Measuring Impact of Trade Logistics Reforms! Washington DC, April 6, 2011 Uma Subramanian ( Global Product Leader, Trade Logistics) Investment Climate Advisory Services World Bank Group

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency  Clients’ and donors’ request for impact measures How should we prioritize our interventions? What is the impact of our work on investment and growth? Where should we focus our efforts and funds?  IFC Strategy and Institutional Development Goals (IDGs) being tested (we are working with IFC Development Impact dept; M& E teams, etc)  M&E framework focused on tracking results and more recently reforms. No systematic measure of impact.  A new methodology for aggregating results into reforms has been developed in FY09 and is being piloted in FY10. Some products are using compliance cost savings measures (e.g. entry and tax) but the methodology does not work for Trade Logistics. We are developing a methodology that measures impact of trade logistics reforms in a practical and relevant manner! New Mantra: Managing for Impact

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 3 A total of 17 reforms since 2008! Reform examples include: Implementation of automatic cancellation and validation procedures for inward and outward transit bonds. What does it mean? Frees up working capital for traders. Creation of risk management and intelligence unit, and implementation of risk based inspections and clearance regime. What does it mean? Compliant low risk traders get speedy border clearance saving time and money. Launch of a one bank counter for Majerwa (dry port) and Customs. What does it mean? Simplifies the trade payment system for firms. Removal of the import and export license. What does it mean? One less document and less red tape. Rwanda: Measuring reforms for the private sector 3 Practical reforms that have significant implications for increase in efficiency and productivity for the private sector. Question: how do we measure the benefits?

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency What do we know? 8  Subramanian, Anderson and Lee (forthcoming 2011)  1% reduction in export time could increase bilateral trade by a range between 0.18% (OECD countries) and 0.6% (Sub-Saharan Africa).  Djankov et al (2007): One percent reduction in time to export increases exports by 0.4 percent. One additional day in transit time is equivalent to a 70km increase in distance between trading partners.  USAID (2007): One extra day in transit for vegetables and fruit is equivalent to lowering price of produce by 0.9%.

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency What do we know? 8  David Hummels (2001): One day saved in shipping time is equivalent to a 0.8% reduction in ad-valorem tax for manufactured goods.  Subramanian, Anderson and Lee (2005)  Using China ES data, reducing customs clearance time by 1 day will generate:,  2.1% increase In total factor productivity for Textile/Apparel Industry  7.4% increase in total factor productivity for consumer goods

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 6 How to measure impact projections? Estimating cost savings to private firms due to trade logistics reforms Projections of increase in exports due to reduced time to trade Module 1 Module 2 Two Modules

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 7 Estimating cost savings to private firms due to trade logistics reforms Projections of increase in exports due to reduced time to trade Module 1 Module 2 How to measure impact projections?

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency Reducing Trade Transactions Time Has a Direct Impact on Trade A 10% reduction export time Increases Export of … by … Sub Saharan Africa6.1% South Asia5.8% East Europe & Central Asia5.0% Middle East & N. Africa4.1% East Asia and Pacific Islands4.1% Latin America and Caribbean3.5% OECD1.7% For Colombia this is equivalent to US $740 million Source: Forthcoming research paper (Subramanian, Anderson and Lee (2011) Direct implications for growth, private investment and poverty reduction 8

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency Reducing time to trade by 10% has higher impact on countries with “creaky” regulations and procedures 9 Country Time to Export (DB 2011) Elasticity Increase in trade (US $ Million) Bangladesh Bolivia Cambodia Colombia Congo, Dem. Rep Croatia Kenya Moldova Montenegro Nepal Peru Rwanda Tanzania

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 10 Estimating cost savings to private firms due to trade logistics reforms Projections of increase in exports due to reduced time to trade Module 1 Module 2 How to measure impact projections?

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 11 Decreased Capital Carrying Charge Reduced Cargo Loss and Damage Lower User Fees and Charges Inventory Cost Savings Building blocks to measuring Cost Savings … for Trade Logistics Projects Cost savings to private sector due to trade logistics reforms

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 12 How would you compute these cost savings?

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 13 Capital carrying charge = f {shipment value, interest rate, time to trade} Decreased Capital Carrying Charge Reduced Cargo Loss and Damage Cargo Loss and Damage= f{ Annual import value, frequency of damage or loss, percent value of consignment lost or damaged in transit}

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 14 User Fees and Charges = f {documentation charges, port and terminal fees, trucking charges, time to trade} Reduced User Fees and Charges Charge Inventory Cost Savings Inventory Cost= f{Inventory turnaround, interest charges for goods in storage, storage costs, inventory losses due to spoilage or damage in storage}

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency Parsimonious selection of data points to be collected as baseline! Pre-determined parameters that will be refined by typology of countries going forward Key Features of the impact model

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 16 Reform could bring 37% savings in trucking costs for a Rwandan firm! Scenario Trip Time (Days) Mombasa-Kigali Truck Rate Pre-Reform - Slow transit resulting in (i)frequent stoppages by police and weighbridge inspectors in Kenya (ii)sluggish modernization of border posts at Malaba and Gatuna 9.5$4,397 Post Reform Situation - Faster transit due to (i)reduced weighbridge inspections and police road checks (ii)Fully operational one-stop border post 5$2,770 Savings Nominal4.5$1,627 %47%37%

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency Simplification and process re-engineering reduces inventory costs for Rwandan firm 17 Scenario Transactions time (Days)Inventory Costs Pre-Reform (i)Onerous documentation (ii)Complex procedures (iii)Poor coordination among agencies 35$2133 Post Reform Situation (2011)– (i)Reduced documents within Rwanda (ii)Streamlined processes in Majerwa (iii)Simpler payment systems 29$1803 Savings 24$330

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 18 Reform Year Post-Reform Year IMPORT SCENARIO Firm Level Impact Savings in Capital Carrying Charge Savings in Cargo Loss & Damage during Transit Savings in User Fees and Charges Savings in Inventory Cost Cost Savings for a Firm Country Level Impact Savings in Capital Carrying Charge 243, , , ,323 Savings in Cargo Loss & Damage during Transit 408,681 3,321,3362,880,062 2,510,212 Savings in User Fees and Charges 865,438 1,662,3252,251,051 2,778,975 Savings in Inventory Cost 2,050,295 3,227,7463,472,346 3,568,145 Cost Savings for Country $3.6 mill $9 mill$9.4 mill $9.6 mill Cost savings of over $30 million from import reforms for Rwanda (ex-ante savings estimation ) (discounted)

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency Do not Panic! Here’s what you will need to collect!

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 20 Here’s what you will need to collect! Baseline data (1) Historical DataSource CUSTOMS, PSI Companies Total Annual Export Value Number of export related customs declarations Number of firms that export only Total Annual Import Value Number of import related customs declarations Number of Firms that import only Number of firms that export and import Annual Revenue Collected by Customs (value) (Customs charges, duties, tax, excise, GST, fees) Customs

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 21 VariablesSource of data Interest Rate (Lending) Public domain, National Bank of the country Average value of Consignment (SME vs. medium/ large) Customs, Freight forwarder, Trader Monthly warehouse/storage cost for inventory holdingsTrader Monthly rental per cubic footTrader Frequency of cargo loss and damage during transit (X times annually) Freight forwarder, Trader Percent value of cargo lost and damaged in transit of one consignment Freight forwarder, Trader Frequency of material spoilage & shrinkage during inventory storage (X times annually) Trader Percent value of material damaged during inventory storageTrader Here’s what you will need to collect! Baseline data (2)

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 22 Thank you!

THE WORLD BANK World Bank Group Multilateral Investment Guarantee Agency 23 Non-linear Econometric Model: Dependent Variable: Proportion of total goods exported from Country i to Country j Explanatory Variables  Income of Destination country (WDI)  Distance between origin-destination countries  Liner Shipping Connectivity Index (UNCTAD)  Cost to import of the Destination Country; DB 2009  Time to import of the Destination Country; DB 2009  Average Tariff of the Destination Country: (UNCTAD) From the Multinomial Logit Model parameter estimates we can calculate inclusive value = Independent Variables Inclusive Value GDP of Countries i and j Liner Shipping Connectivity Index: UNCTAD Infrastructural Quality (Global Competitiveness Index: WEF) Time for exports of the Destination Country Average Tariff of the Destination Country Stage 1: Estimated a multinomial logit model Stage 2: Export Regression Model Dependent Variable: Total Export of Country i to the World =