93529 GUATEMALA Elements of a Transport and Logistics Strategy Anca C. Dumitrescu Graham Smith Theresa K. Osborne 1 CONTENTS CONTENTS.................................................................................................................................................................................. 2 ACKNOWLEDGEMENTS ........................................................................................................................................................ 3 ABREVIATIONA AND ACRONYMS .................................................................................................................................... 4 Executive Summary ................................................................................................................................................................ 5 I. Introduction ......................................................................................................................................................... 7 II. Why a Transport and Logistics Strategy? ................................................................................................ 7 III. Key Definitions and Approach ...................................................................................................................... 9 IV. Guatemala’s Mediocre Ratings for Logistics and Competitiveness ............................................. 11 V. Flows and Costs on the Main Logistics Corridors .............................................................................. 13 VI. Estimated Costs of Guatemala’s Main Transport and Other Logistic Bottlenecks................ 15 VII. Priority Areas for Actions to Reduce Logistics Costs ........................................................................ 20 VIII. Matrix of Recommended Activities .......................................................................................................... 36 Annex 1: Suggested Trade-Supporting Investments in Transport and Logistics ..................................... 38 Annex 2: Strategic Workshop of June 10, 2014 ...................................................................................................... 39 Annex 3: Guatemala Logistics Performance Index (LPI) .................................................................................... 40 Annex 4: Reform of Guatemala’s Port Subsector ................................................................................................... 42 Annex 5: Strengthening the Institutions Managing Guatemala’s Roads ....................................................... 45 Annex 6: Public-Private Partnerships in Transport and Logistics: ANADIE............................................... 48 Annex 7: Air Transport’s Contribution to Trade Facilitation ............................................................................ 51 Annex 8: A Possible Railway Link to Mexico and the USA.................................................................................. 52 Annex 9: References and Bibliography ...................................................................................................................... 53 Annex 10: Map ........................................................................................................................................................................ 55 2 ACKNOWLEDGEMENTS This paper was prepared by Anca Cristina Dumitrescu (Senior Transport Specialist and Task Team Leader), Graham Smith (Transport Consultant), and Theresa Kay Osborne (Senior Infrastructure Economist). The report benefitted from the valuable contributions of Gylfi Palsson (Lead Transport Specialist), and Stephen Muzira (Senior Transport Engineer). The team extends its thanks to the following peer reviewers for their invaluable comments during the preparation of this paper: Marc H. Juhel (Practice Manager), Jean Noel Guillossou (Program Manager), and Charles E. Schlumberger (Lead Air Transport Specialist). The authors are grateful to the Government of Guatemala for their support and collaboration in the preparation of this document, and in particular to the counterparts in PRONACOM. 3 ABREVIATIONS AND ACRONYMS ANADIE National Agency for Partnerships to Develop Economic Infrastructure (Agencia Nacional de Alianzas para el Desarrollo de Infraestructura Económica) BRT Rapid Bus Transit CABEI Central American Bank for Economic Integration CAFTA The Central America Free Trade Agreement COVIAL Unidad Ejecutora de Conservación Vial CREMA Performance-based maintenance contracts DGC National Road Directory (Dirección General de Caminos) IADB Inter-American Development Bank LAC Latin-America and Caribbean region LPI International Logistics Performance MAGA Ministry of Agriculture MCIV Ministry of Communications, Infrastructure and Housing NTLS National Transport and Logistics Strategy OECD Organization for Economic Co-operation and Development PPP Public-Private Partnership PRONACOM Programa Nacional de Competitividad SSATP Sub-Saharan Africa Transport Policy Program TLC The Total Logistics Costs WB World Bank 4 Executive Summary Objective. This document has been produced by the World Bank to support the Government of Guatemala as it improves its transport and logistics sector management in pursuit of enhanced country competitiveness. It identifies and defines elements of a National Transport and Logistics Strategy (NTLS) through the development of a methodology which analyzes bottlenecks and related costs along the main logistics corridors. It does so with a view to (a) mobilizing support in the trading community (essentially private sector) for logistic service improvements, (b) identifying the need for broader public-sector reforms in transport which indirectly impact logistics performance, and (c) helping the Government to set sector priorities and hence to prioritize public investment. At the same time, it points out where improved data and monitoring of performance are needed in order to better quantify economic costs, diagnose key logistics issues, and track improved performance. Approach. The methodology for calculating the logistics costs is based on a World Bank research paper from 2007, refined in subsequent studies - the most recent being “Logistics Costs Study of Transport Corridors in Central and West Africa” (2013) under the Sub-Saharan Africa Transport Policy Program (SSATP). Total logistics costs are derived from the sequence of transit and processing operations, as the sum of two components: (i) financial cost of logistics services; and (ii) economic impact of delays and uncertainties. Upon calculating the logistics costs along four main trade corridors in Guatemala, for both export and import flows, we extracted the potential savings/“avoidable” costs per corridor based on the difference between the actual costs of logistics components and the costs of the same components in a well performing market (the “comparator”). Logistics costs and their sub-components were approximated for those elements where some basis for computation was available. Much of the data used is based on a trucking survey carried out by the World Bank in Guatemala in 2012. In addition, this paper relies upon recent observations and interviews of the World Bank team, as well as the World Bank’s “Country Policy Note on Transport and Logistics: Guatemala” (July 2013). Whenever possible, the authors used the latest (2013) trade statistics data from the National Port Commission of Guatemala. Due to insufficient data available, the results cannot include all the sub-components of total logistics costs. Furthermore, they do not include logistics and transport costs pre- and post- corridor – in particular, along rural or secondary roads, and for maritime or air shipment. For these reasons, the avoidable costs are likely to be even higher than reflected here. Corridor Logistics Costs and Savings. The pattern of trade flows determined that the computation of total logistics costs focus on four trade corridors that capture the country’s main export flows from production areas to the ports and land borders, where inefficiencies are deemed most critical; and in the case of imports, transportation from these ports or land borders to consumption areas. The corridors identified as offering the largest potential reduction in transport and logistics costs, along with the estimated savings (“avoidable” logistics costs), are as follows in declining order: (a) USA (Pacific Coast) and South-East Asia via Puerto Quetzal to Guatemala City –imports (US$277.5 million avoidable logistics costs); 5 (b) Guatemala’s western highlands via Guatemala City to Puerto Santo Tomás de Castillo – exports (US$106.1 million estimated savings); (c) Mexico via Tecún Umán to Guatemala City –imports (US$56.5 million estimated savings); (d) Guatemala City to San Salvador –exports (US$41.6 million estimated savings). Main contributors to high logistics costs. The data analysis and qualitative assessments of weaknesses in Guatemala’s transport and logistics sectors show that the main contributors identified as increasing the logistics costs are: - Inefficient and costly road freight services due largely to a lack of competition and barriers to more flexible freight allocation. This situation is sustained in part by prohibitions on international trade in road freight services; - Deficient and costly seaport operations and infrastructure; - Costly document and goods processing, including delays at borders (ports and inland border crossings); - Guatemala City urban congestion; and - Poor road condition, particularly secondary and tertiary networks due in part to poor maintenance. Suggested Actions to Reduce Transport and Logistics Costs. The Guatemalan government cannot do everything at once –it lacks both people and money: the institutional capacity and the fiscal capacity. Priorities can only be set after a public-private dialogue, and champions for change need to be identified, encouraged and supported. A set of nine main actions have been identified roughly in declining order of the expected benefit-cost balance –giving a heavier weight to benefits that can be achieved relatively quickly and easily. They refer to (i) opening road freight transport services to greater competition; (ii) ease major trade corridor bottlenecks at inland border crossings; (iii) reform the institutional framework for the major public seaports on the landlord model under a national Port Authority; (iv) launch public investment in infrastructure improvements of the ports; (v) construct a partial by-pass of Guatemala City or comparable solution; (vi) improve aviation safety through minor investments in runway repairs and navigational aids; (vii) improve tertiary road networks serving areas where perishable fruits and vegetables are grown for export; (viii) improve road maintenance throughout the country and strengthen the institutional capacity of the road agencies; and (ix) conduct a study to assess the economic and financial viability of reviving the railway for freight. A Matrix of recommended activities in short, medium and long term is also included, along with an annex on trade supported investments in transport and logistics. 6 GUATEMALA Elements of a Transport and Logistics Strategy I. Introduction 1. This document has been produced by the World Bank to support the Government of Guatemala as it improves its transport and logistics sector management in pursuit of enhanced country competitiveness. It identifies and defines elements of a National Transport and Logistics Strategy (NTLS) through the development of a methodology which analyzes bottlenecks and related costs along the main logistics corridors. It does so with a view to (a) mobilizing support in the trading community (essentially private sector) for logistic service improvements, (b) identifying the need for broader public-sector reforms in transport which indirectly impact logistics performance, and (c) helping the Government to set sector priorities and hence to prioritize public investment. At the same time, it points out where improved data and monitoring of performance are needed in order to better quantify economic costs, diagnose key logistics issues, and track improved performance. It thereby proposes, as part of the set of recommended activities, to build the Government of Guatemala’s capacity to measure performance and take action. While the document is based on sound analysis of some aspects of the country’s logistics system, it must be considered primarily a starting point which is subject to broad country dissemination and debate by public and private stakeholders. II. Why a Transport and Logistics Strategy? 2. The importance of good logistics performance for economic growth, competitiveness, and poverty reduction is increasingly well understood, particularly for small, open economies such as Guatemala’s. As formal trade barriers have declined within Central America and within the CAFTA region over the past five decades, high logistics and transport costs have emerged as a key remaining impediment to trade. Today Guatemala, like most Central American countries, rates relatively highly on international indicators of openness to trade, ranking in the top 50 countries out of 180. Yet the Latin-America and Caribbean region on average lags behind East Asia and Pacific, the Middle East and North Africa, and high-income OECD countries on the costs of importing and exporting, and it scores better than only South Asia and Sub-Saharan Africa. 3. A variety of indicators show that Guatemala has costly logistics challenges as well. Despite dramatic improvement in Guatemala’s Doing Business 2014 ranking from 93rd to 79th out of 183 countries, its position in the “Trading Across Borders” indicator ranking has dropped from 112th to 116th in the world. Moreover, according to the Logistics Performance Index (World Bank), Guatemala ranks 74th out of 155 countries in the timeliness, availability, and quality of logistics services. (See Annex 4 for details). Also, although business surveys show that the region’s insecurity is a more severe constraint to doing business, a substantial percentage of firms in Costa Rica (54 percent), El Salvador (32 percent), Guatemala (25 percent), and Nicaragua (24 percent) also rated the high cost of transportation as a major constraint. Indeed, issues of crime and insecurity affect transport and logistics directly. 7 4. Until recently, governments have not focused on logistics in their strategies because they were thought to be performed mainly by the private sector. We recommend a joint approach, public and private, identifying win-win options in which both sides gain. Here are some of the main reasons: - Logistics has become a public policy concern of national governments. Logistics performance is enhanced when approached holistically – due to the complex sequence of coordinated activities in several areas of the economy – and regionally –due to the international trade dimension. - Focus on logistics is a relatively new approach to evaluate weak links in import and export chains, and hence to advise all stakeholders on where to improve what and how. Furthermore, such performance depends on interventions of the government in infrastructure, logistics service provision and enabling regulations, and cross-border trade facilitation. We therefore encourage the Government of Guatemala to take a comprehensive view and a strategic approach: what are the big-picture problems that will require cooperation (and motivation) among many stakeholders? - At the same time, the importance of consistent policies across sectors – including trade, agriculture, transportation, and customs, for example – cannot be emphasized enough. Too easily, ministries take a narrow view, and a short-term view sometimes driven by political periods in office. Mechanisms are needed for a medium-term perspective (say, 4-8 years), neither too short to tackle infrastructure-related bottlenecks, nor too long to recognize the urgency of getting started. - A cooperative approach between the public and private stakeholders – i.e. all the participants along the logistics chains – is necessary to promote and implement the needed reforms. A dialogue is needed across sectors of the economy and across socio- economic networks, to identify shared interests and win-win opportunities. Options for such a public discussion should be considered. - Empirical evidence and studies have demonstrated that transport infrastructure, services and regulations play a crucial role in logistics performance. In Central America and in Guatemala specifically, high transport costs are cited as an important impediment to trade and economic growth. The Government of Guatemala wants to address that. - A “classical” transport strategy with diagnostics, identification of shortcomings and challenges, recommendations and priorities (including investment) by sub-sector –while usually not linking it to other sectors of the economy-- offers an incomplete picture. It does not answer questions such as “How can transport and its modes serve better the logistic chains?”, “What are the concerns of the users of transport infrastructure and services?”, or “Where should the government put its scarce resources in the sector to better address the country’s logistic shortcomings?” 5. We aim to cast our net wider than traditional initiatives, which tend to focus mostly on the provision of infrastructure. We aim to take advantage of the World Bank’s global experience and particularly its familiarity with economic development of the entire LAC region - in consultation with the Inter-American Development Bank (IADB) and the Central American Bank for Economic Integration (CABEI) –and recent thinking on the interactions between trade economists and transport specialists, with customs reforms and enhanced awareness of logistics also playing a big role. 8 III. Key Definitions and Approach 6. What are Logistics? Simply put, modern logistics is the process of mobilizing goods from origin to the final destination market. That process includes the management of transport and inventory in a manner that reduces their costs within the whole logistics chain, and which makes deliveries to customers more reliable. Transport Logistics can be defined as the services, regulations, procedures, and infrastructure that allow for the free and timely movement of goods and people. 7. This paper will: - Provide a brief description of the methodology to be used for calculating the logistics costs along key corridors for international trade (Chapter III); - Review the ratings for Guatemala and neighboring countries in Doing Business, Logistics Performance Index, Transparency International and other indexes or rating systems (Chapter IV). - Describe the main logistics corridors in Guatemala with their trade and transport flows and volumes (Chapter V); - Provide ballpark calculations of main logistics costs along these corridors, including their breakdown, thus facilitating the identification of the main bottlenecks, with emphasis on transport infrastructure, services and regulatory framework issues (Chapter VI); - Identify priority areas to reduce logistics costs, and suggested actions. To that end, the paper identifies policy and/or regulatory measures as well as investments that each subsector needs in accordance with the Government’s strategic priorities, to meet the poverty reduction, regional integration and social goals of its overall development strategy (Chapter VII); - Suggest a Matrix of Recommended Activities in the short, medium and long term, including responsible agencies (Chapter VIII); and - Summarize the conclusions of a strategic workshop held in Guatemala City in June 10, 2014, which discussed and disseminated recommendations and priorities on strategic thinking, public awareness, identification of champions for reforms, and mobilization of support among stakeholders (Annex 2). 8. Methodology. This transport and logistics strategy is approached from the point of view of the private sector and users – producers, exporters, importers, freight-forwarders and transporters - operating along the main logistics corridors (national and international) of Guatemala. Identifying the logistics costs - and calculating the “avoidable” ones - along the main corridors can help the Government formulate policies that result in reduction of transaction costs. The methodology for calculating the logistics costs on selected trade corridors is based on a World Bank research paper from 2007. It has been refined in subsequent studies, the most recent being “Logistics Costs Study of Transport Corridors in Central and West Africa” (2013) under the Sub-Saharan Africa Transport Policy Program (SSATP). In the LAC region the methodology is currently being used in Haiti and in this paper for Guatemala. In accordance 9 with this approach, the typical steps in the supply chain from port to hinterland (in the case of imports), or from the production area to the port/land border (in the case of exports) is illustrated in Figure 1 below. Figure 1: Typical Logistics Chain 9. Logistics costs are derived from the sequence of transit and processing operations. They are directly or indirectly paid by the shipper or consignee (the importer or exporter of goods shipped along a corridor) and/or by consumers if goods are being imported.1 The total logistics costs (TLC) is the sum of two components: TLC = (i) Financial cost of logistics services + (ii) Economic impact of delays and uncertainties (i) Financial costs of logistics services including “gateway costs” paid at the port/border of entry or exit; inland transport costs paid to truckers /transport operators for actual transit transportation; and inland processing costs incurred when crossing the border and at final destination; and (ii) Economic impact of delays and uncertainties (so-called “hidden costs”) – reflecting the time value attached to the cargo, the lead-time in transit, its variability, and the cost of running out of stock or setting up alternative logistics (hedging against unreliability). This is an important component of economic costs, but unfortunately, major sub- components of this cost cannot be computed due to the lack of reliable and detailed data on transit and waiting times. 10. Costs and their sub-components were approximated for those elements where some basis for computation was available, on four main trade corridors in Guatemala, for both export and import flows (see Chapter IV below). Much of the data used is based on a trucking survey carried out by the World Bank in Guatemala in 2012, but this does not provide all the data needed. Due to insufficient data available, the results cannot include all the sub-components of total logistics costs in Guatemala. For that reason, the avoidable costs are likely to be even higher than reflected here. In addition, this paper relies upon recent observations and interviews of the Bank team as well as the World Bank’s “Country Policy Note on Transport and Logistics: 1 What share of the economic costs of inefficient transport and logistics is incurred by consumers versus producers depends upon the relative elasticity of supply and demand for the products being transported. For example, agricultural exports are likely to have a price high elasticity of demand, and therefore costs would be largely borne by producers. 10 Guatemala” (July 2013), which summarizes existing knowledge and prioritizes across issues in transport and logistics. Finally, the authors used whenever feasible the latest (2013) trade data extracted from the port statistics of the Comisión Portuaria Nacional. IV. Guatemala’s Mediocre Ratings for Logistics and Competitiveness 11. Several international rating systems, launched less than a decade ago, have proved to be valuable instruments to shed light on trade and logistics performance, to make the trade process (costs and times) more transparent, and to show governments of low-performing countries the advantages they can expect to gain from efforts to improve logistics. 12. As formal trade barriers have declined within Central America over the past five decades, high logistics and transport costs have emerged as a key impediment to trade. The nations of the region have signed a series of agreements aimed at regional economic integration and both multi‐ lateral and bilateral treaties with countries outside the region. Guatemala, like most Central American countries, rates relatively highly on international indicators of openness to trade, ranking in the top 50 countries out of 1802. Yet the LAC region lags behind East Asia and Pacific, the Middle East and North Africa, and high-income OECD countries on the costs of importing and exporting, and it scores better than only South Asia and Sub-Saharan Africa. 13. Survey-based competitiveness indicators highlight some challenges for Guatemala. The country’s ranking in the 2012-2013 Global Competitiveness Index3 improved only slightly to the 83rd position (out of 144 countries), from 84th in the previous year’s survey. Cited as main drawbacks are concerns about crime, corruption, excessive government bureaucracy and inadequate infrastructure and human capital are cited as main drawbacks. 14. Guatemala has a somewhat better position in the Doing Business Index 2014, ranking 79th out of 183 countries. It is above the LAC average of 97. It also shows an overall improvement from 2013 in the easiness to do business, when it ranked 93rd. That was due to notable improvements in starting a business and paying taxes. However, trading across borders has deteriorated. Also, although in most LAC countries business people view the region’s insecurity as a more severe constraint to doing business than transport costs, a substantial percentage of firms in Costa Rica (54 percent), El Salvador (32 percent), Guatemala (25), and Nicaragua (24) also rated the high cost of transportation as a major constraint 4. 15. Unpacking logistics performance at the country level, the Central America country rankings on the recently released International Logistics Performance (LPI) Index5 are relatively poor, with only Panama in the first 50 countries out of 160. See Annex 3 for details including the LPI indicators. 2 Millennium Challenge Corporation (USA) trade policy indicator 3 IMF Country Report No. 13/247 (August 2013) 4 World Bank trucking survey in Central America, 2011-2012 5 “Connecting to Compete – Trade Logistics in the Global Economy”, World Bank, March 2014 11 Table 1: LPI Comparative Scores for Central America Country LPI 2014 LPI 2012 (out of 160 countries) (out of 155 countries Panama 45 61 El Salvador 64 93 Guatemala 77 74 Costa Rica 87 82 Nicaragua 95 107* Honduras 103 105 Source: LPI *2010 16. Furthermore, the LPI reveals that most LAC countries are partial performers, with no countries in the region classified in the top-performing logistics-friendly category. Two-thirds of LAC countries have 50-60% of Germany’s top rating. Guatemala is among the partial performers with 58% of Germany’s performance: Figure 2: 17. The unexceptional performance of the LAC region in logistics services is becoming a hurdle for growth and competitiveness. By comparing the aggregate values of each LPI component against the aggregate average LPI for LAC countries, the “Connecting to Compete (2014)” report also helps identify bottlenecks. According to the report, ”physical infrastructure stands out as the most serious impediment to logistics performance, followed by customs and border issues”. 18. Transparency International issues a yearly rating of countries on the basis of surveys on perceived levels of public sector corruption. Guatemala’s rating for 2013 of 123rd among the 177 countries rated is a matter of concern. Nicaragua and Honduras also have a low rating. 12 Table 2: Transparency International’s Corruption Perceptions Index (2013) Rating Rating Costa Rica 49 Mexico 106 El Salvador 83 Guatemala 123 Colombia 94 Nicaragua 127 Panama 102 Honduras 140 V. Flows and Costs on the Main Logistics Corridors 19. In the above context, the following chapters will utilize the data and information available to diagnose some of the general policy issues in the sector. Before one can definitively identify specific measures to reduce logistics costs, one needs reliable data and diagnostics to understand which factors influence logistics and transport performance – in particular, time and financial costs. 20. In addition to this broader empirical assessment, for the purposes of quantifying the current inefficiencies and measuring reductions in the time and financial cost of logistics performance, the TLS proposes to take a corridor approach. Recent international experience has shown the merits of the trade and transport corridor concept, which integrates all phases into unified measures of performance, and brings together all stakeholders, whether public or private, producers or consumers. Corridors are a sum of hard and soft components including physical infrastructure, operation, transport services and ancillary services (notably information technology, facilities, etc.) that allow identification and treatment of trade and transport bottlenecks in a holistic manner. Furthermore, most trade and transport corridors are multi- country/regional and involve one or several borders. A regional approach, including cross-border cooperation, is therefore crucial for reducing logistics costs. 21. Key Transport Sectors and Routes. The existing modes for transporting Guatemala’s traded goods are by road, sea, and air. Rail is essentially non-existent at present, and inland waterways represent a very small share of total transportation. Maritime transport dominates the international leg of Guatemala’s logistics chain, representing 78 percent of volumes and 65 percent of total value traded in 2013. Overland road transport represented 25 percent, while air cargo was 10 percent of freight value traded, up dramatically from less than 1 percent in 2011 (Table 3). Road transport is, nonetheless, used at some stage of all logistics chains – including to link production and consumption locations with air and sea ports or to transport intra-regionally traded goods. Among seaports, Puerto Santo Tomás de Castilla on the Atlantic and Puerto Quetzal on the Pacific move the greatest volumes. Of overland routes, Pedro de Alvarado with El Salvador sees the greatest export volumes and Tecún Umán on the Mexican border the greatest import volumes. 13 Table 3: 2013 Trade Flows by Transport Mode of the International Leg Exports Imports Average Freight Values Weight Value Weight Value Exports Imports Mode (000 tons) ($ million) (000 tons) ($ million) $ per ton $ per ton Maritime 7,645 5,976 10,759 11,839 782 1,100 Overland 3,021 3,174 2,202 3,738 1,051 1,698 Air 32 916 29 1,937 28,625 66,793 Total 10,698 10,066 12,990 17,514 941 1,348 Source: Comisión Portuaria Nacional, Guatemala (2014) 22. The pattern of trade flows determined that the computation of total logistics costs in the present document should focus on four trade corridors deemed likely to capture 70-80% of national trade flows. These four corridors capture the main export trade flows from production areas to the ports and land borders, where inefficiencies of infrastructure and border controls are deemed most critical, and in the case of imports, transportation from these ports or land borders to consumption areas. The corridor which offers the largest potential reduction in transport and logistics costs is listed first; the others follow in declining order. (a) USA (Pacific Coast) and South-East Asia via Puerto Quetzal to Guatemala City - mostly imports, but also important for some exports (notably sugar)
 (b) Guatemala’s western highlands via Guatemala City to Puerto Santo Tomás de Castillo – mainly for exports to USA (Atlantic Coast and Gulf of Mexico) 
 (c) Mexico via Tecún Umán to Guatemala City (mainly imports from Mexico to Guatemala) (d) Guatemala City to San Salvador – mainly exports (agricultural and non-traditional, e.g. light manufacturing). 23. The main export and import categories and characteristics associated with each of these four corridors are6: (a) USA (Pacific Coast) and South-East Asia via Puerto Quetzal to Guatemala City: - This corridor handles about half of all Guatemala’s imports, whether in value or in weight; and 30-40% of its exports. Its main efficiency (or otherwise) can therefore weigh heavily on Guatemala’s trade. - The main import flows are not only from the USA West Coast but also from China, South Korea and other South-East Asian sources: vehicles, manufactured goods (containerized), clothing and footwear (also containerized). Puerto Quetzal is also the main entry point for liquid fuels and coal, as well as corn and fertilizers, all imported in large volumes. - Sugar and palm oil, important exports grown and processed in the lowlands of the Pacific coast, dominate exports via this corridor. - Maritime transport via Puerto Quetzal competes with road and rail transport for trade with Mexico, especially that coming from, or going to, Mexico City (nearly 1,400 km from 6 See Annex 3 for details on exports and imports by country, main products, volumes and values of trade. 14 Guatemala City) and the northern half of Mexico. (b) Guatemala’s western highlands via Guatemala City to Puerto Santo Tomás – mainly for exports to USA (Atlantic Coast and Gulf of Mexico): 
 - The western highlands are the origin of much agricultural production, while Guatemala City is the site of garment production and light manufacturing. Unlike Puerto Quetzal, in volume exports dominate traffic passing through the port of Santo Tomás; in tons they exceed imports by about 60/40. The main export commodities are bananas and other fruits and vegetables, coffee, textiles and clothing (at least 750,000 tons per year, about $1.5 billion in value), crude oil and nickel. - The main (or representative) import commodities are vehicles and other manufactured goods (carried in containers on trucks). Since they have a price per ton more than double that of exports passing through the port ($2,000 per ton versus $890), imports dominate in value. (c) Mexico via Tecún Umán (proposed logistics park just inside Guatemala from Mexican border) to Guatemala City: - Imports from Mexico are more than double exports to Mexico in weight, and more than three times in value. Electrical goods and other manufactured goods are prominent among these imports; - Prominent among exports to Mexico are frozen seafood (sent by truck overland rather than by sea, for quicker and more predictable delivery), as well as palm oil and sugar. (d) Guatemala City to San Salvador: - This corridor carries predominantly Guatemalan exports to El Salvador and other countries of Central America: foodstuffs and manufactured goods originating in Guatemala including fabrics, palm oil, beverages and foods, as well as a diversity of goods in transit from Mexico, the US West Coast and East Asia (China, South Korea, etc.). - Most exports to the rest of Central America take the same route, in transit through El Salvador. Together they are about the same value as exports to El Salvador but only about a half of the volume (that is, they are higher-value goods). VI. Estimated Costs of Guatemala’s Main Transport and Other Logistic Bottlenecks 24. Guatemala faces a number of inter-related logistics and transport challenges that compromise its international competitiveness, reduce gains from trade, and increase the price of imported goods. Based on available data and analysis, and using the “micro-economic approach” described in Chapter III, Tables 4-6 below summarize the total logistics costs by component, that is, the direct logistics costs that could be saved (“avoidable costs”) on each of the four corridors identified. However, due to the paucity of data, these costs exclude (i) the potential avoidable costs of uncertainties in delivery times (one component of hidden costs); and (ii) avoidable costs of more efficient maritime service and pricing.7 7 There is some evidence of price discrimination and imperfect competition among maritime shippers, particularly those serving Latin American countries. See, e.g., Hummel et al. 2009. 15 25. Calculation of logistics costs below started from (i) the gateway costs – document processing, customs processing, and (where applicable) terminal handling charges 8 ; (ii) price (freight) charged by trucks per ton-km (a sum of financial logistics costs), and (iii) added the cost of time spent waiting at borders (for imports and exports overland) and/or the dwell time in ports – in the case of imports - and other costs (a component of hidden logistics costs) along each of the selected corridors (Table 4 below). The calculation of potential savings/avoidable costs (Table 5 below) is based on the difference between the actual costs of various logistics components in Guatemala and the costs of the same components in a well performing market (the “comparator”). Taking into account the export and import volumes for each corridor, combined with the avoidable costs within the total logistics costs, Table 6 below shows the avoidable costs per corridor and as a percentage of goods value. It thus offers a snapshot of the potential savings that could be made if the main logistics bottlenecks are addressed. Table 4: Estimated Partial Logistics Costs Per Ton, Four Selected Corridors Total % of Goods Financial Cost of Logistics Value Corridor Logistics and Hidden Costs Costs per (Available/ Processing Services Ton partial costs) Inventory Overland Carrying Cost Delivery Gateway transport (including Time Costs** price* dwell time Uncertainty at port)*** To/from West Coast USA USA Pacific Coast to Guatemala $ 31.6 $ 72.5 $ 2.82 No data $ 106.9 11.4% City, via Puerto Quetzal Ciudad Guatemala to Puerto $ 21.4 $ 65.7 $ 2.36 No data $ 89.4 11.4% Quetzal To/from East Coast USA USA East Coast to Puerto Santo $ 53.5 $ 72.5 $ 4.26 No data $ 130.2 6.5% Tomas Guatemala City to East Coast $ 31.2 $ 65.7 $ 2.87 No data $ 99.8 7.4% US via Santo Tomas To/from Mexico Guatemala City to Mexico via $ 57.3 $ 41.7 $0.25 No data $ 99.2 7.9% Tecun Uman Mexico to Guatemala City via $ 49.8 $ 46.5 $0.30 No data $ 96.6 6.4% Tecún Umán (imports) To/from El Salvador Guatemala City to San $ 43.1 $ 41.7 $ 0.29 No data $ 85.1 8.7% Salvadorvia Pedro Alvarado San Salvador to Guatemala City $ 53.8 $ 46.5 $ 0.93 No data $ 101.3 6.7% via Pedro Alvarado *Source: Central America Trucking Survey, 2011-2012 (note: sample sizes by route are small and not representative) **Source: Doing Business, 2013 ***Source: CA trucking survey and IDB 2013. Mean times are based on few observations 8 Source: Doing Business - Trading Across Borders (2013). 16 26. For those elements of logistics costs that are quantifiable, one can compare to an efficient benchmark (for example, Chile) and compute the avoidable elements, as shown in Table 5 below. The avoidable costs are split into potential price reduction for overland transport (columns 2 - 4), and other direct and indirect logistics costs (last two columns). The analysis of results shows that the main contributors to high overland transport prices are: the high markups (second column); the combined effects of low track utilization, empty backhauls and wait times (fourth column); and the low travel speeds due to traffic congestion and to a lesser extent poor road infrastructure and network links (third column). Apart from the road freight, there is potential to reduce “gateway” (port) costs including port handling charges, document processing and long dwell times (sixth column). Chapter VII below provides a more extensive discussion on these elements. Table 5: Estimated Potential Logistics and Transport Cost Savings as a Percentage of Total Logistics Costs as Computed in Table 4 Reduced Gateway and More Efficient Overland Transport Market Inventory Costs Corridor Increased Halve time costs Improved wait To Chilean# competition/ Reduction in (inventory costs times and asset benchmark reduced Congestion** border, port, and utilization*** efficiency/cost markups* other wait times) To/from West Coast USA USA Pacific Coast to Guatemala City via Puerto 9% 0.9% 1.0% 24% 2.28% Quetzal Ciudad Guatemala to 10% 1.0% 1.2% 14% 2.32% Puerto Quetzal To/from East Coast USA USA East Coast to Puerto 17% 1.9% 2.2% 20% 2.67% Santo Tomás Guatemala City to East 0% 2.5% 3.0% 13% 2.36% Coast US via Sto Tomás To/from Mexico Guatemala City to Mexico 23% 2.2% 2.6% 10% 0.06% via Tecún Umán Mexico to Guatemala City 23% 2.2% 2.6% 25% 0.07% via Tecún Umán (imports) To/from El Salvador Guatemala City to San Salvador via Pedro 15% 2.8% 3.3% 11% 0.14% Alvarado San Salvador to Guatemala City via Pedro 23% 2.4% 2.8% 28% 0.19% Alvarado Note: Other potential savings are available through reduction of informal payments, increased use of temporary workers, and increased firm size. However, these savings were small relative to those represented above. *Assumed reduction = Minimum of 9 cents per ton-kilometer and difference between price and 11 cents per ton-kilometer (regional mean price on international routes). 9 cents is the estimated mean markup on less competitive national routes from Osborne et al. 2014, discussed further below. **Estimated coefficient on velocity in the price equation times 1/3 standard deviation of speed for Guatemala, detailed below. ***Sum of 1/3 standard deviation improvement in utilization, empty backhauls and wait times, detailed further below. #Chile is chosen because it has the lowest gateway costs in Latin America (source: Doing Business). 17 27. In Table 6 below we computed the total avoidable costs per corridor. It shows that the corridors with highest avoidable costs are (a) the import corridor from the Pacific coast via Puerto Quetzal to Guatemala City, and (b) the import corridor from the Atlantic coast via Puerto Santo Tomás to Guatemala City, in terms of total maximum values per year. Among the export corridors, the Puerto Quetzal and Tecún Umán corridors appear to have the highest potential savings. These figures do not weigh the costs of taking the necessary measures to, for example, reduce congestion and increase average travel speeds. Table 6: Estimated Potential Savings Gains, all Measures, by Corridor Freight Current Estimated Savings as Average volumes Logistics Potential Percent of Corridor value per (million Costs Savings Goods ton ($) tons) ($ milion) ($ million) Value To/from West Coast USA USA Pacific Coast to Guatemala 7,354 934 786 277.5 4.0% City via Puerto Quetzal Ciudad Guatemala to Puerto 2,744 784 245 66.5 3.1% Quetzal To/from East Coast USA USA East Coast to Puerto Santo 1,975 1,989 257 106.1 2.7% Tomas Guatemala City to East Coast US 2,323 1,343 232 42.6 1.4% via Santo Tomas To/from Mexico Guatemala City to Mexico via 364 1,250 36 13.4 3.0% Tecún Umán Mexico to Guatemala City via 1,102 1,515 106 56.5 3.4% Tecún Umán To/from El Salvador Guatemala City to San Salvador 1,508 983 128 41.6 2.8% via Pedro Alvarado San Salvador to Guatemala City 566 1,517 57 2.2 3.8% via Pedro Alvarado Note: Average freight values are estimated from national figures by entry/exit point, although the origin or destination may not be Guatemala City in all cases. 28. These corridor-specific calculations are illustrative of the potential gains, and suggest that reductions in freight markups and traffic congestion and in border, port and other wait times can improve trade flows in Guatemala. They do not, however, include logistics and transport costs pre- and post- corridor – in particular, along rural or secondary roads, and for maritime or air shipment. Clearly, these cost elements can also be substantial. 9 We do not compute the avoidable costs for these linkages simply due to a lack of data. We note, however, that the price per ton for maritime shipping can be from $2,500 to $4,500 per container, or approximately $125 to $225 per ton, depending on the destination. To the extent that these prices are not reflective of competitive markups and cost efficiencies, it is likely that they could be reduced as well. Guatemalan maritime shipping is not as concentrated as other countries in the region, as shown in Figure 3 below. However, there is some anecdotal evidence of high markups. Although Guatemala may not have direct control over the degree of competition among shipping 9 See, e.g., World Bank (2012) Supply Chain Analyses for similar corridors 18 companies, there may be indirect means to influence this competition, and this issue is important to track and analyze further.10 Figure 3: Herfindahl Indices of Maritime Shipping Concentration at Countries' Ports, Capacity-Weighted (2011) (1=Monopoly) 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 El Salvador Nicaragua Belize Costa Rica Guatemala Honduras Panama Source: Containerization International Yearbook 2012 29. The underlying data analysis and qualitative assessments of weaknesses in Guatemala’s transport and logistics sectors show that the main contributors identified as increasing the logistics costs, in rough order of importance, are: - Inefficient and costly road freight services due largely to a lack of competition and barriers to more flexible freight allocation. This situation is sustained in part by prohibitions on international trade in road freight services; - Deficient and costly seaport operations and infrastructure; - Costly document and goods processing, including delays at borders (ports and inland border crossings); - Guatemala City urban congestion; and - Poor road condition, particularly secondary and tertiary networks due in part to poor maintenance.11 30. Most of these transport and logistics issues have been quantified and factored in the total cost, as shown in Tables 4-6 above. However, it is not possible to quantify the exact order of magnitude or importance of each contributor because (i) they are interlinked in most cases; and (ii) the avoidable logistics costs are different on each corridor and depend on different factors including trade volumes and values. We also note that the avoidable cost may be much higher in the case of Guatemalan exports of fresh vegetables and fruit from the farm gate-to–processing 10 See, e.g., Hummels, D., V. Lugovskyy, A. Skiba (2009). “The Trade Reducing Effects of Market Power in International Shipping.” Journal of Development Economics, Vol. 89. 11 Sources: LPI survey responses to rate road quality and interviews with Bank staff working in the sector. Moreover, the country’s roads comprise a major portion of national assets, so economic losses of improper maintenance are likely to be large relative to other inefficiencies discussed within the sector. 19 center (or market) link of the logistics chain. The losses incurred due to poor road condition on that segment have not been factored-in due to insufficient information. However, different scenarios may be developed on the cost of spoiled produce due to road infrastructure deficiencies and excessive border crossing waiting time. The following Chapter discusses in more detail each of the main contributors to logistics costs and identifies priority actions to reduce them. VII. Priority Areas for Actions to Reduce Logistics Costs VII.1 Inefficient and costly road freight services 31. This section relies heavily on a recently published World Bank Policy Research Working Paper, “What Drives the High Price of Road Freight Service in Central America?” (Osborne, T., M. Pachon, and G. Araya, (2014) No. 6844). It presents an econometric analysis of the determinants and costs and prices, using data from a survey of Central American trucking firms. In addition, the section draws from the World Bank’s (2013) “Country Policy Note on Transport and Logistics: Guatemala”, July 2013 (already shared with the Government of Guatemala). 32. Based upon the price comparisons for road freight service on main corridors for international trade, Central American domestic trucking tariffs (freight rates) are among the highest in the world at approximately 17 US cents per ton-kilometer relative to 5-12 cents in advanced countries and African trade corridors. As shown in Table 7 below, Guatemala is no exception to this pattern. Moreover, based upon rigorous econometric analysis of the determinants of costs and prices on routes important for international trade, the evidence is clear that these high prices are related to a lack of robust competition among road freight providers, particularly on “national” routes, which connect points within a country – for example, from Guatemala City to Guatemala’s seaports. On routes with more companies providing service relative to the volume of service, prices are significantly lower than on those with fewer companies operating. And although this varies among national routes, the level of competition is much higher on international routes – those involving an international border crossing. Table 7: Costs and Prices on National and International Routes (US cents per ton-km) Country Mean Min Max Average Markup over Average Direct Costs Costa Rica 10.9 2.9 38.2 6.1 El Salvador 15.6 4.5 53.9 8.3 Guatemala 16.4 4.1 88.9 11.0 Honduras 15.7* 3.6 114.0 9.3 Nicaragua 11.3 3.3 81.2 6.1 Panama 33.2** 2.9 111.0 27.0 TOTAL 16.9 2.9 114.0 11.0 Source: Osborne et al. 2014. Notes: Means are simple firm means, calculated from frequency-weighted route-firm prices*Difference with Costa Rica statistically significant at 5 percent level **Difference with all other countries significant at 1% level. 33. Thus, although the average costs borne by trucking companies do not vary on average between national and international routes, markups are approximately 8-10 cents higher on 20 national routes where international competition is prohibited (Figure 4 below). Regional barriers to entry and limited competition on national routes are sustained by the prohibition on cabotage – that is, a truck from one country may not pick up and deliver goods within another country – and on foreign majority ownership of trucking companies. This also raises costs by reducing the flexibility of fleet deployment and by allowing trucking firms to sustain high cost structures. Moreover, this situation has not improved since the data were collected. As suggested by the inland transportation cost component of the Doing Business Trading Across Borders Indicator (Figure 4), these prices have only risen since that time. Figure 4: Prices on National versus International Routes by Country (US cents per ton- kilometer) 70 60 50 40 National 30 International 20 10 0 Costa Rica El Salvador Guatemala Honduras Nicaragua Panama Source: Central America Trucking Survey (2011-2012 data). Note: International routes are defined as those requiring an international overland border crossing. National routes do not. 21 Figure 5: Trends in Components of Trading Across Borders, Guatemala (US$) 1600 1400 Document 1200 Preparation Customs Processing 1000 800 Terminal Handling 600 Inland 400 Transportation Total 200 0 2008 2009 2010 2011 2012 2013 2014 Source: Doing Business 34. The Central America trucking survey data also permit an estimation of the contribution of various factors to the costs of providing road freight service. The contribution of the main cost elements for Guatemala is as shown in Figure 6 below.12 That is, more flexible use of temporary labor, increased safe travel speeds (i.e., reduced congestion, particularly in and around Guatemala City, but also in other bottlenecks), and enhanced input utilization – including higher truck utilization, reduced empty backhaul, and reduced wait times – would have the greatest effect on the costs that trucking firms incur in providing their service. 35. Nonetheless, the total potential reduction simulated (of a 1/3 of a standard deviation improvement in each variable) would reduce costs by 3 cents from 5.4 to 2.2 cents per ton- kilometer. This represents a large fraction of total costs, but only a small percentage of prices. Moreover, this level of cost reduction may not be possible without large public expenditures and indeed an increase in competition to incentivize cost saving and quality improvement measures. 12 The simulated improvements were computed as the estimated coefficient on the variable for the entire sample of 6 Central American countries multiplied by one-third of the standard deviation of the respective variable for Guatemala. 22 Figure 6: Simulated Reductions in Main Cost Factors, Guatemala Road Freight Service 0.06 0.012000 US $ per ton-km improvement 0.05 0.010000 US$ per t-k cumulative cost reduction 0.04 0.008000 0.03 0.006000 0.02 0.004000 0.01 0.002000 0.00 0.000000 Current Increased Higher safe Higher Reduced Reduced Greater Better Road Reduced Average temporary travel speed utilization empty wait times fleet size Quality Informal Cost work (congestion backhaul payments and other speed factors) Cost net of cumulative improvements Improvement in US cents for each factor Source: Guatemala Policy Note (2013) based on Central America Trucking Survey 36. Utilization and empty backhauls are particularly problematic for Guatemalan trucking companies. It is estimated that on average 77 percent of return trips are empty (Figure 7). The problem applies to both short-haul and long-haul trips to ports and airport destinations, as well as to foreign capital cities. For example, empty backhaul on trips from Guatemala City to San Salvador is 90 per cent, to Tegucigalpa is 100%, and to Managua 75%. And yet it is much lower to Costa Rica’s and Panama’s capital, at 24 and 10 percent respectively. This, combined with low fleet utilization13, encourages owners to keep running old trucks, which have lower fixed costs, but also lower fuel efficiency, even though fuel costs represent 40-60% of total operating costs. In Guatemala, few firms report using best operating practices and technologies to improve fuel efficiency. 13 Fleet utilization is the number of kilometers traveled in a year, with or without load. 23 Figure 7: Percentage of Trips with Empty Backhauls ‘% Empty Return’ means % of return trips on which truck remains empty (a) As a result of increasing crime and violence in Central America, security costs have increased for trucking companies and represent 3-4% of total costs; (b) Increased waiting times and significantly high idle times for trucks while en route – especially at international borders-- impact transport costs. VII.2 Deficient Seaport Operations and Infrastructure 37. Three ports serve the needs of Guatemala’s imports and exports by sea: Puerto Quetzal on the Pacific, and Puerto Santo Tomás de Castilla and Puerto Barrios on the Atlantic. Together they move about 18 million tons, including about 1.2 million TEUs. The management structure of the first two of the three ports that serve the import/export of goods in Guatemala is through state-owned ports managed and operated by presidentially appointed controllers (interventores) and with a limited part of operations carried out by the private sector (for instance operating cranes). This can best be described as the tool port model. The third port – Puerto Barrios - is managed and operated by the private sector on public land and infrastructure. Broadly speaking, the physical conditions of the ports are acceptable or good. Nonetheless, the timeliness and efficiency of service at the two publicly operated ports hinders Guatemala’s international competitiveness. As shown in Table 8 below, indicators such as dwell time at port are relatively high at Puerto Quetzal and Santo Tomás. 38. Although efficiency of port handling, customs and other processing, and efficiency of maritime service providers are likely the dominant determinants of the economic costs of using the nation’s ports, port handling charges can also play a role. In this regard, Guatemala has the highest charges in Central America, as shown in the table below: Table 8: Port Handling Charges, Central America and Comparators Port Handling Charges (US$ per container) Exports Imports Guatemala 240 260 Costa Rica 220 250 El Salvador 100 100 24 Honduras 50 215 Nicaragua 120 120 Panama 65 265 Singapore 150 150 Source: Doing Business 2014 (Data from 2013) 39. More important still is to ensure that maritime shipping is as competitive as possible. A properly incentivized port operator could interface more effectively with shipping companies and provide fair and competitive access to port facilities. 40. One institutional solution for improving incentives for port performance and ensuring continuous, professional management has been the landlord port authority model, which has been very successful internationally. Guatemala does not have a national port authority, but some technical functions normally played by a port authority are in the hands of the two public ports. However, there is a void of responsibilities when it comes to undertaking some other functions normally performed by a port authority. For example, there is no body responsible for developing a national strategic plan for the port sector and to guide its implementation, nor to apply specific and uniform technical regulations and carry out marketing of the port sector at large. In the case of the concessioned port, there appears to be no entity at all with any port authority-related responsibilities. Apparently, a draft law for the creation of a national port authority has existed for the last 7 years, but has not yet been passed by Congress. Table 9: Indicators of Quality and Efficiency at Guatemalan Ports Port Pto Barrios Pto Quetzal Region (non- Pto Santo Transhipment Tomas de Ports only) Castilla Average Max Ship Size (TEU) Feeder 2,490 Feeder 2,758 Feeder 2,456 Feeder 2547 Max depth at Container berth 9.5 11 9.8 11.5 Max Crane type Available None Mobile Mobile Panamax STS*** Number of container lines calling at port 6 8* 17 8 *2013 Throughput (000 TEU) 3190 323 496 282 *Length of berth available for container 470 810 907 665 operations (m) Average berth utilization (%) 56** 53 54 Max crane productivity (moves/hr) n/a 22 25 26 Total yard storage capacity (TEU) 5,600 12,537 7,500 10,518 Storage capacity Index 178 345 147 373 (Capacity/Throughput**10,000) Average dwell time of containers on port 2.1 7.6 5 5 (days) Average number of container vessels serviced 2 1.1 3 2 per berth per day Average vessel size (TEU) 1,100 1,793 1,326 1,605 *Vessel turnaround time - Total time at port 15 16 13 28 (h) *Average time off the berth i.e anchor (h) 1.4 6.5 1.4 6 Average vessel productivity 2011 (TEU/h) 45 38 28 21.7 Source: IDB (2013), except: *Comisión Portuaria Nacional, 2014 25 *2012 Data from AGEXPORT. This lists 19 shipping lines for Puerto Quetzal. ***Maximum capacity in the region. 41. Guatemala’s port efficiency is affected by a lack of global strategic vision and, no less important, a lack of consistent, effective oversight of the sector. Management and investment in ports is limited to the narrow view of each individual port, and long-range planning is difficult under the current institutional arrangements.14 In addition, incentives to improve performance are relatively weak. Institutional arrangements are essential for granting the authority and capacity, as well as the incentives to operate more effectively. 42. One institutional solution adopted in many countries of the world with considerable success, has been to convert to a landlord port model. That is, to move from the tool or service port models (as in the case of Guatemala) –where port authorities own the land, basic port infrastructure, superstructure and equipment and provide port service directly and with limited private sector involvement– to a landlord port sector model, where the public port authority owns the port land and basic infrastructure, but where, through well-structured and transparent public- private partnership arrangements, most port operations are concessioned to the private sector. The private sector brings its own equipment, know-how and management systems, and employs its own staff. More than 90% of the world’s major container terminals are now organized this way. 43. Access to the port. The two Atlantic ports, both located in the town of Puerto Barrios and sharing the same access channel, have problems in ensuring access to the quays on-land and to a lesser degree in the access channel. Long-term solutions seem to be needed to relieve the traffic congestion caused by trucks waiting in the town to load or unload at the berths. Most of the cargo passing through the town comes from or goes to Guatemala City and beyond. It is reported that the heavy container traffic delays local road traffic and presents safety risks. VII.3 Costly document and goods processing, including delays at borders (ports and inland border crossings) 44. Inefficient processing and clearance of goods causes delays that can be costly in terms of the value of traded goods held up (inventory cost) –including wastage among farm products— and in terms of the truck fleet being held idle. Although this cost was not a major contributor to the total logistics costs along the four corridors studied, the cost of wastage/product losses and the inventory value losses due to uncertainties in delivery times can be important and are not included in our computation due to a lack of data. 45. These issues can arise from: (a) Poor accountability and lack of incentives to improve cooperation and performance among border agencies. (b) Cumbersome sanitary and phyto-sanitary review and inspection processes, both at border points and at national laboratories, combined with lack of regional alignment of standards systems; 14 In particular, management appointments are linked to the political cycle, resulting in high turnover and inadequate long-term performance incentives. 26 (c) The problem of contraband, leading to (or used as a justification for) high rates of physical controls of consignments (between 60% to 90%); and (d) Weak governance of seaports. 46. As a result, cost-effective solutions such as systematic application of risk management principles in selecting shipments for inspection, additional processing lanes, secure parking facilities, coordinated X-ray scanning, longer processing hours, and other measures are not implemented. Where they have been introduced recently, it is said that Customs are not applying the ‘green channel’ concept as intended, often holding up trucks no less time than trucks assigned to the ‘red channel’. VII.4 Guatemala City urban congestion 47. Most –if not all– major transport and trade corridors in Guatemala include Guatemala City as a logistics “node”, whereas the city of 1.1 million inhabitants is already heavily congested. (The population including suburbs is estimated at 4.1 million.) Infrastructure and traffic management solutions are needed to allow long-distance trucks en route to the national ports to pass through or around Guatemala City, avoiding getting trapped in its congested city streets. 48. When a haulier seeks an “optimal route or path”15 point, the effort to move the cargo through Guatemala City is increased by the so-called urban transit effects. An analysis carried out by the World Bank in 2012 on the occasion of the Trucking Survey in Central America showed that, in all cases where the optimal path passes through metropolitan areas, the overall travel time increases by about 12%. This is an effect greater in magnitude than that produced by topography (terrain slopes), but lower than the waiting times at border crossings. 49. Freight traffic wishing to cross Guatemala City in the absence of a bypass gets caught in local traffic jams. According to the optimal path analysis, Guatemala City adds at least 30 minutes to the freight travel time, decreasing the average travel speed from the typical origin to the destination (often a port) of 86 km/h - in the absence of any other factors of impedance along the road corridor - to below 76 km/h. This effect has been quantified and included as a factor in the total avoidable transport cost. 50. The above effects are conservative and do not take into account (i) the daily freight traffic restrictions in the city, and (ii) the lost opportunity to travel during night – due to high security risk. These add to the waiting time and further decrease the average travel speed. 51. In addition to the maintenance and rural roads issues (above), innovative solutions may be needed to address the need for a bypass around Guatemala City for trucks on long-distance runs between the western highlands and Puerto Santo Tomás –and to divert them from worsening rush-hour traffic jams, while not limiting their access to the City network to only a few hours in 24: a national-scale problem that needs to be integrated with city-based infrastructure planning and budgeting. VII.5 Poor road condition, particularly on the secondary and tertiary networks 15 The optimal route is the one that, among all the possible ways to reach a destination, demands the least possible effort. The effort can be measured in terms of time and costs. 27 52. In addition to border management and infrastructure weaknesses, one of the main logistics bottlenecks that affect the agro-logistics portion of Guatemala’s corridors is poor rural access and quality, in particular roads serving farms (the first link in the export supply chain). Guatemala is currently the largest food exporter in Central America and the second largest regional exporter of perishable goods after Costa Rica. The supply chain analysis carried-out under “Agro-Logistics in Central America” (June 2012) shows that the poor quality of rural roads translates into high costs, particularly for pineapple, tomato and dairy farmers, and cattle ranchers. 53. Poor access and quality of rural roads can affect the exporting of perishable agricultural products in different ways. When the constraint is related to access, producers either face large losses moving their product to market on foot or using animals, or simply never develop their production beyond household subsistence levels. For these producers, anticipated logistics expenses may be prohibitive, and serve as a barrier to entry. Access constraints may keep many small producers out of the market, and are nearly impossible to capture with a supply chain analysis. This paper did not attempt to do so. In the second case, producers have access to rural roads, but the quality is so poor that transporting their goods is too expensive and time- consuming to be profitable. For example, rough rural roads and no refrigeration lead to product losses that are 50% greater on the short freight journey (farm to consolidation warehouse –where they may be loaded into reefer containers) than on the entire journey from the distribution center to Rotterdam16. These producers may not enter the market, or may sell a much smaller quantity of their goods, only at the highest point in the harvest season, when they can accumulate enough volume to make it worthwhile. Figure 8: Diagram of Rural Road Bottlenecks Source: World Bank, Agro-Logistics in Central America 54. Maintenance on the rural road network in Guatemala is notoriously inadequate. Improvement has been thwarted by frequent changes of leadership coinciding with the political calendar, inadequate independence of roads authorities, a lack of outcome-based incentives for the roads authorities, and a lack of co-ordination between the Dirección General de Caminos (DGC), which is responsible for strategic planning, construction, and rehabilitation of the road 16 “Agro-logistics in Central America – A Supply Chain Approach”, Background Paper (June 2012) 28 network, and the Unidad Ejecutora de Conservación Vial (COVIAL), which is responsible for maintenance. VII.6 Nine Proposed Actions for Reducing Transport and Logistics Costs 55. The Guatemalan government cannot do everything at once –it lacks both people and money: the institutional capacity and the fiscal capacity. The beneficiaries of the status quo tend to resist reforms. That is why priorities can only be set after a public-private dialogue. Champions for change need to be identified, encouraged and supported; and other international development agencies need to be informed and a consensus needs to be developed. 56. This section examines policy clusters for reducing transport and logistic costs, roughly in declining order of the expected benefit-cost balance –giving a heavier weight to benefits that can be achieved relatively quickly and easily (‘low-hanging fruit’). An example is savings that can be made quickly by border control changes that reduce border delays, within perhaps a year. The second cluster includes efficiency increases that may take longer but can be largely achieved within the duration of a single 4-year presidency. The transfer of port operations from the public sector to private operators, conditional on passage of port reform legislation, is a prominent example. A third category includes institutional strengthening that is likely to take longer than four years to carry through, notably reform of the agencies managing road improvement and maintenance. (i) Improved Performance by Freight Transport Services (Trucking) 57. Action No. 1: Open road freight transport services to greater competition. Measures need to be taken that will allow truck fleets to raise their annual output, expressed as paying ton- km or loaded distance driven per year, and to respond more flexibly to demand. Policy measures that open up the domestic trucking market to competition will create incentives for lower mark- ups as well as quality improvement and cost savings, as well as create the opportunity and incentives for increased fleet utilization. Liberalization of entry particularly into cabotage could be extended on a regional basis, as part of a bilateral agreement, for example with El Salvador, or in a limited manner as has been done in Europe. This action has potential for a high benefit-cost ratio, as it may bring large benefits at little cost. Other actions recommended below will also contribute to the same objective. (ii) Accelerated Border Controls 58. International good practice among Customs administrations and other border control agencies (plant and animal health inspection) in a growing number of countries has brought about a radical reduction in waiting times at borders for the vast majority of trucks. This is made possible by greater attention given to the professionalization of the border agents, greater reliance on electronic processing of border controls, wider adoption of the Authorized Economic Operator concept and risk management techniques, and greater transparency and accountability. Delegation of powers from the plant and animal health agencies to Customs offers a further simplification of border controls. 59. For trucks waiting to leave Guatemala and enter El Salvador, it has been suggested that more orderly parking and queuing on the Guatemalan side might ease the flow, as an interim solution. However, if Salvadorian border controls start to apply risk analysis consistently, under 29 which importers with a good record will be not be subject routinely to physical inspection, waiting times will be cut substantially, reducing the need for such parking. 60. These concepts, developed in the EU and well documented in World Bank lending, have radically reduced waiting times at borders, as befits a customs union, within months, once the political decisions were made. 61. Websites that document in real time the length of queues of trucks waiting to pass through the various border posts contribute to the transparency of their processing. 62. At the Tecún Umán border crossing between Guatemala and Mexico, it has been proposed that trains of Mexican Railways bringing imports to Guatemala and other Central American destinations should be unloaded, not on the Mexican side as at present, but on the Guatemalan side, in a logistics terminal (or ‘dry port’) under Customs bond. The main border processing is not on the Mexican side but the clearance by Guatemalan Customs and phyto- sanitary inspection (Ministry of Agriculture - MAGA) on Guatemalan territory. If adopted, this change would eliminate the need for Guatemalan trucks to cross into Mexico and re-enter Guatemala, shortening their turnaround time (starting from and returning to Guatemala City) from three days to one day. However, this proposal needs a cost-benefit analysis within a feasibility study of the concept, along with well-designed institutional arrangements. 63. This change will also require negotiation between the Guatemalan and Mexican governments. It will benefit both sides in that delivered prices within Guatemala of imports from Mexico will be lowered, to the extent that Guatemalan trucks raise their productivity and lower their freight rates; and Mexico stands to gain from the increase in its exports that is likely to follow. 64. This proposal has the support of ANADIE as a champion for reform. It is seeking investors willing to develop and operate the proposed ‘dry port’, possibly linked with new manufacturing plants in the Retalhuleu-Mazatenango-Escuintla-Puerto Quetzal corridor (see Annex 6). 65. Action No.2. Ease major trade corridor bottlenecks at inland border crossings. The priorities are the Mexico-Guatemala crossing at Tecún Umán and Guatemala-El Salvador crossing at Pedro Alvarado --both low-hanging fruits in the sense that they will not require big spending on infrastructure. Most of the time-saving changes require the adoption of streamlined processing, applying risk management and green channel concepts, and closer cooperation among border agencies within each country, as well as across the borders. High benefits will accrue as soon as new procedures are agreed on and implemented, at low financial cost: that is, a high benefit-cost ratio. (iii) Public-private Partnerships and Legislation to Promote Development of Private Sector Investment in and Operation of Logistic Parks 66. ANADIE already is promoting such initiatives and has several proposals that the World Bank is interested in learning more about with a view to supporting, including a toll road in the Guatemala City built-up area (see para. 74 below and Annex 6). 30 67. Other initiatives to mobilize funds for investment in improved transport logistics are the subject for dialogue and consultation among MCIV, PRONACOM and ANADIE, the World Bank team and other donors. (iv) Port Institutional Reforms 68. The relatively poor performance of Guatemala’s two public ports could be substantially improved by reorganization of the ports in accordance with the landlord port model. Their performance shortcomings make the case for implementing the proposed national port authority without further delay. It would be responsible for improving and expanding infrastructure in all national ports, for awarding long-term contracts with private firms to operate the various terminals, and overseeing their performance (see Annex 4). 69. An appropriate draft law was prepared by the Comisión Portuaria Nacional in 2007, but it has been side-lined. The model implies changes in relations and closer collaboration among terminal operators, shipping lines, and freight forwarders. The role of the public sector is limited to funding and development of the infrastructure, maintaining navigational aids and ship safety, and oversight of compliance by the private terminal operators with the terms of their concession contracts. 70. The landlord port model is well documented globally. Adoption of this model together with establishment of a national port authority, are measures offering substantial efficiency improvements in a relatively short time. 71. Action No. 3: Reform the institutional framework for the major public seaports on the landlord model under a National Port Authority. Its task will be to develop national port policy and strategy and to plan, coordinate and finance infrastructure improvements in the public ports. The legislation will, in parallel, outsource the management and operation of the main public port terminals to private operators, on the basis of competitively awarded long-term concession contracts. 72. Action No. 4: Within this new legal framework, launch public investment in infrastructure improvements needed in Puerto Quetzal for Pacific trade and Puerto Santo Tomás de Castilla for Atlantic/Caribbean trade. In the case of Santo Tomás include excavation of access channels and water depth at berths to receive larger ships and facilitate (speed up) handling of present-size ships. The future terminal operators will be expected to upgrade cargo handling equipment (notably cranes), storage facilities, and better computer systems to support container handling. Adoption of the landlord port model will shift many management decisions from low-paid and therefore probably corrupt government employees to higher-paid terminal managers and operators (and therefore higher-skilled and more business- oriented, with less reason to be corrupt). Substantial benefits will accrue within a relatively short term. 73. Urgently needed improvements in these areas may warrant some continued public financing in the short run, until the new institutional structure becomes operational. (v) Urban Logistics in and around Guatemala City 31 74. The government can reduce the urban transit effect for long-distance trips that want to bypass Guatemala City. In the interest of trade, the most compelling need is probably for the corridor connecting the Western Highlands with the Caribbean port at Santo Tomás de Castilla. Approaching Guatemala City from the west on Highway CA1, those trucks would be well served by a relatively short ‘bypass’ around the city’s outer northern suburbs to reach Highway CA9 north of the capital17. Traffic coming from the Escuintla coastal lowlands (on Highway CA9) could readily link into CA1 to the western end of this bypass via existing roads in the City’s outer suburbs over a short distance. 75. At least two options for a complete ring road (‘anillo’) have been defined and are being evaluated, one about 25 km (average radius) out from the city center with a total length of 170 km, the other 65 km out with a total length of about 400 km. However, their primary objective seems to be to promote orderly expansion of the City –an initiative developed under the on-going Guatemala Urban Infrastructure Project supported by the municipal government of Guatemala City and the World Bank. They have little obvious connection with the trade corridors, much of whose long-distance traffic needs far less than a complete ring. 76. Study of the feasibility of a light rail system for passengers, which could use the existing right of way of the old railway track crossing Guatemala City, is included as a priority for 2015 among the Public-Private Partnership (PPP) projects of ANADIE18. Alternatively the Government should consider the development of a Rapid Bus Transit (BRT) system, which would require a smaller investment and offers other advantages over light rail. Either system could have an overall positive effect on city congestion and only an indirect effect on freight travel times. 77. Action No. 5: Construct a partial bypass of Guatemala City or comparable solution to avoid traffic jams and restricted hours for trade trucks in transit. One such solution is ANADIE's proposed toll-road through the city center on the old railway right-of-way. Long- distance truck traffic already suffers long delays, and trucks from the Escuintla region and El Salvador, heading for Puerto Santo Tomás, are already numerous, leaving little doubt as to the demand for a solution. But as to the supply side, the capital cost is bound to be high and vulnerable to technical surprises, so it may take 4-6 years before it is completed and traffic begins to benefit. It has been said that traffic from the Altiplano (Northwest) region to Puerto Santo Tomás is insufficient in quantity to justify the high cost of constructing a partial ring around the north side of Guatemala City. However, it may be limited in quantity precisely because of the traffic jams and restrictions imposed on operating hours, which are more damaging for perishable fruits. This chicken-and-egg problem warrants study. (vi) Air Transport: Enhancing Air Freight Services 78. In the last few years freight value traded by air has grown rapidly from 1 to 10 percent of the value of Guatemala’s traded goods. The air transport sector has done well, having implemented major reforms in the past five years. There are no policy restrictions on air liberalization. From a transport logistics point of view, La Aurora airport has enough room to expand and improve its capacity, should the use of air freight for export of high-value fruits, 17 One government source has identified such an alignment that would require construction of a new road, through hilly terrain, of 50-55 km, partly through outer suburbs, partly through lightly forested countryside. 18 Alianzas Publico Privadas, Presentación Agencia y Portafolio de Proyectos 32 flowers and other products be intensified in the future. Given Guatemala’s growing production and export (mainly to the USA and Europe) of high-value perishable produce, the Government can facilitate infrastructure improvements of La Aurora and stimulate more private investment and participation in the cargo storage and handling of the airport. 79. At the same time, in line with the Government’s policies for tourism development, market studies to assess demand for better services to tourism sites, especially Tikal and Antigua Guatemala, may be considered (see Annex 7). 80. Action No. 6: Improve aviation safety through minor investments in runway repairs and navigational aids: Repave Guatemala City (La Aurora) runway and taxi-way, install or upgrade air navigational aids at La Aurora and five regional airports (Retalhuleu, Quetzaltenango, Cobán, Flores and Puerto Barrios) to allow safer operation in bad weather and (for the first time at the provincial airports) night-time landing. While this will be primarily justified through increased passenger traffic, capacity for carrying freight in the passenger planes will also grow. (vii) Upgrading of High Traffic, Poor Quality Rural Roads for Farm Access 81. Roads linking areas that are the source of exports (farm produce as well as manufactured goods) to the first node in the supply chain (facilities for packaging, cooling -where warranted- and consolidating shipments) warrant improvement, as well as initiatives to build trust and facilitate the commercial relations between farmers, producers and traders. 82. Worldwide, reliable roads and bridges in farming areas, especially in highlands, are essential during harvest seasons, but often in bad condition. Special initiatives may be warranted to channel adequate budget into this subsector, to set priorities, but also to ensure motivated, responsible management of funds for their construction and maintenance. Experimentation with community-based initiatives may be warranted; the World Bank can make available international good practice. It may also show that packaging and consolidation facilities are inadequate or warrant bringing closer to the farm gate. 83. Experience over the past decade under the Bank-supported First and Second Rural and Main Roads Projects in Guatemala, targeting this very link in the supply chain, has shown the limited capacity of institutions involved in upgrading rural roads. Such weaknesses were manifest as to securing financing, managing procurement of civil works contractors, and carrying out maintenance. Thus it is hard to separate the narrower objective of upgrading rural roads in areas growing perishable fruits and vegetables, from the broader issue of strengthening the institutional capacity of road agencies for all of Guatemala. 84. Action No. 7: Improve tertiary road networks serving areas where perishable fruits and vegetables are grown for export. The main economic benefit will be the avoidance of large losses between the farm gate and the nearest trader’s warehouse for packaging, refrigeration and/or load consolidation. The main beneficiaries will be mostly low- income/small-scale farmers, concentrated in the Highlands (north and west of Guatemala City) -- and the exporters to whom they sell their produce. This may require a decision of political will. For this purpose, is it feasible to think of a large increase in the roads capital budget (i.e. construction and improvement), or must it depend on reallocation within the present MCIV level 33 of funding? A basis for estimating the financing needed is 500 km of tertiary network at (say) US$100,000-200,000 per km for upgrading existing alignments with better drainage and some new or improved bridges. 85. Farmers may continue growing the same quantities, but losses will be much reduced as soon as road improvements are complete, over relatively short distances. Or if farmers are already discouraged from even planting perishables, they may only be persuaded over a few years to plant more, as they see the more reliable access to the processing plants. (viii) Strengthening the Institutional Capacity of Road Agencies, with particular attention to road maintenance 86. Road maintenance: part of a broader problem: Among the functions of road management, maintenance is always the weakest, everywhere. In this respect Guatemala is no exception. For that reason it ranks high as a contributor to poor trucking performance. However, solutions are hard to separate from broader institutional weaknesses in the roads ministry: how to plan and prioritize improvements, mobilize budgets, award contracts and oversee implementation of works. 87. Fragmentation of responsibilities: One of the most important challenges is that there are several institutions in the subsector: the Direccion General de Caminos (DGC), COVIAL, municipalities and various funds created which have intervened on the road network without collaborating with the MCIV or DGC. There is a need to consolidate, clarify responsibilities, and improve collaboration between the DGC and COVIAL in terms of planning and network maintenance (inventory, transit, planning, research, and prioritization). 88. The need for reform and modernization: To fulfill its key role, the DGC requires a series of actions to reform and modernize. Currently it lacks facilities to do basic tasks such as updating the inventory of the road network, traffic measurements on key routes, measuring road condition, prioritizing and planning needed annual interventions. DGC’s structure does not provide a framework for efficient work and would benefit from updating with the creation, in the medium to long term, of a modern autonomous or semi-autonomous road agency. That would require training of employees, and be less vulnerable to large-scale changes of personnel when governments change –that is, greater continuity of management. A reform of its statutes may be needed to enable it to pay salaries competitive with the private sector. The agency would have an annual agreement with the Minister of Communications and Infrastructure with certain performance indicators. This strategy would make management of the road network more effective. 89. Improvement of procurement and project implementation: The weaknesses in the procurement process, mainly in project preparation, the award of contracts, and the use of a bill- of-quantities system, give contractors strong incentives to increase those quantities. Internal delays in the DGC to meet some existing standards or requirements deter efficient execution of contracts. No attempt has been made to develop types of contract systems that give the owner (DGC) and the contractor incentives to collaborate better, allocating risks to the party that is best able to handle them. We encourage DGC to explore performance-based contracts, tied to compliance with certain levels of service standards, rather than inputs. Such Rehabilitation and Maintenance Contracts (CREMA) have been used in countries such as Argentina and Brazil with excellent results in terms of network condition at reasonable prices. There are also other types of 34 contracts for implementing priority projects that could be explored to improve efficiency in the sector, including public-private partnerships (PPP) in the development and maintenance of the road network. 90. Natural disasters: An important factor to consider on the current state of road infrastructure in Guatemala is the effect of natural disasters: Hurricane Mitch in 1998, Hurricane Stan in 2005, the Pacaya Volcano eruption and Agatha Storm in 2010. These and other events have impacted the fragile infrastructure, and have directly affected the mobility of the population and domestic production. They have also disrupted implementation of planned investments, as funds had to be reallocated urgently to address the damage. 91. Action No. 8: Improve road maintenance throughout the country and strengthen the institutional capacity of road agencies. The latter is probably a precondition for the former, as maintenance is intimately tied to the broader governance and institutional capacity of the road agencies. This is a difficult institutional issue that goes far beyond trade flows and logistics. See Annex 5 for more specific recommended actions. (ix) Transport Budgeting, Planning and Management Criteria 92. Tax revenues of only 12-13% of GDP, the Guatemalan norm in recent years, are well below the international average. The capital (investment) portion is only about one quarter of the total budget. When spending has to be trimmed, investment budgets generally get cut more readily than current budgets, from which government salaries are paid. 93. The current low level of fiscal income presents a dilemma about funding expansion and upgrading of transport infrastructure in these key corridors. Is it a politically feasible option to think of further raising tax on gasoline and diesel fuel, or on motor vehicles, part of which would be dedicated to the maintenance of roads and bridges budget –extending the funding mechanism already used for funding road maintenance through COVIAL? The World Bank can also offer international experience on such an option. (x) Should the Railway be Revived? 94. In the Bank’s view, international experience suggests that freight traffic likely to prefer rail over road in the main corridors will remain, for the foreseeable future, below the threshold of about 3 million tons per year that would justify the heavy up-front investment to re-instate a freight railway line and operation in the Puerto Quetzal-Guatemala City-Puerto Santo Tomás corridor. (It is rare for rail to take more than 25-30% of all freight in a corridor of comparable distance, in the absence of major mineral traffic.) The Bank is willing to offer its experience if the government seeks its advice on how to explore this issue further (see Annex 8). 95. Action No. 9: Conduct a study to assess the economic and financial viability of reviving the railway for freight. Since much of the remaining track and other infrastructure have deteriorated beyond repair, any reconstruction of the railway will have to be comprehensive and many bridges will need to be replaced. The cost will therefore be substantial and it is doubtful that potential traffic could reach the threshold of about 3 million tons per year commonly seen to be a minimum needed to make construction of a freight line economically and financially viable. 35 VIII. Matrix of Recommended Activities 96. The actions recommended above for a National Transport and Logistics Strategy are brought together in the following table. The list identifies the agencies expected to take the lead in implementing each activity. It shows whether each such activity is seen as short-, medium- or long-term, and the categories into which it falls: policy, infrastructure, legislation or regulatory changes, public-sector management, or mobilizing public awareness and support. It also gives the number of the paragraph of this document that expands on its nature and objective. 97. It is hoped that the Guatemalan government will find these actions and related activities helpful as it designs and implements a development strategy whose objective is to promote international trade and thereby to reduce poverty, integrate its diverse regions more closely, and address social goals (especially in the western highlands). MATRIX OF RECOMMENDED ACTIVITIES Rep. Categ- Initiator/ Tim Nº Recommended Activity para. ory Lead Agency -ing A. REDUCE WAITING TIMES AT BORDER CROSSINGS 1 Devise and launch program of actions to reduce waiting times at 58 pol, psm, Congreso, S, borders (including launching of Single Window for border control mob SAT, MAGA M agencies) 2 Set up website reporting queues at border crossings 61 mob Truckers S union 3 Arrange study tours to countries known for efficient border processing - psm Customs S 4 Affirm commitment to use of risk management techniques for border 58- pol Customs S controls 59, 65 5 Apply the concept of ‘authorized economic operator’ (AEO) –which 58 psm Customs, M SAT is already developing-- and ‘green channel’ for accelerated Chamber of processing of border clearance for vehicles so pre-cleared. Commerce 6 Delegate powers for SPS border controls to Customs 58 pol, psm MAGA, MSP M 7 Accelerate negotiations with Customs of El Salvador & Mexico to 62- pol, psm, SAT M reach agreement on reciprocal speeding up of border processing on 65 mob above principles 8 Develop program to design, acquire land, and construct parking areas 59 inf ?? ? near borders B. IMPLEMENT REFORM OF PORT SECTOR 9 Review and update proposed legislation for setting up National Port 69 pol, psm, PRONACOM, S Authority mob MCIV (?) 10 Arrange study tours to countries already operating under the national 70 mob PRONACOM S port authority/landlord port model MCIV, traders associations 11 Secure approval and enactment of port reform bill 71 pol, leg, Traders M mob associations C. MAINTAIN and IMPROVE EXPORT CORRIDORS 12 Designate a network of export corridor highways to reflect their 81 mob PRONACOM/ S economic priority DGC 36 13 Promote closer consultation among road agencies and local community 84 mob, Municipal M leaders about road network priorities, programming of improvements pol, inf, governments 14 Promote experiments in community-based (self-help) road maintenance 91 mob, Munic govts, M psm, COVIAL 15 Prepare action plan for strengthening maintenance of entire road 86,89 mob, DGC, M network: devise and maintain road condition inventory and regular pol, psm, COVIAL -L traffic counts, review standards, lobby for larger budgets, strengthen inf maintenance management skills 16 Strengthen institutional capacity of DGC & COVIAL: review salary 88,93 psm DGC, M scales, recruit and train managers, devise performance-related COVIAL -L management system and remuneration 17 Devise disaster management program, publicize, enlist support of local 90 pol, inf, MCIV M governments, secure funding psm 18 Tighten procurement oversight, review public procurement rules 89 psm MCIV M 19 Devise pilot operation of performance-based road maintenance 89 psm DGC/ M COVIAL 20 Promote PPP transactions for private participation in road projects 66 psm ANADIE M 21 Revisit proposals for partial bypass of Guatemala City 74- inf, psm, DGC, gobierno M- 77 mob Ciudad Guate L D. ENHANCE AIR FREIGHT SERVICES 22 Define and develop program to improve safety at La Aurora and 5 78- inf DGAC M national airports: resurface La Aurora runway & taxiway, and improve 80 navigational aids for landing in poor visibility and night flying E. STUDY REVIVAL OF RAILWAY FOR FREIGHT 23 Devise and carry out feasibility study for possible re-introduction of 94,95 pol, psm, PRONACOM, S freight railway (state-run or private) on all or part of former FEGUA mob ANADIE right-of-way Abbreviations: Categories: pol = policy, inf = infrastructure, leg = legislation, reg = regulatory, psm=public-sector management, mob = mobilize public awareness Timing: S = short-term (<1 year), M = medium-term (1-4 years), L = long-term (5-10 years) 37 Annex 1: Suggested Trade-Supporting Investments in Transport and Logistics Unit Estimated Category Trade-Supporting Public Investments Quantities Cost Cost ($million) ($million) 1 Border Redesign of border control layout to ease Tecún Umán 2 4 crossings flow, add parking (MEX) & Pedro de Alvarado (SAL) border stations 2 Ports' New cargo handling equipment, enlarged Puerto Quetzal & 10 20 handling storage areas, improved land access, Pto Santo Tomás capacity dredging of approach channel 3 Tertiary Improvement of rural roads & bridges in 500 km, roads 0.4 210 roads Altiplano fruit- & vegetable-growing 50 small bridges bridges 0.2 areas 4 Guatemala Either (a) Toll road thru city center using 30 km, 4-lane 5 150 City partial railway RoW, or (b) partial ring-road, divided bypass either (b1) south or (b2) north of city 5 Road main- (a) Rehab, periodic & routine 2,000 km, 5 years 0.04 400 tenance & maintenance in pilot areas to test disaster mgt performance-based approach 6 (b) Planning for emergency response to 10 key depots 3 30 floods & volcanic activity, thru supply of equipment for clearing blocked roads & repairing bridges 7 Other Expanding trade corridor highways to 4- c. 200 km, various 2 400 intercity lane divided (where traffic warrants) locations capacity 8 Air Resurfacing runways & installing/ La Aurora & 5 15 transport upgrading air navigational aids and domestic airports safety lighting TOTAL 1,229 Per year 246 Assumptions: Conclusions: GDP ($ million) $50,000 Transport as % of GDP/year 0.5% Govt budget ($ mil.) $5,500 Transport as % of budget 4.5% capital 11% of- GDP 25% Transport as % of capital budget 18% - current 75% 38 Annex 2: Strategic Workshop of June 10, 2014 1. On June 10, 2014 a strategic workshop was held in Guatemala City, at which a draft of this paper was disseminated and discussed. It invited leaders in both the import/export business community and relevant government agencies to contribute their views and recommendations on priorities, strategic thinking, public awareness, identification of champions for reforms, and mobilization of support among stakeholders. The workshop was hosted by the National Competitiveness Program (‘Programa Nacional de Competitividad‘– PRONACOM). The ministers of finance, economy and transport attended. At the end of the day a delegation of PRONACOM’s leaders, the above ministers and the World Bank presented its conclusions to the President of the Republic. 2. In putting together this document, the World Bank team brought some elements of novelty on: (i) how to address transport reforms holistically, in the context of logistics corridors, (ii) identification and quantification of the avoidable logistics (including transport) costs, based on their weight in the cost components, and (iii) prioritization of reforms and investment in the sector. 3. At the workshop PRONACOM presented the Strategy, while the World Bank team offered international expertise on how to address the logistics bottlenecks through projects embodying the corridor approach; the landlord port model; freight logistics in Guatemala (drawing on the Bank’s 2013 paper); and successful performance-based maintenance contracts (CREMA), etc. 4. The workshop noted that there was a wealth of older and recent strategies, plans, studies and other papers that address almost all the challenges in the transport sector in Guatemala and propose sets of meaningful recommendations. It recognized that these needed to be prioritized and addressed gradually. One of the strategic objectives of the workshop was to foster an open debate on what might motivate the implementation of recommended program changes and reforms, and how to overcome possible obstacles to taking action. 39 Annex 3: Guatemala Logistics Performance Index (LPI)19 International Scorecard 1. The international score uses six key dimensions to benchmark countries' performance and also displays the derived overall LPI index. The scorecard allows comparisons with the world (with the option to display world's best performer) and with the region or income group (with the option to display the region’s or income group's best performer) on the six indicators and the overall LPI index. 2. The logistics performance (LPI) is the weighted average of the country scores on the six key dimensions: (i) Efficiency of the clearance process (i.e., speed, simplicity and predictability of formalities) by border control agencies, including customs; (ii) Quality of trade and transport related infrastructure (e.g., ports, railroads, roads, information technology); (iii) Ease of arranging competitively priced shipments; (iv) Competence and quality of logistics services (e.g., transport operators, customs brokers); (v) Ability to track and trace consignments; and (vi) Timeliness of shipments in reaching destination within the scheduled or expected delivery time. 3. The scorecards demonstrate comparative performance—the dimensions show on a scale (lowest score to highest score) from 1 to 5 relevant to the possible comparison groups—of all countries (world), region and income groups. On the scale from 1 to 5, Guatemala compares with Germany (the number 1 country with the highest LPI) as follows: 19 Source: Connecting to Compete 40 Figure A1: Country Score Card – Guatemala 2014 Source: World Bank, LPI 214 (Country Score Card: Guatemala) 4. The figure shows that Guatemala’s weakest indicator relative to Germany – but also relative to its own LPI indicators – is the quality of trade and transport related infrastructure (59%). Timeliness of shipments is the best LPI indicator (74%). 41 Annex 4: Reform of Guatemala’s Port Subsector 1. Three ports serve the needs of Guatemala’s imports and exports by sea, Puerto Quetzal on the Pacific, and Santo Tomás de Castilla and Puerto Barrios on the Atlantic. Together they move about 12 million tons, including about 1.3 million TEUs. The management structure of the first two of the three ports that serve the import/export of goods in Guatemala is through state owned ports managed and operated by presidentially appointed controllers (interventores) and with limited part of operations carried out by the private sector (for instance operating cranes). This can best be described as the tool port model. The third port is managed and operated by the private sector (but on public land and infrastructure). Interestingly, their concession is not directly with a public body, but through a rail road concession, which only recently has been taken back into public hands. Broadly speaking, the physical conditions of the ports are acceptable or good. 2. Worldwide, reforms and improvements of management of port sectors have overwhelmingly been through conversion from the tool or service port models of management of the sector (which represents the arrangement in Guatemala) – where port authorities own the land, basic port infrastructure, superstructure and equipment and provide port service directly and with limited private sector involvement – to a landlord port sector model, where the public port authority owns the port land and basic infrastructure, but where through well-structured and transparent PPP arrangements most port operations are concessioned to the private sector. The private sector brings its own equipment, know-how and systems, and employs its own staff. 3. The role of the Landlord port authority is as technical regulator, port planner and marketing, collection of data and statistics, representing the country’s port sector interest internationally, and to be the public sector entity dealing with the private operator. Often, the port authorities are national, particularly in countries with only a handful of ports, while in others they can be regionally or even municipally based. 4. Guatemala does not have a national port authority, but some technical functions normally played by a port authority are in the hands of the two public ports. However, there is a void of responsibilities when it comes to undertaking some other functions normally performed by a port authority. For example, there is no body responsible for development of a national strategic plan for the port sector and to guide its implementation, nor to apply specific and uniform technical regulations and carry out marketing of the port sector at large. And in the case of the concessioned port, there appears to be no entity at all with any port authority related responsibilities. It is understood that a bill for the creation of a national port authority has existed for the last 7 years, but has not yet been passed by Congress. 5. In comparison with international good practice, three features in the Guatemala port sector seem to need to be addressed and strengthened: (a) Create the appropriate institutional framework. The overall management of the sector needs strengthening. There is a lack of global strategic vision and, no less important, lack of oversight of the sector. Management of the sector and its investments are limited to the narrow view of each individual port. Internationally, the widely preferred model is a Landlord port authority, which manages the maritime sector and 42 owns the ports, but relies on the private sector for almost all ground operations. Under a landlord port authority model most of the time marine services are maintained by the authority, although there are successful exceptions. (b) Use PPP agreements strategically. Although the private sector plays various roles in Guatemala’s port operations, recent international best practice is based on using PPP arrangements strategically (mostly through concessions), to raise sector performance appreciably. The strategic objectives that countries have pursued through the PPP approach vary, but typically they aim to improve operational performance, stimulate business growth in the ports, attract transshipment cargo, attract private investment in ports, and reduce corruption --or some combination of these factors. In general, the use of PPP agreements would help to optimize the economic benefit for Guatemala. However, since these concessions translate into long-term commitments, it is essential that the concessions are professionally prepared, based on successful international experience. (c) Access to the port. The three ports have problems in ensuring access to the port, particularly the two ports in the city of Puerto Barrios, where long-term solutions seem to be needed to relieve the traffic congestion caused by the location of the ports in the town. Furthermore, most of the cargo passing through the town comes from or goes to Guatemala City and beyond. It is reported that the heavy container traffic delays road traffic and presents safety risks. 6. Puerto Quetzal. The port is managed by the Puerto Quetzal Company, an autonomous government agency, with operation of some equipment in private hands. It is a multi-purpose port serving mainly Pacific Ocean trade. In 2012 about 325 thousand TEUs moved through the port, equivalent to about 5 million tons of cargo. 7. The port has recently completed negotiation of a leasing agreement with Group TCB [Barcelona Container Terminal] for developing and operating a new container terminal. This deal has attracted some criticism in the country that could have been avoided, if it had employed a more competitive and transparent process. 8. Puerto Santo Tomás de Castilla. The port is managed by the Santo Tomás de Castilla National Port Company (EMPORNAC), an autonomous government agency. In 2012 just over 500,000 TEUs moved through this port, carrying about 3.4 million tons. The port has five mobile cranes and works 24 hours a day. It also has a cruise terminal that is not separate from the port’s other functions, but it has a building to receive and process the passengers. The quay is 604 meters long and the option to extend it by a further 300 meters is being explored, to be dedicated to the carriage of grain. About 35 % of its traffic goes to El Salvador. 9. A preliminary study shows that there may be two main areas for development that present a challenge: the width (90 meters) and depth (9.8 meters) of the access channel that is only a few miles long but has problems of access to the land (the port is surrounded by the city of Puerto Barrios). 10. Puerto Barrios Port Terminal. This port is operated by the private sector on the Atlantic coast of Puerto Barrios. It is operated by Chiquita Brand International and Cobigua 43 under a lease agreement that began in 1990 for a period of 25 years, followed by an extension for a period until 2040. Although it specializes in the export of bananas and melons, it is a multipurpose port handling general cargo, grains and liquids. Traffic moving through the port is a little over 300 thousand TEUs per year by volume and about 2.5 million tons. The harbor has no cranes and relies entirely on the ships’ cranes for loading and unloading. The port has the only container scanner in Guatemala. The port uses the same channel as Puerto Santo Tomas de Castilla and faces similar limitations due to on-land congestion. 44 Annex 5: Strengthening the Institutions Managing Guatemala’s Roads Strategic and Institutional Framework 1. The public policy focused on the development of road infrastructure should aim to provide a safe road infrastructure and ensure good levels of service. The accumulation of physical capital and implementation of necessary reforms in the subsector would have the effect of raising the profitability of invested capital and promote socio- economic development and competitiveness of the country's regional and international levels. In strategic terms, the DGC has a Road Development Plan for 2008-2017 with a total budget of 24,000 million quetzals. However, the implementation of this plan depends on the priorities of each government. Regarding the level of general infrastructure, there Multimodal Infrastructure Works Plan prepared with the support of PRONACOM in 2007. This plan is at a general level and does not go much into detail that would be required in terms of strategies, plans and development sub- sector of road infrastructure. 2. The Ministry of Communications, Infrastructure and Housing (MCIV) is the governing body of the transport sector in the country. In terms of responsibility for road heritage, the two most important institutions under the Ministry are: (i) the General Directorate of Roads (DGC), responsible for strategic planning, supervision of construction, rehabilitation, and improvement of the road network; (ii) the executing Road Maintenance Unit (COVIAL), responsible for administering the fund for road maintenance as well as programming and maintenance monitoring. The DGC has 14 regional areas that are responsible for important rural roads outside the administration of the municipalities. State of the Road Network 3. The DGC estimates that, of the approximately 16,000 km of road network recorded (excluding unregistered rural roads), an estimated 40 % of the network is in good condition, 35% in fair condition and 25% in disrepair. In terms of coverage of the road network, road density indicators indicate that approximately 0.13km/km2, Guatemala is similar to that of its neighbors in Central America except Costa Rica (0.74km/km2) position. Using the indicator km/1,000 inhabitants, Guatemala with 1.12 km/1,000 inhabitants has some room to increase their coverage to the population, since most neighboring countries have a value of 3 km/1,000 inhabitants. Current Projects 4. Current efforts are focused on the improvement and expansion of the main road network (CA-1, CA-2, CA -9, cross north), and paving entrances to municipal. Financial institutions involved the sector include the World Bank, IADB, BCIE, BNDES (Brazil), and JICA (Japan) and others. For example, sections of the CA-2 highway (from the border of Mexico to the border of El Salvador) are being funded with $400 million ($280 million from BNDES and $120 million from BCIE). There is also interest in financing with the cooperation of other countries, such as Mexico. 45 Initial Impressions of the Main Challenges Fragmentation of responsibilities 5. One of the most important challenges in the sub-sector is that there are several institutions in the sub-sector and there is a fragmentation of responsibilities in the road network (role of the DGC, COVIAL, municipalities and various funds created to have been involved in the road network without collaborating with the Ministry or DGC). There is a need to consolidate, clarify responsibilities, and to improve collaboration between the DGC and COVIAL in terms of planning and network maintenance (inventory, transit, planning, research, and prioritization). Institutions in need of reform and modernization 6. To fulfill its key role, the DGC requires a series of actions to reform and modernize. Currently no facilities to do basic activities such updates; inventory of the road network, traffic measurements on key routes , road condition measurement , prioritization and planning of interventions required annually. The structure of the DGC does not provide for an efficient work and would benefit from some updating in terms of creation in the medium to long term, a modern agency (autonomous or semi-autonomous). That would require training of employees, and ensuring that there are not many personnel changes depending on the change of government. It would also benefit from a reform of the law so that payments competitive with private sector salaries were met. The agency would have an annual agreement with the Minister of Communications and Infrastructure with certain performance indicators. This strategy would improve the efficiency of the management of the road network in the country. It would be prudent activity also further investigate the structure and role of the different institutions (DGC, COVIAL) and determine which would be the best structure in the country. Weaknesses in procurement and project implementation 7. There are weaknesses in the procurement processes, mainly delays in project preparation, procurement processes and the use of designs based on bills of quantities and prices that ultimately result in the interests of contractors to increase those amounts. Internal delays in the same DGC to meet some existing standards or requirements do not lead to an efficient execution of contracts. No recruitment systems have proven to increase collaboration between client and contractor and allocation of risks to the party that is in better condition to handle. Search -based solutions such as contractual compliance with certain levels of service (standards) and no contracts of inputs could lead to greater efficiency in the sector. Examples of how the CREMA contracts (Rehabilitation and Maintenance Contracts) have been used in countries such as Argentina and Brazil with excellent results in terms of network condition and handling prices. There are also different types of contracts and implementation of priority projects that could be explored to improve efficiency in the sector, including public -private partnerships (PPP) in the development and maintenance of the road network. Natural Disasters 8. Finally, an important factor to consider especially on the current state of road infrastructure in Guatemala is the effect of natural disasters - Hurricane Mitch in 1998, Hurricane Stan in 2005, the Pacaya Volcano eruption and Agatha Storm 2010 and some recent adversity. 46 Previous events have impacted the fragile infrastructure, and have directly affected the mobility of the population and domestic production. These impacts have also affected investment plans, as should reallocate funds urgently to recover the damaged with high unplanned infrastructure investments. 47 Annex 6: Public-Private Partnerships in Transport and Logistics: ANADIE 1. In 2010 the Guatemalan Government set up the Agencia Nacional de Alianzas para el Desarrollo de Infraestructura Económica (National Agency for Partnerships to Develop Economic Infrastructure). Known by its Spanish acronym ANADIE, the agency’s strategic objective is to develop economic infrastructure and provide services to society that would strengthen the economy and enhance the quality of life of the population through equity participation and the business and financial technological capabilities of the private sector. 2. Specifically, ANADIE was created to:  Develop and coordinate with the competent authorities, plans, policies and standards for partnership-type contracts for the development of economic infrastructure.  Ensure proper use and performance of such contracts by state institutions that are interested in hiring through this type of contract. 3. In its start-up phase, ANADIE has identified a portfolio of projects that would contribute to making Guatemala more competitive in its international trade. Their total project value is estimated at almost $3 billion. This annex summarizes the definition and main parameters of five of them: (a) Intermodal ‘dry port’ at Tecún Umán at the border with Mexico (b) Widening Pan-American Highway (Highway CA-2) to four lanes (c) Freight railway serving the Pacific coastal region (d) Toll highway to facilitate access to Guatemala City’s center (e) Containers and tourism at Sto Tomás de Castilla. (A) Intermodal ‘dry port’ at Tecún Umán at the border with Mexico Estimated investment: $30 million Planned call for bids: mid-2014 4. The project site is an area near Guatemala’s Pacific coast within 2-3 km of the Mexican border where the Pan-American Highway (CA-2) crosses into Mexico. This is the only crossing open for goods. In 2013 about 2 million tons of goods crossed between Mexico and Guatemala; 40% of entering goods stayed in Guatemala, 60% were in transit to other Central American countries. Of bilateral trade between Mexico and Guatemala, imports to Guatemala make up three-quarters and exports from Guatemala one quarter. 5. On the Mexican side, some 40 km from the border, is the city of Tapachula (population about 300,000). It is served by a local railway that connects with the Mexico’s national network, whose business is freight, including substantial flows to and from the USA—traffic which has grown substantially since Mexican Railways were privatized in 1995-97. 6. The link to the Guatemalan border, damaged by a hurricane in 2005, is being restored, 48 and plans include extending the line across the border into Guatemala at Tecún Umán ending at a proposed freight logistics terminal (‘dry port’). The terminal would be built and operated by a private firm. 7. Since Mexico and Guatemala do not allow each other’s’ trucks to ply within the other’s territory, this terminal would allow truckloads and containers to be off-loaded from Mexican trucks and trains and reloaded onto Guatemalan trucks, and vice versa, within a ‘free zone’ controlled by Guatemalan Customs. (B) Upgrading Guatemala’s part of the Pan-American Highway as a 4-Lane Toll Road Estimated investment: $90 million Planned call for bids: late 2014 8. ANADIE is also exploring a possible project to upgrade the coastal highway (CA-2) from Tecún Umán via Retalhuleu and the Escuintla area to the Salvadorian border at Pedro de Alvarado, a total distance of 300 km, of which about 220 km is not yet 4 lanes. In addition to passenger traffic, it could expect to attract substantial freight traffic. The potential catchment area includes some of Guatemala’s largest agricultural estates (sugar, palm oil, vegetables) as well as several manufacturing plants. It would be tolled. Bidding for private-partnership co- financing would go to the bidder asking for the smallest capital contribution by the Guatemalan government. (C) Pacific Freight Railway Estimated investment: $150-200 million Planned call for bids: early 2016 9. ANADIE is also exploring the viability of rebuilding the derelict railway line parallel to the above highway. Extending the Mexican connection at the same gauge (standard gauge), it would use the right-of-way of FEGUA, which ceased operations in 2007. It might be limited to the coastal plain, the Escuintla region being home to manufacturing plants and Puerto Quetzal, Guatemala’s biggest port. It might attract co-investment by the operator of a proposed natural gas pipeline within the same right-of-way, to bring natural gas from the PEMEX terminal at Salina Cruz (on Mexico’s Pacific coast) to Guatemala City, a distance of about 730 km. 10. This seems worth exploring further, starting with a detailed assessment of the potential demand for such a dedicated freight line –especially if the parallel highway is to be upgraded at about the same time. The PPP approach that ANADIE is promoting creates favorable conditions for a large industrial firm or trading chain to take the main ownership role and thereby bear the market risk. (D) Toll Road to Facilitate Access to Downtown Guatemala City Estimated investment: $200 million 11. This highway, 30 km in length, would also use the old railway right-of-way --normally 30m wide, though encroached by squatters in some sections. This allows room for 2x2 lanes highway, which would be tolled. Its main benefit is that, not only would it add 4 lanes with grade-separated intersections to the total of main arterials serving the city center, it would allow 49 access to it with a minimum of traffic jams, far fewer than on existing arterials, which are all toll- free and have very few grade-separated intersections. Consideration is also being given to installing a light-rail passenger line in the center of the right-of-way. (E) Containers and Tourism Facilities at Puerto Santo Tomás de Castilla Estimated investment: $250 million 50 Annex 7: Air Transport’s Contribution to Trade Facilitation 1. Air transport’s share in Guatemala’s imports and exports is very small in physical terms, and even in value terms it is well below 1%. But air transport is important for high-value exports; while the average value per ton of exports by sea is $740 and by land $835, by air it is $11,000. More than half of the current volume of air freight (imports and exports) is carried on passenger planes. Dedicated freighter aircraft are limited, mainly to the express carriers (Fedex, UPS and DHL). For this reason the technical needs as well as the economic and financial considerations of freight are closely tied to passenger movements. 2. Over the past 10-15 years air transport throughout Central America has performed well. In 1997 the TACA group, of which Guatemala’s Aviateca was a member, met the performance and safety standards that enabled them to achieve code sharing status with American Airlines and to negotiate open-skies agreements with the USA. This implied opening their air transport markets to other US operators, which in turn helped expand traffic over the following years. Guatemalan tourist traffic grew on average 17% per year between 2003 and 2009. 3. It has also benefited from major institutional reforms. The step-by-step integration of Aviateca with TACA (El Salvador) and AVIANCA (Colombia), as well as other Central American airlines, has been successful and has enabled rapid expansion of routes and traffic. Today in Central America there are effectively no policy restrictions on air liberalization. 4. In parallel, Guatemala City’s airport, La Aurora, underwent a substantial renewal, upgrading and expansion during the past decade. In 2013 air freight arriving in La Aurora was 26,000 tons and 32,000 tons were exported. It has cold-storage facilities. It now has enough capacity to accommodate foreseeable expansion of air freight for export of high-value fruits and flowers, mainly to the USA and Europe. 5. It is unlikely that Guatemala has any freight flow that alone would justify substantial upgrading of the secondary airports. At the same time, in line with the Government’s policies for tourism development, market studies to assess demand for better services to tourism sites, especially Tikal and Antigua Guatemala, may be considered. 6. Nonetheless the airports will benefit from some further infrastructure improvements and more private investment and participation in cargo storage and handling. The runways and taxi- ways at both La Aurora and Mundo Maya (serving Tikal) need resurfacing and improved approach lighting, as well as improved fire-fighting vehicles and equipment. 7. Several of the secondary airports need improved air navigational aids, to allow safe operation during poor daytime visibility and at night. 8. The cost of such a program has been estimated at $15 million. 51 Annex 8: A Possible Railway Link to Mexico and the USA 1. In the World Bank’s view, international experience suggests that freight traffic likely to prefer rail over road in the main corridors will remain, for the foreseeable future, below the threshold of about 3 million tons per year that would justify the heavy up-front investment to re- instate a freight railway line and operation in the Puerto Quetzal-Guatemala City-Puerto Santo Tomás corridor. In the absence of major mineral traffic, it is rare for rail to take more than 25- 30% of all freight in a corridor of comparable distance. Traffic through these two ports is now about 13 million tons per year. 2. However, the Public-Private Partnership approach (see Annex 6) offers the large advantage that it puts responsibility for much of the investment required, as well as the demand risk, onto the private investor/operator who would be the government’s partner. Mexican experience with privatization of railway freight operations20 3. Into the early 1990s Mexican state-owned railways had been very unsuccessful and incurred large deficits. Deregulation of road freight transport in 1989-90 enabled truckers to take market share from the railways, and made the railways losses even larger. In 1995-6 the Government ceased all intercity passenger operations and put the network up for bid among freight operators, who would assume full responsibility for both track and train operations. The result was that major parts of the network were awarded, under 30-year concessions, to two large USA-based railway companies (solely freight). Concessions for other lines were awarded to Mexican companies, again solely for freight. One or two local lines that attracted no bidders remained in the public sector. 4. In the 17 years since the new companies started operating, Mexican rail freight traffic has almost doubled. The share of land freight carried by rail, as opposed to road, has risen from 19% to 25%. Average tariffs are slightly higher than in the United States and Canada –not surprising, considering that the US railroads specialize in dense, long-distance flows of coal, other minerals and bulks, and transport of containers that take advantage of economies of scale, leaving shorter and less dense flows to road transport. 5. A bill currently in the Mexican congress would give the government limited powers to regulate tariffs where necessary. The operators would be required to offer smooth interchanges between their networks; and new competitors would be allowed to use the existing lines even though they do not have to invest in their maintenance. 6. Given the importance likely to be attached to interconnection with the Mexican network, the Guatemalan government would have to be willing to allow Mexican companies to bid for any concession as currently being contemplated. 20 Source: Economist magazine, March 15, 2014 52 Annex 9: References and Bibliography FEG ANADIE (2014): Presentacíon Agencia y Portafolio de Proyectos, marzo 2014 CATRANSCA (2008) “Actualización del Estudio de Costos del Transporte Terrestre por Carretera y Tarifas Sugeridas”, Cámara de Transportistas Centroamericanos “CATRANSCA”, 2008 Centro de Investigaciones Económicas Nacionales, Guatemala 2011 “Infraestructura en Guatemala: Lineaminetos de Política Económica, Social y de Seguridad 2012-2020” Dirección del Comité Civico “Compromiso Ciudadano” (2011). “Plan Ciud Guatemala 2020+ - Ciudad + Ciudadania: Compromiso Ciudadano”. Doing Business, 2014, Understanding Regulations for Small and Medium-Size Enterprises, World Bank/International Finance Corporation (2014) Economist Intelligence Unit, 2014. Guatemala: Country Report Hummels, D., V. Lugovskyy, and A. Skiba (2009). “The Trade Reducing Effects of Market Power in International Shipping.” Journal of Development Economics, Vol. 89 IDB (2013). “Assessment of Port Performance and Port Connectivity Study in Belize, Central America and the Dominican Republic”, IDB Technical Note No. IBD-TN-512, 2013. Guerrero and Abad, eds. Nathan Associates (2008) “Estudio de Factibilidad para un Nuevo Terminal de Contenedores en Puerto Quetzal, Reporte Final”, Nathan Associates, presentado a Empresa Portuaria Quetzal, 2008 OACI (2008) “Plan Maestro del Aeropuerto Internacional La Aurora” Osborne, T., M. Pachon, and G. Araya (2014). “What Drives the High Price of Road Freight Transport in Central America? World Bank Policy Research Working Paper No. 6844 PRONACOM (2007) “Plan Multimodal de Obras de Infraestructura” – Dr. Joan Cabezas PRONACOM (2009) “Diagnóstico de la cadena de valor del sector logístico marítimo y propuestas para mejorar la competitividad del comercio exterior de Guatemala”, Eduardo Lugo SIECA (2009) “Estado de Situación de la Integración Económica Centroamericana” World Bank (2014). Connecting to Compete – The Logistics Performance Index and its Indicators 53 World Bank (2012) “Logistics in Central America – The Path to Competitiveness” - Economics Unit, LAC, World Bank (2012) World Bank (2012) “Agro-Logistics in Central America – A Supply Chain Approach (Background Paper)” – Economics Unit, World Bank (2012) World Bank (2012) “Resultados del Customs Assessment Trade (CAT-R), preparado para la Administracíon Aduanera de El Salvador” World Bank (2013) Policy Note on Transport and Logistics in Guatemala. Economics Unit, Sustainable Development, LAC World Bank (2013) “Supply Chain Analyses of Exports and Imports of Agricultural Products: Case Studies of Costa Rica, Honduras and Nicaragua” World Bank (2013) Logistics Cost Study of Transport Corridors in Central and West Africa “World International Trade Statistics” “El Sistema Portuario Nacional en apoyo al comercio exterior 2013” – Comisión Portuaria Nacional Guatemala 54 Annex 10: Map 55