Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet 2018  Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Transport Costs and Prices in Lao PDR: Unlocking the Potential of an Idle Fleet Final report September 2018 Report No: AUS0000443 iii Table of Contents Table of Contents Acknowledgements vi Acronyms and Abbreviations vii Exchange rates vii Executive Summary 1 1 Background 4 2 Scope and methodology 6 Scope 6 Methodology 6 Limitations 8 3 Findings and Results 10 Transport market 10 Vehicle utilization in comparison 16 Contracts and price setting 34 4 Policy options and regional trade 36 Annex I Technical notes on the variables used in the models 40 Annex II Axle load limits in Lao PDR 44 References 45 iv Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet List of Boxes Box 1 Common trucks used in Lao PDR 13 Box 2 Using bus services for freight transportation 14 Box 3 Comparing transport costs with the findings of other studies 21 Box 4 Overstated profits 31 Box 5 The transshipment model 38 List of Figures Figure 1 Topographical map of Lao PDR 15 Figure 2 Average truck mileage in selected developing countries in 2007 17 Figure 3 Total cost per ton-km by cargo carried per wheel per year (all observations) 17 Figure 4 Breakdown of variable costs 19 Figure 5 Variable and total costs for selected routes (LAK per ton-km) 20 Figure 6 Operating costs (LAK per ton-km) by vehicle size 25 Figure 7 Variable costs (LAK per ton-km) by vehicle size and route direction 25 Figure 8 Volume vs. weight (cargo density of Lao freight) 26 Figure 9 Average transport prices by cargo weight (in LAK per ton-km) 26 Figure 10 Transport price by product group (in LAK per ton-km) 26 Figure 11 Profits by service offering/product group 29 Figure 12 Profit distribution (in percent) for all observations 31 Figure 13 Actual load factor and annual kilometer 32 Figure 14 Profit distribution (in percent) for all observations 32 Figure 15 Axle load limits in Lao PDR (as of 26 September 2013) 44 List of Tables Table 1 Sampling data for transport costs 7 Table 2 Sampling data for transport prices 7 Table 3 Variable costs by vehicle age and geographical area (LAK per kilometer) 19 Table 4 Total cost per ton-km (overall, northern and southern routes) 23 Table 5 Comparison of various performance indicators between formal and informal firms 23 Table 6 Overview of transport prices by geographic location and actual prices (by weight and volume vs. vehicle weight and volume capacity (in LAK per ton-km) 23 Table 7 Costs vs. prices (in LAK per ton -km) 29 v Acknowledgements This report was prepared by Christian Ksoll, Paul Apthorp, and Pipong Phimphachanh (consultants), with overall guidance from Mombert Hoppe (Senior Trade Economist and Task Team Leader) and Charles Kunaka (Lead Private Sector Specialist). Hannah McDonald-Moniz (Communications Officer, EAPEC) provided support during preparation and dissemination of the report and Phet Udom Mainolath (Program Assistant, EACLF) provided logistical support. Preparation of this report was funded by the MDTF to support the Second Trade Development Facility, funded by Australia, the European Union, Ireland, Germany, the United States, and the World Bank. © 2018 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for non-commercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2018. Transport Costs and Prices in Lao PDR - Unlocking the Potential of an Idle Fleet. © World Bank.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. vi Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Acronyms and Abbreviations ADB Asian Development Bank ASEAN Association of Southeast Asian Nations cbm Cubic meter COGS Cost of goods sold FC Fixed costs FEU Forty Foot Equivalent Unit FTL Full truckload GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GMS Greater Mekong Subregion HGV Heavy goods vehicle ISIC International Standard Industrial Classification of All Economic Activities LIFFA Lao international freight forwarders association LTL Less than truckload MDTF Multi Donor Trust Fund NR National road SME Small and medium enterprises TEU Twenty Foot Equivalent Unit ton-km Ton-kilometer VAT Value added tax VC Variable costs VFC Vehicle fixed costs PDR People’s Democratic Republic US$ United States dollar Exchange rates USD 1 = LAK 8,200 THB 1 = LAK 265 CNY 1 = LAK 1,320 VND 1 = LAK 0.37 vii Table of Contents Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Executive Summary The cost of transport in Lao PDR is said to be prices were LAK 2,966 (USD 0.36) or LAK 882 higher than in neighboring countries, affecting (USD 0.11), respectively. the competitiveness of producers and shippers alike. However, the picture appears to be more Transport prices in Lao PDR are considered high nuanced. Since there has not been much hard as they are based on actual cargo weight. But evidence to support this claim, this paper fills the high transport prices are largely observed in the gap by empirically investigating transport costs less-than truckload segment. Transport prices and prices for domestic routes in Lao PDR and vary considerably with the direction of transport, identifies the key drivers behind transport costs. with lowest prices observed for Southern routes compared to Northern routes. It is striking that Operational performance of companies transport prices based on actual cargo weight are much higher than prices based on vehicle The transport sector in Lao PDR can be described capacity. This implies that Lao transporters do as thin, consisting of a dozen large players (defined not fully utilize their vehicle carrying capacity. as having a fleet size of more than 50 trucks) Still, downsizing the vehicle fleet is unlikely to and many small firms (companies with less than bring a cost-benefit to transporters, given the 5 trucks or owner-operators). Many of the micro much higher per ton-km operating costs of smaller firms work in the informal sector. Productivity vehicles. levels in the Lao transport sector are generally very low. Across the study sample, the average The underutilization of weight capacity in the annual distance driven per truck is only 55,000 transport sector could also be attributed to cargo km which is very low, though comparable to other generally being more voluminous than heavy in landlocked, developing countries. Lao PDR. Additionally, Lao transporters operate the trucks that are available to them rather than Transport costs are on average LAK 489 per ton- the ones most suitable to the task. Given Lao km (equivalent to USD 0.06 per ton-km). A large PDR’s topography, not all vehicle types and sizes majority of transport companies operate within a are ideal for all routes. Transporters tend to use band of LAK 230 (USD 0.028) and LAK 575 (USD larger vehicles on Southern routes with their flat 0.07), of which variable costs make up 62 percent. terrain and smaller vehicles on Northern routes. Smaller firms tend to be less efficient than larger ones in spite of their much smaller overhead costs. Contrasting transport costs against price data The 25 percent cost advantage per ton-km of provided by transport operators shows several informal firms is offset by the economies of scale of firms operating at a loss. On the other hand, larger firms that operate newer and larger trucks. when using price data from the transport users, the survey reveals high profit margins, especially In order to determine transport prices, both in consumer goods distribution. This is partially transport operators and transport users were because of small shipment sizes and weight. interviewed. Depending on whether the transport However, overall profits are likely overstated prices were based on the actual cargo size and considering low vehicle utilization and large weight or on the vehicle’s capacity, transport overcapacity in the sector. This is in part because 1 Executive Summary the model employed did not capture idle times transport price outbound if they have a high of the fleet whereas in practice vehicle fixed chance of getting a return load on the way back. costs (such as depreciation, vehicle financing, The chance of getting a return load from Luang etc.) continue to accumulate. Overloading is one Prabang is much lower than getting one from strategy firms use to increase productivity. Boten, hence prices are considerably higher. The low annual mileage, together with the high The Boten route is also one of the few examples cost of capital and low profit margins, prevent where the impact of foreign competition on companies from investing in more expensive, domestic transport prices can be observed. Prices yet more cost-efficient vehicles, which in turn for domestically transported goods (Vientiane increases variable operating costs. Whereas – Luang Prabang) have not been affected yet management capacity in Lao PDR is low across because foreign transporters are not allowed to all sectors at varying degrees, the large number carry domestic loads, per cabotage rules. However, of small firms with little operational capacity with Chinese vehicles allowed to source and deliver in the transport sector helps to explain why the cargo to final destination based on a bilateral operational standards in that sector are so low. agreement, Lao operators are increasingly exposed to foreign competition for international Market and competition cargo. The vast majority of cargo destined to Boten is international cargo (imports from China Many transport companies in Lao PDR deploy or exports to China). vehicles at the behest of the customer. While they are also covered by contracts, the relationship This is good news for Lao consumers. Importers between the two parties is what holds the deal and exporters already benefit from lower prices together, rather than market competition. This for international cargo. Export competitiveness is because personal or family relationships play a of Lao products increases as the final price of Lao large role in the business culture in Lao PDR. As products delivered abroad decreases. a result, operators do not appear willing or able to redirect their activities, compete for work, and Regional opportunities break into new routes and markets. And while no operator would admit to being part of a cartel or Lao operators need to modernize and enhance operating in collusion on a particular route, none of utilization of their trucking fleets. The Vientiane them is keen to compete beyond their main routes. – Boten route provides a showcase for how The result is a highly fragmented trucking sector market liberalization policies and international along territorial lines. This is exemplified by large competition can contribute to reduced domestic per ton-km price differences between routes across transport prices. Given the current market the country. But there are also large differences in situation, the direct delivery of Thai and Chinese prices observed even along similar or overlapping trucks to their destination within Lao PDR (rather routes, such as Vientiane – Luang Prabang (LAK than transshipping at the border onto a Lao 3,671) vs. Vientiane – Luang Namtha/Boten (LAK truck) has reduced transport prices. Whereas 1,394). While some of the price difference may be this is beneficial for consumers, it has also led to attributed to the small sample size for specific considerably less work for domestic operators. routes, more relevant explanations may include The absence of a robust domestic demand for factors such as the probability of getting a transport, current overcapacity and low vehicle return load and competition by foreign operators. utilization (on average 55,000 km per year) may Transport firms may be willing to accept a lower trigger a mass exodus of Lao firms from the 2 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet transport sector, unless Lao operators are able to It is also important to build the capabilities of Lao acquire significant volumes of international cargo. trucking operators. Most Lao operators do not However, competing in this market will require seem interested in competing in the wider GMS and investments in newer, more fuel-efficient vehicles, ASEAN regions and have not developed the skills which in turn would require an annual mileage of to market their abilities or respond to enquiries at least 75,000 km. in a professional manner. The study team has encountered a strong desire from SME managers Lao transporters should exploit more opportunities and owners to receive training in marketing and in regional markets. Lao transporters can provide management, and to enhance their understanding an interesting value proposition with considerable of accounting principles, all of which is key in business opportunities if they start embracing pursuing international opportunities. international movements rather than protecting their market. From a regulatory perspective, Access to port traffic at Laem Chabang and Lao PDR transporters enjoy more freedom than Bangkok can help reduce the empty running that any other country within the Greater Mekong is prevalent in the Lao transport markets. A key Subregion, given existing bilateral agreements aspect of tapping into regional trade opportunities with all neighboring countries. By engaging in is access to Laem Chabang and Bangkok ports, regional trade, Lao operators could offer transport as the majority of international trade transits services across the entire region without through these ports. Currently, very few trucks unnecessary and costly transshipments (provided can access the ports because of transit bond they are increasing their standards of operation issues. The share of Lao containers is only 60,000 too). This opportunity still exists, but the window out of the 7 million annually. is closing with the growing logistics capacity in Vietnam and Thailand. 3 Background 1 Background The World Bank has undertaken a broad study GIZ conducted the study Transport and Logistics -- Commercialization of Rice and Vegetables in Lao PDR: Impact of the ASEAN Economic Value Chains in Lao PDR : Status and Prospects Community (Apthorp, Ksoll, & Quarmby, 2014), (World Bank, 2018) -- to better understand the which aimed to estimate the impact of a more current and potential role of the private sector open ASEAN market on the Lao transport sector. in agricultural production, distribution, onward The authors predicted that competition in the processing, and export competitiveness to transport and logistics sectors from foreign identify policy reforms. As part of this effort, vehicles would intensify with the greater market the World Bank looked in detail at transport liberalization of ASEAN countries. More foreign operators’ costs and the transport prices borne firms would offer services in Lao PDR and would by consumers. Transport costs and the quality outcompete Lao operators. The study also shows of logistics services play a key role in the ability that there are ample business opportunities for of firms in Lao PDR to connect to regional and the Lao transport sector, including internationally. global value chains, to import inputs and to ship Development of the sector means not only greater final goods to destination markets. High transport participation of Lao vehicles in import, export, costs directly undermine the competitiveness and transit traffic, but also the introduction of of the Lao private sector. There have long been value-added services, such as door-to-door cold- assertions that the cost of transport in Lao PDR chains for the handling of perishable agricultural is higher than that of its neighbors, affecting products in the Lao export and Thai-Chinese competitiveness of producers and shippers alike. transit trades. Lao transporters have one and only At the same time, there has not been much hard one choice if they want to remain in the business: evidence to support those claims. This paper fills upgrade, innovate, and compete. this gap by empirically investigating transport costs and prices for domestic routes in Lao PDR Very few studies are based on hard transport and identifies the key drivers behind transport and logistics cost data, although some studies costs. attempted to gather such information. Most notable are two studies focusing on international Several studies on the transport sector have transport: Lao PDR - Trade and Transport already been completed. Many of them, such as Facilitation Assessment (World Bank, 2014) and Private Sector Views on Road Transport along the Logistics Benchmark Study of the East West North South Economic Corridor (Ksoll & Quarmby, Economic Corridor (Banomyong, 2010). The trade 2012), have focused on trade and transport and transport facilitation assessment focuses facilitation measures, and how to better integrate on the corridors connecting Bangkok with Lao the regional transport market, often in relation to PDR’s three main entry ports, namely Vientiane, the GMS economic corridors. Kaysone Phomvihane and Chong Mek/Pakse. The logistics benchmark study estimates transit time Another set of studies looked at the international and costs across the entire East West corridor, linkages of the Lao transport sector. For example, from Tak in Myanmar to Danang in Vietnam, a 4 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet distance of 1,110 km. The average transit time The most recent work on logistics costs in Lao is between 37 and 70 hours, and the average PDR was financed by IDE-JETRO (2017). This firm- costs are approximately USD 1,800. However, it level survey investigates international transport should be noted that at the time of study, there costs from Japan to Lao PDR. The paper studied were essentially no cargo movements along both international as well as domestic transport the entire corridor. Costs and timeframes have costs in Lao PDR and Thailand, and concluded been estimated with the assistance of logistics that transport costs in Lao PDR are between 1.4 service providers. Whereas the study provided and 2.2 times higher than in Thailand, depending information on border crossing delays and costs – on whether a backload cargo was secured. including an estimate of informal fees – there is no information on the domestic components of each To fully understand the Lao transport sector, more corridor section. information is needed. This study aims to fill this gap by investigating the costs and prices along several domestic transport routes in Lao PDR. 5 Scope and methodology 2 Scope and methodology The following section provides an overview of Cost component of the study the scope, methodology and approach used to determine transport operating costs and To determine transport costs, transport service prevailing transport prices. providers were surveyed through face-to-face interviews. The costs are further disaggregated into three broad categories (further explanation Scope on the different variables is available in Annex I): The focus of this study is on the domestic i) Fixed costs (FC) transport sector and transport services carried Also referred to as overhead. For the purpose out by heavy goods vehicles (HGVs). For this study, of this study, typical costs included regulatory HGVs are defined as trucks with a gross vehicle compliance costs (licenses, permits, etc.), annual weight in excess of 9.5 tons. The study explores insurances (for cargo, building, etc.)1, staff costs prevailing transport costs and prices in detail. It is for management and administration, maintenance recognized that bus services provide an alternative workshops, warehouses (if directly related to transport option on some routes, which is treated the transport operations) and drivers. It also as competition to HGV transport. included facility related costs (i.e. rent, electricity, communication expenses, company cars, etc.), as Lao PDR is a landlocked country and the smallest well as external loans. one among its neighbors in terms of economic size. Given that transport firms from neighboring ii) Vehicle fixed costs (VFC) countries operate in Lao PDR, transport policies in Vehicle fixed costs are all costs incurred to other countries affect the Lao domestic transport ensure vehicles are ready for use. This consists sector. To the extent relevant, this is highlighted in of three main components: capital costs for this report. vehicle financing, regulatory compliance costs (registration, insurance, technical inspection, road tax, and in some cases an operating license for the Methodology truck), and depreciation of the vehicle. This study aims to provide detailed insights into iii) Variable costs (VC), transport operating costs and transport prices Variable costs include all components associated for end-users on specific routes. The study is with the operation of the vehicle. therefore split into two corresponding sections. The interviewers used a detailed questionnaire According to enterprise registration data (Ministry capturing the different cost and price components of Industry and Commerce Lao PDR, 2018) there for both parts of the study. are a total of 11,894 companies involved in road 1 Excluding insurance for vehicles. 6 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet freight transport in the entire country. However, Selection via company registry data: some this number is grossly overestimated as the companies were identified based on a number of registry does not delete entries. The enterprise “transport-heavy” ISIC codes from the business data proved not to be very useful. registration data of the Ministry of Industry and Commerce in Lao PDR. This provided an initial Due to time and resource constraints, a total of 27 pool of 2,248 companies. The selection for price cost interviews were conducted, for a total of 33 interviews used a random approach but was route observations (see Table 1). The selection of balanced between company size (determined by the firms was based on several lists of transport registered capital), sectors, activity and location. companies available to the study team. The Targeting companies using the company registry selection of companies on that list was random. data was not very effective because (i) the initial Since many lists were out of date, the actual selection contained many inactive firms and selection of transport companies was based on unsuitable companies, and (ii) not all companies firms still in operation that were available and selected agreed to be interviewed or disclosed the willing to participate in the study. The interviews information requested, in spite of assurances of were carried out in two different locations -- confidentiality. Vientiane and Pakse -- but interviewees came from a variety of locations across the country (including Selection through the network of the study Oudomxay, Luang Prabang and Savannakhet team: as a second step a number of companies among others). were identified through the network of the study team to complement the initial selection from the Price component of the study company registry. To assess transport prices in Lao PDR, the study In the end, 64 companies were surveyed on team interviewed transport users, which were transport prices for a total of 84 route observations selected using two approaches: (see Table 2). The interviews for transport prices were conducted in person and by phone using a Table 1 Sampling data for transport costs Total Entire road transport industry population 11,894 (Ministry of Industry and Commerce Lao PDR, 2018) Companies on various lists* 300 Companies approached 77 Companies interviewed 31 Interviews used in the survey 27 Source: (Ministry of Industry and Commerce Lao PDR, 2018), Authors Note: * Includes companies that ceased operations. Table 2 Sampling data for transport prices Total Companies by selected ISIC codes (Ministry of Industry and Commerce Lao PDR, 2018) 2,248 Companies shortlisted 87 Companies interviewed 64 Source: (Ministry of Industry and Commerce Lao PDR, 2018), Authors. 7 Scope and methodology structured questionnaire. The interview lasted company. Vehicle fixed costs were a mix between approximately 15-25 minutes and surveyed costs accruing throughout the year and the inbound and outbound transport, although not distance driven by a particular truck per year. every company provided data for both legs. As part of the transport cost interviews, transport Limitations prices for the routes surveyed were also collected to obtain an initial picture of profitability. These The study team was well received by the transport prices were later validated anonymously by the companies interviewed. Generally, companies study team who requested quotes for the same or shared their information, even competition- similar routes. sensitive data. Nevertheless, it is suspected that not all companies were fully transparent, as the Assumptions data in some cases did not correspond with the team’s on-site observations. One company has In order to analyze transport costs and prices been excluded from the final analysis because of in Lao PDR, the study team built a detailed data credibility issues. price and cost model. A major challenge was to capture the different business models found The level of professionalism within companies in the marketplace to reflect actual transport varied widely. Larger companies maintain costs. This was particularly difficult for firms accounting departments to track costs and with mixed business models. For example, some revenues. Newer players, usually with younger manufacturing companies also maintain their own management, used computers. Traditional family- fleet, and the transport function is only part of the owned businesses with up to 20 trucks or so often company to support their main business activity. tracked their expenses in handwritten notebooks. To the extent possible, the study team attempted The study team had the impression that none of to separate transport costs from other business the companies maintained very detailed records. activities. And when it came to the question of taxes, there was little incentive to be transparent. Where Additionally, a number of assumptions were no detailed record was available, numbers were made in order to appropriately reflect costs in estimated during the interview. the model (i.e. if respondents did not take certain cost components into account or did not know Generally, the structured interviews proved the costs). This was particularly true for vehicle suitable to collect transport cost information. financing and depreciation. A detailed explanation However, since the transport costs interviews were of the assumptions and calculation of costs is very time consuming, the study team aimed only provided in Annex I. for a limited number of observations. More data on costs could have been collected but the study Other assumptions were made in order to team made a decision based on the inevitable meaningfully combine the different cost trade-off between quality and quantity. components because of the different basis for calculation. For example, variable costs are The study team encountered difficulties in calculated for a specific trip (with specified finding companies willing to provide data on distance and duration), company fixed costs transport prices in Lao PDR. As a consequence, had to be broken down for the entire year and data for some routes is thin, and when stratified, the kilometers driven throughout the year in the sometimes comprises of only a few or even single 8 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet observations. It was difficult to derive meaningful collect such data. Given the overall reluctance to conclusions because of the large variations in the share price information, any other method would data. At the same time, interviews (in-person or have most likely resulted in even fewer responses. by phone) continue to be the best instrument to 9 Findings and Results 3 Findings and Results Transport market ••New market entrants, facilitated by significantly cheaper trucks from China and, Macroeconomic perspective more recently, greater availability of second- hand trucks from Japan. Cargo volumes within Lao PDR are generally low, especially when compared to neighboring The impact of the above is felt both in the economies (China, Thailand, Vietnam, Myanmar). international and domestic transport market. Very few sectors or companies generate International transport by Lao trucks suffered significant cargo volumes for domestic transport. a steep decline due to liberalization policies. Lao The largest ones for domestic distribution are operators were not prepared to compete with beverages (BeerLao), natural resources (various neighboring countries nor did they establish direct mines), construction materials (i.e. cement business links with Thai, Vietnamese or Chinese factories) and a few others. The common theme firms. Lao operators continue to prefer the border identified through interviews with operators is transshipment model which has been promoted by that there is considerable idle transport capacity. LIFFA and parts of the Lao government (see Box 5). The downturn in business can be attributed to a The lack of articulation (semi-trailer) operations number of factors: also reduces the scope of work that the Lao operators are able to assume cost-effectively. In ••Foreign trucks being able to deliver directly to the domestic segment, new market entrants split destination and the related reduction in cross- the domestic pie in a greater number of smaller border transshipment. pieces, largely incentivized by the availability of cheaper trucks. At the company level, the picture ••Greater use of foreign trucks for exports as is mixed as some of the larger companies, mostly return cargo (see above point). with longer-term contracts, have not felt the slowing demand as much as smaller ones. ••The continued use of inadequate transport equipment by Lao operators; most import cargo Importers and exporters in Lao PDR have arrives on semi-trailers while the majority of benefitted from the liberalization policies of the Lao transporters still use 12-wheeler trucks. government. Foreign transport companies are providing better transport services at lower ••A fall in many commodity prices and their prices. Exporters can access foreign markets more knock-on effect on domestic transport cheaply and Lao PDR’s trade competitiveness has demand. improved. But the effects of greater competition in the international transport segment has not ••Greater enforcement of anti-logging legislation, trickled down to the domestic market. Prices especially in the Champasack province. on purely domestic routes are still higher, likely because foreign trucks are prohibited from carrying domestic cargo due to cabotage rules. 10 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Regulatory environment ••General hauliers: These are operators without any specialization that operate in the open In order to transport goods in Lao PDR as a third (spot) market. They usually work on shipment- party service provider, a transport license must by-shipment contracts as well as take second- be obtained from the Ministry of Public Works hand work or operate under the control of a and Transport2. The license entitles the holder to consolidator. For the latter, they fill in the gaps provide third-party transport services in the entire during periods of high demand from primary country. In certain sectors, a transport license can contractors. These firms tend to be SMEs and also be obtained for transport of own cargo. While are particularly vulnerable to demand shocks. own-account operators are not supposed to offer third party transport services, they often do and ••Contract operators: They are often general can as long as the customer does not require a VAT hauliers but have long-term contracts with receipt. some of the major transport users (beverages, animal feed, cement, construction material, The licensing process itself is not perceived agricultural products, etc.). In order to land by transport operators as a barrier to enter one of these contracts, the companies must the transport market. It is usually much more meet a number of requirements in terms of challenging to finance the purchase of vehicles at safety, accounting standards, vehicle quality, reasonable costs or find well-trained drivers. experience, etc. As a result, these operators generally perform at a higher level across all To operate a vehicle, transport operators must areas of operation. In some cases, the contracts obtain the following documents: stipulate geographical limitations. ••Registration (renewal every 2-5 years) ••Specialist carriers: Specialist carriers are often required to use special equipment to ••Third-party liability insurance (annual renewal) fulfill transport demand such as cement carriers, fuel tankers, ore and mineral trailers. ••Technical inspection (annual renewal) They tend to work on dedicated contracts as they can’t use their equipment in the general ••Road tax certificate (annual renewal) market. Whereas investment costs are much higher, these carriers are somewhat protected ••“Truck passport” (annual renewal; for from new market entrants given the long-term international operations only) nature of their contracts. Specialist carriers tend to get higher returns that reflect the The costs of obtaining all licenses are around LAK higher investment costs. Nevertheless, these 2-5 million per truck per year, depending on truck operators must know their cost base well to size and insurance coverage. ensure a return on investment. Domestic market segments ••Mineral / raw material transporters: These companies generally have higher equipment The following section provides an overview of the standards and purchase new equipment different market segments as well as an overview from Japan, China or Europe during times of the most commonly used vehicles within those of high mineral prices and resulting high segments: transport demand. Although many firms are 2 The Ministry of Industry and Commerce issues the business license, the Ministry of Public Works and Transport issues the transport license. 11 Findings and Results now suffering from the price downturn, they ••Owner-operators: Owner-operators often seem better prepared to handle it, with less operate in the informal sector. Business borrowing and a better understanding of their operations are often financially not viable with true cost structure. Some have also been able interest rates in excess of 5 percent per month. to diversify to new revenue sources. Their overhead costs are typically limited to a small storage area for an operating base. ••Own account operators: Own account The trucks are for hire at various truck gates operators maintain their own trucking fleet around the county. In many cases, they operate to support their main business activities. In on specific routes with a fixed customer base. Lao PDR, typical cases are fuel distributors, Since they operate in the informal economy, saw mills, cement producers, and others. They there are no official records, all payments are are somewhat similar to specialist operators made in cash, and taxes, if any, are paid as in terms of requiring special equipment, and a lump sum. Without accounting practices, hence the need for major capital investments. depreciation is not taken into account. All Unlike specialist operators, they do not carry expenses are financed out of pocket, and if for hire and reward for other companies. Since expenses exceed affordability, the operator most of those companies are part of larger exits the market. Among this group, there is companies they tend to follow accounting generally little respect for laws and regulations, principles (including depreciation and accrual and overloading is common practice. for maintenance costs). A key difference with third party transport services is that own ••Agricultural traders and producers: account operators treat transport operations Agricultural traders as well as producers often solely as a cost of doing business and do not tend maintain their own trucks, generally very few to transfer it to the cost of goods sold (COGS). in numbers (1-3 vehicles) and size, to bring the produce from the farm or collection point to ••Mixed own account and general haulage: the local market. Growers bring their produce In some cases, own account operators offer to collection points where they get paid for transport services on the open market, the amount delivered. Traders take it from although they may have only a general business the collection point to local or even national license for a manufacturing or trading activity. market. While growers use vehicles as small as The boundaries between transport and other vans and pick-up trucks, 6-,10- or 12-wheeler activities is often blurred. trucks and/or buses are used for longer distances. There is no evidence that these ••Consolidators: These are groupage or Less than vehicles or their operation are costed in any Truck Load (LTL) operators that offer transport way other than as the cost of doing business. services along a particular route. They rely on The cost of transport is not factored into the a main customer base and generally charge by selling price – this is determined by the market, weight and/or volume (kilo/ton, cubic meter). and traders ensure they are not losing money. In most cases they maintain warehouses at both points of origin and destination to hold cargo. For return cargo, they rely on their own customers as well as compete on the open market. They generally use second-hand Japanese 12-wheelers, and their costing tends to be wholly based on round trips. 12 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Box 1 Common trucks used in Lao PDR There are only a few different truck types being used in the transport sector in Lao PDR. The most common ones have been listed in the table below. Southeast Asian countries (especially Thailand and Lao PDR) make reference to specific types of trucks by classifying the number of wheels instead of carrying capacity or gross vehicle weight. The table below provides a reference for “conversion”. It should be noted that trailers are combined to tractor-trailer configurations as well as rigid vehicles commonly referred to as wagon and drag. Truck type Gross vehicle weight Estimated carrying capacity Common name and usage 4-wheeler 9.5 tons 1 to 6 tons Urban distribution 2 axles / 6 wheels Max. G.W. 14,100 kgs. 14.1 tons 6-wheeler This is the max. There are 2 to 7.6 tons Urban distribution and refrigerated box smaller ones trucks 2 axles / 6 wheels Max. G.W. 14,100 kgs. 10-wheeler 23.2 tons 13.2 Heavy cargo in distribution, construction 3 axles / 10 wheels or agriculture Max. G.W. 23,200 kgs. 12-wheeler Mainstay of national fleet 27.2 tons 15.2 tons (second-hand from Japan where they are 4 axles / 8 wheels Max. G.W. 20,000 kgs. 4 axles / 12 wheels Max. G.W. 27,200 kgs. known as 10 tonners) 18-wheeler 41.4 tons 25.4 tons Semi-trailer with 6x4 tractor and 2-axle 5 axles / 18 wheels trailer Max. G.W. 41,400 kgs. 22-wheeler Mainstay of long-distance and container 49.6 tons 30.6 tons movements. 6 axles / 22 wheels Max. G.W. 49,600 kgs. 6x4 tractor and tri-axle trailer 6-wheeled trailer on 2 axles 16.1 tons 9.1 tons Used with 10 or 12 wheeled rigid as a 2 axles / 6 wheels draw bar outfit Max. G.W. 16,100 kgs. 8-wheeled trailer on 2 axles 18.2 tons 11.2 tons Used with 10- or 12-wheeled rigid as a 2 axles / 8 wheels drawbar for vey heavy bulk cargo Max. G.W. 18,200 kgs. 12 wheeled trailer 27.3 tons 17.3 tons Used with 10- or 12-wheeled rigid as a drawbar for very heavy bulk raw 2 axles / 8 wheels Max. G.W. 18,200 kgs. 3 axles / 12 wheels Max. G.W. 27,300 kgs. materials Source: Authors. 13 Findings and Results Domestic transport sector Box 2 The trucking sector is highly fragmented with a dozen large players (with a fleet size in excess of Using bus services for 50 trucks). The majority are small firms (with less freight transportation than 5 trucks) or owner-operators, many of which Agricultural traders from Champasack work in the informal sector. The market itself is reported using bus services to send cabbage very thin with many companies specializing in one and other vegetables to Vientiane. They use type of operation or operating on one particular this service unless they have enough cargo to route. Management capacity and service levels fill an entire truckload. are generally low, and the Lao trucking fleet can be characterized by an aging fleet of second-hand The price to send a 20 kg bag is LAK 10,000. Japanese 12-wheelers that have been converted Traders deliver normal shipments of 20-30 from left-hand to right-hand driving. bags to the bus station in Pakse. The cargo is picked up in Vientiane where it is directly In addition to trucking operators, there is also an transferred to the nightly wholesale market extensive bus network in Lao PDR. Bus services are for resale. commonly used for both passengers and smaller It is also possible to send a “full bus-load” freight shipments. Buses operate between all major of 400 bags. In this case, the bus company cities in Lao PDR with Vientiane being the lynchpin. sends a dedicated bus to deliver the cargo Vientiane is connected to all major towns in the directly to the market in Vientiane. The price country, often with several departures a day. The for this service is approximately LAK 4 million, bus companies also carry unaccompanied cargo which is roughly comparable to the cost of a on a ‘port to port’ basis and there is no collection 6-wheeler truck. or delivery. Buses do not capture a large part of freight transport demand but are very popular for The use of buses to carry full loads of cargo is time-sensitive shipments of 100 kg or less. They not restricted to agriculture. Full busloads of enjoy a good reputation for operating on time and charcoal bags can be seen being offloaded at being an effective way to send smaller cargo to Lao Bao on the Vietnamese border too. regional centers on a same day or overnight basis. Source: Interviews. The bus station to bus station service is used by many shippers in Vientiane to supply customers in Transport network and route rural Lao PDR. It is slightly more expensive than specialization using consolidation services, but it is faster as buses follow a schedule and don’t wait to be fully Domestic transport network loaded to depart. Payment for transport services is either in advance or upon collection of the goods. Lao PDR can be roughly divided into two broad geographical areas, the South and North, with inherently different terrain and topography. As can be seen in Figure 1, the southern part of the country is largely flat and features better roads. The northern part is hilly and mountainous with windy roads and tight curves. Wear and tear on the infrastructure is much heavier in the North because of climatic conditions. 14 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Figure 1 Topographical map of Lao PDR 15 Findings and Results The main domestic transport corridor is NR 13  ehicle utilization in V which runs all the way from Boten at the Chinese border to Nong Nokkien at the Cambodian border. comparison Most economic centers of the country are located Among the companies interviewed, the average along the corridor including Vientiane, Thakhek, annual distance driven is 55,000 kilometers. In Savannakhet, Pakse, Luang Prabang, and Luang comparison with other developing countries (see Namtha. Most other main routes, especially East- Figure 2), Lao PDR is in the lower mid-range and West routes such as NR8, NR12, NR9 are used is comparable to other developing, landlocked for international traffic to and from Thailand and countries (i.e. Niger, Malawi, Ethiopia, Hungary, Vietnam or link the various mines, hydropower Czech Republic, etc.). and infrastructure projects and agricultural areas with markets. The low annual mileage together with the high costs of capital and low profit margins prevent Route specialization companies from investing in more expensive, yet Although Lao is a small country, the trucking more cost-efficient vehicles. This in turn increases industry is territorially fragmented. This is in variable operating costs and prevents them from part because of existing customer relationships competing with transport service providers from and investments in infrastructure such as neighboring countries. This is exacerbated by the warehouses and sales offices. In addition, there grim outlook for the transport industry. In recent seems to be some territorial segregation of the years, declining transport demand together with transport market amongst operators. While no new market entrants have led to significant operator would admit to being part of a cartel or overcapacity in the sector. As a result, many operating in collusion on a particular route, none trucks remain idle for long periods of time. of them is keen to compete beyond their main routes. Even large, national companies do not Costs, prices and profitability operate in all parts of Lao PDR. This is particularly the case for consolidation services that tend to This chapter presents the findings obtained from specialize on certain routes, such as Vientiane – the data gathered in the transport operator Luang Prabang. The rates are higher than those and user surveys relating to costs, prices and to Luang Namtha. However, no operators to the profitability. other districts had plans to compete on the Luang Prabang route even though they pass through Transport costs it when going North. Even freelancing informal The average transport costs per ton-km within operators are hesitant to take on work outside the entire sample is LAK 489 (USD 0.059). When their regular route. A combination of personal and eliminating two peculiar outliers (with costs in commercial relationships seems to keep outside excess of LAK 1,800), the average operating costs operators from gaining a foothold. For transport per ton-km decrease to LAK 454 (USD 0.049). As users, this translates to generally higher prices for can be seen in Figure 3, the large majority (>70 transport than they would face under free market percent) of companies operate within a band of competition. LAK 230 (USD 0.028) and LAK 575 (USD 0.07). Total costs per ton-km decrease with increasing economies of scale. The greater the utilization of vehicles (measured as tons per wheel per year), the lower the total cost base per ton-km. 16 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Figure 2 Average truck mileage in selected developing countries in 2007 120,000 (in thous nds) P kist n 110,000 South Afric 100,000 90,000 K n 80,000 Indon si 70,000 Indi ri 60,000 Colombi truck mil C m roon Ni Pol nd C ch R public 50,000 Chin r Ethiopi L o PDR 40,000 Hun r M l wi 30,000 Ni 20,000 Av r 10,000 0 Source: Adapted from (Teravaninthorn & Raballand, 2009) Figure 3 Total cost per ton-km by cargo carried per wheel per year (all observations) Cost p r ton-km 900 800 700 600 500 400 = 0.6321x + 566.49 300 200 100 0 0 50 100 150 200 250 300 350 400 Tons p r wh lp r r Source: Authors Note: Red lines indicate corridor between LAK 230 and 575. 17 Findings and Results Overhead costs 182,000 per day. Trip allowances are an essential Overhead costs are dominated by staff costs, in part of the drivers’ remuneration and are used to spite of a generally low average wage. On average, complement their base salary. The more overnight company staff and management account for two trips drivers make the more trip allowances they thirds of the overhead costs. External financing get. The average costs for an employee across costs make up around a quarter of the overhead all ranks and across all firms amounts to LAK costs – general company loans account for 14 19.5 million per year, and is therefore only slightly percent and costs for fleet financing account for higher than the base wage for drivers per year. 10 percent.3 Within the sample, overhead costs vary substantially. As expected, these are very Finding and retaining reliable and safe drivers small for informal transport operators. whose is a key challenge across the entire industry. main overhead consists of a small storage area to The problem of driver retention affects vehicle store goods temporarily and who usually operate utilization as well as fuel usage. Operators do not with less than 3 trucks. hold drivers accountable to performance because the drivers are likely to walk away, and the costs In order to finance working capital, companies to recruit new, better drivers are too high. Only tap various sources: commercial banks, friends few companies with newer equipment are starting and family, as well as external investors. Capital to monitor driver performance, as other countries costs for loans are generally expensive but vary do, and hold drivers to higher standards. At the greatly. Banks tend to offer the cheapest rates, same time, one company reported that it is not but not all companies have access to them. Within offering more services because it is not able to find the sample, interest rates varied from as low qualified drivers for its trucks. as 8 percent per year to as much as 5 percent per month. Informal companies tend to pay the Variable costs highest interest rates, because without formal Variable costs vary considerably depending on the access to finance, they rely on family, friends and distance, trip duration, terrain, road condition, loan sharks. The duration of loans is usually in the and other factors. The key driver of variable range of one to five years. costs are fuel expenses (on average 58 percent of variable costs), staff costs (17 percent) and tires Within staff expenses, drivers make up on average (13 percent). See Figure 4 below for a breakdown 50 percent of total staff costs. The wages for of variable costs. drivers and assistant drivers can usually be split in two parts: (i) a base wage, which amounts to LAK The average variable costs make up around 16.8 million (USD 2,050) per year on average, and 62 percent of the total costs per ton-km -- the (ii) trip allowances. Trip allowances are calculated remaining 38 percent of costs can be attributed based on the duration of the trip and cover food, to fixed costs4. This 60/40 ratio is similar in other accommodation and, in some cases, small truck regions such as East Africa; but compared to maintenance costs. In rare cases, drivers receive developed countries (for example, France where only a trip allowance without a base wage. The the ratio is 45/55), the share of variable costs is average trip allowance within the sample is LAK high. The difference can be largely attributed to 3 Cost for fleet financing have been added as a proxy to reflect higher capital costs for companies with a large trucking fleet. It should be noted that those costs are based on various assumptions and estimations by the authors and should therefore be used with caution. 4 A detailed explanation of the various cost types and what is included within each of them can be found in Annex I: Technical notes on the variables used in the models. 18 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Table 3 Variable costs by vehicle age and the much lower overhead costs, especially wages. geographical area (LAK per kilometer) The difference in financing costs is probably not significant when balancing between lower capital Total North South expenditure and much higher interest rates. New truck 4,685 4,886 4,285 Old truck 5,053 4,792 5,532 Using new and upgraded equipment reduces Source: Authors variable costs, but less than expected. New trucks (up to 3 years) are only around 8 percent cheaper to Note: A new truck is defined as being 3 years or less; an old truck more than 3 years. operate per kilometer than older trucks (see Table 3 i Variable costs by vehicle age and geographical Vehicle fixed costs area (LAK per kilometer)). This could be due to the Vehicle fixed costs include annual vehicle fact that new Chinese trucks entering the market registration, financing costs and depreciation. are less efficient than new trucks from Japanese Many Lao operators, especially micro and or European manufacturers. This effect is most small companies, do not appropriately reflect visible on northern routes where the terrain is very depreciation costs in their pricing. As a result, mountainous, most new trucks are Chinese and companies often go out of business once the truck older trucks tend to be Japanese. Chinese long- is in disrepair (or when repair costs are too high). haul trucks are usually 22-wheeler semitrailers, Therefore, depreciation costs have been assumed while Japanese vehicles are usually second-hand in the model even though not all companies take 12-wheeler rigid imports. Yet, operating costs are them into account. Some larger companies do higher for new trucks than old ones. On southern apply depreciation and basic accounting methods. routes, where the terrain is flat, new trucks seem to offer a 22 percent cost advantage. Figure 4 Breakdown of variable costs 0% 5% 17% 13% St ff 4% R ul r m int n nc (lub , p rts, tc.) 4% T r s Fu l V hicl s rvic Insur nc Oth r 58% Source: Authors. 19 Findings and Results Across the sample, depreciation costs account Figure 5 shows that average total costs per ton- for little more than half (52 percent) of the vehicle km are much higher for northern routes (LAK 582) fixed costs. Vehicle finance costs make up a little than for southern routes (LAK 391). At first glance, less than half (45 percent). Vehicle registration it seems abnormal that the route to Luang Prabang costs account for a mere 3 percent. is substantially more expensive than routes to the far north (including Boten, Luang Namtha and The cost of capital for vehicle financing are Huayxay) in spite of using the same infrastructure. relatively expensive in Lao PDR with typical There are a number of reasons for that: The service interest rates between 10-15 percent per year provision is very different between the far north (usually over a period of 3 years). Companies route and Luang Prabang. The Luang Prabang minimize those costs by purchasing cheaper, route is dominated by consolidation services as second-hand vehicles as well as opting for upfront it is a major consumption center. Consolidation cash payments as opposed to external financing. In services are far more expensive than regular full such a case, the capital cost assumed in the model truck load transport services. Companies that were the deposit rates of the largest commercial provide consolidation services usually maintain a bank, at 7 percent. destination warehouse, plus daily laborers which help operate the acceptance facility and handle Transport costs by route the loading and offloading of cargo. The higher share of fixed costs to total costs is a combination Given the inherent geographical differences of the higher overhead as well as the shorter between the northern and southern regions in Lao distance. PDR and their likely effect on operating costs, the study investigated these costs between northern and southern routes. Figure 5 Variable and total costs for selected routes (LAK per ton-km) 900 800 700 600 500 400 300 200 100 0 Av r Av r Av r Vi nti n - Vi nti n - Vi nti n - Vi nti n - Vi nti n - ntir North South Lu n V n Vi n F r north P ks P ks / s mpl Pr b n Ch mp s ck Source: Authors Note: Far North includes Boten, Luang Namtha and Huayxay. 20 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Box 3 Comparing transport costs with the findings of other studies As mentioned above, IDE-JETRO (2017) conducted a study on domestic transport costs in Lao PDR. This box compares the findings of this survey with the IDE-JETRO study. The paper studied both international as well as domestic transport costs in Lao PDR and Thailand and concluded that transport costs in Lao PDR are between 1.4 and 2.2 times higher than in Thailand, depending on whether a backload cargo was secured. For transport costs, the picture is more mixed. Whereas fuel is generally more expensive in Lao PDR, driver wages are a quarter of those in Thailand. The prices of vehicles depends on the brand and origin – Japanese trucks are more expensive in Lao PDR, Chinese ones are cheaper. Generally, the domestic logistics costs in Lao PDR greatly varies with conditions of terrain, types of transportation equipment, freight forwarder’s nationality etc. The following table provides a more detailed summary of the costs in the two studies: Route Average Maximum Minimum Per KM Study Vientiane – Savannakhet USD 1,208 USD 1,250 USD 1,100 USD 2.466 IDE-JETRO (empty backload) Vientiane – Savannakhet USD 743 USD 750 USD 735 USD 1.515 IDE-JETRO (with return load) Vientiane – Savannakhet USD 864 - - USD 0.915 This study (empty backload) Vientiane – Luang Prabang USD 1,510 USD 1,562 USD 1,375 - IDE-JETRO (empty backload) Vientiane – Luang Prabang USD 928 USD 938 USD 919 - IDE-JETRO (with return load) Vientiane – Luang Prabang USD 964 USD 1,172 USD 854 USD 1.162 This study (empty backload) Note: Transport costs along the Vientiane - Luang Prabang route have been estimated in the IDE-JETRO study to be 1.25 times of those between Vientiane and Savannakhet. Data on the Vientiane - Savannakhet route in this study is based on a single observation. Data on the Vientiane - Luang Prabang route in this study is based on three observations. Only full truckloads have been included in order to maintain comparability. The exchange rate used to convert LAK to USD is 1:800, the same that was used in the IDE- JETRO report, to ensure comparability. As can be seen in the table above, the results of this study are slightly higher than the “with return load” costs but substantially lower than the “empty backload” ones. The differences could stem from the fact that both studies rely on very few observations. There is also some ambiguity in the IDE- JETRO study with regards to the exact routing and nationality of the service providers. Source: Authors, IDE-JETRO (2017) 21 Findings and Results Transport costs by firm size Formal companies face a 25 percent higher total cost basis per kilometer, in spite of operating Within the sample, large companies (and to much larger vehicles. This can be explained by the some extent medium size firms) tend to be more higher overhead costs of formal entities, since the efficient than their smaller competitors. They tend variable costs per kilometer are about the same to drive more kilometers per year than others (LAK 5,419 vs. LAK 5,426). In other words, the and, despite their overhead costs, have lower per economies of scale of operating large trucks are ton-km costs (see Table 4 ) In part, this could approximately as large as the benefits of operating be explained by the fact that most of the larger smaller vehicles in an informal setting. This also companies have long-term contracts with one of means that bringing informal companies into the the major transport service users. Large contracts formal economy may be difficult as they would provide certainty on cargo volumes and prices, lose competitiveness from increased overhead even if it may also require specialized transport costs. equipment that cannot be used otherwise. While this seems to limit investments in new equipment On a per ton-km basis, informal companies (the average age of trucks at large companies is operate at 46 percent higher total costs even 5.6 years) it also seems to encourage investments though their load factor is an estimated 4 percent in larger equipment (large companies operate on higher than for their formal competitors (see Table average the largest truck). Owner-operators are 5). This indicates that formal companies use much on the opposite of the spectrum. They drive the larger vehicles and drive longer distances to reap least number of kilometers per year, operate the economies of scale. This is somewhat reflected smallest vehicles and their costs per ton-km are in the higher average annual kilometers driven double the ones of large companies. (56,958 km vs. 48,233 km). Although the sector is facing large overcapacity, Transport prices mostly in medium and small companies, no major shifts in market share seems to be taking place. Table 6 provides an overview of transport prices by Larger companies operating under longer-term geographic location and selected domestic routes. contracts seem to be “too busy” to venture out The data was obtained from the transport prices to new routes and gain market share from their survey. The data shown in the table distinguishes less competitive rivals. This may be attributed to between prices charged based on actual cargo the fact that each transport operator is bound size and prices charged for the vehicle capacity to family or commercial relationships as well as (using full truck load shipments only). The concept the territorial organization of the Lao transport is similar to chartering a bus for a tour group. For industry where each operator has its own market the bus operator, it does not matter much if there place (see also secton on Contracts and price are 25 or 50 people traveling on the tour. But the setting) -- although no evidence could be found to price per person will double if only 25 show up. substantiate this claim. Applying this methodology to cargo, the price of transporting a shipment based on actual cargo Transport costs by formality size is broken down by the actual cargo weight (i.e. 5 tons), whereas in the case of vehicle capacity, The study team interviewed only a small number the price of the shipment is broken down by the of firms in the informal sector. All of them were entire vehicle capacity (i.e. 15 tons). Only full owner-operators with the exception of one with 3 truckload (FTL) shipments have been included trucks operated by other family members. in the analysis, to exclude price distortions from 22 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Table 4 Total cost per ton-km (overall, northern and southern routes) Avg. truck Avg. truck Size of Company* Overall Northern Southern Annual Km size** age*** Large (5) 323 372 (3) 250 (2) 84,000 12.0 5.6 Medium (21) 452 524 (10) 387 (11) 54,325 10.3 5.7 Small (2) 328 - (0) 328 (2) 60,000 11.0 7.5 Micro (5) 862 866 (4) 845 (1) 38,680 9.2 6.8 Source: Authors Notes: * By number of trucks (Large: >51; Medium: 6-50; Small: 2-5; Micro: 1) ** By average number of wheels per truck *** In number of years In parentheses: number of observations the results rely on. Table 5 Comparison of various performance indicators between formal and informal firms Size of Company* Overall Northern Average total costs per ton-km 425 776 Average total costs per km 9,532 7,068 Average variable cost per km 5,419 5,426 Average load factor vs. capacity 55 percent 59 percent Average profits per ton-km 4 percent 21 percent (percentage) Average annual km driven 56,958 48,233 Average truck age 5.8 years 7.0 years Source: Authors Note: Parentheses indicate the number of observations the results rely on. Table 6 Overview of transport prices by geographic location and actual prices (by weight and volume vs. vehicle weight and volume capacity (in LAK per ton-km) No of Avg. price No of Avg. price Km observations (1) per ton-km (1) observations (2) per ton-km (2) Average all routes 85 2,966 62 882 Average North 40 3,336 40 869 Vientiane - Luang Namtha 650 2 1,394 1 521 Vientiane - Luang Prabang 362 12 3,671 8 552 Vientiane - Xiengkhuang 335 11 4,818 9 570 Xayaburi - Vientiane 400 2 563 2 759 Xayaburi - Luang Prabang 120 5 1,822 4 1,917 Average South 34 1,925 34 622 Vientiane – Champasack 671 7 1,479 5 528 Pakse/Champasack– Vientiane 740 3 943 1 353 Vientiane - Savannakhet 460 6 4,381 5 386 Savannakhet - Vientiane 460 3 419 - - Vientiane - Thakhek 430 2 4,826 1 228 Thakhek - Vientiane 420 3 1,191 3 934 Average Central - 11 5,057 11 1,548 Vientiane – Bolikhamxai 150 2 2,492 2 687 Inner-city Vientiane 24 8 4,571 6 1,781 Source: Authors Note: Average price per ton-km (1): based on actual cargo weight Average price per ton-km (2): based on vehicle weight capacity Km is average distance 23 Findings and Results consolidation services (which are usually much While some of this may be attributed to the small higher than FTL shipments). sample size for specific routes, more relevant explanations may be the probability of getting a Transport prices vary greatly by the direction of return load, competition by foreign operators, as transport (both in (1) and (2)). Lowest transport well as territorial fragmentation of the transport prices are observed on southern routes with an market (see also section on Transport market). average of LAK 1,925 / LAK 622 per ton-km, followed by northern routes with an average of Transport firms may be willing to accept a lower LAK 3,321 / LAK 869. The highest prices per ton- outbound transport price if they have a high chance km are observed on central routes with an average of getting a return load at or near their destination of 5,057 / LAK 1,548. (i.e. from Boten). The chance of getting a return load from Luang Prabang is much lower so prices There are a number of explanations for this: are considerably higher. Most trucks drive back empty due to the high trade imbalance between ••The higher price of northern routes is likely Vientiane and Luang Prabang, with the latter due to the more mountainous topography and mainly sourcing consumer goods from Vientiane worse road condition (compared to southern with little cargo to return with. On the other hand, routes). trade between Vientiane and Luang Namtha is more balanced as there are many imports coming ••The high prices of central routes are driven by into Lao PDR from China via Boten, just 50 km Vientiane inner-city movements in the sample. North of Luang Namtha. The chance of landing a Prices for inner-city movements are highest return load in Boten is higher, resulting in lower per because of the short average distances within ton-km prices. the city limits. When excluding inner-Vientiane, the average transport price for central routes The Boten route is also one of the few examples decreases to less than half, an average of LAK where the impact of foreign competition on 2,492 / LAK 687. domestic transport prices can be observed5. Transport prices for the domestic leg (i.e. Vientiane There are large differences in observed prices even to Boten) are much lower than they are for other along the same routes (see prices in column 4 of destinations along the same route (i.e. Vientiane Table 6 -- Avg. price per ton-km). For example, – Luang Prabang). Prices for domestically ton-km prices for Vientiane – Luang Prabang transported goods have not been affected yet (LAK 3,671) are roughly 2.5 times higher than for because foreign transporters are not allowed Vientiane – Luang Namtha (LAK 1,394) in spite of to carry domestic loads thanks to cabotage being located along the same route with similar rules. However, with Chinese vehicles allowed conditions. Similarly, the transport price for to source and deliver cargo to final destination Vientiane – Champasack (LAK 1,479) is only one based on a bilateral agreement, Lao operators third of the price between Vientiane – Savannakhet are increasingly exposed to foreign competition (LAK 4,381) or Vientiane – Thakhek (LAK 4,826). for international cargo. In fact, the vast majority of cargo destined to Boten is international cargo (imports from China or exports to China). 5 No price or cost data has been collected as part of this study for international transport as it focuses only on domestic transport (see also Scope section). 24 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Figure 6 Operating costs (LAK per ton-km) by vehicle size 1,000 900 800 700 600 500 400 300 200 100 0 6 10 12 22 24 26 28 32 wh l rs wh l rs wh l rs wh l rs wh l rs wh l rs wh l rs wh l rs Source: Authors. Figure 7 Variable costs (LAK per ton-km) by vehicle size and route direction 800 700 North 600 South 500 400 300 200 100 0 6 10 12 22 24 26 28 32 Ov r ll wh l rs wh l rs wh l rs wh l rs wh l rs wh l rs wh l rs wh l rs Source: Authors. 25 Findings and Results Figure 8 Volume vs. weight (cargo density of Lao freight) in cbm 100 90 80 70 = 1.426x + 18.522 60 50 40 30 20 10 0 10 20 30 40 50 60 in tons Source: Authors. Figure 9 Average transport prices by cargo Figure 10 Transport price by product group weight (in LAK per ton-km) (in LAK per ton-km) 800 70 800 70 700 60 700 60 T l communic tion quipm nt Constuction m t ri l 600 600 Lo s nd f rtili r s 50 50 A ricultur l products B v r 500 500 M chin r , v chicl s nd p rts 40 40 Liquid bulk 400 400 30 30 300 300 20 20 200 200 10 10 100 100 0 0 0 0 H v (> 15 tons) M dium (> 1 - 15 tons) Li ht (<1 ton) Av r pric p r ton-km (l ft xis) Source: Authors. Av r si of c r o in cbm (ri ht xis) Source: Authors. Notes: Data only takes into account product groups with a minimum of 2 observations. Price data is based on vehicle capacity. Data does not include shipment transported below 150 km or cargo below 5 tons. 26 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet In spite of excluding consolidation shipments, it Volume-weight considerations is striking that transport prices based on actual The underutilization of weight capacity in the cargo weight are much higher than prices based on transport sector could also be attributed to cargo vehicle capacity. This implies that Lao transporters that is generally more voluminous than heavy in do not fully utilize their vehicle carrying capacity. Lao PDR, as can be seen in Figure 8. Transporters However, as indicated in Figure 6, downsizing the may reach the volume capacity before they reach vehicle fleet is unlikely to bring a cost-benefit to the weight capacity or axle load limits. For example, transporters, given the much higher per ton-km across the entire sample, the volume-weight ratio operating costs of smaller vehicles. is on average 9.0 (for each cbm the weight is then 111 kg) while the international standard for road Economies of scale transport is 4.0 (cargo weights 250kg per cbm). Vehicle size determines operating costs. Total However, it should be noted that natural resources operating costs increase with the size of the are underrepresented in the sample. vehicle, but larger vehicles, if fully loaded, have greater economies of scale and reduce operating Transport prices are inversely correlated with costs per cargo unit. Figure 6 illustrates the size and weight (see Figure 9). Prices increase economies of scale achieved for the different steeply with decreasing cargo weight and size. For vehicle sizes in Lao PDR. It is worth noting that example, cargoes beyond 15 tons are shipped on most economies of scale are achieved between average for LAK 979 per ton-km while prices for 6-wheelers, 10-wheelers and 12-wheelers. The light cargo (below 1 ton) are on average LAK 6,911. data suggests that there are little benefits of using Medium heavy cargo (between 1 and 15 tons) trucks larger than 12-wheelers, in terms of cost is priced on average at LAK 2,916. These stark per ton-km. While the heavy-use of 12-wheelers differences are well-explained with economies of can be largely explained by their availability in scale. The average size for light cargo is only 8.5 the market (largely as imports from Japan), the cbm, while for medium and heavy cargo it is 34.5 benefits of investing in larger vehicles (including cbm and 60 cbm respectively. new ones from China) do not offer economies of scale. It is also important to note that the majority Considering the trade-off between volume and of semi-trailers (i.e. 22-wheelers) are Chinese transport costs of individual vehicle types, imports which are less efficient than trucks from domestic transporters seem to have found an other manufacturers. equilibrium. Additionally, given Lao PDR’s topography, not all Transport prices by product vehicle types and sizes are equally suitable for the Transport prices based on actual cargo weight different routes. Transporters tend to use larger vary greatly across the entire sample, from as low vehicles on southern routes with their flat terrain as LAK 52 to LAK 37,878. Using data on vehicle and smaller vehicles on northern routes. Figure capacity, this range narrows down to LAK 36 to 7 illustrates the variable costs across different LAK 3,086. The following section presents some vehicle sizes by route direction. Whereas the price data stratified by product groups and data suggests the same narrative along northern transport services using vehicle capacity data6. routes as above, the economies of scale continue to increase for larger vehicles along southern routes, albeit at smaller increments. 6 To get a better sense of actual (long haul) transport prices in Lao PDR, cargo transported over very short distances (below 150 km) has been eliminated as well as very light and small cargo because this is often shipped by bus or one of the consolidators. 27 Findings and Results Transport prices seem to be somewhat uniform (in generally make very few profitable trips while the range of LAK 527 to LAK 688) and independent their fixed costs accumulate, even when trucks of the actual product, with the exception of liquid are idle. Therefore the profits in the model are bulk cargo (see Figure 10). The much lower prices overestimated (see also section on Profits and for liquid bulk (LAK 499 per ton-km) can be vehicle utilization). explained by large economies of scale as transport volumes are relatively high throughout the year Cost and price by route and distances on average fairly long. Additionally, Costs and prices can differ significantly for since contracts are usually over longer periods different routes. Table 7 contrasts the cost of time (5 years), operators can depreciate their of transport for various routes (based on the assets over a sufficiently long duration that it does transport cost survey) as well as the prices from not affect transport prices. The transport prices the transport price survey. Prices have been for beverages are relatively low because of the calculated based on actual cargo size and weight return loads of empty bottles. (1) and entire vehicle capacity (2). The latter only takes into account full truck loads. Profitability of the Lao transport sector Using prices based on actual cargo weight, it seems Profits in different service and product that profit margins may have not captured all segments price elements. The gap between costs and prices Contrasting transport costs against price data diminishes considerably once prices are calculated from the price survey reveals extremely high based on vehicle capacity rather than actual profit margins in the transport sector across cargo size. Average profits across all observations all product groups with the exception of liquid decrease to 24 percent. This suggests that full bulk (see Figure 11). Consumer goods distribution truck load prices are generally calculated on a commands extremely high prices, in part because roundtrip basis. It also means that the premium of the small shipment size and weight, as well as for consolidation services is very high which may the higher cost of maintaining cargo acceptance be in part driven by the challenge to fully utilize at destination facilities. This business provides weight limits in consolidation cargo. the highest profits in absolute terms and gross margins of close to 50 percent. Gross profits seem The high prices which are based on actual cargo to be particularly high in the agricultural sector weight explain why there is a general belief that although this is based on very few observations transport prices in Lao PDR are high. However, high and not considered realistic. transport prices are largely only observed in the less-than-truckload segment where the average Generally, this data should be taken with caution per ton-km price is LAK 7,191. If considering for a variety of reasons: only full truckloads, transport prices decrease considerably (see column 4 in Table 7 -- Average ••Data for various products is extremely thin and price per ton-km (2)). On high volume routes relies on very few observations, especially cost (such as Vientiane - Luang Prabang, Vientiane - data Savannakhet, Vientiane – Champasack/Pakse and a few others), one can observe very competitive ••The cost data only considers trips when trucks rates in the range of LAK 228 to LAK 552 per operate. However, many trucks stand idle ton-km. These also tend to be routes where larger for long periods of time due to overcapacity trucks with lower operating costs are being used. in the sector. As a result, trucking operators 28 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Table 7 Costs vs. prices (in LAK per ton -km) Average costs Average price Average price per ton- per ton-km per ton-km (1) km (2) Average all routes 489 2,966 882 Average North 578 3,321 869 Vientiane – Boten/Huayxay/Luang Namtha 294 1,394 521 Vientiane - Luang Prabang 839 3,671 552 Vientiane - Xiengkhuang 578 4,818 570 Xayaburi - Vientiane - 563 759 Xayaburi - Luang Prabang 1,822 1,917 Average South 391 1,925 622 Vientiane – Champasack 347 1,479 528 Pakse/Champasack – Vientiane - 943 353 Vientiane - Savannakhet 327 4,381 386 Savannakhet - Vientiane 327 419 - Vientiane - Thakhek - 4,826 228 Thakhek - Vientiane - 1,191 934 Average Central - 5,057 1,548 Vientiane – Bolikhamxai - 2,492 687 Inner-city Vientiane - 4,571 1,781 Source: Authors Note: Average price per ton-km (1): based on actual cargo size and weight Average price per ton-km (2): based on vehicle capacity (size and weight). This column only considers full truck loads (FTL shipments). Figure 11 Profits by service offering/product group 1,200 1,000 Consum r oods incl. consolid tion Tr nsport cost 800 Profit m r in 600 Construction m t ri l T l communic tion A ricultur l products v hicl s nd p rts quipm nt s 400 M chin r , Liquid bulk B v r 200 0 (200) Source: Authors. Note: Data only takes into account product groups with a minimum of 2 observations. Liquid bulk based only on 1 cost observation. Price data is based on vehicle capacity. Data does not include shipment transported below 100 km or cargo below 5 tons. 29 Findings and Results Prices vs. prices Figure 12 also shows that some trucking The study team also collected prices directly companies offer transport services below full cost. from transport service providers. These prices are This data has been provided by the transport substantially lower than those that were provided firms themselves and confirms that only very few by transport service users through the price survey. transport companies know their true operating Due to the large differences observed, a handful costs. There are a number of explanations for this: of companies were approached anonymously to provide quotations for a transport service ••The large majority of small transport firms (identical or similar to the one surveyed during the operate on a “per trip” basis. They disregard cost interviews). While those quotations were on depreciation, and financial obligations are only average 16 percent higher than the information considered if and when an actual payment provided during the interview, fuel costs had has to be made. Firms usually don’t consider increased 17 percent since then, or LAK 1,250 per opportunity costs. As a result, their overhead liter of diesel (Lao State Fuel Company, 2018). and fixed costs are very small and most costs Variable cost increases seem to be passed on are variable. This also explains the strong directly to the users. preference of transport firms to split their drivers’ pay into a small monthly fixed portion Using the truckers data, the majority of firms and a relatively large variable one. Without a within the sample seem to generate profits7, as can base cost for the vehicle (i.e. financing costs be seen in Figure 12. But profit margins within the and depreciation), the marginal costs for a sample vary substantially, with some companies truck to wait an extra day for a return load recording margins in excess of 50 percent while boil down to an extra day of allowance for the others record losses of more than 70 percent per driver. trip8. The average profit margin is 6.9 percent. ••Transport operations are not the primary Variables such as routes served, company size, business activity for all companies, in which vehicle size, own account operators/long-term case cross-subsidization occurs . contractors/spot markets etc. are all insufficient to explain why companies generate profits or losses. ••Cost increases are passed on in the spot market through increased rates. In longer- Profits and vehicle utilization term relationships, most rates are historical The profits shown are likely to be overestimated. and well-established, and therefore more Table 7 shows the profit margins when trucks are rigid. Additionally, they are often supported actually operating. The model used ignores idle by ‘official rates’ from the local government times of the fleet whereas in practice, vehicle fixed and/or trucking associations9. However, small costs continue to accumulate even when vehicles operators that attempt to discount the nominal are idle. Very few companies run all trucks the tariff will come under pressure from their peers. majority of the time. In several companies, more than half of the fleet is parked. Box 4 provides an example from the survey. 7 Profits are calculated based on prices and costs provided by the transport companies. 8 For that particular trip surveyed. 9 Officially these rates are for guidance only. These rates are determined based on distance and road condition/elevation criteria. 30 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Figure 12 Profit distribution (in percent) for all observations 80% 60% 40% 20% 0% -20% 40% -60% -80% -100% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Obs rv tions Source: Authors. Box 4 Overstated profits This example company has a fleet of 13 trucks. Its fleet consists of new and second-hand vehicles from Japan. Vehicle size varies between 12- and 22-wheelers. The company has been focusing on the spot market since it lost the long-term contract it had been operating under. Taking into account total costs (per ton-km) and prices charged (per ton-km) to their customers, the company generates an operating profit between 5 and 20 percent* for each trip. However, the entire company only makes around 10 long-haul trips per month (of around 3 days each) and another 10 short-haul trips (of around 1 day each). The utilization of the company’s fleet is therefore around 10 percent (40 vehicle-days per month out of approximately 400 available vehicle-days). The fleet is idle 90 percent of the time Fixed costs amount to LAK 500,000 (USD 61) per day or LAK 15 million (USD 1,830) per month. Vehicle fixed costs for a second-hand truck is LAK 200,000 (USD 24) per day and 400,000 (USD 48) for a new truck. Extrapolating those costs for a fleet of 13 trucks, monthly vehicle fixed costs range between LAK 78 million (USD 9,512) to LAK 156 million (USD 19,024). Downsizing the fleet is hardly possible due to weak demand for second-hand trucks. This weak demand can be attributed to (i) overcapacity in the Lao transport sector, and (ii) restrictive policies to import second-hand trucks and vehicles in neighboring countries. The result has been a big drop in prices for second-hand vehicles in Lao PDR. In light of the continuously accumulating vehicle fixed costs, the current profit margins generated per trip are by far insufficient to sustain the company in the long-run given its current cost structure, fleet size and work load. In other words, the profits generated per trip are eaten up by the costs incurred when the fleet is idle, which reduces profits considerably and might even result in overall losses. Note: * Depending on the depreciation period. 31 Findings and Results Figure 13 Actual load factor and annual kilometer L od f ctor 250% 200% 150% 100% 50% 0% 0 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000 Annu l km Source: Authors. Note: 100 percent loading capacity equals legal weight limits. Figure 14 Profit distribution (in percent) for all observations Cost p r ton-km 2,000.00 1,800.00 1,600.00 1,400.00 1,200.00 1,000.00 800.00 600.00 400.00 200.00 0% 0% 50% 100% 150% 200% 250% L od f ctor Source: Authors. Note: 100 percent loading capacity equals legal weight limits. 32 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet ••Due to the large overcapacity in the sector, inclined to falsely report vehicle weight to be within transport companies will accept any rate that official load limits. Additionally, the payment of is above their variable costs to increase vehicle informal fees to weigh stations is an indication utilization and recover some of their sunk costs. that vehicles do not conform to existing weight The data shows that prices10 are consistently limits. Given the low volume and weight density above variable costs and thereby help reduce of Lao cargo, some transporters exceed by far the losses. Based on this calculation, only one volume capacity of their vehicles (12-wheeler open company showed losses (and transport is not trucks are particularly suitable for overloading). their primary business). Using only variable costs, the average profit margin is 43 percent. The likelihood of overloading decreases with the annual utilization of the vehicle, as can be seen in Overloading Figure 13. In other words, companies with fewer According to an ADB funded study (2015, p. 14) 11 kilometers driven per vehicle are more likely to on road sector governance, overloading is highly overload. Overloading increases competitiveness prevalent in Lao PDR with no end of this trend in of the individual service provider at the expense of sight. Levels of overloading are even higher where public roads. there are no fixed weigh stations; mobile weigh stations record higher levels since such checks are The effects of overloading on competitiveness unannounced and therefore not anticipated by of an individual transport company can be seen operators, in contrast with fixed weight stations. clearly in Figure 14. The average costs per ton- For more information on axle load limits in Lao km decrease significantly with an increasing load PDR, refer to Annex II. factor. While overloading was common practice even in “good” times in Lao PDR, in the current 17 percent of companies interviewed admitted environment with large overcapacity and low overloading. The average overloading amount was vehicle utilization, many feel it is the only option 26 percent of the vehicle’s gross vehicle weight. to remain profitable. The high cost of capital and One company even reported overloading of up to the abundance of Japanese trucks on the market 250 percent of gross vehicle weight. Overloading may also explain why Lao transporters were is likely more prevalent than the numbers suggest, incentivized to invest in second-hand Japanese as companies might not have reported overloading vehicles . in the survey, and some transporters might be 10 For this test, prices provided by the transport companies have been used. 11 The report was funded by ADB but prepared by Oriental Consultants; International Development Center of Japan; Mekong Consultants. See Reference section for full citation. 33 Findings and Results Contracts and price setting Commercial relationships are similar to family relationships and gifts are also common practice A small number of companies from a handful to deepen ties between companies. This practice of sectors12 with large transport demand in Lao is not exclusive to Lao PDR as it happens in PDR operate either on own-account, on longer- developed Asian countries too. Lao trucking term contracts with third-party transporters/ companies see it as a cost of doing business. forwarders, or a mixture of the two. The contracts In some cases, the cost is recovered through are drawn up for a period of one to 5 years and inflated prices or dummy loads. This custom of usually specify an estimated volume, transport gifting the client (all throughout contracts) may prices, routes, etc. Negotiations usually occur on also partly explain the large difference between an annual basis. If the parties do not agree, the prices provided by truckers and prices provided contract is terminated. by clients. If considering this together with the likely underestimated costs due to low vehicle To win contracts, operators are expected to utilization and overcapacity in the sector, profit provide a kickback to the customer. This is margins decrease significantly. usually set at 10 percent and built into the rates. Nevertheless, contracts are in practice In spite of rates being pre-determined in contracts, nothing more than a letter of intent as they are they are by no means fixed. Some contracts not enforceable. The exception to this is when specify what triggers a change in transport rates operators purchase specific equipment on behalf and by how much, while other contracts will be re- of their clients. Even then, however, contracts do negotiated when volumes decrease. However, the not necessarily protect companies. For example, client is unlikely to give the work to other operators when Phu Bia mine changed from Australian to for a lesser price. Due to the existing relationships, Chinese ownership, the new management decided both parties are likely to negotiate a solution. to discontinue its relationship with the existing transport company that had recently purchased For the spot market, each provincial department 50 new vehicles, in spite of an existing contract. of public works regularly publishes transport While contracts do not provide absolute certainty rates to most common destinations. The rates are with regards to future work, they are nonetheless agreed upon in cooperation with the local trucking useful because they can be used to access cheaper association and based on distance, road conditions financing with financial institutions (i.e. for and elevation levels. Although this is only seen as working capital or assets). a guide, operators tend to abide by those rates. Considering the data from the cost survey, the Personal or family relationships play a large spot rates seem to be set very generously in favor role in the business culture in Lao PDR. Many of operators. transport companies have a family connection with their customers and have deployed vehicles In general, the operators do not appear willing or at the behest of the customer in return for able to redirect their activities and compete for guaranteed work. While they are also covered by work. Operators have a tendency to protect what “contracts”, the relationship is what holds the deal they have rather than compete for new contracts. together. Gifts are not unusual to strengthen the Their fate often lies with a small number of relationship. customers, if not a single customer. If this business disappears, the operators seem unable to find new customers or compete in tenders. 12 Including beverages, mining as well as some construction companies for large infrastructure projects and cement. 34 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet 35 Policy options and regional trade 4 Policy options and regional trade Historically, Lao transporters have operated the – Luang Prabang route. The direct delivery of Thai vehicles that were available to them, rather than and Chinese trucks to the destination within Lao the ones most suitable to the task. The supply of PDR (rather than transshipping at the border onto good second-hand trucks from Japan in particular a Lao truck) has reduced transport prices and the has meant that the transport industry has come work load for domestic operators considerably to rely on 12-wheelers. While these 5 or 6 year old and may be the final trigger for a mass exodus trucks are well maintained and in good condition of Lao firms from the transport market. For Lao when bought from Japan, they are far from ideal consumers this is good news. Importers and for the road conditions in Laos. They are designed exporters already benefit from lower prices for for good roads and higher cruising speeds. They international cargo. Export competitiveness of are not designed to be overloaded and driven on Lao products increases as the final price of Lao the steep mountain roads of Lao PDR. products delivered abroad decreases. Downsizing the fleet or vehicle size is practically The cost and price data analysis has shown impossible in the current market. Due to low that many transporters generate losses while freight demand in the domestic market, there is operating, in part because of large overcapacity no demand for second-hand vehicles. In the past, in their fleet. New, domestic focused market operators were able to sell their second-hand entrants have exacerbated the situation. Many trucks at a good price, even after 10 years of operators now face a fundamental choice: Since usage in Lao PDR. This is no longer the case (see downsizing is not an option and many companies section on Transport market). The price of 5-year are dying a slow death, they can exit the market old vehicles has dropped from USD 50,000 around to cut losses, or take the risk of investing in a new four years ago to only USD 25,000 today. This fleet to make profits. The latter would require decline in prices is expected to continue with other reducing transport costs substantially. The recent countries further limiting the import of second- research by IDE-JETRO (2017) comparing Lao and hand vehicles. Operators report that the market Thai transport costs suggests a cost reduction for second-hand vehicles has basically collapsed between 29 and 55 percent. This can only be and it is hard to dispose of used trucks for anything achieved with investments in newer, more fuel- other than spare parts. As an upside, maintaining efficient vehicles. Investments in new vehicles the current fleet gives operators the opportunity would require an annual mileage of at least 75,000 to take on larger loads when they occur. km (not the current average of 55,000 km). This would reduce fixed and vehicle fixed costs by about The Vientiane – Boten route provides a showcase 20 to 35 percent per km driven. The transporters for how market liberalization policies and would then have a larger, more economical asset international competition can contribute to to operate with. Savings in variable costs are reduced domestic transport prices. The increased estimated to be around 15-30 percent due to the competition from Chinese operators has led to higher fuel efficiency of newer trucks and lower substantially lower transport prices along the expenditure on tires (together those account for Vientiane - Boten route compared to the Vientiane 70 percent of variable costs). Cost savings could 36 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet be even greater if the current high costs to access operators to embrace regional trade and the finance were reduced. international movements of goods. For example: Given the current market situation with fixed ••Trade between Thailand and Vietnam: Around routes and static market shares, as well as the 10 years ago, cargo volumes amounted to 20- relatively small cargo volumes (due to the absence 30 trucks a week. Presently, it is an estimated of major manufacturing or domestic agricultural 5,000-6,000 trucks per week, but few Lao distribution activities within Lao PDR), it is operators are involved in this trade. unlikely that the domestic market offers sufficient opportunities to reach the required mileage ••Trade between Thailand and China: Most of 75,000 km per year. But opportunities for manufacturing components between Thailand engaging in international transport may provide and China are now transported by road. The the necessary vehicle utilization to invest in new transshipment of fruit and vegetables between trucks. Thailand and China takes place at Boten in Laos. Yet, no Lao transporters are involved in So far, Lao transport operators have been these operations. excluded from international operations. Although cross border international freight traffic should Lao transporters could provide transport not have a major effect on domestic transport, services (and customs brokering, etc.) without it does in Lao PDR due to the large amount of transshipment or use integral trailers instead of imports from China and Thailand. The domestic containers to be more competitive. The example transport operators have benefited from cargo of the Netherlands in Europe highlights how a entering at Boten (at the Chinese border) and from small economy can take advantage of its location: the Thai borders, most notably in Chong Mek and Dutch trucks operated from Germany to Spain Vientiane. But the lack of semi-trailer capacity is even before the single market. The only condition beginning to take its toll. Customers now prefer to was to cross “home territory” along the way. use Thai, Chinese and Vietnamese trucks straight This opportunity also exists for Lao PDR, but to their destinations and not transship onto Lao the window is closing with the growing logistics 12-wheelers at the border. Rather than embracing capacity in Vietnam and Thailand. the demand for semi-trailers and the movement of containers and cargo on one vehicle, the trucking Another key aspect of tapping into regional trade industry together with the Lao international opportunities is greater access to Laem Chabang freight forwarders association (LIFFA) continue to and Bangkok ports, as the majority of international favor the transshipment model, in which all cargo trade transits through these hubs. Currently, is transferred at the border onto Lao trucks. This very few trucks can access the ports because of would not only delay the arrival of cargo, it would transit bond issues. The share of Lao containers also increase costs, risk of damage and introduce is only 60,000 out of the 7 million annually. This greater uncertainty regarding delivery times (see opportunity should be pursued rigorously through Box 5). bilateral negotiations. From a regulatory perspective, Lao trucks can travel freely within the Greater Mekong Subregion thanks to existing bilateral agreements with all neighboring countries. Given Lao PDR’s location, there are considerable opportunities for Lao 37 Policy options and regional trade Box 5 The transshipment model The transshipment model proposed by LIFFA and other Lao stakeholders would likely prove more expensive for transport users than current practices. All cargo entering and exiting Lao PDR would need to be transshipped between a Lao and foreign truck. For containerized cargo, a lift-on/lift-off transshipment costs approximately USD 80-100. Transit cargo from Thailand via Lao PDR to China or Vietnam would be at least USD 160-200 more expensive just because of the container movement. Currently this cargo must be transshipped only once, usually between two foreign trucks. One company indicated that importing cargo directly to the destination is approximately 30 percent cheaper than transshipping the goods onto a Lao truck at the border. Non-containerized cargo, such as the fruit and vegetable trade between Thailand and China, would need to be manually transloaded two times as well (it is currently transloaded once in Boten). Each transshipment takes approximately 4-5 hours and is completed with manual labor. Transloading the cargo disrupts not only the cold chain but also increases the risk of damage and spoilage of cargo. Additionally, very few Lao transporters have the necessary experience and equipment to handle reefer cargo. The costs of manually transloading a 40 ft. reefer container are estimated to be similar to those for containerized cargo. A practical consideration is that most foreign trucks entering Lao PDR tend to be semi-trailers. Since Lao transporters predominantly use 12-wheeler trucks with lower carrying capacity, two Lao trucks would be needed to match one foreign vehicle which in turn would drive up transport costs considerably. Transshipment also carries a number of hidden costs. In order to effectively transship cargo between two trucks, schedules must be aligned carefully in order to reduce wait times. With average estimated vehicle fixed costs between USD 100-200 per day, delays of all types become even more costly. Involving two trucks would double the cost. Additionally, whereas manual transloading does not require infrastructure (other than sufficient space for 2 trucks), lift-on/lift-off operations require a crane, which are a significant capital investment. Cranes require careful maintenance to prevent frequent breakdowns and extend their lifespan. In some cases, warehouses and other infrastructure are also needed to support transshipment operations, all of which drive up transport costs. Sources: (Ksoll & Quarmby, 2012), Authors 38 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet 39 Annex I Technical notes on the variables used in the models Annex I Technical notes on the variables used in the models Fixed costs not incur any costs for the facility, none have been assigned. Companies that rent their office Regulatory compliance costs space have been costed with the actual rental Many firms reported that official costs to obtain fees. Running costs have been included in the the necessary licenses and permits are very low. analysis regardless of ownership status. However, it seems that many transport operators have to pay relatively large, agreed-upon ••Company cars: Where information on company informal fees to various authorities (including cars was available, they have been depreciated tax authorities and the police, for example) as an over a period of 5 years using a linear method. expected additional cost of doing business. These The annual depreciation has been added to costs have been recorded as overhead. company facility costs. Staff costs External loans ••Management: In some cases, the owner of External loans have been taken into account in so the transport company does not receive a far as they require regular repayments(monthly, monthly salary but regularly extracts cash quarterly or annual). In such cases, the payments from the company to finance personal daily have been calculated on an annual basis. Where expenditures. These withdrawals have been such information was not available, estimations estimated as salary. have been made using interest rate, loan amount, and duration of the loan. In the absence of external ••Warehouse: Staff costs associated with loans, no capital costs have been accounted for. warehouse operations have been included if the warehouse was a critical part of the transport Assumed fleet cost operations. During data collection there was Companies with a large fleet have higher capital inconsistency about whether daily laborers costs than companies with a small fleet. No were included or not, but since wages for daily detailed information on the overall fleet costs laborers are very low, the impact on overall was obtained due to time constraints during the transport costs is estimated to be marginal. interview. In order to take capital costs for the fleet into account, several assumptions were ••Drivers: Only the base wage of drivers and made for the fleet of each company: assistant drivers has been recorded as fixed costs,. In Lao PDR, it is common practice to ••The vehicle fleet of every company has an provide a daily allowance for overnight trips. average age (new, 2.5 years, 5 years, 7.5 This has been recorded as variable costs. years, 10 years). This estimation was based on observations made during the interview. Company facilities ••Office space: In many cases, transport ••The purchase price of each vehicle type was companies own their office facility, often as the estimated based on values obtained during the family residence. For those companies that do study and authors’ experience. 40 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet ••Truck values were estimated for vehicles of ••Leasing: If available, the monthly leasing rates different ages (new, 2.5 years, 5 years, and have been accrued to obtain annual leasing 7.5 years) to obtain average fleet value based costs. on actual fleet parameters. At 10 years, the vehicle value was set at 0. ••Combination of the above sources of finance: The costs of each source of finance has been To calculate the capital costs, additional calculated to obtain a complete picture. assumptions were made: ••Regulatory compliance costs ••Capital costs were fixed at 7 percent (in line with other capital costs). ••Registration: Vehicle registration is valid for a period of up to five years. The annual costs ••The share of vehicles under financing has been were used to calculate annual operating costs. estimated to be 50 percent for all companies (unless known otherwise). ••Insurance: Only vehicle insurance has been used in this cost item. Vehicle fixed costs ••Operating license for the truck: In some cases, Capital costs for vehicle financing a separate operating license for the truck must There are three main vehicle financing options be obtained. in Lao PDR: (i) owner financing, where the owner pays the full purchase price with his own funds, Depreciation (ii) financing through external sources (i.e. bank, The cost of depreciation of the vehicles has been friends, business partners), and (iii) leasing, or a taken into account despite not many companies combination of the three: applying depreciation or other measures to take into account vehicle capital losses. In this study, ••Owner financing: With owner financing, the the depreciation period applied is 5 years, in transporter still incurs capital costs in the accordance with international standards, across form of opportunity costs. Such capital costs all companies, even though some use their vehicles have been priced based on the deposit rate of for much longer periods. The study assumed a Lao banks (for LAK), at 7 percent. linear depreciation method. New and used vehicles are treated differently: ••Financing through external sources: The study did not differentiate between different types ••New vehicles are depreciated over five years. of external financing. To establish the annual Unless otherwise indicated by the interviewee, operating costs of trucks, annual repayments the remaining value of the vehicle after five were estimated, either by adding up the years is estimated to be 30 percent. monthly payments, or determining them using the actual interest rate, loan amount and ••Second-hand vehicles are depreciated over five duration of the loan. The rates in the market years too. The remaining value of the vehicle vary widely and can be as high as 5 percent per after five years is zero. Since major repairs month (60 percent per year). can be expected to occur within the five year period, an estimate of such major repair costs has been taken into account. 41 Annex I Technical notes on the variables used in the models Variable costs Tires Tire costs have been estimated using the same Variable costs are calculated for a specific route methodology as for periodic vehicle service (see using a specific vehicle (as opposed to for the above). whole fleet). This approach allows to distinguish different cost types for different vehicles (for Insurance example, the difference between a 6-wheeler and Trip-based cargo insurance offered by transport a 22-wheeler). service providers practically does not exist in Lao PDR. At present, only one of the companies Staff costs surveyed offers this service. This item captures all variable staff costs. In most cases it includes a trip allowance for traveling Other variable costs staff. Traveling staff are the driver, and in some This item captures all other variable costs. Most cases, an assistant driver and loading staff. notably, these are informal payments (i.e. tea money), road tolls, parking fees, border pass Fuel costs fees, weigh bridge fees, labor costs (for loading During the time of the study, diesel prices increased and unloading the vehicle at point of origin and from around LAK 7,150 to LAK 7,620 depending on destination), and others. In some cases, it was the exact geographical area. In order to maintain not possible to obtain more details on informal cost comparability, diesel prices have been fixed payments because respondents did not want to across all companies at LAK 7,150. reveal unlawful practices, such as overloading, for example. Where possible, further information was Vehicle maintenance collected. The study distinguishes between two types of vehicle maintenance: (i) permanent vehicle service, before or during the trip to ensure vehicles runs smoothly, and (ii) periodic vehicle service, such as oil filter changes, every 5,000 or 10,000 km. To establish the total vehicle maintenance costs, the permanent vehicle service costs were estimated on a per-trip basis, and the periodic vehicle service costs were calculated for the distance of the particular trip being assessed. 42 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet Transport prices In order to meaningfully interpret the transport prices collected by the study team, various conversion rates have been used: TEU/FEU/Full truckload (by size of truck) in cbm: Full truckload 28-wheelers 32-wheelers 24-wheelers 22-wheelers 10-wheelers 18-wheelers 14-wheelers 12-wheelers 8-wheelers 6-wheelers 4-wheelers TEU FEU in cbm 33.2 66.4 10 25 30 35 50 50 65 65 90 100 100 TEU/FEU/Full truckload (by size of truck) in tons: Full truckload 28-wheelers 32-wheelers 24-wheelers 22-wheelers 10-wheelers 18-wheelers 14-wheelers 12-wheelers 8-wheelers 6-wheelers 4-wheelers tons 6.0 7.8 19.2 13.2 15.2 18.2 25.4 30.6 32.4 40.6 44.8 43 Annex II Axle load limits in Lao PDR Annex II Axle load limits in Lao PDR Figure 15 Axle load limits in Lao PDR (as of 26 September 2013) WEIGHT LIMIT TONS Weight Limit/Load 2 axles / 4 wheels 2 axles / 6 wheels 3 axles / 6 wheels 3 axles / 10 wheels 3 axles / 6 wheels Requirements Max. G.W. 9,500 kgs. Max. G.W. 14,100 kgs. Max. G.W. 16,00 kgs. Max. G.W. 23,200 kgs. Max. G.W. 13,500 kgs. 3 axles / 8 wheels 4 axles / 8 wheels 4 axles / 12 wheels 3 axles / 10 wheels 4 axles / 14 wheels 4 axles / 14 wheels Max. G.W. 17,500 kgs. Max. G.W. 20,000 kgs. Max. G.W. 27,200 kgs. Max. G.W. 23,200 kgs. Max. G.W. 32,300 kgs. Max. G.W. 32,300 kgs. 5 axles / 18 wheels 6 axles / 22 wheels 2 axles / 4 wheels 2 axles / 6 wheels 2 axles / 8 wheels 3 axles / 12 wheels Max. G.W. 41,400 kgs. Max. G.W. 49,600 kgs. Max. G.W. 14,000 kgs. Max. G.W. 16,100 kgs. Max. G.W. 18,200 kgs. Max. G.W. 27,300 kgs. Source: Ministry of Public Works and Transport, Lao PDR 44 Transport Costs and Prices in Lao PDR Unlocking the Potential of an Idle Fleet References Apthorp, P., Ksoll, C., & Quarmby, J. (2014). Transport and Logistics in Lao PDR: Impact of the ASEAN Economic Community. Vientiane: GIZ. Banomyong, R. (2010). Logistics benchmark study of the East West Economic Corridor. Business Management Quarterly Review, 1-13. IDE JETRO. (2017). Logistics Costs in Lao PDR: Policy-oriented research project. IDE JETRO. Ksoll, C., & Quarmby, J. (2012). Private Sector Views on Road Transport along the North South Economic Corridor. Bangkok: GMS-FRETA / ADB. Lao State Fuel Company. (2018, June 14). Lao State Fuel Company. Retrieved from Oil prices: http://www.laostatefuel.com/en/gas-price.html?page=1 Ministry of Industry and Commerce Lao PDR. (2018, April 25). Enterprise Registration and Management Department. Retrieved from Statistics: http://www.erm.gov.la/index.php/en/statistics Oriental Consultants; International Development Center of Japan; Mekong Consultants. (2015). TA-8492 LAO: Road Sector Governance and Maintenance Project. Vientiane: Ministry of Public Works and Transport, Lao PDR. Teravaninthorn, S., & Raballand, G. (2009). Transport prices and costs in Africa. Washington DC: World Bank. World Bank. (2014). Lao PDR - Trade and transport facilitation assessment. Washington, DC: World Bank. World Bank (2018), Commercialization of Rice and Vegetables Value Chains in Lao PDR : Status and Prospect. http://documents.worldbank.org/curated/en/577801535723026712/Commercialization-of-Rice-and- Vegetables-Value-Chains-in-Lao-PDR-Status-and-Prospects 45 The World Bank Group Lao PDR Country Office, East Asia and Pacific Region Xieng Ngeun Village, Chao Fa Ngum Road, Chantabouly District, Vientiane, Lao PDR worldbank.org/lao