Transport Costs in Ethiopia: An Impediment to Exports?

First Draft: October 09, 2003 This Version: March 18, 2004

This paper has been prepared as by Bemnet Aschenaki (Summer Intern, AFTP2) under the supervision of Karim El Aynaoui (AFTP2) as a background study for the World Bank’s FY04 Country Economic Memorandum for Ethiopia. We are grateful to Ishac Diwan, Christiane Kraus, John Hine, Negede Lewi, Bekele Negussie, John Riverson, and Menbere Taye Tesfa for comments on an earlier version.

TABLE OF CONTENTS

Page No. Summary ................................................................................................................. 2 1. Introduction and Historical Perspective ...................................................... 3 2. The Market Structure……………………………………………..…….. .......... 4 A. Dry and Liquid Goods……………………………………………….4 B. Who are the Players? ………………………………………...........5

- Associations…………………………………………………..…5 - Party Enterprises………………………………………………..6 - State Owned Enterprises………………………………………6

C. Implicit Explicit Barriers to Entry…………………………………...7 - Customs tariff on trucks and spare parts……….. ................ 7 - Business practices……………………………………………...7 - Regulatory framework…………………………. ................ 7 3. Transport Cost…………………………………………………. ................ 8 D. International transport cost………………………… ................ 8 - Sea……………………………………………… ................ 11 - Air………………………………………………….…................ 11 E. Domestic transport cost……………………………. ................ 12 - Within Country Main Roads…………………… ................ 12 - The Addis Ababa Djibouti Corridor………………................. 13 - Off Main-Roads Transport Cost…………………….. ............ 15 F. Structural issues affecting transport prices…………………....... 17 - Impact of food aid and fertilizers………………. ................ 17 - Ethiopian Shipping Lines after the loss of Assab ................ 18 - Liberalization of Air transport with respect to cargo ............. 18 - Conclusion……………….………………………………………20

APPENDICES

Appendix I Estimated unit road transport cost for containers on African corridors Appendix II Model Showing Impact of Additional Aid Grain Supply on Domestic Prices Under Different Scenarios Appendix III Freight Carried on the Ethio-Djibouti Railway Appendix IV WFP Rates for Movement of Food Aid from Djibouti to the Main Hubs Appendix V East Africa Freight Transport Tariff

2

Transport Costs in Ethiopia: An Impediment to Exports?

Summary • In a landlocked country, the export-value-to-weight ratio is a key factor in

determining the potentialities for worldwide competitive exports of labor intensive manufacturing goods. Ethiopia’s labor per hour rate at US$0.42 is one the lowest in continent. But as a landlocked country, Ethiopia faces considerable difficulties and high costs in reaching regional and international markets, importing key inputs, and delivering services to firms.

• This paper shows that on export, import and on the domestic front, transport costs are high for Ethiopia. For instance, in garment processing trade, overall transport costs represent around 28 percent of the total value added. This is a high proportion; not only by African standards–Africa’s average transport cost are between 15 and 20 percent of the value of output. The world average is 6.1 percent.

• Transport costs impose serious constraints on the overall socio-economic development efforts of Ethiopia. While high transport costs favor import substitution activities, it also make exports viable only if there is a high export-value-to-weight ratio. Note that the size of the export sector is for now a factor increasing transport cost: when export activities will develop one could expect that economies of scale will allow to reduce transport costs.

The main conclusions of this study are the following: For export: ● It costs .07 cent and 27 days to ship one shirt from Bangkok to New York. For

the same shirt it would cost .11 cent and 32 days from Addis Ababa to New York. For a company looking to do business in Ethiopia it would be very difficult not to be discouraged by this high cost.

● For exports to North America the CIF value paid by the importers is high for Africa and Ethiopia. The cost in Ethiopia is 9 per cent of the export value, Uganda 9 per cent, Mozambique 11 per cent, and Morocco 7 per cent. When this is compared with Asia 4 per cent and China 6 per cent, Ethiopia has a long way to go.

For imports:

• The study looked at imports of goods from New York to Djibouti, Algiers and Beijing.

• It is 10 per cent cheaper for a 20 foot container to be transported from NY to Algiers than it is to Ethiopia.

• It is 26 per cent cheaper for the same 20 foot container to be transported from NY to Beijing than it is to Ethiopia.

• It is 23 per cent cheaper to transport a 20 foot container to Beijing than it is to Algiers.

On domestic transport costs: • Although on a per ton per kilometer basis Ethiopia compares well with other

countries, it is the cumulated distances that make transport costs an impediment to exports.

• When we look at other African nations the result in mixed. Malawi’s domestic 2

transport rate is US$.065 per ton kilometer, Zambia $.07 per ton kilometer, Zimbabwe $.03 per ton kilometer and South Africa had the lowest with .02 per ton kilometer, Ethiopia’s is between .04 to .06 per ton kilometer.

• On the Addis Ababa-Djibouti corridor, Ethiopia’s transportation cost is cheaper than its landlocked counterparts and somewhat compares well with coastal countries such as Kenya. Price seems to increase on the main roads only when triggered by fertilizers and food aid imports.

• Domestic off road transportation cost is very difficult to pin point. Tracking the movement of the harvest from farm gate to the market is also difficult to segregate from transaction cost. This is largely due to the absence of organized transport system as well as the different mechanisms (donkey, cart, human) to transport the harvest.

Air Transport: • Air transport costs are competitive compared with other East African nations but

capacity is an important limitation. One reason that could explain this outcome is that Ethiopian Airlines (EAL) has a monopoly on air transport and as result can cross-subsidize its freight operations –at the request of the GoE to facilitate exports – with passenger traffics. Thus, today a severe impediment to export is the weak cargo capacity of EAL and the rationing by quantity that could heighten if the quantity of exports of manufacturing products increases that could hinder non traditional export development.

Structural issues, that if addressed could improve the sector’s efficiency, are remaining:

• The current dualists structure of the industry, in which 70 percent of the industry fleet is old and poorly managed may impede the efficiency of the road transport industry in Ethiopia and subsequently export competitiveness.

• Although domestic costs are somewhat competitive, weak contestability of the market is a limit to higher efficiency gains. The party and government enterprises dominating the market are the only exceptions: they are more organized, have enough capital and modern fleets, have greater access to information and as a result are dominating the market, and as a result could create important barriers to entry.

• Ethiopia’s terrain is also another obstacle that has to be dealt with in innovative ways –beyond road construction. This is evident in the remote areas of the country where grain is produced by small farmers.

• Custom tariff on trucks and spare parts are quiet high. The tariff on trucks is around 40 percent and can move up to 75 percent for certain models. Spare parts also carry high tariff. Due to this fact the majority of the freighters in Ethiopia are outdated. The price of the locally produced trucks are also very high even compared with the tariff that is paid on imported trucks.

3

1. Introduction and Historical Perspective This paper attempts to review the impact of transport costs on export

competitiveness in Ethiopia. By doing so, it assesses if the sector is an overriding impediment to the emergence of labor intensive manufacturing activities. The focus is on road and sea transport. While air transport costs seem not to be an issue when compared to other countries, capacity is a strong constraint. Air cargo transport charter operations have been recently liberalized and the major beneficiaries of this move could be in the short term the horticulture business, specially the flower exporters. Also, the paper attempts to draw a picture of the current situation in terms of cost for import and export industry, as well as for internal movement of goods.

Ethiopia’s transportation history has over the last century overlapped

significantly with that of Djibouti and Eritrea. Until 1993 when Eritrea became independent, it was a province in the former People’s Democratic Republic of Ethiopia. The railway linking Djibouti and Addis Ababa, which was constructed between 1897 and 1917, formed the initial focus of the three countries’ transport system. The then Franco-Ethiopian railway, later renamed “Chemin de Fer Djibouti (CDE)” opened to traffic in 1917, became the principal route, handling for about 90 percent of Ethiopian import and export cargo for the next sixty years. This re-enforced the position of the port of Djibouti; which became an important bunkering port, handling about 3 million metric tones (MT) of fuel annually, particularly prior to the closure of Suez Canal in 1967. The outbreak of the Ogaden war in 1977 marked the beginning of the decline of the use of the port of Djibouti by Ethiopia. This followed the uprooting of the railway tracks around the Ogaden, which cut off the link to Addis Ababa, compounded by the inferior state of the road from Djibouti to Ethiopia, via Dire Dawa.

In order to secure an alternative route to the sea, Ethiopia upgraded and expanded the port of Assab. Constructed in 1957, it became its main gateway for up to 90 percent of its import and export cargo from 1977 to 1993. The transport history of the three countries underwent further changes with the independence of Eritrea in 1993, which cut Ethiopia’s direct link to the seaport, making it a landlocked country. Notwithstanding, Ethiopia’s position to use the port of Assab was secured through trade and transport protocols with Eritrea which facilitated continued access; in 1995, the port of Assab handled some 2.8 Metric Tons of Ethiopian cargo, compared to a mere 131,256 metric ton at the port of Djibouti.

However, the port of Djibouti authority has over the last several years

made strenuous efforts to capture an increasing share of Ethiopia’s traffic, recording an increase to 148,860MT in 1996, and to 278,350 metric ton in 1997. These efforts became to their full potential when the border conflict between Ethiopia and Eritrea broke in May 1998, making the port of Assab inaccessible to Ethiopia traffic, which was relocated in its entirety to the port of Djibouti.

Under the communist regime (1974–1991) all commercial transport operators were organized into zones, i.e. “Ketenas”. The Ketenas/zones were

4

controlled by either the Ethiopian Transportation Corporation (EFTC) or the Passenger Transportation Corporation (PTC). These state corporations operated their own large trucks or bus fleets and managed the other operators. EFTC was running a fleet of over 1200 trucks, and managing the private truckers as its subcontractors. The role of the private owner was reduced to operating and maintaining the vehicle. EFTC obtained the business, allocated loads, organized payments, received a 5 percent commission, etc… Freight rates and passengers fares were set up by the government. The rate/km varied little with trip distance, commodity or road type and toad condition. To ensure equity among operators, routes were rotated.

Proclamation number 14/1992, enacted in May 1992, deregulated the transport sector in Ethiopia. EFTC during that time was operating 1200 trucks. Once EFTC was dismantled, it was broken into four government enterprises. Comet, Shebele, Wyira, and Gefersa. Most of the staffs were distributed between these four enterprise. A transport company called Abyssinia was also created for the retrenched workers of EFTC. The four enterprises are allowed to operate independently with there own budget and management. Several large trucking companies also emerged in this period with “quasi-governmental” backing (party companies). After the war with Eritrea started, large private trucking firms were encouraged to create Associations. This has led to a dilution of the domination of public enterprises and ex ketanas in the market. Today, there is competition for freight traffic, at least in the Djibouti corridor. However, there has been a large outcry in the private sector with regards to the public enterprises and party companies. The public enterprises are supposed to be converted to “share limited” companies and then privatized, yet no time schedule has been fixed.

2. The market structure: a high degree of concentration and important barriers to entry A. Dry and Liquid Goods

Though 60-70 per cent of dry cargo imports are containerized for the sea journey, land transport of goods on the Djibouti corridor is mainly break bulk. Dry goods account for the majority of the cargo moved in Ethiopia. This includes food aid, fertilizers, cargos, commodities and manufactured goods. Dry good movements are often allocated by a tender system. Associations, PLCs, public enterprises, and party companies are able to participate in these tenders. Most factories owned by the government, such as cement and sugar plants, have there own internal fleets. If they are stretched out the contract is usually transferred to government trucking companies.

For liquid goods, mainly gasoline the government will import gasoline jet

fuel, diesel, and gas. The government will then sell this gas to the major oil companies in Ethiopia, such as Shell, Mobil and Total. The purchase price is fixed as well as the selling price –this is determined by the government. As a result, the profit margin is determined. The oil companies have the option of choosing their transport company. Then a contract that lasts between 3 to 5 years is signed. Thus, the industry is indirectly regulated by the government.

5

Recently the Government of Ethiopia has started buying oil from Sudan. The only companies that are allowed to move gas from Sudan to Ethiopia are companies that belong to a government approved association. Private companies wanting to-do due business have to belong to this single Association to participate in the movement of gasoline. B. Who are the key players in the Sector?

We can distinguish three types of operators: Associations and Private Limited Companies(PLC’S)

Associations are private operators. Associations and private limited companies (PLCs) account for 49 percent of the fleets operated in Ethiopia. The system favors associations especially when they are vowing for large business or tenders. By forming an association, a small independent private operator with a fleet size of 3-10 trucks increases his chances of working.

Associations are providing a legal umbrella for small, yet independent,

operating truckers. The typical organizational structure of an association includes a head office, one or two branch offices, a chairman, a board of directors and a general manager and skeleton staff of operations officers, book keeper etc… Record available at the Road Transport Authority indicate that there are currently more than 40 associations of truckers registered throughout Ethiopia, up from 29 in 1996. Most associations have been formed from former Ketama members. The Association are allowed to operate throughout the country, though many tend to specialize in a particular area or on particular routes.

The major role of an association is to find cargo for its members and to co-ordinate its movement for which a commission or service charge of 2-3 percent is payable. The commission is payable even if the cargo is not arranged by the association, often on an assumed freight rate. In practice, cargo movement in Ethiopia is controlled through “freight orders” or “dispatch notes”, which are only issued by registered operators, such as associations. Thus, although a member may arrange cargo on its own, he still must obtain a dispatch note from the association. If a member of the Southern Association obtains a return load from the area of the Northern Associations, the commission will be paid to the Northern Association which issues the

Market Structure (By fleet Size)

Associations

& Private Limited

Companies Party

Enterprises

Government & Gov't

Managed Associations

Associations & Private Companies

Party Enterprises

Government & Gov't Managed Associations

6

dispatch note. Without the dispatch note, the driver has difficulty passing through freight check points throughout the country.

One of the key weaknesses of associations is the loose structure that

bind membership, and general weak human capital among members. Registration as a member of an association and the payment of a fee is only recognized as a right to freight order, while the management of the operation of a truck including its laitance is exclusively the member’s responsibility, which implies that there are no economies of scale or operational advantage of belonging to an association. Members often refuse to accept routes or cargo assigned to them, or freight rates negotiated by the association. Every member is individually minded, which coupled with the general high illiteracy among members makes it difficult to run associations on a commercial basis. The associations provide limited service to their members and customers, are restrictive and have monopolistic tendencies. The associations hinder the developments of independent operators and probably limit the profit of the more efficient members Party Companies

These are companies which are owned and operated by the different EPRDF organizations. Examples are Trans-Ethiopia, Blue Nile Transport Company and Dinsho Transport. Trans-Ethiopia or (TESCO) is the more efficient transport company in the country. It was founded in March 1993. Its activities include dry and liquid bulk cargo transportation, engaging associates in freight or passenger transport, providing engineering and workshop/garage services, importing and selling vehicles, spare parts, tires, workshops/garage equipment and machines, acting as agent for same, providing consulting services as well as other training and transportation services. Trans-Ethiopia‘s fleets are modern compared with the other players. The other examples are Blue Nile Transport Company owned by Amhara National democratic Movement (ANDM) and Dinsho Transport of Oromo Peoples Democratic Organization. Government and Government Managed Associations

State Owned Enterprises include Comet Transport Enterprise, Bekelcha

Transport Enterprise, Shebele Transport Enterprise, Comet Associations, Bekelcha Associations and Shebele Associations. These Enterprises and the associations operated and managed by them have 4,022 fleets under there disposal. These pubic enterprises are very active in the movement of fertilizer imported by the government. It is important to note that government enterprise’s Comet, Shebele, Wyira and Gefersa are partnering with private companies in forming and managing associations thus expanding there participation in the transport sector. Government enterprises like Ethiopian Grain Marketing Enterprise are also active in this industry. This enterprise is in charge of collecting grain from all over the country and marketing it as well a exporting it, when feasible. This enterprise is also involved in the movement of goods as well. It has close to 120 vehicles at its disposal thus when the vehicles are going to pick up grain they will try to take cargo instead of going

7

empty. This enterprise is a major player in the transport industry in terms of vowing as well competing for business. C. Implicit and Explicit Barriers to Entry Custom Tariff on Trucks and Spare Parts

Tariff on trucks and spare parts are quiet high. The ad-valorem tariff on trucks is around 40 percent. Spare parts also carry high tariffs. As a result, the majority of the freighters in Ethiopia (70 percent) are outdated. The price of the locally produced trucks is also very high. Taxes on cars and spare parts run between 35-40 per cent. Recently, excise taxes on freight trucks and spare parts have been lifted. More generally, a study by DFID found out that freight truck was 40-50 per cent more expensive in Africa than in Asia. Business Practices

The trucking industry in Ethiopia is complex. A few private, party, and government enterprises are dominating the market, especially when it comes to big orders like food aid and fertilizer movements. The majority of the business for small truck owners comes from what they call “left over” from the big companies. Whenever there is a big movement of food aid or fertilizer, a room is created for the small timers to do business. Thus, a big part of their business is sub-contracts given to them by the large companies. It was interesting to learn that the contracts between the large companies and the food aid organizations is in US$, but the sub contract is usually in ETB.

Regulatory Framework

Once can say that the commercial transport has shifted from central control to partial competition. The Road and Transport Agency (RTA ) is in charged of regulating the market. The functions of the agency includes:

• Setting the standard and enforcing it with respect to driver competence,

vehicle safety, the licensing of commercial operators, and vehicle dimension, weight and axle loads;

• Establishing the framework within which the market performs; • Monitoring performance of the sector, and collecting relevant data; • Making sure the industry and specifically the vehicles are kept to the

standard.

To avoid conflicts of interest, the staff of the regulatory agencies are barred from holding positions in commercial transport entities-like positions on enterprises boards or associations committees.

8

3. Transport costs: An impediment to Export Profitability?

According to a study by UNIDO (Thoburn 2002)1 on transport costs in Africa, the sector is a greater barrier to exports than the custom tariffs they face in importing countries:

• Sub-Saharan Africa’s average freight costs are more than 20 per cent higher than those of other countries.

• For some goods, such as clothing, textile and footwear, in which Africa is potentially competitive, average transport cost are between 15 and 20 percent of the value of output.

• Ten landlocked countries in the early 1990s faced net transport and insurance cost equivalent to up to 42 per cent of total export costs. For developing countries as a whole this ratio was 5.8 per cent.

A. How Does Ethiopia Compares with Other Countries on International Transport Costs?

Ethiopia’s labor per hour rate at

US$0.42 is one the lowest in continent. As we can see from the table2 it is clear that Africa’s unskilled labor is able to compete in this industry. Natural openness like access to coastal lines is an important determinant of competitiveness in the international markets for labor-intensive exports. But as a landlocked country with a large and sparsely populated land area, Ethiopia faces considerable difficulties and high costs in reaching regional and international markets, importing key inputs, and delivering services to firms.

Lessons from international experience are showing that geographical

distance, which is used as proxy for transport costs, is negatively related with trade. Limao and Venerables (2000)3show that raising transport cost by 10 per cent reduces trade volume by more than 20 percent. Poor infrastructure accounts for 40 per cent of predicted transport cost for coastal counter, and up to 60 per cent for landlocked countries.

As a result of the Uruguay Round agreement, MFN tariffs for most

landlocked developing countries for major developed markets (United States, Canada, European Union and Japan) will range between 3.7 and 7.1 percent while the average cost of transport for landlocked developing countries’ exports

1 John Thoburn(2002). “Finding The Right Track For Industry In Africa-Some Policy Issues And Options-UNIDO Discussion Paper”. 2 United States Bureau of Labor Statistics. 3Limao, N., and Venables, AJ (2000). “Infrastructure, Geographical Disadvantage and Transport Costs

9

is four times greater (approximately 15 per cent) than the above tariffs. It doubles the costs of transport for developing countries as a group (8.1 per cent) and it is almost four times higher than the average for developed countries (4.0 per cent). Africa has the highest freight-to-export ratio. A number of landlocked developing countries in Africa spent about 40 per cent of their export earnings for the transportation and insurance services.

In sum, transport costs do pose a problem to export growth from Africa

when looking at the overall nominal shipment rate4. According to a study done by the World Bank (2002)5 for approximately one-quarter of the products studied, African transport cost are around 15 percent, and for 10 product groups rates of over 20 percent occur.

In 1995, Ethiopia’s nominal shipment rate was at 12.6 percent and it has

dropped to 10.4 percent by 2002, the lower bound of the African costs found by the World Bank study (see Figure). When we compare Ethiopia with other African nations with access to the sea, such as Kenya (with a nominal shipment rate of 8.2 percent), Ethiopia seems to be somewhat competing in terms of shipment rate. However, Ethiopia’s nominal shipment rate is much higher than the Asian countries included in the sample, and also than South Africa. Uganda has one of the highest cost with (17.3 percent) in 1995 and (19.2 percent) in 1999. Kenya also seems to be somewhat in par with Ethiopia with in 2000.

Nominal Shipment Rate*

0

5

10

15

20

25

Ethiopia Ghana Kenya SouthAfrica

Tanzania Uganda Thailand India

Countries

Rat

e in

%

199519961997199819992000

Source: IMF, Balance of Payment Statistics Yearbook

Total freight costs of African developing countries as a proportion of imports was 12.65 per cent which is considerably higher than the average of 8.70 for developing countries. It is more than double world average percentage. The African average masks difference among the sub regions. The transport factor for import trades for countries in Northern Africa is the lowest at 11.21 per cent, and for countries in the Indian Ocean it is 12.23 per cent. Countries on the east coast of Africa also recorded a cost factor slightly below the average at

4Nominal Shipment Rate = (freight credit + freight debit + insurance credit + insurance debit)/(merchandise exports + merchandise imports)

105 The World Bank: Ethiopia Export Development Strategy. October 17, 1997. Report No 17098-ET.

12.35 per cent. The cost factor was higher in Western and Southern Africa, which recorded 13.90 and 16.42 respectively. The average for sub-Saharan African countries was 13.84 per cent, and highest cost factor was found in landlocked countries at 20.69 per cent.

When we compare import costs it is clear that Ethiopia is in the high end

of the ladder. It cost $2,195 USD to ship a 20 inch container from New York to Djibouti and $1,395 USD from New York to Algiers. In the same toke it only cost 1,108 USD to the ship the same container to Beijing, China.

In manufacturing processing trade, transport costs as a share of total

value added are high in Ethiopia, questioning the potential for manufacturing exports. Garment Express PLC, the only Ethiopian company that is taking advantage of the AGOA framework, faces large transaction and transportation cost. This company is engaged in processing trade, importing 100 per cent of its raw materials from the Far East –mainly from Taiwan- and re-exporting finished products to the USA. According to Mr. James Hunt who is the principal client of Garment Express “the cost and time required to ship a shirt from Thailand to New York and Addis Ababa to New York, it costs $.07 and takes 27 days from Bangkok to New York and costs $.11 and takes 32 days from Addis Ababa to New York”.

When importing its raw material, Garment Express is forced to use ESL

which charges above average for its services. In addition ESL’s service is not very efficient specially when considering the time sensitivity of the industry.

The table above displays the transport costs supported by Garment Express. Note that the cost of importing the container from Djibouti to Addis Ababa is double the cost of exporting it from Addis Ababa to Djibouti. Transport costs represent 28 percent of the total value added. When the handling and port fees are omitted this figure drops to 18 percent. Yet, this is a high proportion not only by African standards –Africa’s average transport cost are

11

between 15 and 20 percent of the value of output – this is reflected in other African countries like Zimbabwe which has 19.74 per cent, Rwanda 20.02, Mali 32.83 and Uganda with 9.61 per cent. It is useful to note the world average is 6.1 per cent. Note also that transport availability will depend on the time of the season and this will determine price the company will pay. Sea transport

Ethiopia’s transport cost compares well with the other countries included in the sample (see graph). The following graph shows the cost of transporting food aid shipment from U.S port to the East African nations. In 2000, Ethiopia imported 365,000

Weighted Average Freight Cost from U.S Port

$0.00$20.00$40.00$60.00$80.00

$100.00$120.00$140.00$160.00

Ethiopia Eritrea Kenya Rwanda Sudan Tanzania

Country

Cos

t Per

Met

ric T

ons

Source: United States Department of Agriculture

thousand tons of food aid from the U.S and paid $88 per ton for shipping. Eritrea on the other hand imported a mere 81,137 tons and paid $147.20 per ton. Note that lower costs for Ethiopia may be due to very large amount of imported food aid.

Air transport In the floriculture sector, an air freight intense activity, the transport costs

for one of the major exporters in the sector represents around 33 percent of which is a somewhat in line, even on the low side, when compared to neighboring countries. The price offered by EAL for cargo is therefore competitive (see Figure).

When we compare Ethiopia’s air freight cost to Kenya’s which is the

main exporter of cut flower in East Africa, Ethiopia is apparently well positioned. This is especially impressive when we consider the length of time Kenya has been involved in the cut flower business. Even though Ethiopian Air lines is the dominant force in this field, the price it offers is close if not better than its other East African counter parts. Ethiopia’s competitiveness with Mauritius should also be noted because Mauritius is one of the leading textile exporters in Africa. One reason that could explain this outcome is that Ethiopian Airlines (EAL) has

12

a monopoly on air transport and as result can cross-subsidize its freight operations –at the request of the GoE to facilitate exports – with passenger traffics. However, manufacturing export using air freight remain scant and a severe impediment to export is the weak cargo capacity of EAL and rationing by quantity that could happen if the quantity of exports of manufacturing products increase.

Source: Freight Forwarders & Ethiopian Air Lines Cost to New York and Paris, 2002 Figures

For instance, the shortage of air cargo capacity may be one of the key constraints soon affecting the floriculture business. it is now reported that floriculture exports are expected to grow by 30 percent next year, with 40-45 hectares of cut flowers by then in production, together with 750 hectares of off-season fruit & vegetables for export. B. Domestic Transport Costs Within Country main roads

On a per ton per kilometer basis, inland road transport does not seem to be a serious constraint to the movement of goods. When we look at the cost of transportation where the roads are paved, the price seems to be sensible and in par with other countries (see Annex 4). Prices seem to be a function of the quality of the road and to increase in this roads only when triggered by some external factors like movement of fertilizers, food aid or shortage of transport trucks.

13

Domestic Freight Transport Tariff

0.0360.0370.0380.039

0.040.0410.0420.0430.0440.045

1995/1996 1996/1997 1997/1998 1998/1999 1999/2000 2000/2001

er

TK

ilo

mete

r$ P

on

For several years prior to deregulation in 1992, the official rate on main roads was US$0.0145 per ton per km with slightly higher rates for roads in difficult terrain. At the same time, contract rates on the Asseb route were US$0.025- US$0.029, and on unpaved roads around Dire Dawa, US$0.044-0.058. Since deregulation, rates have risen but slightly. The graph reports the evolution the domestic cost of transportation in Ethiopia. The price of freight transport had peaked in the year 1998/1999 to US$0.043 per ton per kilometer as well as in 1999/2000 to US$0.044 per ton kilometer. This was due to the war with Eritrea where many resources had to be diverted to the war effort. But after the war ended in 2000/2001, the price of transport dropped to US$0.038 per ton kilometer. The oversupply of transport trucks and decline in demand from the industry as well as the decline in business transaction contributed to this decline. When we look at other African nations the result in mixed. Malawi’s domestic transport rate is US$.065 per ton kilometer, Zambia $.07 per ton kilometer, Zimbabwe $.03 per ton kilometer and South Africa had the lowest with .02 per ton kilometer.

The Addis Ababa-Djibouti Corridor

Transport costs in the Addis Ababa-Djibouti corridor seems to be

competitive on a cost per kilometer, particularly when compared with other African countries (see Table below) The table below shows 1.74 cost for the corridor. This cost does not necessarily reflect the cost structure of the domestic market. The price to and from the port is totally dependant by the shipment of food aid and fertilizers thus it is possible this price could have been taken during the high or low season. When we compare the Addis Djibouti corridor to Uganda and Rwanda, both landlocked countries using the port of Mombassa as there gateway to the sea, Ethiopia’s cost is quiet competitive (see Annex 5). It costs 0.85 cents per ton kilometer per ton kilometer from Mombassa to Kampala and 0.098 per per ton kilometer from Mombassa to Kigali. The cost from Addis to Djibouti is 0.049 cent per ton kilometer.

14

In the Addis Djibouti corridor, the competition and the availability of

transport is plenty to support the need of the exporters. One reason for this fact is that Ethiopia imports around two times more volume than it exports, so there are plenty of capacity available on the way back to Djibouti. Ethiopia’s imports for 2002 were 3.5 millions tons and total export volume was a mere 1.6 million tons. Thus most of the trucks are traveling empty to the port. Also, the Djibouti road is now in a good condition. However, processing activities, importing raw materials to be re-exported, are facing much higher costs on the import segment.

For instance (see Table), transport cost from Addis Ababa to Djibouti for

a coffee exporter is around 10 percent of the value of one ton of coffee.

15

Off-the-Main-Roads Transport Costs

While transport costs along the main roads are somewhat sensible compared to other countries, farmers incur high transport costs to move their grain production from the farm gate to the market. Various studies have demonstrated the difficulty farmers face in transporting their goods from the farm gate to the market. Still, since most of the harvest is transported by free lance truck owners located sparsely through out the country, it is difficult to have a clear picture in terms of cost.

According to Dessalegn (1998) and alii 6, the wholesaler traders of grain

are the main users of freight transport. They use trucks to move their grain from the markets to their terminal markets and other deficit areas. About 15 percent of the wholesalers have their own trucks and the rest depend on private and state owned freighters as well as on NGO’s.

According to Harrison (2002)7, grain passing from surplus areas is handled from the farm by farmers themselves or assemblers normally using donkeys. A donkey will carry about 70kg for 5km at an assembler’s fee of Birr4-5. This grain is then re-bagged into one quintal sacks by the merchant who normally has some rudimentary storage in the local grain market; typically his expected margin is about 5 percent for a quick sale. Licensed merchants are subject to income tax, which can be quite arbitrarily assessed, and if dealing with the Administration, it takes the form of a 5 percent withholding. Longer distance transport is largely private sector, with truck owners generally being contracted by merchants, rather than merchants having their own vehicles.

Handling is quite costly, from ETB 0.5 upwards for loading or unloading.

Trucking costs vary through the season depending on supply and demand. At the time of the mission, (relatively low season) the price for 300 km from the Jimma area to Addis was about ETB16 per quintal, equivalent to US .06 per quintol. According to Harrison(2002) this price is high when compared with South Asia. It should be noted that this figure is not a true reflection of price since it was collected during the low season.

6Dessalegn, Gebremskel and T.S Payne, and J.D Shaffer (1998) “Market structure, conduct and performance; constraints on performance of Ethiopia grain markets. Grain Market Research Project (GMRP), MEDac, Working paper 8, Addis Ababa 7 Harrison, P. (2002): “Ethiopia: Grain Marketing. Review of Recent Trends”, Unpublished, Washington DC, The World Bank.

16

Box 1. Kaffecho Zone: Practical Example on Grain Transportation Kaffecho Zone lies in the south western corner of Ethiopia and covers an area of some 11,000 km between the Gojeb River in the north and the Omo River in the south-south east. Approximately 96% of the 1994 population of between 650,000 and 700,000 people is rural and depends directly on agriculture for its livelihood. Howe and Garba found out that reliance on traditional forms of transport pose considerable barrier to the development of an exchange economy and locks the peasant farmer into a substance mode of existence and low quality of life from which it is difficult to escape. Pack animals offer a significant payload advantage over human carriage, especially if one person can command the use of several animals. Even with a single animal the potential cost reduction from substitution of pack for human carriage is of the order of 50 per cent, which would significantly improve the efficiency of transport work by farmers (Tesfahunegn, 1986). Howe and Garva gave two examples from the field to illustrate their point: Example 1: Mule hire for the journey from Chiri to Bonga-about 20-30 km depending on the point of departure-costs Birr15-20 for a maximum load of 1 quintal (100kg). This trip would normally occupy two days necessitating a further Birr 10 for meals and accommodation. The daily opportunity cost of labor in rural areas estimated at Birr 2.5 giving a total cost of Birr 30-35 per quintal. For comparison, urban wages in Bonga Town paid by municipality are fixed at a minimum of Birr 6 per day, although private sector rates of Birr 3 were quoted for urban areas generally. Only in the case of the high value seeds, most of which are traded in small quintals, is the transport cost in reasonable proportion to the gross selling price. It may still of course be disproportionate in relation to the net return to the farmer. For the low value food staples, such as maize and sorghum, the transport cost makes net return unlikely. Moreover, given the low availability of pack animals, head or back loading is even more unattractive because of the limited payload (20 kg maximum for long distances) and transport costs amounting to Birr 15. Example2: A mule carrying 60kg of dried coriander pods(not seeds) was hired for Birr 15 for the 43 km journey to Bona from Felega Selam. It entails a three days trip so allowing Birr 20 for meals and accommodation and Birr 7.5 for the opportunity cost of labor gives a total cost of Birr 42.5 or Birr 16.7/tones km (US$2.7/tonne km). The transport cost is again high in relation to lively net and gross returns. Equivalent local truck transport rates and Birr 0.6-0.9/tones km ($0.10-0.14/tones km) for the 115 km trip from Bonga to Mzan Teferi. Even allowing for the tapering off of costs with distance it is clear that traditional forms of transport are very expensive. Passenger transport by animals is generally more expensive than goods. This is due to a combination of noth greater demand and supply constrains. Source: Transport Constraints and the Roles of Mules and Donkeys in Kaffecho Zone, in Ethiopia by John Howe and Rabira Garba.

Because of the dismal state of roads in Africa, farmers there face the

highest marketing costs in the world. A study by the World Bank, completed in the late 1990's, found that it cost roughly $50 to ship a metric ton of corn from Iowa to Mombasa, Kenya, more than 8,500 miles away. In contrast, it cost $100 or so to move the same amount of corn from Mombasa inland to Kampala, Uganda — about 550 miles. And not much has changed in recent years.

Box1 . What About the Train? The railway to Djibouti, now owned jointly by the Ethiopian and Djibouti governments, issimilar to a museum piece, with narrow tracks, steep grades, small engines, and very slowtrains. At its historical peak the railway carried less than 500,000 tons a year. Todayofficials claim that it carries nearly 300,000 tons a year. The railway operating cost areunusually high for several reasons. The average freight load is only 150 tons, as a result ofgradient curvature, and track standard. The railway way was built to very light standardthrough extremely rugged terrain and was neglected for many years, leaving it in urgentneed of a major program of track rehabilitation. Exporters report unsatisfactory experiencewith railway service. One exporter trying to ship pea beans (pulses) and similar vegetableproducts to Djibouti was promised three day delivery of three wagon-loads of products fromNazareth. The shipment, loaded on April 7, reached Djibouti on April 20, by which time the

17

C. Structural Issues Affecting Transport Prices The impact of food aid and fertilizers imports on transport costs

Two big items have a significant influence on the functioning of the

transport sector. Firstly, Ethiopia often faces massive food shortage and is forced to depend on food aid. Secondly, the importation of fertilizers driven by the government’s policy in the agriculture sector has also a big influence on the sector. The transport industry is affected by price peak periods caused by bunches arrival of these imports which have different priorities from the Government and donor’s point of view. In such situations, available trucking capacity has always failed to cope up, as traditionally, direct delivery of food aid and fertilizers from ships to waiting trucks is systematically preferred by the truckers –for price and volume.

These import peaks may also often coincide with harvest periods when

crops need to be transported from the fields. During the peak times, prices have jumped as high as 65Birr per ton/km and dropped as low as 20Birr per ton/km during non peak times.

Local Transport Tariff by Season

020406080

Slow Average Peak

Se ason

Tarif

f SlowAverage Peak

Between 1995-2002 Ethiopia has received close to 5.8 million metric ton

(MT) of food aid. Since 1984 food aid to Ethiopia has become a regular part of transport sector. A combination of several factors, including droughts, civil strife, and poor government policies has adversely affected food production in the country. Each year the Disaster Preparedness and Prevention Commission (DPPC) appeals to donors for food aid assistance. During times when food aid is being brought into the country the transportation industry is adversely affected. Between October 13, 2002 and December 28, 2002, 142,576 Metric Tons of food arrived at the port of Djibouti. This year the government of Ethiopia is asking for 1.5 million tons of food. Fertilizer import was also 302,409 tons for 2002. During peak times like, prices have a tendency to double or in some cases triple. The efficient and organized companies happen to be the party and government enterprises which take majority of the contract. When these companies don’t want to deliver to rough areas they will sub-contact to public companies with much less tariff.

18

Within this context, WFP, by far one of the biggest importers in Ethiopia, is a price market maker. The cost of WFP to deliver from the port to the main hubs is listed in Appendix.

Ethiopia Shipping Lines after the loss of Assab

As a result of the 1998 war with Eritrea, Ethiopian Shipping Lines (ESL)

had to transfer 100 percent of its operations to Djibouti. Before the war with Eritrea, Ethiopia only used 7 percent of the facility at Djibouti but after the war Djibouti became the only feasible port available to serve Ethiopia. To compete, the government of Ethiopia took the drastic measure of forcing all import Letters of Credit (LC) to use ESL’s and Maritime and Transport Service Enterprise (MTSE). The National Bank of Ethiopia lists specific countries to which the instruction would apply. ESL itself currently lists 34 countries it considers covered by the instruction. The list is a mirror of the current ESL route network. Many of the importers we talked to have voiced their concerns in regards to the service provided by ESL as well as the price ESL charges. ESL also received low mark for its punctuality.

ESL runs service to the Gulf, to India, to the Far East, to the

Mediterranean & Black sea, and northern Europe. Another feature of the monopoly is in the form of protection granted to ESL that it applies not only to imports carried on its own vessels, but also to imports that it chooses to carry by means of space booked on other lines. ESL is in the process of acquiring new vessels which should help the carrier compete and the current system is being phased out. Liberalization of the Cargo Air Transport

Until recently, Ethiopian Air Lines was the only carrier that could carry

cargo out. EAL itself had only one dedicated cargo plane, holding back air freight intensive exports. Ethiopian Civil Aviation Authority issued its new circular on March 6, 2002, no. 05/2002, “Liberalization of Air Transport with Respect to Cargo Operations”. This circular eliminated the need for EAL Waiver in regards to cargo and charter operations. The one catch on this new circular is the fact that all charter companies have to use Ethiopian Airlines’ ground handling crew. One company –MIDROC Aviation– is in the final phase of launching the first charter business in Ethiopia. 4. Conclusion

From this study we are able to see that Ethiopia is in par, and often better positioned, with other East African nations on international transport costs and on the Djibouti-Addis Ababa corridor, and also on the main roads. Actually it is safe to say that in some areas –corridor and air freight– Ethiopia’s transportation cost is cheaper than its landlocked counterparts. However, many problems are remaining. The sector is not efficient. It is dominated by large state and party companies who are able to crash competitors. Associations are making a head way in terms of countering this monopoly but

19

they have a long way to go. The real victims are the small timers with one to five trucks at there disposal. Ethiopia’s terrain is also another obstacle that has to be dealt with. This is evident in the parts of the country where grain is produced.

The industry has gone through many changes in the past decades. From

deregulation to the loss of the port of Assab to depending on the port of Djibouti which was not fully utilized in the past. During this time the industry had to readjust to the situation and the port of Djibouti has proven its capability in handling all of Ethiopia’s needs.

The future of the Ethiopian Transport Industry will depend on several factors. First the upgrading of the fleet. The government needs to provide the industry with some tax break so newer trucks can be imported. Special emphasis should also be considered for spare parts and specially tires since they account for 22 percent of the transportation cost for the owners. Better coordination between the different parties especially in terms of food aid, fertilizers transportation. Information should also be readily available to all the transport companies. It is obvious that the large state, party and some private companies are taking advantage of the available information i.e., ship schedule, location, and time and date of arrivals will help the industry become more efficient, organized and should help the industry reduce its inefficiency.

20

ANNEX 1

Estimated unit road transport costs for containers on African corridors Maximum 28 tons in 40’ containers, 2001 or latest year available Distance

Distance Total Cost km Coast US Per kDouala (Cameroon) – Bangui (Central African Republic) 1 600 7 900 4.94 Douala (Cameroon) – N’Djamena (Chad) 1 900 8 000 4.21 Dar es Salaam (United Republic of Tanzania) – Kigali (Rwanda) 1 650 4 980 3.02 Dar es Salaam (United Republic of Tanzania) – Bujumbura (Burundi) 1 750 5 180 2.96 Dakar (Senegal) – Bamako (Mali) 1 200 3 400 2.83 Lomé (Togo) – Niamey (Niger) 1 234 3 160 2.56 Lomé (Togo) – Ouagadougou (Burkina Faso) 1 000 2 550 2.55 Mombasa (Kenya) – Kampala (Uganda) 1 440 3 250 2.26 Dar es Salaam (United Republic of Tanzania) – Lusaka (Zambia) 2 000 4 230 2.11 Cotonou (Benin) – Niamey (Niger) 1 056 2 200 2.08 Dar es Salaam (United Republic of Tanzania) – Blantyre (Malawi) (via Lilongwe)

2 030 3 573 1.76 Dar es Salaam (United Republic of Tanzania) – Harare (Zimbabwe) (via Lusaka)

2 490 4 013 1.61 Beira (Mozambique) – Lubumbashi (Democratic Republic of the Congo) (via Harare and Lusaka) 1 581 2 554 1.61 Nacala (Mozambique) – Lusaka (Zambia) (via Lilongwe) 1 774 2 735 1.54 Durban (South Africa) – Lusaka (Zambia) (via Plumtree) 2 524 3 873 1.53 Walvis Bay (Namibia) – Harare (Zimbabwe) (via Maun) 2 409 3 585 1.49 Maputo (Mozambique) – Johannesburg (South Africa) 561 775 1.38 Walvis Bay (Namibia) – Johannesburg (South Africa) 1 885 2 593 1.38 Average in United States mainland 1.10 Average in European Union 1.65 Source: UNCTAD secretariat on the basis of SATN Comparative Transit Transport Costs Analysis September 2001 – USAID; and Mediterranean Shipping Company, presentation to UNCTAD, Geneva, February 2003.

USm

ANNEX 2

Source: Ethiopia: Grain Market Review –Paul Harrison, Consultant following Mission to Ethiopia Aug 2002

ANNEX 3

FREIGHT CARRIED ON THE ETHIO-DJIBOUTI RAILWAY

1999/00 2000/01 2001/02IMPORTSIRON AND STEEL 3964 7765 4639FOOD AND GRAIN 64484 70803 32496FUEL AND LUBRICANT 36618 28889 26725VEGETABLE BOX 1445 1648 1794CHEMICAL 2186 138FERTILIZER 476 1066CAR 1311 439 304CLOTH AND TEXTILES 3510 1659 792PULSES AND CEREALS 3761 211 3686FOOD ITEMS 7993 1938 3647SOAP 377OTHER 23782 13488 20917Total 149907 128044 95000

EXPORTCOFFEE 12722 10376 10471VEGETABLES AND FRUTIS 33712 34848 37968MOLASSES 13557 13565 14847CATTLE 1005ANIMAL FEED 432 393 606OIL SEEDS 167VEHICLES 22 16 14OTHER 2532 2798 9094TOTAL 64149 61996 73000

INTERNAL TRADEPULSES, FLOUR AND CEREALS 33554 16249 23708VEGETABE AND FRUIT 11700 12604 13194CAR 961 1471 472SUGAR 100OTHER 24168 19130 14626TOTAL 70483 49454 52000

Source: Ethio-Djibouti Railway

ANNEX 4 WFP rates for Movement of Food Aid from Djibouti to the Main Hubs Destination KM Tariff/Br/TKM Tariff BR/MTN Tariff US/MTN Djibouti-Mekele 839 0.65 545.35 $63.56 Djibouti-Wereta 834 0.62 517.08 $60.27 Djibouti-Wolyta Sodo 1160 0.42 487.2 $56.78 Djibouti-Shashemene 1030 0.42 432.6 $50.42 Djibouti-Addis Ababa 925 0.42 388.5 $45.28 Djibouti-Nazareth(Road) 827 0.42 347.34 $40.48 Djibouti-Nazareth(Rail) $47.46 Djibouti-Kombolcha 567 0.52 294.84 $34.36 Djibouti-Shinnille 331 .80 264.8 $30.86 Djibouti-Dire Dawa-Road 323 .80 258.4 $30.12 Djibouti-Dire Dawa-Road-Rail $24.72 Source: WFP 2003

24

ANNEX 5

Source: “Transport costs and performance indicators on Mombassa and Dare Salam port corridors” and Ethiopian Road TTCATransport Authority.

25

BIBLIOGRAPHY

SD Publication Series: Office of sustainable Development Bureau for Africa: Comparative Transport Cost Analysis in East Africa, Technical Paper No 21. June 1996 United States Department of Agriculture (East Africa Sub region): Enhancing Transportation Management To Foster U.S. Agricultural Trade Opportunities by Jim Caron and Heidi Reichert Transportation and Marketing, AMS March 2001 United States Agency for International Development(USAID) Mission in Ethiopia: Ethiopia Road Transport Study, November199 World Food Program(WFP): Food Aid Information Unit: Ethiopia Food Aid Status The World Bank: Ethiopian transport Sector Memorandum Technical papers December 19, 1996. Report No. 15535-ET The World Bank: Ethiopia Export Development Strategy. October 17, 1997. Report No 17098-ET The World Bank: The Federal Democratic Republic of Ethiopia Developing Exports to Promote Growth, April 25,2002. Report No.23294-ET The World Bank: Diagnostic Trade Interrogation Study. April 11, 2003 Ethiopia: Grain Market Review –Paul Harrison, Consultant following Mission to Ethiopia Aug 2002 Grain Market Research Project (GMRP) Gebremskel Dessalegn and T.S Payne, and J.D Shaffer (1998) “Market structure, conduct and performance; constraints on performance of Ethiopia grain markets., MEDaC, Working paper 8, Addis Ababa

List of People Interviewed Dr. Worku Zewde General Manager Garment Express PLC Addis Ababa Mr. Riaz Shamji Director Golden Roses Addis Ababa Mr. Waleed A. Bagersh Bagersh PLC Addis Ababa Mr. Worku Desta Transport Coordinator Abbas Trading & Transport Enterprises Addis Ababa

Mr. Fisseha Dejene National Logistic Officer World Food Program Addis Ababa Mr. Tadesse Bekele Head of Logistic DPPC Addis Ababa Mr. Gatachewe Worku Head of Planning Department Road Transport Authority Addis Ababa Mr. Serah Njoroge Program Officer Regional Coordination Office Public Private Infrastructure Advisory Facility (PPIAF) Nairobi, Kenya