Efficiency of Logistics System and Georgia

News | Good Governance | Publications | Article 7 December 2015

Author: Davit Gochava

 

The article was writen in the framework of the project "Strategic Plan Georgia 2020 - Strengthening Public Involvement" and was published on the blog "Georgia 2020".

 

According to the survey conducted by the World Bank (WB) in 2014, the level of efficiency of the Georgian Logistics System is rather low: Georgia is not even among 100 countries on the list and lags behind not only developed countries, but also post-soviet states such as - Latvia, Estonia, Lithuania, Ukraine, Kazakhstan, Russia, Armenia, Moldova, Belarus, Tajikistan; Georgia’s position in the 2012 ratings were much better. The article analyzes the dynamics of logistics efficiency in Georgia over the last years and the deterioration of the efficiency of logistics system in general.

 

In 2007, the WB International Trade Department, in collaboration with Finland's Turku School of Economics developed the first ever Logistics Performance Index (LPI), in order to assess the level of development of logistics system in different countries. Since then, the survey is carried out once every two years and currently, the LPI survey is available based on data collected in 2007, 2010, 2012 and 2014 [1].

 

The LPI is calculated via acquiring data from international, national or regional logistical and warehouse operators, as well as freight forwarders. The survey comprises two parts: International LPI ( respondents evaluate criteria according to the 5 point measurement scale assessing the efficiency of the logistics system in 8 countries with which the company works) and Domestic LPI (respondents evaluate criteria according to the 5 point measurement scale assessing the efficiency of the logistics system in their respective countries). The eight countries are chosen based on the most important export and import markets of the country where the respondent is located, on random selection, and - for landlocked countries - on neighboring countries that form part of the land bridge connecting them with international markets. The method used to select the group of countries rated by each respondent varies by the characteristics of the country where the respondent is located. Overall, an integral LPI is calculated and the country ranking is determined in the list.

 

Core performance components for evaluating logistics efficiency are:

  • The efficiency of customs and border clearance, rated from “very low” (1) to “very high” (5);
  • The quality of trade and transport infrastructure, rated from “very low” (1) to “very high” (5);
  • The ease of arranging competitively priced shipments, rated from “very difficult” (1) to “very easy” (5);
  • The competence and quality of logistics services, rated from “very low” (1) to “very high” (5);
  • The ability to track and trace consignments, rated from “very low” (1) to “very high” (5);
  • The frequency with which shipments reach consignees within scheduled or expected delivery times, rated from “hardly ever” (1) to “nearly always” (5).

 

“The LPI is trying to capture a rather complex reality: attributes of the supply chain,” said Jean-François Arvis, the founder of the LPI project. “In countries with high logistics costs, it is often not the distance between trading partners, but reliability of the supply chain that is the most important contributor to those costs.” [2].

 

According to the 2014 survey, the top 10 in the country list are mostly high income countries: Germany, Netherlands, Belgium, United Kingdom, Singapore, Sweden , Norway, Luxembourg, USA, Japan. Overall, there is a tendency of improvement in several indicators. Additionally, the overall points of low performing countries increases rapidly, compared to high performing countries. The authors of the report concluded that low, medium and high income countries need different strategies of improving logistics performance and efficiency.

 

“You can’t just do infrastructure without addressing border management issues,” Arvis said. “It’s difficult to get everything right. The projects are more complicated, with many stakeholders, and there is no more low-hanging fruit.” [3]

 

Middle-income countries usually have fairly well-functioning infrastructure and border control. They generally see the biggest gains from improving logistics services, and particularly outsourcing specialized functions, such as transportation, freight-forwarding, and warehousing.

 

In high-income countries, there is a growing awareness of – and a demand for – “green logistics,” or logistics services that are environmentally friendly.

 

In this context, interest definitely increases towards “Strategic Plan Georgia 2020”; In order to fully use the country’s transit potential, the document sets a goal to improve the LPI. To be more precise, the document aims to achieve LPI value of 3.1 by 2017, and 3.3 by 2020 [4]. When the document was published Georgia had LPI of 2.77, however currently it is lower - 2.51.

 

In the first ever LPI survey, Georgia was not included among 150 participating states. In 2010, Georgia obtained 2.61 and was 93rd out of 155 countries; in 2012 survey, Georgia advanced and was 77th with a point of 2.77; in 2014 survey, the country moved to 116th place with LPI of 2.51, which means that there was a significant deterioration and 39 countries superseded Georgia in the rankings.

 

 

Several things had a negative impact on Georgia’s LPI:

         1. The efficiency of customs and border clearance (Table 3.)

         2. The quality of trade and transport infrastructure (Table 3.)

         3. The ease of arranging competitively priced shipments (Table 3.)

         4. The competence and quality of logistics services (Table. 3)

 

The situation in terms of the ability to track and trace consignments has not changed. (Table 2 - Tracking & Tracing).

 

Georgia only improved the frequency with which shipments reach consignees within scheduled or expected delivery times (Table 3 - Timeliness). Yet, this indicator did not contribute to advance in overall ranking.

 

Hence, the problematic aspects of Georgia’s logistics system are border procedures, pricing policy, the quality of infrastructure, service competency and its quality. The deterioration of this indicator might be the result of drawbacks in areas such as the transport systems asset and network optimisation, coordinated work of various transport means, marketing, the output of operations, strategic planning of human resources and management efficiency.

 

For example, according to the experts of WB, the lack of coordination between different types of transport is a significant problem, because policies for public infrastructure investment, infrastructure cost recovery, transport taxation, environmental and safety regulations, among others often are formulated by different groups of people, pursuing different objectives, in different modal departments, using different economic principles and tools [8].

 

Public funding for developing and maintaining each modal network is not always aligned with an overall National Transport Strategy, since it does not exist at all. Strategy is necessary, as it establishes a general direction that must be backed up by a detailed plan and set of performance measures. Similarly, infrastructure regulation and pricing policies are usually determined independently. Both factors influence the relative fortunes and potential of the transportation system [9].

 

The improvement of the Logistics Performance Indicator is possible by increasing the effectiveness of border management. This might involve improvements in effectiveness of custom facilities. Yet, no less important is the improvement of the work of other agencies present at the border, including those responsible for sanitary and phyto-sanitary controls. Often, multiple approaches are required [10].

 

Problems related to the management and operations of transportation need to be eradicated - frequent delays and complex procedures extend transportation time and increase costs. If the service is of low quality, viable physical contacts are insufficient [11].

 

Conclusion

The lack of the clear and formalized National Transport Strategy is the main reason of the drop in the effectiveness level of Georgia’s logistics system. The management of transportation sector - determining the improvement of the effectiveness of logistics system - is only possible through National Transport Strategy, that applies common policy aims and consistent benchmarks for public investment performance.

 

National transport strategies should help establish broad policy principles and settings, such as sector governance, public and private sector roles, the extent of competition, the types of interventions necessary to attain coordination and integration between modes, the nature of regulation, consistent pricing principles. The role of government in establishing a level playing field for transport modes is perhaps the most complex, but better done imperfectly than not done at all.

 

As a conclusion, we can state that in this regard, implementation of EU Directives in transport is urgent and it is necessary to work on the issues in order to properly deal with challenges at hand.

 

 

Bibliography:

1. 10. 11. «Connecting to Compete 2014: Trade Logistics in the Global Economy» - © 2014 The International Bank for Reconstruction and Development/The World Bank

http://www.worldbank.org/content/dam/Worldbank/document/Trade/LPI2014.pdf

2. 3. «Logistics Performance Index (LPI) Report: The Gap Persists» - World Bank Group.

http://www.worldbank.org/en/news/press-release/2014/03/20/logistics-performance-index-gap-persists, თარგმნა - დ.გოჩავა

4. «Social-Economic Development Strategy of Georgia - Georgia 2020 » - Georgian Government 

http://www.adb.org/sites/default/files/linked-documents/cps-geo-2014-2018-sd-01.pdf

5. 6. 7. The World Bank - Country Score Card: Georgia 2014

http://lpi.worldbank.org/international/scorecard/column/254/C/GEO/2014/C/GEO/2012/C/GEO/2010/C/GEO/2007#chartarea

8. 9. «Railway Reform: Toolkit for Improving Rail Sector Performance» - ©2011 The International Bank for Reconstruction and Development / The World Bank

http://www.ppiaf.org/sites/ppiaf.org/files/documents/toolkits/railways_toolkit/PDFs/WB_toolkit.pdf

 

 

The ideas expressed in the article belong to the author only and do not represent the position of IDFI, the University of Bremen or the Federal Foreign Office of Germany. Therefore, these organisations are not responsible for the content of the article.

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