Logistics and transportation have trended differently than other economic sectors in Ethiopia, despite the fact that the government has introduced several adaptations to enhance the sector. Logistics and transportation, which mainly engage in import and export services, are vital to the nation’s economic development. However, despite the attempts by the government to keep freight moving, it still lags behind other sectors in terms of results. Logistics and transportation of goods imported and exported into the country costs more than other countries. To alleviate this problem the government has attempted several strategies.
Because Ethiopia is landlocked, logistics and transportation have to be very efficient, especially at the ports of entry, in order to minimize costs.
Constructing dry ports is one of the things the government has done to alleviate some of the problems. It has also encouraged the private sector to import modern trucks and introduced the multimodal transportation scheme. A proclamation was also passed addressing the demurrage process. Additionally, private transporters are now required to adhere to associations that now have complete responsibility for transporting freight to and from the country.
The new system was introduce late last fiscal year and 47 associations engaged in cross border transportation and 14 that work in cross-country transportation have been established. Additionally12 companies are operating under the cross border scheme, according to Abelneh Agidew, public relations head of the Federal Transportation Authority.
The idea behind the new regulation is to control the activity of trucks crossing the border. By modernizing transportation and logistics, the government hopes it can improve its results and make the system more cost effective.
“We introduced this system with the goal of making the improvements we felt needed to be made based on the studies conducted,” Abelneh Added.
The public relations head and other officials close to the issue say that previously brokers and other traders who worked in the informal economy ‘gamed the system’ while truck owners had little control over how they conducted business.
He said, since the new way of doing business was fully introduced in May this year they have seen significant improvements. There are also several other changes that have come about in the attempt to improve cargo transportation. The first one is that truck owners that are members of associations must now pay a commission to the associations for cargo they carry from the port.
The transport market had been controlled by illegal market actors and brokers but now it is being completely led by the associations formed under the new scheme, explains Abelneh.
“If anyone sees the past year’s performance, the amount of demurrage charges on cargo is almost zero. This is the result of the new system which has accelerated cargo transportation from the port,” the public relation head explained.
He said that previously trucks took nine days on average to travel back and forth from the Djibouti port, but that has declined to about four days since the new scheme was fully applied.
He argued that the current associations are not only engaged in collecting commissions from the business, but they also bring businesses for their members.” Furthermore truck owners now are able to obtain more information about their trucks whereabouts and the business that they are undertaking, which was previously not the case,” he added.
“Currently around 250 cargo trucks provide transportation between Ethiopia and Djibouti; previously trucks would wait at the port for as much as three weeks which was very expensive,” the authority official said.
He said that stakeholders like the Ministry of Transport, Ministry of Trade and others evaluated the changes by visiting Djibouti.
Before the transport associations were restructured, they were considered weak and they would not take the responsibility of finding a market to support the truck owners.
Under the new arrangement the associations are expected to be staffed with qualified employees based on the standards set by the authority.
Even though the authority stated that the new system has registered significant changes, the private sector involved in the transportation business claims there is a problem with the new ways.
Although the number of days for transporting goods round trip between Djibouti and Ethiopia has been reduced to around four days, often the trucks are ‘deadheading’-returning back to the port without freight which reduces the profit they can make.
“There are several costs, including fuel and tyres (tires) that still exists when you return back to the port with an empty truck,” some owners of transportation companies said. “We are driving 925km to the port of Djibouti from central Ethiopia without cargo or empty containers, which is very damaging to the nation’s economy,” the same transporters said.
“Previously we would at least return with empty containers, even though we would have to wait for days in the country. Under the current rules we have to return to Djibouti without waiting for containers to transport back,” they complained.
Some transporters however agree that the new system has brought about some improvements.
They also want more clarification about the process of establishing associations. According to the new system trucks are classified in different levels. Every level has unique grades based on their loading capacity and manufacturing date or type of service provided.
For instance the associations included on level one are divided into two different grades; the manufacturing date of a truck included on level 1 (A) is from 0-10 years and has a capacity to load from 30-40 tons of cargo and level 1 (B) has a similar manufacturing date but the loading capacity is from 20-29.9 tons of cargo. An association organized under level 1 should have 125 trucks for both A and B grades. The associations included on level 1 must have four offices including the head office at the center and a branch at the port of Djibouti.
Level 2 is for trucks from the age of 10.1-20 years and is classified in two grades with a loading capacity similar to level one, but the association that is included under this category must have at least 100 trucks, and at least three offices including the head office and a branch at the port.
Level 3 associations are made up of trucks that have a manufacturing date of over 20 years and they have two offices and 75 trucks in each association, and level 4 is classified for only companies that have over 50 trucks. The other level included in this system is level 5 or a specialized category, which is used for transporting machines, construction materials, or very large cargo.
With the current status a businessperson involved in the transport sector can own trucks of different ages, because it would be difficult for the business actors to be involved in different associations based on different levels. To eliminate this challenge the authority has allowed the truck owners to be in just one association, based on the majority number of the trucks that they own. For example business people who have ten trucks, a majority of which are between the ages of 10.1-20 years and few new brands will be included in the association organized on level 2, while the businessperson who has a majority of brand new trucks and few older trucks would be a member of level 1.
“It is not clear what happens under the rules when trucks that are currently considered new become older. The government has to clarify the process,” the transporters said. “Even the way of organizing the associations has a problem, because one association might not have trucks with different loading capacities,” the transporter said.
The Transport Authority argued that it implemented the system after several discussions with stake holders and transporters.
Transporters also claimed that the multimodal system still has room for improvement. They said that Ethiopian Shipping and Logistics Services Enterprise (ESLSE) has to work efficiently. “Even though transporting cargo from the port of Djibouti to Ethiopia has been reduced to about four days now, the container demurrage issue still remains. This is because containers still remain in Ethiopia for a long time and that mean demurrage fees which are paid in hard currency,” the transporters noted.
They also stated that even thought they expect to sign an agreement with the enterprise to pick up cargo quickly based on the demurrage law; it is difficult to get approval or a signature from the enterprise. “For this reason it is hard to get a demurrage charge from the enterprise,” they complained.
But the transportation actors agree that the new system has reduced port costs and storage fees.
The latest World Bank report on Ethiopian international trade stated that high fixed costs are driven by a mix of factors ranging from infrastructure and trade logistics (where individual companies may need their own fleet to transport their inputs and outputs) to low regulator quality to constraints on the credit market (where new market entrants of smaller sizes have little chance of receiving finance from private banks).
It stated that smaller firms suffer most in a high fixed cost environment, and the few firms that are able to overcome high costs of entry are then those that are large enough to stay in business for a longer period. “It is no surprise that this produces an environment where incumbent firms have relatively high survival probabilities beyond the second year,” the report stated.
In fact, high rates of protection on outputs combined with high transport costs change the profit incentives for producers by influencing which sector to invest in and which markets to serve.
The report recognized that Ethiopia is currently undertaking some crucial investments to improve trade logistics in the medium-term.
With several new public investments in roads, a rehabilitated rail link between Addis Ababa and the rapidly modernizing container port of Djibouti, the expansion of the dry port in Mojo, expanded coverage of the multi-modal transport system and coordinated reforms between customs and shipping-related agencies, trading is expected to be improved according to the report.
Currently the sole Multi modal operator, Ethiopian Shipping and Logistics Services Enterprise, a public enterprise, also plays a role transporting cargo to and from sea ports. The enterprise currently operates 60 freight trucks and has ordered an additional 115 new trucks with 60 tons of hauling capacity. These Renault trucks should help the logistics service. Based on the latest government decision the enterprise will also get another public freight transporter. Comet Transport which has about 205 trucks, and has also ordered 100 Renault trucks with the logistic enterprise and will merge with the state giant shipping enterprise, which is considered to be one of the biggest shipping firms in the continent.
The new trucks purchase by the enterprise and Comet was signed with a Dubai based supplier Van Vliet XL. Some transporters consider this to be unfair competition. “The government needs to consider ways for private truck companies to be more involved,” they claimed.
“We will be forced out of business when the state enterprises boost their capacity,” the transporters, some of which are also engaged in freight forwarding and transit services, said.
A government official who requested anonymity stated that the government is responsible for expanding the public enterprises with the goal of improving logistics service to meet the growing demand and improve the nation’s development.
“The private sector does not have that much capacity to invest as the government does,” the official said.
“It is a monopolistic market that is fully owned by ESLSE and that is highly damaging the private sector. They can buy the trucks, but it is difficult for the private sector to get finance to purchase trucks like state enterprises,” the private actors complained. “We are expected to privatize state enterprises, but the government is actually excluding the private actors,” they added.
Market competition is crucial not only for efficiently transporting cargo from the port but returning back empty containers to the port, the transporters suggested. According to experts, containers have stayed at the Ethiopian dry port for less time, 71 days, whereas previously it would take several months. Still private companies say they could do even better if they were allowed to fairly compete.