based on a survey of nearly 1,000 logistics professionals worldwide. It is a useful tool in comparing logistics performance across countries and identifying key reform priorities within countries. The LPI consists of two parts and is based on numerical ratings of 1 (weakest) to 5 (strongest) to assess logistics performance. Photo Source: International LPI - based on the assessment of foreign operators located in the country s major trading partners, and is a weighted average of the six components. 1. Efficiency of the customs clearance process; 2. Quality of trade and transport-related infrastructure; 3. Ease of arranging competitively priced shipments; 4. Competence and quality of logistics services; 5. Ability to track and trace consignments; and 6. Frequency with which shipments reach the consignee within the scheduled or expected time. Domestic LPI - based on logistics professionals assessments of the country where they work, and contains detailed information on individual aspects of logistics performance. 1. Quality of trade-related infrastructure; 2. Competence of service providers; 3. Efficiency of border procedures; and 4. Data on the time and cost of moving goods across borders.

3 INTERNATIONAL LPI: EVALUATING PERFORMANCE IN EUROPE AND CENTRAL ASIA Europe and Central Asia s overall performance fared ahead of that of South Asia s as measured by the International LPI (Fig 1). While Kazakhstan (2.83) fared better than the average Lower middle income country (2.59) and just above the average Upper middle income (2.80), other selected Central Asian economies are positioned either well below the low income countries mean LPI score (2.43) such as Tajikistan (2.35) or above such as Turkmenistan (2.49). Kyrgyz Republic (2.62) is placed just above the Lower middle income average. Figure 1. Central Asia and South Asia in 2010 s International LPI Index In terms of individual countries from the selected group, Kazakhstan is the best performer ranked 62 nd out of 155 countries, while Kyrgyz Republic (91 st ) is one of the top 10 logistics performers in the 2010LPI, low-income countries group. Tajikistan (131 st ) is ranked towards the bottom of overall LPI ranking. LPI score as percentage of highest LPI score While Connecting to Compete 2010 highlights priority areas for increased policy attention, the report offers an optimistic message. Logistics professionals assess the trends in logistics and trade facilitation in their country of work to be generally positive. The use of increasingly standardized information technology solutions in logistics is widespread worldwide, and customs reform has progressed in most countries, irrespective of their level of performance. In fact, the logistics performance of a significant number of countries is gradually converging toward the level attained in the top performing countries. Part of this convergence is driven by a global trend toward consolidation and homogenization of service provision, especially in container, air freight, express cargo, and contract logistics. The current economic situation will further encourage this trend. But the increased awareness and proactive policies of a growing number of countries also play a major role in driving better performance, underpinning some of the most encouraging increases in LPI scores compared with the 2007 LPI report. 2 Source: LPI 2010

4 The relative score of the 2007 LPI is higher in 2010 across all quintiles, consistent with a gradual convergence of logistics performance, because all countries are now performing better compared with the country with the highest score. All three selected countries perform higher as a % from the best performer in 2010 as compared to 2007 (fig 2); Kazakhstan increased its performance from 35% in 2007 to a bit less than double in 2010 when it reached 59% while Kyrgyz Republic increased from 42% to 52% and Tajikistan from 29% to 43%. Figure 2: Percentage of the best performer: 2007 vs Trade logistics and facilitation in landlocked Central Asia Central Asia is one of the two large concentrations of landlocked developing countries in the world. The nine landlocked countries in Central Asia have a population of more than 70 million people. For obvious reasons, these landlocked developing countries are particularly dependent on the performance of their trade and transit connections. Since the Almaty Declaration on landlocked developing countries at the Almaty Ministerial Conference in October 2003, assistance has increased substantially, including corridor projects, customs reform, multimodal transport, railroad projects, and restructuring airport and aviation services. The World Bank is increasingly linking lending with advisory activities to stimulate change in trade facilitation, customs, and transit systems. In parallel with the web-based LPI survey, about 300 operators were interviewed using the LPI questionnaire with a focus on scoring their countries and other countries in the region. This subsurvey provided not only information on regional bottlenecks but also a comparison between regional assessments and the global ranking. Interesting findings emerge when LPI data collected in Central Asia are compared with LPI data received from outside Central Asia. 3 LPI 2007 d LPI 2010 Highest performer Singapore 100% Highest performer Germany 100% Lowest performer Afghanistan 7% Lowest performer Somalia 11% Source: LPI 2010 and 2007 The LPI assessment from outside Central Asia is lower than the scores collected within the region. Kazakh freight forwarders in particular see the regional operational environment as much easier. China s regional score is the only exception. Uzbek freight forwarders rate China significantly lower than do LPI respondents from outside the region or from Kazakhstan or Kyrgyzstan. But Kyrgyz freight forwarders rate China higher than its LPI index score, indicating the closer trade relations between these two countries.

5 Table LPI Scores of selected Central Asian Countries: 2010 LPI outside view versus Central Asian view Freight Forwarders 2010 LPI Kazakh Uzbek Kyrgyz China Russian Federation Uzbekistan Tajikistan Kyrgyzstan Kazakhstan Source: The Central Asian data was provided by the USAID Regional Trade Liberalization and Customs Project located in Bishkek, Kyrgyz Republic. A team of researchers was trained in the survey methodology and helped collect data through face-to-face interviews of international freight forwarding agencies personnel. The most notable difference between observations from Central Asia and those from the rest of the world concern the Russian Federation and Tajikistan, ranked 94 th and 131 st in the 2010 LPI, respectively. If scores given by Central Asian respondents were used, Russia would rank 20 th to 40 th and Tajikistan 52 nd to 90 th in the 2010 LPI (table 1): illustrating the impact of long-standing relationships and a common language and legacy facilitating trade between the Commonwealth of Independent States (CIS) countries. Conversely, the absence of these ties and differences in trade regimes create impediments for trade between CIS countries and many other parts of the world. PERFORMANCE FACTORS NEEDING FURTHER ANALYSIS (DISENTANGLING LOGISTICS PERFORMANCE IN CENTRAL ASIA) As noted in the Connecting to Compete 2010 Report, the logistics environment has improved worldwide. While income remains an important determinant of a country s logistics environment, it does not account for all variations across performance levels. The conclusion of the Connecting to Compete report suggests that countries should be classified in four broad groups: High performers, consistent and partial performers, and logistically constrained economies. Kazakhstan is the only consistent performer in this group, followed by a partial performer, Kyrgyzstan and finally, Tajikistan in the logistics constrained group of countries (Fig 1). Figure 3. International LPI components performance, by selected countries and regions 4 Source: LPI 2010

6 When comparing the three selected Central Asian countries with the performance in Europe and Central Asia or South Asia, a number of lagging areas stand out. Moreover, the selected countries in the region perform poorly in almost every other category assessed by the LPI vis-à-vis the rest of the continent with few exceptions (fig 3). While Kazakhstan performs better than or just about the level of performance for Europe and Central Asia in infrastructure quality, customs performance (which actually does not measure just customs but the ease of clearing borders) and the quality and competence of logistics services, the other two countries lag behind. For their part, both Kyrgystan and Tajikistan are particularly constrained by the infrastructure quality and lag behind in the quality and competence of logistics services; Tajikistan also lags behind in customs performance while Kyrgyzstan performs better. Tajikistan performs better than the average for the region in the ease of arranging competitively priced shipments (i.e. availability of affordable international transport connections available in that country) while Krygyzstan still lags behind. DOMESTIC LPI IDENTIFIYING LOGISTICS BOTTLENECKS The Domestic LPI provides additional information useful to identify logistics bottlenecks, using qualitative (respondents assessments about the logistics environment in the country they are based in) and quantitative information, such as time and cost to import and export. 5 Source: Stanley foundation website. Border crossing Kazakhstan-Russia

7 RECENT EVOLUTION OF CENTRAL ASIA S LOGISTICS ENVIRONMENT THE CHALLENGE OF LOGISTICS IN TRADE CORRIDORS AND LANDLOCKED COUNTRIES 6 In line with most regions in the world, professionals based in Central Asia assess that the overall logistics environment has improved since These improvements are most noticeable in ICT infrastructure, private logistics services and customs clearance procedures, where 57% or more of these logistics specialists indicate that the conditions are more favorable than 5 years ago (fig 4). Figure 4. Positive trends in logistics performance since 2005 (% of respondents answering improved or much improved ) Trade corridors are the arteries carrying trade within regions. They are directly relevant for landlocked countries, which depend on them for their exports and imports to World markets. This performance depends on a series of factors such as the quality of the system supporting trade on corridors, infrastructure, availability and quality of logistics services (trucking), trade and transport procedures, and above all, the transit regime. Apart from unreliability costs, transporters on trade corridors operate under regulatory systems that can negatively affect productivity and impose an additional burden on landlocked countries. While transport costs are not very different from levels found in other countries, prices charged on some corridors can be significantly higher.

8 For instance, between 35%-55% of all logistics operators based in Central Asia assess that port, airport and road transport rates are high or very high, whereas this percentage adds up to only 45% in the rest of the developing World (fig 5) Figure 5. High charges and fees (% of respondents answering high or very high ) RELATIVELY HIGH QUALITY OF LOGISTICS SERVICES WITH SOME AREAS STILL LAGGING According to the assessment of logistics specialists, regulation and the quality of logistics services has improved in recent years. The qualitative information gathered in the Domestic LPI indicates that the selected Central Asian countries are lagging behind Europe and Central Asia average, especially in the rail transport services segment (with the exception of Kazakhstan) and in warehousing/transloading and distribution services (fig 6). Figure 6. Competence and quality of service in logistics, by selected countries and regions (% of respondents answering high or very high ) 7 Source: LPI 2010

9 INFRASTRUCTURE REMAINS HIGH IN THE TRADE AND TRANSPORT FACILITATION AGENDA with the rest of the region, therefore calling for facilitation initiatives to further develop and promote the use of this transport mode. 8 According to the qualitative information collected from trade operators, trade supporting infrastructure appears to be viewed as a major constraint in the selected Central Asian countries, in relation to other regions in the continent (fig 7). Figure 7. Quality of trade and transport related infrastructure, by region (% of respondents answering low or very low ) BORDER AGENCIES COORDINATION AND PREDICTABILITY IS A PRIORITY Finally, in terms of efficiency of processes, predictability of clearance times in the selected countries in Central Asia are fairly good with the exception of Tajikistan, while the transparency of customs clearance procedures still lags behind (fig 8). Figure 8. Efficiency of processes, by selected countries and region (% of respondents answering often or nearly always ) Source: LPI 2010 The selected countries in the region appear to underperform both Europe and Central Asia and South Asia, most notably in roads, rail, and airports: infrastructure quality is remarkably low in comparison

10 In addition, the selected countries in Central Asia, rates of physical inspection are at about 12% with the exception of Kazakhstan (42%) and multiple inspections (15%) with the exception of Kyrgyzstan (2%) with high inspection rates causing uncertainty (Fig 9). Figure 10: Sources of Major Delays (% of respondents answering often or nearly always ) 9 Figure 9. Border clearance times and rate of physical inspection In terms of sources of major delays, pre-shipment inspection is a constraint with average rates at about 30% with the exception of Tajikistan at 70% (fig 10). As shown in previously (fig 4), professionals are especially concerned with the quality of services delivered by non customs agencies such as SPS. It is also important to note that customs brokerage services are ranked lower, much so than other private trade and transport services. This relates to typically lax regulation of entry in this particular business which adds to inefficiencies in clearance. Therefore, inefficiency in border management procedures or services and lack of coordination among border agencies contributes to increase time costs, indicating that this core area of trade facilitation should be also taken into consideration.

11 Connecting to Compete 2007 helped spark dialogue in several countries among various stakeholders in the government and between policymakers and the private sector about measures to address logistics bottlenecks and facilitate international trade and transportation. The optimistic messages from Connecting to Compete 2010 should encourage countries to do even more, particularly important for countries whose trade logistics performance continues to be low. Otaviano Canuto Vice-President and Head of Network Poverty Reduction and Economic Management This booklet contains excerpts from the World Bank report Connecting to Compete 2010: Trade Logistics in the Global Economy Download the complete report at