The case of Maghreb countries by qym17251

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									        Peterson Institute for International Economics

Prospects for Greater Global and Regional Integration in
                      the Maghreb

                      Washington, DC
                       May 29, 2008




              Transport Sector Study

                           Draft
 

Opportunities for logistical improvement through
integration: The case of Maghreb countries
Hassan Benabderrazik, economist, Agro-Concept

Nordine Ouabdesselam, Janair


Contents
Trade, logistics and regional integration ................................................................................... 3

Transport reforms in the region................................................................................................. 5

       Railways transport ............................................................................................................. 7

       Road transport ................................................................................................................... 7

       Air transport ...................................................................................................................... 8

       Ports management ............................................................................................................. 8

       Shipping companies .......................................................................................................... 9

       Customs reforms................................................................................................................ 9

The LPI measure of performance .............................................................................................. 9

Opportunities in integration..................................................................................................... 10

    Infrastructures...................................................................................................................... 10

    Hub Spoke opportunities ..................................................................................................... 11

       Ports................................................................................................................................. 12

       Airports and national carriers .......................................................................................... 12

    Multimodal transport and logistical platforms .................................................................... 13

    Logistics as optimizer.......................................................................................................... 13

    Concluding remarks............................................................................................................. 14




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             Opportunities for logistical
      improvement through integration
          The case of Maghreb countries

Trade, logistics and regional integration
The sobering story of the failure of North African countries to deal peacefully with
their differences is only too obvious when you stand on either side of the
Algerian/Moroccan border. Closed frontier checkpoints, unused rail tracks that lead
nowhere, unfinished motorways are monuments which celebrate the failed dream of
the Union of the Arab Maghreb, launch in Marrakech nineteen years ago.


What are the drivers and projects which convince people to stand up for this
ambitious project to integrate the region ?    Do we have to conclude that during all
the years where have pursued their own path have undermined the rationale for such a
project? On either side of this border, less so on the Algerian/Tunisian border, many
age old links of trade and families have faded away to be replaced by smuggling.
They have been replaced by ever stronger North South ties, as the three countries
have vied to strengthen their ties with their important European partner and countries
beyond.    We are not speaking metaphorically, the new roads, harbors, railroads
respond to a North South logic and this has profoundly change the economic
landscape of North Africa. The question this paper seeks to address is whether all this
makes the UMA obsolete? That is the questioning line of this paper.


In dealing with it, we will delve on regional infrastructure, transport and logistics and
try to use economic analysis in order to assess opportunities for cooperation and
common development.




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Numerous papers and studies 1 have looked at the relationships between infrastructure
and development in the context of economic integration. Two insights emerged : the
nature of infrastructure as a network good, where the value of the services provided is
in proportion of the number of feasible connections created; and the intensity of use
as a measure of economic benefits. An empty road, an idle port are bad investments
and a greater use of both multiply the social benefits of the investments.


Where transports is concerned, I will focus on the changing landscape in all three
countries which has resulted from regulatory reform whose aim was to improve
competitiveness. A brief summary of the main milestones in the process will help
you to understand progress made and what needs to be done. Although the countries
concerned diverge in their reliance on export, hence logistical performances, all three
have modernized the institutional framework for port operation, road, rail and air
transport. The need to improve efficiency through competition and public/private
partnerships lay behind these reforms. The increased use of containers, logistical
platforms and integration in global value chains has contributed to modernize the
sector.


Logistics consist in the proper use of the transport networks in order to ensure well
functioning supply chain. It encompasses transport by all modes, management of
storage facilities, of information networks in order to process quickly and efficiently
documents, customs and banks requirement.


The potential a performing logistical chain offers to reduce cost and the efficient use
of infrastructure is important as logistics account for 18 to 20 % of GDP in MEDA
countries. Cost reduction of 25 % are quite common. This reduction comes through
optimal use of transports lines, relying extensively on logistical platforms to group


1 Agenor, P. R. and B. Moreno-Dodson. 2006. "Public infrastructure and growth: new
channels and policy implications." Policy Research Working Paper Series 4064.
The World Bank.
Calderon C. and Serven, L. 2004. “The Effects of Infrastructure Development on Growth and Income
Distribution”. World Bank Policy Research Working Paper No. 3400, The World Bank, Washington DC.
Vito Tanzi,2005, “Building regional infrastructure in Latin America”, IADB,
Vito Tanzi, 2006, “the production and financing of regional public goods”, IADB




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and distribute, on transshipment to optimize routes and costs, on extensive reliance on
information processing for EDI, in short on good management of supply chains.


Although there are numerous opportunities to optimize infrastructure usage and
logistical cost through integration, these would not exist without trade integration.
There are no logistical cost reductions without trade.    Closed border precludes any
trade. How much would trade increase if borders were opened? The modeling effort
of Lahcen Achy suggests a tenfold increase, the World Bank report on Maghreb
integration 2 a much smaller increase. These contrasting views on the potential trade
growth between southern rim Mediterranean countries agree on one point : the trade
between North Africa and Europe will remain key. The sheer size of Europe’s market,
its proximity, the trade concessions, cooperation and investments it offers suggest a
sustained expansion of North South trade.


This explains the question at the core of this paper on the relevance of the UMA
project. In a globalized environment, with trade routes, infrastructures and logistics
oriented by the needs of Euromed trade, is the integration project still make sense ?




Transport reforms in the region
When they became independent, more than a generation ago, North African countries
inherited an institutional framework which regulated transport and infrastructure
modeled on that of France. This model assumed that competition was a recipe for
failure and wasting of resources.


Where air transport is concerned, national carriers shared the benefits of a duopoly,
with a fixed grid of supply and prices.


Public agencies supplied and managed airport and air services, financed by monopoly
taxes or through direct public subsidies.

2« Is there a new vision for Maghreb economic integration ? “, November 2006,
Social and economic development group, Middle East and North Africa, The World
Bank,
 “Le commerce en Afrique du Nord, Evaluation du potentiel de l’intégration régional
en Afrique du Nord », Nations Unis, CEA, Rabat 2006.

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Where road transport is concerned, governments set up a public monopoly of freight
forwarding. All requests for road freight were processed by public agencies, which
allocated freight to licensed transporters. Each route had its licensed operators. The
BCT set tariffs. The allocation of freight was based on licensed capacity, without
regard on quality and punctuality. “Destructive competition” justified extensive state
intervention : governments were eager to avoid price wars and overinvestment in
capacity.


Roads were planned, built and maintained by government and financed by the central
budget.


Where maritime transport is concerned, state companies operated lines connecting
the main ports to French ports in pool conferences, sharing capacity and setting
prices. In Morocco, OCP set up Marphocean for specialized phosphoric acid
transport and Sonatrach had it own fleet of LNG tankers. Chartered ships were used
for bulk and general cargo.


Ports were planned, built, maintained and managed by state agencies and financed by
the central budget. Dockers worked in closed shops. Stevedores were in charge of
handling, loading and unloading. Such systems did not look kindly on innovations
such as Roll On Roll Off, Container terminals, specialized quays.


Public monopoly characterized railways transport. State bodies were in charge of
infrastructure development, finance, maintenance and the management of railways
transports.


By the beginning of the nineteen eighties, the shortcomings of this rigid framework
became increasingly obvious. To give one example, in Morocco, in the field of road
transport, a large number of informal private transporters took over the sclerotic
Office National des Transports organization, taking more than 90 % of traffic. He
result was growing fragmentation, little quality control and equipment often ill
adapted to needs. Many large industrial companies set up their own fleet in order to
insure quality, thus increasing fragmentation. The same situation prevailed more or

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less in Algeria, with dominance of own transport. In Tunisia, the authorities set up
regional monopolies with mixed success, until liberalization in the nineteen eighties.
Here, this reform created a fragmented sector with many small suppliers and no large-
scale operators. Whereas logistics were treated as a strategic means of leveraging
competitiveness in Europe and Asia,         MEDA countries found themselves unable to
adapt to this new paradigm.


In air transport, the national carriers operated with high costs and high tariffs, with a
negative impact on tourism.


Where maritime transport costs were concerned, cartel pricing, poor state
management of ports, long delays in custom inspections combined to make the trans
Mediterranean transports one of the most expensive in the world.


This poor state of affairs finally convinced the authorities to initiate sweeping reforms
in the transport sector, in the nineties, more or less on the same period in Tunisia,
Morocco and with a little lag in Algeria.

Railways transport
Encouraged by the World Bank, governments adopted the new standard model of
railways services provision, separating infrastructure and transport, allowing for
competition.     Governments    tried to use Public Private Partnerships, with little
success, in order to extend the network.



Road transport
Government, in the three countries, liberalized freight and imposed a licensing
scheme aimed at improving the technical and managerial practices of the firms.
Tough protracted, these reforms encouraged competition, even if they did not solved
the fragmented nature of the market and the poor quality of the service. As they
began operating in Morocco in the nineteen nineties, multinationals brought with
them second, third and fourth party logistics firms. New cross-docking platforms were
set up which reinforced the role of large-scale distribution in Morocco.




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International road transport plays a vital role in strategic exports of the southern
countries (fresh fruits and vegetables, garment). It allows door-to-door delivery and
small size shipment. It fits with the requirements of the supply chain of large-scale
distribution.   It permitted exports to benefits from geographical proximity. The
resilience of textile industry in North Africa, as it faced the end of Multi Fiber
Arrangement and competition from Asia, is largely due to the flexibility and
punctuality provided by semi-trailers. Even after due recognition of their importance,
the governments have been unable to increase the share of local firms over ten per
cent.



Air transport
Morocco entered in an open sky agreement with the European Union in 2004. This
agreement was a cornerstone of morocco’s policy which aims to attract 10 million
tourists by 2010. It allowed an impressive expansion of the number of airlines
operating in Morocco, and a sharp reduction in travel cost. This increase in air traffic
gave a new impetus to airport authorities and the national carrier to turn Casablanca
Airport into a hub for North and Western Africa.



Ports management
Where port management is concerned, important steps towards a liberalized
environment have been taken. The state monopoly in Morocco has been dismantled.
Ownership and commercial operation has been separated. This reform allowed the
Moroccan government to set up TangerMed, a project of a transshipment harbor, a
multi-modal logistical center and a very large industrial zone as a public enterprise
dedicated to this sole project. In Algeria, the port services are now open to private
provision and each port is run individually, either by the Chamber of Commerce or a
state company. A container terminal has been built at Bejaia in partnership with
Protek, the Singapour port operator. Dubaï World Port has expressed interest in
managing container terminals in Algiers.      The same course has been followed in
Tunisia. The government looked for private partners in order to develop a cruise port
in La Goulette through a BOT arrangement, and proposed different concessions to
adapt its ports capacity in Rhades, Zarzis and the port of Gabès.



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Shipping companies
State shipping companies have been restructured and some privatized as was the case
Comanav in Morocco. National authorities promoted some competition and the share
of goods transported through national carriers dropped significantly. The three
countries are involved in the European initiative “Motorways of Sea”, to define heavy
duty sea lines and simplify the process of transport through Electronic Document
Interchange, GPS based tracking system, etc…



Customs reforms
Custom reform has been pursued in Morocco and Tunisia, with a clear goal of
reducing the time spent on custom inspection.
EDI systems have been setup in Tunisia (SINDIA Tradenet) and in Morocco
(SADOK)             to reduce delays in imports and exports. Tunisian system is the most
ambitious, which bring together banks, freight forwarders, port authorities, customs,
maritime agents, importers, and exporters, ministry of trade and custom agents.


The LPI measure of performance
All these reforms should have boosted logistical efficiency. However, international
benchmarks show that a long road lies ahead in order to attain parity with other
regions. The tables below are extracts from the World Bank report on trade logistics
in the global economy “Connecting to compete”3 . The authors constructed a
composite index of logistics performances LPI and ranked 150 countries accordingly.
Tunisia takes the lead in North Africa, ranked 60ieth, Morocco follows lagging at the
94th and Algeria is part of the bottom ten.


Country                 LPI                 Customs                  Infrastructure International
                                                                                        shipments
Tunisia                        60                    39                       44               55
Morocco                        94                   101                       77               64
Algeria                       140                   148                      139               139



3   “CONNECTING TO COMPETE: TRADE LOGISTICS IN THE GLOBAL ECONOMY”, 2007, World Bank.


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Country             Logistics          Tracking       & Domestic           Timeliness
                    competence         tracing            logistical
                                                          cost
Tunisia                   88                  60                 30              105
Morocco                   119                130                 133              95
Algeria                   139                109                 33              103


The analysis of the individual components of the index shows that customs
procedures are dragging down Algeria and Morocco. They explain part of the
Tunisian ranking.


It safe to state that the dependency on exports in Morocco and Tunisia explains their
relative ranks. Algeria’s performance is due to its reliance on oil and gas exports.


Opportunities for integration
The closing of the border between Morocco and Algeria for almost 25 years had a
profound impact on trade flows, trade routes and logistics in the region. It pushed
trade flows in a North South pattern, increasing the reliance on the European market
and its needs. It means that operators know more about the requirements of
consumers in the North; logistics firms are more familiar with the norms and
regulations governing customs and inspections in Spain and France that those of
Algeria and Tunisia. When governments consider investing in infrastructure, Europe
has precedence over their neighbors. This increased ignorance of the other does not
imply that there are no opportunities to integrate. It makes them difficult to tap.

Infrastructures
The rule of thumb is simple. The value of any infrastructure rise in proportion to its
use and its use is dictated by its utility and convenience. In the case of transport
infrastructure, the extension of the network is essential. Value and convenience are
increased by the number of connections available. This network effect is unrelated to
the cost of the investment. From this point of view, the closing of the border is an
economic disaster. Railways road are shut and a valuable infrastructure is sitting idle,


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reducing its utility to that of a “Cul de sac” instead of a vector for increased trade and
improved competitiveness.


The same point valid for motorways. Moroccan national network will stop at Oujda
and the east west Algerian motorway will stop at Maghnia or Tlemcen. Obviously all
the connections to Morocco and Spain are unusable for Algerian and Tunisian
entrepreneurs and vice versa. Passengers bear the cost of this disruption, reducing
their ability to use the road network.


In a globalized environment, where all three countries have multiple trade
agreements, it is difficult to envision integration with a common trade barrier (Custom
union) with the effects of trade creation and trade diversion. The open integration
model implies that trade derives from competiveness and not from protection. In this
regard, using efficiently networked infrastructure could push trade creation.
Closing the border led to investments in independent infrastructures to overcome the
closure, as exemplified by the development of the ports of Nador and Ghazaouet.
Ghazaouet is closer to Oujda than Nador. The benefits of using it would have been
higher usage (economies of scale) and reduced expenses in new infrastructure
development.




Hub Spoke opportunities
The value of infrastructure is related to its usage and the number of connections it
allows. So increasing connections and usage are a constant objective of harbor and
airport managers. Using hub-spoke organization offers one solution for small
operators. Instead of competing frontally to draw in liners in order to increase the
number of destinations, small operators could rely on a hub spoke model, where they
can connect to hubs and transship containers and passengers in a planned way. Using
this model, even small harbors/ airports can offer large number of destinations and
origins. In terms of cost, this model allow for economies of scale when the hub is able
to accommodate quick transshipment and large ships, making it a better proposition
than a direct connection.




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Ports
The first transshipment harbor ready to receive ultra large carriers (post panamax),
located in a southern rim Mediterranean country began to operate near Tangiers in
2007. It expects to attract art of the “around the world lines traffic”, and to respond to
logistical requirements of global value chains, in order to increase foreign direct
investment in Morocco. Renault – Nissan was the first major car company to commit
itself in the industrial park, followed by parts manufacturers. MEDHUB, the largest
logistical platform in the region is very close and connected by rail and highway to
the port.


Once connected by rail, sea feeders and highways to Algeria and Tunisia, it could
become a regional hub facility, improving the competitiveness of all the regional
firms included in global value chains. The option of developing national
transshipment ports instead of using Tangiers Med facilities would certainly imply
under use and over cost, increasing logistical costs to firms.




Airports and national carriers
The three national fleets are dwarfs in the global world of air transport, in relation to
the established world airlines as well as to the emerging global companies or
alliances. For Air Algérie, Tunis Air and partly Royal Air Maroc, their networks, the
size of their markets, made them plain feeders to global hubs (Emirates in Dubai, BA
ins Heathrow,). Air France cannibalized part of their traffic by excluding them from
its Roissy hub. Their Paris Airport is the Orly Airport, with few international
connecting flights, therefore channeling transit passengers to Air France.


For West African traffic, Royal Air Maroc has a stronger hand. The location of
Casablanca, its activity in Western Africa and North America, it’s dense network
with Europe allowed her to develop a hub for Western and North Africa, eventually
challenging the domination of Paris. An alliance grouping North African airlines
could and should use it to increase its market share on the North Atlantic route.




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Multimodal transport and logistical platforms
All North African countries lag in logistical development. Their efforts addressed
with partial success shortcomings in international trade. Nevertheless, the outdated
system of local transport, storage and distribution in their internal market is even more
challenging to modernize, with Tunisia standing in a somewhat better position. They
need to pursue on their internal reforms in order to streamline their
production/distribution system. In this regard, logistical platforms should play an
important role. A logistical platform is a tool to deal efficiently with space and time
constraints and to give flexibility to the supply chain management. A platform could
group/ungroup goods, mix products and origins to share containers and so doing
increase the efficiency of transport, quality of service to customers.


Their interconnection has the potential to improve the competitiveness of the three
economies, through an efficient distribution process and more importantly by
connecting suppliers. This connected suppliers network could ease the climb in the
value added chain (eg. automotive parts in Tunisia, Morocco and Algeria).



Logistics as optimizer
Third and fourth party logistics insure an optimization of supply chain costs, by
internalizing different functions: transport, storage, assembling, packing, custom
processing, tracking and document processing. They optimize by exploiting prices
differences related to underuse of capacities: empty seats, idle space, quays and berth,
immobilized trucks. In so doing, they play a crucial role in increasing the benefits of
infrastructure development.


We can draw many examples of such virtues in recent history of the region:


   •   When ports were congested in Algeria, the National Office of Cereals relied
       on wheat imports unloaded in Casablanca and transported by rails to millers in
       Algeria.
   •   Imports to Oujda could be treated indifferently by Ghazaouet or Nador ports.
       The imbalance in general cargo trade in Algeria (High import demand, low
       exports of goods ) led to a steady exports of empty boxes (containers) from

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       Ghazzaouet. Empty boxes are not expensive to fill, creating incentives for
       exports from Oujda, if and only if, the border is open.


These few examples show the pervasive benefits of shared infrastructure through
good logistics.



Concluding remarks
As has been stated previously, there are no gains in logistics without trade. The
essence of logistics is to lower transaction costs and quite naturally, without
transaction there are no costs reductions.


Trade is currently proscribed through the land border between Morocco and Algeria.
This closure led to a curious state where all exchanges go through Spain and France
harbors or are smuggled. This precludes from a better knowledge of consumer needs
in both countries, of investment opportunities created by the combination of talents
and resources of the two countries.


Smugglers know how to play the differences in subsidies, from foodstuffs to
pharmaceuticals and gas. They know the moneychanger game of speculation,
hoarding and bureaucratic rules on foreign currencies. They are aware of the appeal of
Moroccan caftans and accessories on the fashion cognoscenti in Algiers, Tlemcen and
Oran. They know the parts in short supply and the keen demand of confectionary
goods in Morocco.


These examples show what the gravitational models predict: huge opportunity of
trade through the proximity in cultural values and consumers preferences. However,
they tell just half of the story. In fact, North African entrepreneurs spent a lot of
money and time to identify the precise needs and opportunities for trade and
investments. Due to the cultural closeness between North African consumers, this
knowledge could fuel locally based development, trade and investments. It could
allow open economies –due to their commitments with WTO, European Union, USA,
Arab league and WTO - to benefit from integration without resorting to the standard
strategy of a custom union with trade diversion alongside trade creation. Clearly,

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North African entrepreneurs could and should use their clouts and jump start
knowledge in order to leverage the increased market size induced by border opening.


In these developments, two complementary tools would certainly play a role in
linking producers:


           •   Clusters, with a shared pool of qualified workers and suppliers (design,
               engineering, equipments and inputs) such as textile in Tunis,
               agricultural products in Agadir.


           •   Networked firms, working for global value chain, and leveraging gains
               in logistical development in the region along the lines of our
               presentation.


All these developments need good logistics. Not the other way around.




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