IBFB seminar on Logistical Challenges & Opportunities of Business

IBFB seminar on Logistical Challenges & Opportunities of Business
Dr. Forrest E Cookson, Economist, Development in Democracy, USA presented a keynote paper at the seminar. Honorable Shipping Minister Shajahan Khan attended the seminar as Chief Guest, Dr. Khondaker Golam Moazzem, Research Director, the Centre for Policy Dialogue (CPD) and Dr. Nazneen Ahmed, Senior Research Fellow, Bangladesh Institute of Development Studies (BIDS) spoke as the distinguished discussants. 

Introduction

Some Important Considerations:

The logistical issues that are discussed in this paper focus  primarily on exports and the imports related to the exports. The future of the Bangladesh economy rests on its ability to export manufactured goods competitively to world markets.  There is no alternative to export led growth if Bangladesh wishes to achieve protracted rapid GDP growth.

Export led growth in manufacturing is characterized by exports growing more rapidly than GDP, by significant Foreign Direct Investments to bring technology and market knowledge, and by  logistic systems to enable efficient and timely management of exports and imports.  In the past four years the growth rate of exports has declined below the GDP growth rate, FDI continues to stagnate at about $1.5 billion.   The major logistical links are all reporting full capacity use.

The logistics needs of Bangladesh should be based on recognition of six principles:

I. Recognition of the importance of integration of the various transport modes

II. Achieving a balance between speed and cost as appropriate to the marketing necessities.

III. Reliance on the private sector for investment and operations in logistic facilities.

IV. Greater reliance on short run measures, improved management of existing facilities, and small high return investments.

V.   Political will to act.

VI.  Most important, urgent action.

1. Logistical flows are interactive:  Ships deliver containers to ports, containers are unloaded and stored and later moved by truck to factories or to depots.  Trucks deliver goods, sometimes in stuffed containers sometime not; goods are stored until ready for loading on ships to take them to the export destination.  All along the way there is need for moving containers, storing materials, and shifting from one mode to another.  Such integration is an essential part of tackling logistics challenges. 

2. Cost minimization is not the sole objective of logistics planning.  Speed can be very important.  In the export of manufactured goods on time delivery is obviously important.  High value commodities will move rapidly as the time for movement will be kept small to reduce the costs of resources tied up in the manufactured good.  Some products have marketing cycles that require the delivery to the market on time or significant losses will be incurred.  In Bangladesh logistics planners have been too concerned with costs and not sufficiently focussed on the importance of speed in the management of goods flows.  It is not that cost is not an important factor but rather that there is an appropriate balance that depends on the type of good, the marketing environment, and the costs of movement and storage.

3.  In Bangladesh it has become increasingly evident that operational matters are best vested in private enterprise.  Rules and objectives are best set by Government that has a holistic view of the issues, but has poor capacity to manage logistical operations.  Private companies, on the other hand, will never see beyond their balance sheet but are efficient and oriented towards making things work smoothly.  This does not remove the direction and control from the hands of the Government, rather it allows the Government to concentrate on what it is supposed to do. 

4. At this point in the development of exports the most important measures must be short run.  New highways and ports may be needed, but the logistical problems facing successful export led growth must be managed in one to five years.   Priority attention must go to what can be achieved in a short time.

If GDP growth rates of 8% are to be achieved over the next ten years the kind of transformation the Government seeks to achieve then the export growth rate must be above 10% to earn the foreign exchange and to produce the jobs in manufacturing that are needed for stable employment. 

What are the implications?  In seven years the number of containers handled in the port will more than double; the truck flow on the highways will have doubled. Inflows through land ports will more than double; air cargo will grow by at least three times, and possibly by much more.  All of this has to be accomplished with the major facilities that we have in hand.  There is not enough time to build new deep sea container handling ports.  There is not enough time to build a new airport or another road linking Chittagong and  Dhaka.  There is not enough time to make any significant shift of industry to the western part of the country, hence shifting part of exports to Mongla Port is not a feasible alternative.  All these long run objective are necessary, but if one wants to deal with the next decade then we have to accept the restraints of our present facilities.  The focus of these remarks is how to achieve results quickly.

There are two implications:  First, the railway will be of no use.  For years we have heard about the railway as a way to move containers and relieve the stress on the highway.  Impossible.  Railways are too high cost for short hauls.  Also the Railway will take days to deliver containers while exporters are working on hours.  A second implication is that using the inland waterways will not work within the time frame that we are considering.

Perhaps certain cargoes can be forced on inland waterway movements.  But realistically the key exports of manufactured goods and the imports of their raw materials cannot. Inland water way movement is too slow and requires many shifts of cargo from one mode to another.

This means a focus on improved management and small investments that can be completed in one to three years.  It also means an approach to logistics that is too often missing:  Effort to learn from experience, to try to improve things, and to set quantitative standards and assess performance against these.

Government organizations are not very good at this.  Consider the budget:  Ambitious, unrealistic targets are set.  These are often so unrealistic as to have a negative impact on what is achieved.  But then targets are revised to more or less what is achieved.  This is a completely useless approach.  It enables planners to talk about targets that cannot be met allowing them to avoid the hard work of trying to figure out what can be achieved.  Impossible targets are ignored or lead to false statements and dishonest claims. This further confuses everyone and undermines any serious approach.  Organizations need to set quantitative targets considerable feasible.  If the target is not met one does not change it.  Rather one tried to figure out how one got it wrong.  That is the only to learn and to improve job performance.

One sees the same approach by the Export Promotion Bureau that sets targets but never learns when targets are not achieved.  Probably for political purposes Government organization do not want to be shown to have been wrong. 

V. The next point is a delicate one.  There has to be the political will to overcome many problems that have a serious impact on logistics.  Real change always results in someone getting hurt.  There are always losers.  The faster the economic change the more persons who find themselves in difficulties as they are not changing their efforts rapidly enough.  Too often change depends on an accident.  For example,  the agreement to allow properly supervised off-dock facilities was a result of one particularly far sighted NBR Chairman who, recognizing that change was important, pushed aside opposition and went ahead  allowing establishment of off-docks.

An issue of importance right now is the management of the weighing stations on the Chittagong-Dhaka highway.  Truck owners have to accept limits on their loads but the assessment process must be made uncorrupt.    Central to the political will is the courage to tackle corruption or to find ways to compensate people involved while making the logistics systems work.  To make a great breakthrough—I define as 15 years of 12% growth of exports—the political leaders must make things work and not allow the people to reject change because it is too difficult. [That means an increase of export growth of 400% and implies a 250% increase in GDP].  That is possible but the logistical problems have to be managed without expectations of completion of major new facilities and political playgrounds have to be suspended. 

5. Finally, there one has to recognize that the tackling the logistics issues must be done now.  There is no time for delay.  I will argue that the framework of the solutions is clear.  Details can be improved but the real world allows no delays.  The issues cut across the port facilities, highways, civil aviation, NBR, road transport regulators, and the needs of the export community, particularly the RMG sector.

Logistics and Export Growth:

The importance of these issues is critical to the economy.  At present export growth has slowed to about 6% per annum.  Logistic planners have to assume that it is going to increase to 10% if the national goals are going to be met.   This is so important that a very senior official should be appointed to drive the logistic changes, removing obstacles, seeking high level political support as needed, and working to meet the needs of the export industries.  Without a high level appointment working out of the PMO it is unlikely that timely improvement in the logistic problems can be achieved in the next five years. The types of issues covered in this paper will be rejected by vested interests.

The central economic strategy for Bangladesh to achieve sustained rapid economic growth is Export Led Growth.  It is useful to consider in detail what this means for some export led growth.

1. As a general rule exporting manufactured goods requires imports of components.  With high tariff levels including the VAT and other taxes, the imported goods must be free of such duties.  It is impossible to compete in world markets if import duties are paid on raw materials and components of exports.   One major delay is customs processing of these components.  The point is not the cost implications but the time that it takes for Customs to clear the goods, whatever the duty exemption procedure being used.

2.  Footwear:  Production of different types of shoes is similar to the RMG sector.  Raw materials are partly imported and partly obtained domestically.  There are several input items required from abroad and preparation and clearing of samples travels by air cargo.  Delays over clearing samples or obtaining items needed throws off the buyers delivery time.   

3. Pharmaceuticals.  Pharmaceuticals are at present a rather small item in exports but have great potential.  The nature of the production process is that imports of raw materials and exports of finished products are largely by air freight.  As this sector grows the flows through the air cargo system will rise;  at present there are delays and mishandling of goods handed as air cargo.   For successful development of this sector air cargo flows must be very efficient insuring rapid management of imports and exports, with the specialized handling needed.

4.  Electronics:  Another area of potential export is electronics.  Most of such exports will use air freight.  This is another sector that will lead to large increases in air cargo flows.

5. RMG:  The garment sector will remain the mainstay of the nation’s exports for at least the next decade.  The logistical management of this industry is essential to enable achievement of rapid growth.  Successful development of the sector will raise the volume of exports to above 10% requiring more than doubling of the handling of containers associated with the industry over the next seven years.   But there is more.  The industry is changing towards fast fashion.  This requires short production cycles and shorter runs.  Time pressures are intense and frequent delays in the logistical flows will send buyers elsewhere. 

In the past the structure of production is based on a single production run for a season.  For the spring and summer orders there is an initial period of perhaps one month while orders are discussed, samples are prepared, materials and accessories ordered.  Then comes the period of production and shipment. With large orders and long production runs shipment may be spaced or made in large amounts at the end of the production cycle.  Buyers like everything shipped more or less together to minimize their inventory costs.

Fast fashion changes this.  The buyer places smaller orders and wants the product on time, but then is ready to produce additional orders dependent on what the customers are buying in Bangladesh is badly placed as large container ships cannot serve the industry due to the size of ships that can use the ports.  Trans-shipping will continue for the next seven years and probably beyond that.  It would be a catastrophic mistake to believe that that a deep sea port will be available before the next decade.  Having to send containers to Singapore or Colombo for onward shipment simply places more pressure on the manufacturers.

Another trend in the RMG sector is increasing use of air cargo as a standard means of shipment.  As buyers increase their use of air cargo the pressure on  management in Bangladesh will grow dramatically.

Successful development of the Bangladesh economy over the next decade will require anticipation and preparation of the logistical needs of the RMG sector.

Infrastructure planning in Bangladesh has suffered from a lack of faith.   The volumes of freight through Chittagong Port and being transported along the road system have grown much more rapidly than the planners could responsibly imagine.  When working on projections of demand one wanted to be reasonable and to base estimates on a sense of what has happened in the past.  All of this proved wrong resulting in insufficient capacity everywhere in the logistic system. 

In looking to the future one has to act on faith that the nation can achieve the growth of exports needed to manage high growth rates.  Of course this is risky and if export industries fail to sell then the country will have over invested in transport infrastructure.  This is a risk the country needs to take.

However, much can be done with low cost measures to improve management.  Major investments will not be completed in the next decade.  It remains necessary to focus attention on low cost actions that will achieve large capacity increases.

Specific Problems and Possible Solutions

In what follows we take a ten year perspective.  Within this period we cannot expect any relief from a deep sea port handling for containers, a new highway to Chittagong or a new airport.  It is necessary to deal with the facilities that are available.

Chittagong Port:

Imports are partly bulk cargo and partly in containers;  we focus on the shipment of containers.  Over the past five years container flows have increased at a rate of 13-14% per annum.  Over the next 10 years this implies a 270% increase in  the number of containers that will pass through the port.  There will be little increase in the containers per vessel so one can expect a similar growth in the number of container ships arriving. 

At present there are 16 berths for container ships assuming that the general cargo berths will stop being used for containers.  Of these three have operating gantry cranes and another three cranes are being installed.  When the six cranes are all operating then the port can handle about 1250 vessels per year at a rate of 3.5 days per ship.  [This assumes the port operate 320 days per year.  The port loses days from weather disturbances, festivals, and maintenance time for cranes. In addition the overall efficiency of the system is taken at .85]   Present number of container vessels is about 1100 so there is a little extra capacity but not much.  This will improve the situation and reduce the waiting time in the outer anchorage.  In other words with the installation of the new cranes and repair of the old cranes the port will be operating at a reasonable level. 

However, five years from now there is not sufficient time to increase the number of berthing slots.  But the number of ships will increase by almost 100%.  How can this be handled?  If all 16 berths have gantry cranes then the time for loading and unloading is reduced to less than 2 days.  The number of ships that can be handled will increase to about 2200.  In other words by installing gantry cranes for all 16 berthing places the existing 16 berthing slots will be able to manage the growth.  It is   possible one or two other berths may be found in the port to provide a little bit extra capacity. 

How to go forward after five years?  Here the answer is to build a bayside container terminal.  It will be needed in five years  so there is no time to lose in building this facility.  A total of 30 berthing slots will be required to handle the traffic so the new Bayside facility should contain 15-16 slots.

Our conclusion is that two steps are needed to insure that Chittagong port can handle the increase of container traffic that will flow from the successful economic development:

A. Order 10  cranes immediately to complete the installation of such so as to cover all 16 berths. One no longer relies on cranes on container vessels as these are too slow. There may be space difficulties but one has to study how to manage this.  In addition the maintenance of these cranes must be properly managed.  This means annual maintenance must be done even if the cranes cannot be used for the period required.  Also there must be an adequate spare parts inventory.  The cranes must operate essentially all the time apart from routine maintenance.  This is the only way to meet the rising demands for shipping containers. 

B. Immediately prepare plans for a Bayside terminal with sufficient capacity to install 16 berths.  Land acquisition may be greater so that further development of the Bayside terminal will increase overall efficiency. 

Increasing the capacity of the port is only part of the problem.  There are three other areas of importance.

First, is the role of the  Customs in the operation of the port.  There seem to be a number of points that will insure that the operations of the Customs does not lead to a build up of containers in the port.  We can compare the rate of clearance of containers through the Customs with the rate of unloading of containers by the port.  From the importers view the slower is the limiting factor that determines the port delays.  When the Customs is faster than the port there is little build up of containers for clearance and improvement falls on the Port authorities. 

The simplest way to speed up Customs is to shift more and more of the inspection to the off-docks and allow containers to be moved out of the port to the off-dock for customs clearance.  This decentralization of customs operations should be feasible.  There has always been opposition to this but the increase in clearance of containers will match the growth that we have used for the port requirements.  Without decentralization it is unlikely that the Customs can clear containers rapidly enough to avoid delays of incoming raw materials for export industries.

The second point that will improve customs clearance is to use sampling of containers for inspection by linking the probability of a container being inspected to the risk associated with the record of the importer and the type of goods being imported.  Risk directed sampling will reduce the number of inspections and hence accelerate average clearance time.  The difficulty here is clear; high risk importers are precisely those that will attempt to use facilitation payments to avoid inspection. 

The second problem is the management of road transport around the port.  This is the problem of the Chittagong end of the Dhaka-Chittagong highway and the delivery of export cargo and collection of import cargos.  Road planning is connected with the locations of the 19 operating off-dock facilities and the rules Customs establishes for the management of imports through the off-docks.   This is a very complicated analysis but the growing volume of trucks that will be moving around make this a high priority for the authorities.

The third problem is management.  There is a compelling case for the selection of an international Port Management Organization that will provide  modern non-political management of the port.  If the port is to meet the demands of a rapidly growing economy the politicalization of the port management will have to be stopped and a professional organization engaged.

Ideally compensation of the port management organization should be linked to achieving agreed goals of the flow of containers.  This must involve Customs and clear agreement with Customs to maintain mutually acceptable clearance rates. 

Chittagong-Dhaka Highway

The flow of container traffic along the Chittagong-Dhaka Highway will increase at more or less the same rate as the flow of containers through the port.  We estimate total traffic flow will grow by 60% in 5 years and by 155% in 10 years.  This is in each direction on the highway.  We have assumed no alternatives.  Shifts to the railway or to waterways will be small and not effect the magnitude of the projection.   

To maintain a higher flow the average speed of the traffic has to increase.  At present the average speed is 20 km/hr for a 15 hour trip or 25km/hour for a 12 hour trip.  This is absurdly low for the most important highway in the country.  A reasonable target is 50 km/hour for the average speed.  There are a number of obvious steps that will help to achieve this. 

A. Reduce side friction from vehicles parked along the highway.  This intrudes on the driving lanes and causes vehicles to drive slower.

B. Ban slow vehicles such as CNG, pedaled rickshaws and vans as weak as electrically driven rickshaws. 

C. Traffic police assigned to the highway should have well defined tasks and there should proper monitoring to insure that they are working. 

D. Reduced access to the main highway must be established and crossing points should be controlled by traffic lights.

These points represent the need for a clear choice that political softness is not going to keep Bangladesh from achieving improved economic status.

The next point is controversial.  There should be a police check point north of Chittagong.  Trucks must have a valid fitness certificate, the driver must have a valid driver’s license.  The truck must have up to date insurance coverage.  There should be another check half-way and a third just south of Dhaka.  The form of these certificates should be smart cards that can be checked by inserting into an appropriate card reader.  Trucks and buses that fail this check will have to pay a fine.  At first there will be much opposition to this but in time bus and truck owners and drivers will start to follow the rules.

The driver’s license should be given only after some training.  A preliminary license can be issued with an allowance of say one year for the driver to complete the training program.

The weight limits on trucks musts be enforced.  The truck owners are arguing that the existing limits make it uneconomic to operate the truck.  The reason that they make this argument is that other trucks are offering lower charges based on higher illegal loads.  Competition will drive down the truck charges for hauling goods.  Only by enforcing the weight limits for everyone using the road will the truck and bus owners accept the weight limits and be able to raise their fees.

To establish driver discipline the control of the Chittagong-Dhaka highway should be turned over to the army for 18 months. 

Another approach that I favor but is more complicated is to ration access to the highway for trucks and large buses.  To travel on the highway during the night the truck owners purchase a coupon allowing them to enter the highway during a given time period with an announced destination. The best way to manage this is to auction off the time slots.  Bidders would be truck and bus owners.  The number of slots auctioned off would be set so that the road congestion would be reduced and average speed of 50 km would be achieved.  As this system is implemented it will increase the average travel speed on the highway.  At first there will be noisy protests but this will calm once it is seen this is to everyone’s benefits.   

Air Cargo:

The air cargo situation is very unsatisfactory both for exports and imports.  Facilities are inadequate, warehousing is insufficient, there is tremendous disorder in the handling of both exports and imports.  Most of these problems are simple to correct.  The air cargo situation is now a serious impediment for the RMG sector causing unnecessary delays. 

Exports of air cargo.  The volume is rising rapidly.   As discussed above the shipments for the garment sector is rising and with the spread of fast fashion it will grow more.  At present the delays and mismanagement cause many air cargo flights to depart with unfilled space.  This either leads to higher charges for the freight that is loaded or to less provision of  cargo space.  If a flight goes half empty the charges will be twice what they will be with a fully loaded flight. Most air cargo flights are on schedules and will not wait.  Fixing this is very important but is not getting much attention.

Bangladesh has faced problems with inadequate security for outgoing freight.  While this has improved in recent months there is no assurance the assessment of risk will not emerge again.

The essential step for outgoing air cargo security is to scan the container.  There is insufficient equipment to mange this promptly.  The scanners available are suitable for luggage but not the containers used for air cargo.  This means the container has to be stuffed after scanning all the boxes it contains.  Containers remain in the airport.  Within the existing failing system one third of the scanners are out of order.  Due to the stuffing of containers inside the airport there is pilfering of the outgoing cargo.  There is insufficient equipment for weighing the packages.  There are only two scales and one is broken. 

The physical set up is cramped leading to confusion, enabling pilfering, and damage to goods. 

Handling of export air cargo is in the hands of Biman.

This disastrous situation is readily fixed.  First one should introduce off-dock facilities where export air cargo can go through security checks and move into the airport under Customs control when it is called for loading.  Containers would have to be available in the off-dock facilities for stuffing and security check as well as the necessary Customs clearance and documentation.  All of this is straight forward to do.  Private companies will step and take on this task.  These companies will be fast, provide the necessary equipment for security scans and work with the airlines and Civil Aviation to move the outgoing containers when necessary.   

Civil Aviation should work out with NBR an appropriate set of rules for handling.  Two licenses to operate an off-dock facility for air cargo can be granted.  There will be an immediate improvement in the handling of outgoing export cargo.  Biman should no longer be involved.  They have tried and failed.  Here is a perfect example of giving the job to the private sector.  If the air cargo for exports grow as is expected then the off-docks will expand to do this work.   

For small packages a contract can be let to take over this.  One of the international companies like DHL can do this efficiently and without delays and confusion as exporters of small packages now face.

Imports of Air Cargo:

The management of air cargo imports is another disastrous area.  Incoming air cargo arrives; the Air Way Bills and other documentation are handed over to Biman the handling agent.  The goods are stored in the inadequate available warehousing facilities or eft on the ground without overhead cover.  Eventually Biman gets around to giving the documentation to the customer, a process that averages two days.  Documentation is given to Customs for clearing.  Everything is done manually and it takes an average of four days to clear the goods.  One week has gone by, goods are pilfered, in the rainy season damaged, damaged by rough handling and so forth.  Small packages are stored haphazardly and can take a long time to find.

As air cargo volumes rise the amount kept inside the airport waiting for clearance grows and grows.  it has reached a breaking point now with most customers dissatisfied with the service.

If you are an RMG company trying to get fabrics for making samples or for short production runs you are losing time.  If you are a pharmaceutical company trying to get hold of your raw materials you are losing time.  Of course people react to this sending in agents to pay bribes to get the goods quickly.  This makes the workers greedy and increases the chaos in handling the imports.

Obviously all of this should be turned over to a private company to manage.  The time to turn over the AirWay bills to customers by the handling agent should be a few hours.  Proper warehousing should be constructed serviced by forklifts and modern warehouse management procedures.  There are dozens of RMG companies that have experience in operating complex warehouse systems. 

The handling of the air cargo should be given to a private company and taken away from Biman.  Biman has failed and should not be allowed to continue to mismanage such a critical logistics area.

Automation of Customs should be a high priority undertaking.  Here is where Digital Bangladesh is needed.  There is no shortage of companies that can design or adopt software that is available and then get such systems up and running to support Customs.

The target should be to reduce the time between the air cargo landing and the customer taking it out of the airport to one day from the present 5-6 days.

Here is another example of the need to recognize the imperatives of rapid economic growth.  Giving these handling rights to Biman is an old-fashion idea going back to Pakistan times.  Biman cannot handle this in a satisfactory way after years of trying.  Whatever vested interests there are here need to be discarded and an efficient system introduced.

In both the export and import of air cargo there is urgent need for improvements.  This is best achieved by contracting to private groups to manage the air cargo and to work carefully to integrate Customs responsibilities.  All of this is facilitated by appropriate use of information technology and the warehousing experience of   the RMG sector.

Land Ports: 

Benepole is the key land port.  Through Benepole comes a great deal of food products and large amounts of fabric for the RMG sector.  We concentrate on the RMG fabric imports but the approach suggested is universal.

It is easy to describe this.  Most of what happens is imports.  The Indian truck arrives, unloads its cargo, leaves the documentation and departs with a load if one is available.  The cargo is stored until the documentation is issued to the importer who then clears customs, loads the goods on a Bangladesh truck, and takes it away. Often there is an unnecessary wait for a truck on the Bangladesh side; either the customer has a truck waiting for a long time or the customer has to call one to come.  All increasing transport costs.

On the Indian side the present arrival rates and processing rates keep a queue length several kilometers long resulting in trucks waiting several days.  This immediately increases the cost of transport on the Indian side with higher costs to the Bangladesh importer. 

The land port mangers are trying to handle the storage and document handling.  Warehousing is inadequate and not well managed.  Customers are searching for cargo and then working to get it through Customs.

The issues are similar to air cargo imports.  The Land Port is trying to run a large warehouse operation with no experience, without proper equipment, and without computerized management systems.  The Land Port authorities should contract to the private sector to build warehouse facilities and operate the warehouse and document management. 

Once again Customs needs to introduce computerized management systems which it can readily do.   

Proper development of the facilities at Benepole will reduce transport costs, reduce delays in obtaining vital cloth inputs to the production process, and also speed up the movement of food products. 

Conclusion:

To achieve rapid economic growth the volume of exports must increase substantially over the next ten years.  The logistics systems for handling exports will come under tremendous pressure if the growth drive is successful.  There is need for immediate actions as it is not feasible to wait for major capital improvements.  This paper has reviewed a number of low cost undertakings that would provide significant improvement in periods less than five years.

Most of these involve increasing the role of the private sector to operate systems leaving Government officials responsible for oversight and control.  All involve increased use of computerized systems.  Involve use of the private sector to do the work.  All leave the government in charge.

The opportunities for prompt improvements are substantial.  Without such improvements in the logistics of exports and imports rapid economic growth cannot be achieved.  

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