J.7_CTJ_T&L_Analysis_final.pdf

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS

CTJ ASSESSMENT SERIES - PART III:

TRANSPORT AND LOGISTICS ANALYSIS

HORTICULTURAL EXPORTS

IN CENTRAL ASIA

September, 2017

MORGANA WINGARD FOR USAID

RFP 72011518R00001

Attachment J.7

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS | 2

ABOUT THE ACTIVY

USAID Competitiveness, Trade, and Jobs Activity in Central Asia aims to facilitate exports and employment in horticulture and strengthen transport and logistics services across the five

Central Asian economies. By incentivizing firms to become more regionally competitive and by addressing cross-border impediments to trade, USAID helps to develop a more diverse and competitive private sector and generate export-driven growth.

Five-Year Project: October 2016 to September 2021

Goals: Expand regional trade and employment in the horticulture, transport and logistics sectors in Central Asia

Approach: Market Systems Development – facilitating market actors to implement activities and achieve goals

The views expressed in this publication do not necessarily reflect the views of the United States

Agency for International Development or the United States Government.

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TABLE OF CONTENTS

EXECUTIVE SUMMARY 5

THE PROBLEM 5

THE FINDINGS 5

THE RECOMMENDATIONS 7

CHAPTER 1: INTRODUCTION 8

BACKGROUND 8

ABOUT THIS RESEARCH 8

CHAPTER 2: METHODOLOGY 9

THE FRAMEWORK 9

PROBLEM STATEMENT 9

FOCUS AREAS 10

PRODUCTS 10

TRANSPORT MODE 10

SUPPLY CHAIN (ORIGIN-DESTINATION) 10

DATA METHODS 11

DATA COLLECTION 11

DATA ANALYSIS 11

RECOMMENDATIONS 11

CHAPTER 3: HORTICULTURE SUPPLY CHAINS 12

THE SUPPLY CHAIN AND STAKEHOLDERS 12

FARMERS 12

BROKERS 13

EXPORTERS 13

TRANSPORT OPERATORS 14

BORDER AGENCIES 14

BUYERS 14

TRANSPORT MODES 15

ROAD TRANSPORT 15

RAIL TRANSPORT 15

AIR TRANSPORT 16

TRANSPORT PERFORMANCE ANALYSIS 17

COST ANALYSIS 19

TRANSPORT ROUTES 20

OVERVIEW 20

KAZAKHSTAN 22

THE KYRGYZ REPUBLIC 22

TAJIKISTAN 22

UZBEKISTAN 22

KEY ISSUES 23

POLICIES AND REGULATIONS 24

PHYSICAL INFRASTRUCTURE 26

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS | 4

PRIVATE SECTOR COMPETENCY. 26

CHAPTER 4: FINDINGS AND ANALYSIS 29

COUNTRY SPECIFIC FINDINGS 29

KAZAKHSTAN 29

THE KYRGYZ REPUBLIC 32

TAJIKISTAN 36

UZBEKISTAN 39

COMPANY SPECIFIC FINDINGS 44

EXOTICA, LLC 44

ABBADA COMPANY, LLC 44

FARMER’S ORGANIC GARDEN, LLC 45

CHAPTER 5: RECOMMENDATIONS 47

OVERVIEW OF FOCAL AREAS 47

FOCAL AREA 1: CUSTOMS MODERNIZATION 48

FOCAL AREA 2: SANITARY AND PHYTO-SANITARY 49

FOCAL AREA 3: COLD CHAIN CAPACITY 54

FOCAL AREA 4: TRANSPORT INFRASTRUCTURE 56

FOCAL AREA 5: TRANSPORT OPERATIONS 64

FOCAL AREA 6: TRADE FINANCE 66

FOCAL AREA 7: MARKET DIVERSIFICATION AND DEVELOPMENT 66

CHAPTER 6: CONCLUSION 69

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EXECUTIVE SUMMARY

THE PROBLEM

This research, commissioned by USAID Competitiveness, Trade, and Jobs Activity in Central Asia (CTJ), diagnoses the horticultural exports in Central Asia, focusing on transport and logistics matters. The study covers four countries (Kazakhstan, Kyrgyz Republic, Tajikistan and Uzbekistan). The problems can be grouped into three categories or collectively known as the 3 ‘P’s. The framework summarizes the key problems encountered in the transport and logistics of horticultural exports.

Road transport is the dominant mode of transport due to its simplicity and flexibility in conducting door to door delivery, which can take between 3-7 days. During the export season, the cost of road transport ranges between $0.20 to $0.30 per kg for shipments to Moscow. The of railways is less, at $0.10 to $0.20 per kg, but takes 2-3 times longer. It is suitable for selected dried fruits. Air transport is deemed too expensive for fresh produce as it can cost $3.00 per kg. The respondents of this research rarely use this means of transport. This paper argues that, while road transport is dominant, this constrains exporters to over-rely on traditional markets, and does not motivate them to explore new opportunities in markets farther abroad which may require multi-modal transport.

THE FINDINGS

This research consists of a survey that quantifies the importance of the perceived importance and the satisfaction of the respondents on predefined variables. By measuring the ‘importance’ and the ‘satisfaction’ and aggregate the results, one can understand which variable has the biggest ‘gap’ or difference between the mean importance score and the mean satisfaction score. If the gap is large (relative), this means that more attention needs to be focused to address the variable. This is because its importance is high but the respondent is not satisfied, implying existing problems with the current situation.

The responses show that the two variables with the biggest gaps are (1) trade finance and (2) transport infrastructure. Enterprises lament the high cost of borrowing (16% to 28%) and lack access to trade finance services such as transport insurance, export credit insurance, and other financial services. This constrains the enterprise from growing (such as the inability to switch to using a more fuel-efficient vehicle).

Transport infrastructure is another shortcoming. It not only covers the road and rail network, but also border crossing points which are cited as impediments. Both problems result in delays and a higher cost of transport.

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It is note-worthy that the ‘Cold Chain’ and ‘SPS’ are also two other problem. The cold chain infrastructure includes temperature controlled centers, refrigerated trucks and containers, and cold chain professionals.

Cold chain centers represent a massive investment and are costly to operate. In Kazakhstan and

Uzbekistan, the private sector has aggressively moved to build these facilities, while in the Kyrgyz Republic and Tajikistan their importance is also recognized, but their construction is hampered by financial limitations. In the Fergana Valley, there is a lack of refrigerated trucks to transfer perishables. This is a serious constraint during the peak export season during which the cost of a refrigerated truck to Moscow can reach as high as $9,000, about three times the normal price. The highest price recorded thus far was

$9,000 early in 2017 in Uzbekistan. The respondents also acknowledge a shortage of qualified professionals in the cold chain, so such capacity building in this regard would be useful.

SPS poses major problems for exporters. The incompatible standards and the stringent requirements of

Europe naturally confine the export potential of fruits and vegetables to that continent. Even within Russia and Kazakhstan exporters can face problems. For instance, Kazakh importers buy from the Kyrgyz

Republic but feel that the SPS level is too low and that the packaging from the Kyrgyz Republic needs to be better. The Kyrgyz Republic and Tajikistan lack laboratories to meet the Eurasian Economic Union

(EAEU) SPS standards. The Russian Phyto-sanitary service “Rosselkhoznadzor” requires all foreign exporters to obtain a unique code from the unified export register, one which is not easily available in the

Kyrgyz Republic and Tajikistan. Presently, a driver entering the EAEU border must submit SPS documents, ask for a unique SPS code, and then proceed to a destination at which the laboratory examination may be performed. Failure to do so can cause the rejection of an entire shipment, but this process of compliance costs an average of $1,340 per shipment.

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THE RECOMMENDATIONS

This report provides action items according to seven focus areas:

1. Customs Modernization

2. SPS Standardization

3. Cold Chain Capacity

4. Transport Infrastructure

5. Transport Operations

6. Trade Finance

7. Market Diversification and Development

First of all, every country is in a different stage of customs modernization. CTJ can align their efforts so that there is wider acceptance regarding implementation. Here, different actions are prescribed for each country. This consists of single window and a green lane for agricultural shipments.

Second, the problem of a unified export register must be resolved and the process of getting a unique code must be streamlined. CTJ can also intervene on the hardware side (laboratories and instruments) and/or on the software side (training on SPS programs).

Third, cold chain problems should be addressed in a coordinated manner, with a national master-plan for cold chain infrastructure, operations, and talent development. In done in a haphazard manner, there is the risk of over-building cold rooms, which will lead to an over-supply of these in the future. The use of refrigerated containers as temporary storage is an immediate remedy, but the real long-term cost-effective solution is to have well-designed cold rooms. The training and implementation of pre-cooling is also critical to lengthen product shelf life.

Transport corridors and key border crossing points commonly used by shippers in exporting products are identified. This identifies areas of improvement. Road transport is the primary means of export, and is not likely to change in the foreseeable future, so efforts should focus on rehabilitating the road network.

In the longer term railways offer a more economical solution to send dried fruits. Multi-modal transport linking road to other transport modes should also be considered. Finally, air transport has the potential to overcome distance limitations and can be another source of increasing export volume.

CTJ can intervene in trade finance by education (promoting the awareness of trade finance services for farmers, exporters, and transport operators), and encourage banks, associations, and enterprises to develop blanket offers so that the cost of such services (e.g. insurance premiums) can be reduced through quantity purchasing.

Finally, this report argues that over-reliance on the Kazakhstan and Russian markets is unwise, and there is a need to diversify and develop new markets. It is acknowledged that this is a long-term endeavor.

Through more research, business-to-business matchmaking, and trade exhibitions, prospective markets such as China and India may be penetrated.

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CHAPTER 1: INTRODUCTION

BACKGROUND

Central Asia presents a unique and interesting case regarding global trade integration. The core five countries include Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. Since the disintegration of the Soviet Union in 1991, these young nations have had varying degrees of economic success after independence. Countries that are well-endowed with natural resources, particularly

Kazakhstan and Turkmenistan due to their energy and mineral resources, have fared relatively better.

Smaller nations such as the Kyrgyz Republic and Tajikistan have had a narrow range of exports, and imports mainly sustain their economies. Uzbekistan has had commendable success in building a more diversified industrial base.

Nonetheless the region faces unique challenges. First, the counties are land-locked, which indicates how they are not fully-integrated into global maritime trade lanes. Second, they inherited from the Soviet Union infrastructure and standards which are not be compatible with other international standards. For instance, the existing railway networks in the Kyrgyz Republic and Tajikistan are not beneficial to those countries.

The SPS standards in the Central Asian Republics are GOST-based, and are not harmonized with international standards, thereby increasing the difficulty of exports to other markets. Third, the large, geographical land mass and small domestic population increase the inefficiency of supply chains. Goods travel long distances to reach markets. There are no economics of scale and scope that can be derived from the agglomeration effects of large cities. Fourth, there are prevalent challenges in border crossings.

Restrictions in transit regimes, cumbersome documentary and procedural requirements, and unharmonized standards obstruct the efficient cross-border movement of goods. All these reasons make for a detrimental impact on transport time (lengthy) and cost (expensive). Thus, supply chains are unreliable and inefficient.

The fact that agricultural exports are a dominant economic component in the Central Asian Republics has led to an undesirable economic situation. Exports of fruits and vegetables are the main income source for countries like the Kyrgyz Republic, Tajikistan, and Uzbekistan, but unfortunately, these items are essentially low-value and high-weight items. The consequent costly transportation therefore diminishes the profitability of such exports. Furthermore, the unpredictability of the supply chain can result in spoilage or higher the normal defect rates, resulting in write-offs.

ABOUT THIS RESEARCH

The United States developed a new program “New Silk Road Initiative” to support the Central Asian

Republics (CARs) in integrating more effectively into the global trade system. A pivotal element of this program is Competitiveness, Trade, and Jobs (CTJ), a five-year project (2016-2021). The project mandate is to raise competitiveness, to promote trade, and to generate employment. The CTJ commissioned a preliminary study focusing on the horticultural sector. This paper is part of the study, and shall concentrate on an assessment of the transport and logistics in Central Asia, highlighting the constraints and providing recommendations to address issues.

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CHAPTER 2: METHODOLOGY

THE FRAMEWORK

It is common knowledge from any review of the available literature that the Central Asian Republics have the following characteristics:

1. The countries are land-locked.

2. The dominant modes of transport are road and railways.

3. The supply chains are relatively inefficient. (i.e. transport times and costs are high).

4. Within the four exporting Central Asian Republics, the countries have both relative stronger performers and weaker performers.

5. Agricultural exports are significant.

Considering these five characteristics, the study then formulated a methodology according to four major elements that constitute the ‘framework’:

PROBLEM STATEMENT

Agricultural exports account for a substantial volume of the exports from the Central Asian Republics.

However, markets for produce have been concentrated in the Russian Federation and

Kazakhstan. Note that the latter is not self-sufficient in fruits and vegetables, and also serves as a re-export center to the former. Thus, this study performs a diagnostic assessment to analyze why this is so, and identifies the main barriers to a greater export volume. The barriers can be institutional and non-tariff trade barriers such as policies and regulations, or they can be an under-developed infrastructure. Another constraint can be a weak private sector for transport and logistics in performing more shipments or in completing a more sophisticated and demanding supply chain.

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FOCUS AREAS

The first task is to define the project’s boundaries. This is important so that the study can focus only on important parameters. Horticultural products are varied, thus this study is not for conducting a comprehensive study on all the export products, nor is it a general study on the agricultural/horticultural sector. Typically, horticultural products are ‘commoditized’, which means they are of comparatively low value and high weight. This makes them undesirable candidates for export, especially when the end markets are faraway. It is then strategically important to focus on only items that have a higher value-weight ratio so that exports can be competitive.

Since this study focuses on ‘Transport and Logistics,’ the proposed scope will target three major inputs:

a. Products

b. Transport Modes

c. Supply Chains (origin to destination)

PRODUCTS

This study includes five products (cherries, beans, apples, apricots, and grapes) in seven types (the four former products and then apricots and grapes in both fresh and dried forms). The study performs an

‘End Market Analysis’ in which these products are analyzed and then elaborates on their transport and logistics. These items were also chosen based on their global aggregate demand, and the relatively higher value and competitiveness of exporting from Central Asia.

TRANSPORT MODE

This study plans to focus on road transport in as much as preliminary research identifies this as the most popular method for exporting agricultural produce. It will seek to understand why other modes are less popular or are not as feasible, at the present time.

SUPPLY CHAIN (ORIGIN-DESTINATION)

This study covers producers from Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan.

The stakeholders in the supply chain, their characteristics as well as their functions, will be elaborated. At the same time, the study will also describe the transport corridors used to send goods. Destinations to traditional markets such as Kazakhstan and Russian Federation are emphasized since they presently account for most of the exports from the Central Asian countries of the Kyrgyz Republic, Tajikistan, and Uzbekistan. New markets are also included, and these consist of Turkmenistan, China, Europe, and India. It must be acknowledged that data for these destination markets could be sparse as little shipments go to these regions. However, it is important for exporters to consider the long term advantage of market diversification. The oil present crisis which led to a sharp Russian ruble devaluation in 2014, and which resulted in reduced imports of agricultural produce from Central Asia, showed the risks of market concentration. The subject of new market access and diversification will be given a cursory analysis here, and could be the subject for CTJ’s future research.

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DATA METHODS

DATA COLLECTION

This study collects both primary and secondary data. Data collection begins by a review of current studies.

Base-line data from the central statistics office from each CAR is available on the website, as well as international organizations such as the World Bank and the Asian Development Bank. Such information and data form the base-line performance indicators.

Field consultants are also sent to Almaty, Bishkek, Dushanbe, Tashkent, and cities in the Fergana Valley to conduct the focus groups. Using a standard questionnaire, time and cost data are captured on actual commercial shipments. Respondents in the focus group include producers (in the Fergana Valley), shippers

(exporters and traders), as well as buyers. In addition, consultative interviews with the policy makers are also held, particularly with Ministries in Commerce, Transport and Economic Development. Customs

Administration agencies that are also pivotal, so their inputs are also sought. The base-line data are also revised and updated (although some public data on websites are not updated), through the primary data collection from these stakeholders, DATA ANALYSIS

Any empirical data (in raw form) received are first reviewed. If there are any irregularities detected or incorrect submissions, the team will contact the respondents to verify the data. Un-usable samples are discarded. The questionnaire attempts to quantify respondents’ perceptions so that the importance and the exiting performance of transport and logistics competitiveness factors may be analyzed.

Another important set of information is qualitative in nature, and consists of references to competitiveness factors and recommendations to improve the transport and logistics sector. These will be used to supplement the empirical data where applicable. This information will also be featured in the discussion on competitiveness factors.

RECOMMENDATIONS

At the end of the analysis, recommendations for policy makers and the private sector will be given. It must be emphasized that these recommendations are written from the perspective of an international aid agency (USAID CTJ), so they can differ from those of a policy maker or the private sector. Wherever possible, the report will also indicate priorities and where CTJ could be especially relevant to intervene on behalf of, or collaborate with, stakeholders on actionable items.

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CHAPTER 3: HORTICULTURE SUPPLY CHAINS

THE SUPPLY CHAIN AND STAKEHOLDERS

The supply chain for horticultural exports originating from Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan, to the Russian Federation and Kazakhstan as key export destinations. The roles of the various stakeholders are elaborated below.

FARMERS

Farmers are producers of agricultural products and serve as the fundamental unit in the supply chain of agricultural products. They have land plots with private houses or leased land for a definite term. Farmers might choose the product themselves or take an order on consumer request. They are influenced in their decision based on the types and sorts of agricultural products in commercial demand based on supply and demand, as well as on the results of business in past season. In most cases, they themselves find and buy seedlings, seeds, and land using only their own capital or by borrowing funds on the side (not from official financial institutions) for the cultivation and production of agricultural products.

In general, farmers are only involved in production and do not participate in further value-added activities in the supply chain due to:

(1) lack of knowledge of the following;

financial and banking issues, norms and requirements for goods (certification, sanitary and etc.), documentation for export (contracts…), procedures for the export of goods, logistics and transport issues, customs procedures, challenges, opportunities, suppliers’ rights, and other legal issues.

(2) lack of funding and free access to funds,

(3) lack of transparency and free access to the trade market,

(4) lack of guarantees and protection for the farmer’s business, property, and income.

Farmers can also be classified as the most ‘unbanked’ or the ‘under-banked’ segment of the population.

Without a bank account, they conduct all transactions in cash. However, the absence of a bank account

13 | USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS means they cannot enjoy any trade finance (if such exists). The lack of credit history also hampers their borrowing ability. Thus, farmers will need to self-finance production costs, or raise funds through borrowing from friends and relatives, at still relatively high rates. For instance, in Tajikistan, such borrowing methods still cost 8% to 10% per annum for producing dried fruits.

In Uzbekistan, a special type of organization known as the ‘Farmer Business Entity’ (FEB) exists. These are legally registered business entities that have stronger bargaining power vis-à-vis the individual farmers. FEB owns large tracts of land which it can distribute to farmers. If can dictate to resident farmers what to plant. According to legislation, a FEB is supposed to perform cultivation, pest control, and irrigation of the land on a regular basis, but this may not be implemented fully at times. If such lack of maintenance results in a poor harvest, low crop yield, or even widespread destruction of crops due to diseases or pests, the farmers bear the full consequences while still having to pay land lease fees to the FEB.

BROKERS

A broker acts as an agent connecting farmers to the exporters or directly to overseas buyers, earning a commission in the process. The functions of a broker consist of receiving an order from the consumer for a certain type, quantity, packing, and delivery date of goods, finding producers (farmers), organizing packers who are provided with packaging materials by the customer or broker. Packers are engaged in collecting, packing, and delivering crop-products to the agreed harvesting collection point, organizing the procurement collection point within their mahallas / regions.

acting as a guarantor for the delivery to the customer and for payment to the farmer. Prepayments or post payments of up to two weeks are usually acceptable.

It should be noted that the activity of brokers is not official, but is still an integral part of the supply chain.

A broker is an individual who is not officially registered, but who has a wide data base of consumers.

Brokers maintain relations with both consumers and farmers. Brokers enter into business relations with famers based on verbally agreed terms, and act as guarantors for the integrity and timing of the supply of goods and their payment. The commission varies in each country. In Uzbekistan, the broker applies its commission in the amount of UZS 200 to UZS 1000 per kilogram of product, which he receives in cash.

EXPORTERS

Exporters are officially registered legal entities and have an official bank account and conduct economic and operational activities formally. They can own farms legally, where they can both grow agricultural products and carry out intermediary activities such as buying goods from brokers or farmers and selling them for export. In most cases, exporters are mediators for finding goods through brokers or directly from farmers.

Exporters are the next important link in the supply chain of agricultural products for export. They perform many functions, starting with the search for products from the primary source and ending with the sale

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS | 14 goods for export. Exporters perform the following functions; organization of purchases of products, packaging, storage, transportation, processing documentation associated with the preparation of the contract, product certification, customs clearance, receipt of revenue, and settlement with the manufacturers. Thus, it is important to note that the optimization of price depends on the quality of the logistics management of the exporter.

TRANSPORT OPERATORS

Agricultural and horticultural exports move from origin to destination in two main ways. In one, the exporter has its own private fleet of trucks to transport products. In the second, the service of a transport operator is engaged to move the goods. The latter is more common because only the biggest exporters have their own fleet to move goods. It is not feasible for most exporters to maintain a delivery fleet when there are no products to move (bearing in mind that the such exports are highly seasonal).

Transport operators are either owner-operator or a registered company. The former is an individual who owns the truck and performs all the transport services. This represents quite a sizable number in Central

Asia. The latter belongs to incorporated companies that own the transportation assets and hire drivers to perform deliveries. Typically, these companies are also registered members of a national transport association and a TIR Carnet Holder (for the privilege of simplified border crossings).

BORDER AGENCIES

When moving across borders, transport operators will need to pass through multiple border agencies.

Typically, the importing side will impose stricter controls and procedures to ensure product safety (for the destination market) or to ensure that no fraudulent activities such as smuggling occur (for the transit country).

In Central Asia, typical border crossing procedures are completed in the following sequence:

a) Border Security (by border guards operating under the Ministry of the Interior)

b) SPS (by SPS agents operating under the Ministry of Agriculture)

c) Immigration Control (by immigration officers operating under the Ministry of the Interior)

d) Transport/Weight Controls and Vehicle Inspections (by transport inspectors operating under the

Ministry of Transport)

e) Customs Controls (by customs officers operating under the Ministry of Finance).

A national ‘single window’ has been actively discussed by the countries of Central Asia, and may be featured in the future, but the typically border crossing is still a sequential process. This process is aggravated considering the wait time in queue at a high-traffic border crossing point.

BUYERS

Buyers are importers, such as wholesalers, which then distribute to retailers. A retail chain which is large enough can also buy directly. The characteristics of the buyers have been succinctly explained in another report ‘End Market Analysis,’ so this shall not be repeated here.

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TRANSPORT MODES

ROAD TRANSPORT

Road transport is the primary mode used to move horticultural exports. This is due to the face that:

Road transport cost is one of the lowest in comparison with other modes of transport ($0.10 to

$0.20 per kg) during normal times, although this could rise up from $0.20 to $0.35 per kg during the peak export season, It is the most flexible means of transport, from the collection of goods at packing houses/warehouses/refrigerated centers directly to the customer’s premises. It can complete door-to-door delivery, The level of supply chain sophistication is the lowest since neither transport operators nor the shippers need to understand and use multi-modal transport, Road transport can be completed in 3-5 days on average to traditional markets like Moscow, Transport operators are familiar with the common transport routes and can also estimate costs

(including facilitation fees for unofficial functions). Such knowledge is important because shipping via a new transport mode such as trains or via multi-modal can be risky if the transport operator does not understand the tariffs and thus may under-estimate the cost).

Although road transport is the primary mean, it can also be an ‘Achilles Heel’ or constraint. This is because road transport is usually the most effective for deliveries of up to a 500 km radius.

Beyond that, the transport economics of trains and even water may be more advantageous. Also, road transport necessitates multiple border crossings, which can introduce uncertainties. And, fuel cost is the main cost driver for road transport and accounts for an estimated 40% to 50% of the vehicle operating cost (to be analyzed in more detail in a later section). While oil prices are low now compared to historical levels, if the oil price surges, the road freight rate will rise as transport operators pass this increase to the exporters. All of this is an explanation as to why the Central Asian Republics do not venture much into new foreign markets due to the significantly longer distances involved and the complications in supply chain.

RAIL TRANSPORT

Railway transportation is more complicated and slower, and thus not acceptable for fresh perishables.

However, this could be an effective mode of transport for dried fruits for which time-sensitivity and cold chain requirements are less stringent.

Sending a train costs approximately $0.10 to $0.20 per kg, which is cost effective compared to road transport.

However, the lead time could be two to three times longer than road transport. This is because trains leave on a scheduled basis and stop at every major station where the transfer of wagons or goods may take place.

Trains do not provide end-to-end delivery. At the origin and destination, the shipper and the consignee may still need to arrange a truck to move the goods from and to train stations.

An advantage of using train delivery is the lower probability of encountering unofficial payments.

Such activity, while common for a road border crossing point, is usually less likely at a rail border crossing point. This is because a border officer can easily detain a truck and question the driver, and then order a full examination requiring unloading all goods. This examination does not affect other traffic. On the other hand, a border agency cannot easily stop a shipment and delay an entire

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS | 16 train since they must move on schedule. This fact enhances the cost competitiveness of train versus road.

In Central Asia, exporters sending goods on trains will have to engage the services of an international freight forwarder. Planning must be done in advance due to the nature of railway operations. It is less flexible, unlike road transport, in which an exporter can call a trucker and come for collection the next day.

Very few respondents in this study use railway transport. In such cases, they send dried fruits to markets farther abroad, such as Europe.

AIR TRANSPORT

The cost of air transport is very high, and starts from $1.4/kg when shipping to the most popular destinations:

$1.4 – $2/kg via Bishkek-Moscow, $2/kg via Istanbul-Bishkek, $2.20/kg via Bishkek-Berlin, The cost of Almaty-Moscow charter flight is $67,000 for up to 20 tons, and $78,000 for up to 27 tons. That’s $3.35 and $2.88/kg respectively.

Generally, logistics companies in Central Asia are less conversant with air freight and transport, as land transport is usually the favored method. Air cargo agents can assist these companies in understanding this kind of transport. There are two primary methods of shipping by air. First, cargo may be placed in the belly of a passenger air craft during a scheduled flight. The carriage capacity is only 1-5 tons per flight as most space is reserved for baggage. There is also the risk of cargo off-loading if the baggage volume is higher than expected. This will mean that the goods must wait for the next flight. Then, the goods must be returned to a cold room if they are fresh produce. This requires the airport to have the appropriate facility and process to handle these kinds of goods. The second method is by chartering a cargo plane.

This is unscheduled, and must be arranged in advance. Typically, the carriage capacity is 40-100 tons.

The main advantage of air transport is the ability to send good in the shortest time possible. But, the main disadvantage is the high cost. Based on the usual cost estimates, it is not feasible for the horticultural products. For scheduled belly cargo carriage, the cost ranges $1.40 to $2.20 per kg. Chartered flights will cost $2.88 to $3.35 per kg. Most horticultural products, except for fresh cherries sell at a price of less than a $1 per kg. It is simply too expensive to send these goods by air.

Having said that, it might be possible for air transport to play a role in increasing export volumes if;

Specific commodities that can be sent by air are identified and an air cargo strategy is devised.

For instance, Africa has been successful in horticultural exports to Europe by sending uncut flowers to Amsterdam, where they are further packaged or cut for re-export. Flowers are light in weight and high in value, and require rapid delivery. This makes flowers an ideal category for air transport.

Loads are mixed to optimize the weight-cost combination.

For example, sending horticultural products alone might not justify the cost of air transport.

However, if the those products are mixed with other high-value items, this may be feasible. For instance, high-value horticultural products like fresh cherries could be shipped with carpets. A high-end carpet can go for $15,000 in Europe.

17 | USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS

Globally, air cargo is expected to be the fastest growing transport mode compared to land and sea transports. The situation in Central Asia indicates that this transport mode is under-developed, but could be considered as part of an export strategy to penetrate markets like Europe and India, to which road transport is challenging.

TRANSPORT PERFORMANCE ANALYSIS

It must be emphasized that transport costs are highly volatile, and depend on the season of the year. In

Kazakhstan and Uzbekistan, trucking costs to Russia are more stable due to the presence of a greater number of qualified transport operators. In the Kyrgyz Republic and Tajikistan, however, there are fewer qualified transport operators, and during the peak export season the low availability of trucks can lead to excessive pricing if the exporter secures their services at the very last minute.

The above cost estimates were made using the following criteria:

Exports occur in the summer when there is a high export volume, A refrigerated truck carrying twenty tons of fresh fruits and vegetables is used, The destination is Moscow, Russian Federation, which is the main market of the four exporting countries, The price covers only transport related items such as fuel, the driver’s salary, and parking and lodging. It does not cover any other non-transport related costs such as SPS certification, Drivers take the most popular and established routes from origin to destination. There is no detour due to unforeseen circumstances (such as a border closure).

At off peak season, trucking costs can be as low as $1,500 to $2,500 per truck carrying twenty tons of goods. The cost estimates used above reflect the supply and demand problem of truck availability. The prices of road transport can easily double during peak season.

Looking at the cost and time data, it appears that Kazakhstan enjoys the best relative performance. Road freight cost constitutes around 20%, assuming the export price is $1 per kg. This advantageous position is due to (1), a better road network system, (2), being an established member in the Eurasian Economic

Union (EAEU), and (3), a closer geographical location with direct border access to Russia. It can be seen

COMPARISONS OF TRUCKING COSTS FROM DIFFERENT ORIGINS TO RUSSIA (MOSCOW)

EXPORTING COUNTRY ESTIMATED TRUCKING COST

Kazakhstan $ 3,500 to $ 5,000 ($0.175 to $0.25 per kg)

Average Transport Time is 3 to 4 days

Kyrgyz Republic $ 4,500 to $6,000 ($0.225 to $0.30 per kg)

Average Transport Time is 3 to 5 days

Tajikistan $ 4,500 to $ 6,500 ($0.225 to $0.324 per kg))

Average Transport Time is 5 to 7 days

Uzbekistan $ 4,000 to $ 6,000 ($0.20 to $0.30 per kg)

Average Transport Time is 4 to 5 days

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS | 18 in the case of the Kyrgyz Republic and Tajikistan that the cost and time are progressively higher due to the increased distance that necessitates crossing Kazakhstan as a transit country. Even Uzbekistan needs to cross Kazakhstan to get into Russia, but the route taken is typically in the western region. Uzbekistan has a slightly better position compared to the Kyrgyz Republic and Tajikistan due to its better-developed infrastructure and the greater availability of qualified transport operators.

While road is the dominant mode of transport for horticultural exports, it is possible to use railways to send dried fruits. A train of a 55-60 tons capacity going from Tajikistan to Russia costs $8,700, which represents $0.145 per kg. This is more economical than using road transport for the same journey which can cost $0.225 to $0.324 per kg. However, railways take 10-20 days, compared to road transport which takes 5-7 days. The uncertainty in using railways can be higher (10-20 days variance).

There is other significant cost factor that can affect the final delivery cost to the end destination.

Facilitation fees. Customs and traffic police are empowered to detain a truck along its journey.

When the truck carries perishables, they become easy targets for corrupt practices due to the need for rapid movement. As such, the transport cost can become 2 to 3 times higher when carrying fresh fruits, as compared to dried fruits. For instance, a truck carrying dried fruits from

Tajikistan to Russia costs $1,500 to $2,500 and that price remains stable all year round. The same truck carrying fresh fruits can cost $5,500 to $6,500 during the summer.

Truck Availability. It is important for exporters to secure refrigerated trucks early. During peak export season, the spot rate surges significantly. Many exporters are interested in owning and operating a private fleet of trucks so that they can service buyers directly during the export season without losing business, which can happen when exporters cannot find refrigerated trucks even after agreeing to higher prices. In the Kyrgyz Republic and Tajikistan, transport operators with qualified trucks are very limited, and this creates a pricing power that can disadvantage exporters.

Trans-loading. A supply chain is the most efficient when the truck that carries the goods can cross a border rapidly and move from origin to destination. However, this is not the case. Within the four exporting countries, Tajikistan is at the most disadvantage, because there is a need to trans-load at the border to either a Kyrgyz Republic or Kazakhstan registered truck before the goods can continue to Russia. This requires more time and cost.

Condition of the Truck. Transport becomes more complicated when exporters try to send to

Europe, which requires European-compliant trucks. In general, the condition of the fleet in Central

Asia can be regarded as non-complaint, especially for smaller fleet operators due to their lack of finances. Thus, the usable lifespan of a truck is maximized in order to earn a decent return, resulting in excessive wear and tear. The operation cost of using an outdated truck is higher due to its lower operating efficiency.

19 | USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS

COST ANALYSIS

Continuing the transport pricing discussed in the last section, here a more detailed cost analysis is conducted.

This is an estimation of the cost breakdown for a 20-ton carriage using a standard refrigerated truck per trip. The vehicle operating cost is the highest, accounting for almost two-thirds.

Unofficial costs account for 27%, followed by parking fees and lodging/meals for drivers.

Cost Drivers per km Cost/$ % The vehicle operating cost (VOC) is the prime cost. Here, the VOC is further itemized into the relevant cost drivers. The cost is expressed in “per km” as a unit.

Fuel expenses account for 43% and is the main cost driver. This is followed by driver’s pay which is

26%. There are other maintenance costs and many drivers do their own maintenance and repair to conserve costs.

Depreciation is a non-cash expense (19%). Thus, it is estimated that the VOC is $0.63 per km. This forms the minimal level for pricing road transport services. The transport operator will have to quote a higher level per km to earn an operating profit. This analysis assumes a standard refrigerated truck. For older trucks, the VOC can be higher due to lower operating efficiency.

Fuel Cost $0.23 36.51%

Refrigeration Related Expenses $0.01 1.59%

Drivers' Pay $0.14 22.22%

Technical Maintenance $0.04 6.35%

Repairing of Engines/Body $0.03 4.76%

Spare Parts and Tires $0.05 7.94%

Overhead $0.03 4.76%

Depreciation Expenses $0.10 15.87%

Estimated Vehicle Operating Cost $0.63 100.00%

Vehicle Operating Cost, 65%

Unofficial Payments , 27%

Parking and Lodging , 8%

Transport Cost Breakdown

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS | 20

TRANSPORT ROUTES

OVERVIEW

The common routes adopted by exporters and transport operators from Kazakhstan, the Kyrgyz

Republic, Tajikistan, and Uzbekistan are illustrated below. Note that these are the heavy traffic routes, so alternative routes are also possible.

Kazakhstan the Kyrgyz Republic

21 | USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS

Tajikistan

Uzbekistan

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS | 22

KAZAKHSTAN

Having a direct border with Russia and being a founding member of the Eurasian Economic Union (EAEU) certainly puts Kazakhstan in a very advantageous position for exporting horticultural products to the

Russian Federation, the main market for Central Asian produce. Note that Kazakhstan is not self-sufficient in many food produce spheres, and imports from the other Central Asian Republics for re-export to

Russia. Agricultural products are mainly planted in the south in such regions as Shymkent and Zharkent which then are transferred to Almaty in its capacity as a consolidation center (green arrows). From here, produce is typically sent to cities along two primary routes. The first is Almaty-Karaganda-Astana-

Kostanai, crossing the border at Kairak. The second is along the ‘Western-China to Western Europe’ corridor, moving from Almaty-Shymkent-Kyzlorder-Aktobe, crossing the border at Zhaisan. Since

Kazakhstan and Russia are EAEU member states, there is no customs border between the two nations, so border crossing is relatively fast.

THE KYRGYZ REPUBLIC

The Kyrgyz Republic exports a large quantity and variety of fresh produce to Kazakhstan and the Russian

Federation. Due to the lack of cold chain facilities, the supply is not consistent throughout the year.

Production occurs mainly in the Naryn and Issykul regions. Trucks will cross the border at Ak Tilek into

Kazakhstan and then continue on to Almaty. The distance between Almaty and Bishkek is only 250 km.

From Almaty, the truck will move along the Karaganda-Astana-Kostanai-Kairak route. Kyrgyz operators prefer to use this road to enter Russia instead of taking the other, more circuitous route in the western direction. The highway linking Astana and Almaty is in better condition. Kyrgyz operators are also active in exporting produce to cities in the eastern region of Russia. Trucks will move from Almaty-Taldykorgan-

Aktogai-Semey and cross the border at Aul.

TAJIKISTAN

Tajikistan transport goes through the Kyrgyz Republic in order to export produce to Kazakhstan and

Russia. The country is a key supplier of dried fruits to these destination markets. A bilateral transit trade agreement exists between the two countries. On the other hand, political tensions between Tajikistan and Uzbekistan result in higher uncertainty, and thus a route through Uzbekistan is less popular with Tajik exporters. (note after the change in political leadership in recent years, there is a renewed optimism and sentiments are improving between Tajikistan and Uzbekistan). Tajikistan transport operators cross the border in the Batken region. The trans-loading of goods between trucks is done at Kyzlbel where procedures for this are quite established. Kyrgyz operators then take over the goods and continue to

Kazakhstan using the routes defined earlier. From Kyzlbel, trucks will go to Osh and then cross into

Kazakhstan at Ak Tilek under a transit regime.

UZBEKISTAN

Although serving the same principal markets, Uzbekistan uses different transit routes to reach Kazakhstan and Russia. The only reason for Uzbekistan to send to the Kyrgyz Republic for re-export to Kazakhstan is to label the items as produced within the Kyrgyz Republic and thus qualify for preferential treatment in the EAEU. Production is mainly centered in the fertile Fergana Valley cities. From there, the trucks will cross the border at Yallama and go on to Almaty. Trains will cross at the Keles-Sarygash station. Items are either sold in Almaty or re-exported into Russia using the Almaty-Astana-Kairak route. For exports

23 | USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS to Russia, it is more common for Uzbekistan to ship using the westerly route. Trucks will drive to the border point at the northwestern tip at Dautota and enter Kazakhstan. Then trucks will move through

Beyneu-Makat and cross Kurmangazy into Russia. From there, the trucks proceed to Moscow, St.

Petersburg, and other cities.

KEY ISSUES

This research identifies a list of pertinent issues in the transport and logistics for horticultural exports in

Central Asia. These are summarized in the framework below.

The issues can be broadly classified into the three ‘P’s, namely;

Policies and Regulations

What are the institutional barriers and problems? These usually take the form of non-tariff trade barriers. They can be addressed by regional cooperation between policy makers and more coordinated public-private cooperation.

Physical Infrastructure

What are the limitations caused by the absence or inadequacy of roads and other structural elements? Investment interventions from international donor organizations, augmented by foreign private investors, are most effective here.

Private Sector Competency

Competency = Capacity + Capability. What are the constraints faced by the private sector?

Financial and technical assistance as well as capacity building can produce tangible results to improve the private sector productivity here. Productivity is the only long-term driver of growth and results.

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA TRANSPORT AND LOGISTICS ANALYSIS | 24

POLICIES AND REGULATIONS

The four countries exporting countries of Central Asia typically have a more harmonized system of transit trade, border crossing procedures, and regulations. However, due to the legacy and historical development during the post-Soviet era, the region’s standards and regulations are generally not harmonized with the neighboring trade blocs such as East Asia and South Asia.