The road ahead: Improved connections needed to capitalise on industrial growth

Growth in Colombia’s transportation sector has traditionally been driven by the nation’s sizeable population and the various industrial centres spread over numerous large and medium-sized cities. In recent times, economic growth and trade liberalisation have added demand for international traffic, providing domestic transporters with an opportunity to develop and modernise their business to global standards. The fundamentals for a thriving transportation sector are in place; however, decades of underinvestment and militancy-linked sabotage to the nationwide infrastructure and distribution network have led to significant logistical complications, pushing up both cost and duration of domestic shipments.

ROAD: Road carriers – the primary mode of domestic cargo transportation – are faced with a host of challenges. Despite an increase in the number of trucks on Colombian roads, cargo volumes have gone down while the cost of inputs has gone up. Measured as a portion of newly registered vehicles, trucks accounted for 19.2% at the start of the millennium; in 2012 their share had gone up to 45% of a total of 118,348 new vehicles registered. However, according to figures from Colfecar, the road transporters’ association, slowdown in industrial and agricultural activity led to a drop in volumes from 140.5m tonnes in 2011 to 135.4m tonnes in 2012, while revenue fell by 5.8% to a total of COP15.22trn ($9.1bn).

This situation is related to the ageing of the fleet, a problem that a number of interviewees highlighted in their encounters with OBG. The number of trucks is growing faster than the volume of cargo that is transported, primarily because many entrepreneurs using freight transport do not have the capital or the incentives to modernise their fleet. Sufficient parking is also a concern in some areas. Alejandro Jaramillo, general manager for parking technology provider APD de Colombia, told OBG, “The Bogotá urban plan includes a parking distribution and concessions scheme, but this has not been working adequately.”

COSTS: Meanwhile, annual costs had risen by 4.6% by December 2012 on the back of an increase in the price of diesel and wages, which constitute 33.7% and 11.9% of transporters’ cost structure, respectively. “The situation has raised the desire for all members of the industry – public and private – to come together and assess immediate measures to help overcome this challenging period,” Jaime Sorzano, executive president of Colfecar, told OBG. While most of the factors behind the sector’s weakened performance are linked to macroeconomic developments, short-term gains can be made through better coordination of nationwide traffic movement, which are often hindered by the deficient state of the road network.

As part of the measures, Sorzano emphasises timely communication from the National Institute of Roads (Instituto Nacional de Vías, INVÍAS) and National Infrastructure Agency (Agencia Nacional de Infraestructura, ANI), which are responsible for the managing construction and repair of roads and highways.

Another suggestion is to reduce the size of the informal transport sector. While estimations differ, the Ministry of Transport calculated in 2012 that 75% of 2400 registered transporters fail to properly declare their activities. Colfecar is lobbying the authorities to address the issue. “If we are to become a globally competitive logistics nation, we must ensure that all players are on a level playing field,” Sorzano told OBG.

These suggestions follow longstanding road transport issues, incurred by decades of underinvestment in roads, overly bureaucratic regulations and high cost structures. Road freight carriers are subject to limitations on operating days and hours, especially during Colombia’s numerous bank holiday weekends, when trucks are banned from the roads on Saturdays and Mondays. According to Carlos Trujillo, president of Transmeta, a transportation company owned by aviation conglomerate Avianca, trucks are not allowed on the roads for as many as 80 days per year.

FUEL: Another thorn in the Colfecar’s side is the high cost of fuel, particularly diesel, which ranks among the highest in the region. Fuel accounts for up to 35% of transportation costs. “Despite the fact that Colombia is an oil producing nation, the cost of fuel is high and represents a serious imbalance in the cost structure of land transport,” Sorzano said. The association attributes these costs to the monopoly of Ecopetrol, which in charge of setting pump prices, and the subsidies for bio-fuels paid from revenues of other combustibles.

SECURITY: Road security has improved significantly in recent times. Indeed, over the course of 2012, a total of 258 robberies were reported compared to 405 the year prior. The majority of the incidents occurred in urban areas, such as by Medellín and Bogotá, according to Colfecar. The numbers demonstrate the progress made in rural areas, which, due to guerrilla militancy, were the most problematic areas up until a few years ago. A combination of measures taken by the public and the industry, as well as a reduction in guerrilla activity, have substantially improved security in Colombia’s rural area. In addition, technology such as GPS tracking and modern communications systems, has allowed operators to monitor their personnel and cargo and anticipate security concerns in a timely manner.

The sector is still in a transition phase on security issues, however. As Alfredo Castellanos, general manager for shipping firm TNT Colombia, told OBG, “Security issues, though substantially improved, remain an outstanding problem for the road cargo sector. There are clauses in insurance policies restricting movement and timing on some shipments. Consequently, products such as tyres, clothes and electronics are hard to insure and cannot be transported at night.”

MAINTENANCE: The sector’s structural challenges aside, the evident priority lies in improving the road network. Years of underinvestment in infrastructure means the quality of the land connectivity compares poorly with the rest of region. In its 2013 “Global Competitiveness Report”, the World Economic Forum ranks Colombia 93rd out of 144 countries in terms of quality of infrastructure networks, behind Peru (89), Ecuador (90) and Brazil (70). The scale of modernisation needed is exacerbated by the topographical composition. Its western half is comprised of three parallel mountain ridges, around which most of the population and commercial activity is located.

Urban and industrial areas like Bogotá, Medellín, Cali and Bucaramanga are a significant distance from each other and from the nation’s ports. As Felipe Sánchez Rozo, founding manager of Cargo Master, a domestic transportation company, told OBG, “When you analyse the cost of freight shipped to the US or Europe, almost half of the cost is incurred domestically. It can take up to four days to transport goods from Bogotá or Medellín to the coast while in, for example, the UK the same distance could be covered in half a day.”

HIGHWAYS: While Colombia lacks safe, well-maintained roads in general, the most pressing issue lies in the scarcity of double lanes, which cover only 1500 km. The lack of modern highways is perhaps the principal reason for traffic congestion and delays. In its most recent bid to tackle the infrastructure deficit, the government prioritised the expansion of highways by some 2000 km along strategic axes including Bogotá-Barranquilla, Bogotá-Buenaventura, Medellín-Golfo de Morrosquillo, Medellín-Cartagena and Medellín-Puerto del Rio on the Magdalena river.

Another priority is the construction of a set of highways linking Medellín, Colombia’s second city, to the Pacific and Caribbean ports, and to Bogotá. The current plans are for five main thoroughfares – the Autopistas para la Prosperidad (prosperity highways) costing COP9.91tn ($5.95bn), according to data from the state procurement portal Secop.

RAIL: Significant investment is needed if Colombia is to include rail links in its domestic transportation model. While public rail links have been in use since the 1950s, a lack of investment had led to the system’s collapse by the early 1990s, followed by the liquidation of the national railway company. The network now is limited to around 200 km. In a bid to revamp the deteriorating system, the government decided to privatise the nation’s two primary rail networks.

The Ferrocarril de Atlantico, running 250 km from Bogotá to the private mining port of Cienaga on the Atlantic coast, is operated by FENOCO, which is overseen by a consortium of private investors including mining giants Drummond, Glencore and financial conglomerate Goldman Sachs. FENOCO was awarded a 30-year concession in 2001, with obligations to have the line up and running by 2008, which it fulfilled.

The second line, Tren del Occidente, connects the Cauca Valley and city of Cali to the port of Buenaventura on the Pacific coast. In 2008 a 30-year concession for the renovation and management was awarded to a consortium of Colombian, Israeli and American investors, after a previous concessionaire who held the licence since 1998 had run into financial difficulties. While the new investors have had more success in extending the line inland and raising the yearly transported volumes, they remain far off the 600,000 tonnes per year the concession aims to achieve.

In a bid to reactivate other sections, ANI has called upon the private sector to invest and manage a selection of prioritised lines before implementing plans to revamp and expand the entire nationwide network. While ANI’s push for private investments may well result in revived rail activity, critics fear that, due to the dominance of mining companies among the candidates for upcoming concessions, universal usage of railways may be unlikely (see Infrastructure chapter).

Besides the need for renovation of neglected lines, an update to international standards in regard to track gauge is required. The lines on offer thus far include La Dorada-Chiriguana and Bogotá-Belencito, both heavily affected by the 2010-11 floods. The tracks cover more than 800 km and will require an estimated combined investment of COP2trn ($1.2bn).

BY SEA: Colombia has a number of maritime connections on both the Atlantic and Pacific Ocean. While the rise in cargo traffic has stabilised in light of the fall in industrial output in 2012, ambitious investment plans are being rolled out at all facilities, largely driven by a confidence in Colombia’s industrial recovery as well as an increase in trading volumes coming in the wake of new trade agreements (see analysis). While both coasts measure more than 1000 km in length, most of the ports are based along the Atlantic, where the cities of Cartagena, Barranquilla and Santa Marta serve as bases for three separately managed commercial ports open to both cruise ships and cargo vessels. In addition, the coast is used as exit point for mining operations located across the country, including the ports of Cienaga, Bolivar and Prodeco.

CARGO: Cartagena houses the biggest container terminal on Colombia’s northern coast, in addition to entry points for vehicles, bulk and general cargo and cruise ships. La Sociedad Terminal de Contenedores de Cartagena, which has one of the concessions for the port’s management, is currently rolling out an investment plan to increase the capacity of the container terminal to be able to receive ships carrying up to 12,000 twenty-foot equivalent units (TEUs). The port zone of Barranquilla comprises a number of terminals capable of handling all types of cargo. At the Port of Barranquilla, the public terminal is operated by different concessions, with Puerto de Barranquilla Sociedad Portuaria as the main one. Due to its position on the mouth of the Magdalena River, this facility caters to trans-shipments to and from inland river ports. Santa Marta is Colombia’s third maritime entry point on the Atlantic coast and is used for handling coal, cargo and container traffic. In line with developments at competing ports, it is also investing in building capacity and modern equipment. Annual capacity of the container terminal, run by the Sociedad Portuaria de Santa Marta, is currently being expanded from 100,000 to 440,000 TEUs. Santa Marta operates two Panamax cranes, and at the start of June its subsidiary in Barranquilla, Barranquilla Container Terminal also received three Panamax cranes.

PACIFIC: On the Pacific coast, the Port of Buenaventura receives more containers than any other and holds two terminals – the Sociedad Portuaria Regional de Buenaventura and the Terminal de Contenedores de Buenaventura – as well as the sole maritime connection for mass-cargo in the country’s west, predominantly servicing trade with Asia and the westcoast of the Americas. Excluding minerals and fuel, the facility accounts for some 46% of the nation’s imported and exported volumes and is run by a consortium that includes global conglomerate DP World (which owns 19% of the terminal). A drop in industrial activity in 2012 has led to a reduction in containerised and general cargo at the facility, while volumes of bulk cargo rose in the year.

Anticipating a recovery of Colombian industries as well as higher trade volumes resulting from free trade agreements with Canada, the US and South Korea, the port is undergoing significant expansion at a value of $450m. This will be split among improvements and expansion works in the port’s infrastructure, handling equipment and dredged area. The overall objective is to raise the port’s installed capacity from 13.5 tonnes per sq metre to 22.8 tonnes per sq metre, which would allow the port to process a total volume of 27m tonnes by 2032. Construction of a new container terminal beside the existing facilities, named Aguadulce, is set to start in 2013. Under management of Philippinebased ICTSI, the new facility will add annual capacity of 400,000 units and 2m tonnes of bulk cargo.

BY AIR: The aviation sector grew by 14.5% over the course of 2012, reaching 24.7m passengers according to ATAC, the Colombian air transport association. This rise can be attributed to an increase in both international and domestic traffic, encouraged by bigger personal and business travel budgets, themselves spurred by macroeconomic growth and lower prices attributable to heightened competition and recent investments in more efficient planes (see analysis).

Domestic traffic exceeds international numbers, which accounted for 15.8m and 6.7m passengers, respectively, in 2012. Spurred by a deficient road network and the population’s spread over numerous large and medium-sized cities, domestic carriers have experienced continuous expansion at a compound annual growth rate of 13.9% since 2006. A sizeable leap was recorded in 2010 when the number of passengers increased from 10.3m to 14m. Avianca, Colombia’s flagship carrier, controls 64% of the segment, followed by Chile’s carrier LAN and Panama’s Copa Airlines. The remainder of the market is divided between state-owned operator SATENA, low-cost carrier (LCC) EasyFly and Viva Colombia, Colombia’s first LCC, which began operations in May 2012. Despite its recent entry, Viva Colombia has significantly added to the sector’s dynamics by offering low prices and new domestic connections, triggering a response from Avianca and other airlines (see analysis).

International traffic grew at a compound annual growth rate of 10.2%, despite stagnation in 2007-09 which was largely due to the effects of the financial crisis in the US, the segment’s biggest market. Avianca holds the leading market share, accounting for half of international seats and frequencies leaving from Bogotá, followed by carriers Copa and LAN.

Cargo volumes have increased over the past three years after undergoing drops in 2008 and 2009. At the end of 2012 a total of 919,789 tonnes had been transported by air, up from 740,000 tonnes in 2010. Exported items predominantly consist of flowers, in terms of volume, and gold, in terms of value. Imports by air – significantly lower than exports – are much more diverse and led by electronics, medication and aircraft equipment. With the advancement on numerous free trade agreements and anticipated recovery in the extractive industries, from which 90% of the cargo demand arises, imports are expected to rise.

EXPRESS: International express services are dominated by the “big four”, namely DHL, which has an estimated market share of 50%, Fedex (25%), UPS (12%) and TNT (3%). While exports used to account for some 70% of shipments, a drop in production in sectors like agriculture, mining and textiles have reversed the trade balance. According to figures at TNT, imports now account for some 70% of total shipments. International couriers have also been attracted by Colombia’s large population and its rising levels of consumer demand. This is underlined by their investments in designated facilities in the new cargo terminal at Bogotá’s El Dorado international airport. Matthew Zagaja, general manager of infrastructure development firm Lynxs Group, told OBG, “Due to technological advances, the terminal can maximise storage space and should not need additional capacity for another 15 years.”

Despite the country’s potential as a regional logistic hub, regulations have thus far deterred some international couriers. As TNT’s Castellanos told OBG, “The current regulatory framework could be made simpler for handling transit cargo.” At present, all cargo follows regular import and export procedures.

COURIERS: Most domestic couriers are Colombianowned. The market is dominated by Servientrega, TCC, Deprisa and the public postal service 472, which hold a combined 50% market share in parcels less than 5 kg. Envia, Cordinadora and Saferbo join these ranks in the segment for parcels of more than 5 kg.

While growth in postal services has flattened due to the rise in digital mail, the parcel segment has increased: “This has led a mismatch between demand for express services and infrastructural capacity,” Eduardo Meola, general manager of Deprisa, a subsidiary company of Avianca, told OBG. The deficient road network is a severe challenge to courier companies aiming to achieve same-day or 24-hour delivery, and make it practically impossible for destinations outside of the “golden triangle” of Bogotá, Medellín and Cali. The express market is the third biggest in Latin America thanks to both the size and distribution of the country’s population.

Besides infrastructural improvements, couriers are seeking increased use of technology to allow for globally benchmarked services, especially as free trade agreements are expected to push up consumer demand for adequate estimation of transport times, costs and conditions. As publicly available communications infrastructure is limited compared to developed markets, operators have had to cover investments in tracking systems themselves. “Digitalised tracking of packages is still a bit behind largely due to nonuniform technology across partners and links in the supply chain,” Robinson Vásquez Escobar, president of Suppla, a domestic logistics provider, told OBG.

OUTLOOK: Colombia’s ambitions to build a globally competitive intermodal logistics industry are challenged by the backlog in infrastructure investment. Mindful of the need for more public and private investment, the government has committed to spending 3% of GDP on infrastructure improvements compared to less than 1% at present. Moreover, it has taken farreaching steps to facilitate private sector investment and returns (see Infrastructure chapter).

Provided the funds come on-stream and make their way to improvements in connections, Colombia has an opportunity to improve its domestic connections and its transport links with trading partners around the world. Accompanied by sound regulations for imports and exports, and more competitive fuel pricing, a bright road lies ahead for the transport sector.

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The Report: Colombia 2013

Transport & Logistics chapter from The Report: Colombia 2013

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