report no. 15303-cha china container transport services and...
TRANSCRIPT
Report No. 15303-CHA
ChinaContainer Transport Services and Trade:Framework for an Efficient ContainerTransport SystemOctober 10, 1996
Infrastructure Operations DivisionChina ancl Mongolia DepartmentEast Asia an(i Pacific Regional Office
Document of the World Bank
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CURRENCY EQUIVALENTS(as of Januarv 1. 1996)
Currency = RenminbiCurrency Unit = Yuan (Y)
Y 1.00 = 100 fenY 1.00 = $0.12$1.00 = Y f.4
FISCAL YEAR
January I - December 31
WEIGHTS AND MEASURES
I millimeter (mm) = 0.0394 inch (in)I centimeter (cm) = 0.3937 ipch (in)
I meter (m) = 3.2808 feet (ft)I kilometer (km) = 0.621 14 mile (mi)
I square meter (m2 ) = 1 0.7639 square feet (ft)I square kilometer(kmn) = 0.3861 square mile (mif)
1 cubic meter (m3 ) = 35.3147 cubic feet (ft')I hectare (ha) = 2.4711 acres (ac)
1 liter (1) = 0.2642 US gallon (gal)
PRINCIPAL ABBREVIATIONS AND ACRONYMS USED
B/L - Bill of LadingCAS - Country Assistance StrategyCFS - Container Freight StationsCGA - Customs General AdministrationCIB - China Import and Export Commodity Inspection BureauCOSCO - China Ocean Shipping CompanyCRC - China Railway Container Transport CompanyCT - Container TerminalCY - Container Yarddwt - Deadweight tonsEDI - Electronic Data InterchangeEDIFACT - Electronic Data Interchange for Administration, Commnerce and TransportEIR - Equipment Interchange and ReceiptFDI - Foreign Direct InvestmentFTC - Foreign Trade CorporationGDP - Gross Domestic ProductISO - International Standards OrganizationJIT - Just-in-timeJV - Joint VentureLCL - Less-Than-Container-LoadMOA - Ministry of AgricultureMOC - Ministry of CommunicationsMOFTEC - Ministry of Foreign Trade and Economic CooperationMOH - Ministry of HealthMOR - Ministry of RailwaysNCCTF - National Container Cooperation Task ForceOECD - Organization for Economic Cooperation and DevelopmentPenavico - China Ocean Shipping AgencyPSB - Public Security BureauSETC - State Economic and Trade CommissionSEZ - Special Economic ZoneSinotrans - China National Foreign Trade Transportation GroupSIT - Sinorail Intermodal Transport CompanySOE - State-Owned EnterpriseSPC - State Planning CommissionSTC - China Ocean Shipping Tally CompanyTEU - Twenty-Foot Equivalent UnitsUN/ECE - UN Economic Committee for Europe
CONTENTS
PREFACE ............................................................. iii
EXECUTIVE SUMMARY .............................................................. v
1. CONTAINER TRANSPORT AND CHINA'S FOREIGN TRADE ......................... 1A. Introduction .............................................................. 1B. The Container Revolution .............................................................. 2C. Logistics Management .............................................................. 3D. Changing Requirements of China's Foreign Trade ............................................ 4E. Regional Disparities .............................................................. 6
2. CHINA'S CONTAINER TRANSPORT SYSTEM .................................................... 8A. Organization of Container Transport: The Intermodal Chain ............................ 8B. Participants in the Intermodal Chain ............................................................. 1 IC. Seabome Container Traffic ............................................................. 14D. Inland Container Movement ............................................................. 15E. International Norms ............................................................. 18F. Performance of China's Container Operations .................................................. 19
3. BARRIERS TO THE MOVEMENT OF CONTAINERS ....................................... 22A. Institutional Problems ............................................................. 22B. Inadequate Transport Links to the Interior ........................................................ 23C. Ineffective Competition ............................................................. 25D. Cumbersome Border Procedures ............................................................. 27E. Inadequate Facilities and Low Technology Base .............................................. 29
4. REMOVING THE BARRIERS TO INLAND CONTAINER TRANSPORT ....... 31A. Redefine the Role of Government ............................................................. 3 1B. Develop Container Transport Links ............................................................. 33C. Stimulate Competition ............................................................. 34D. Improve Border Procedures ............................................................. 37E. Improve Technology and Facilities ............................................................. 39
5. IMPLEMENTING RECOMMENDED ACTIONS .................................................. 41A. Action Programs for Policy Reform ............................................................. 41B. Physical Developments ............................................................. 42C. Role of the Bank ............................................................. 43
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Annex 1: Description Of COSCO And Sinotrans Groups ................................................ 47
Annex 2: International Efforts For Trade Facilitation ..................................................... 51
Annex 3: Cost Of Inefficient Container Transport System ............................................... 55
TABLES IN TEXT
Table 1.1: World Container Trade Development .............................................................. 3Table 1.2: Exports of Goods and Services Relative to Gross Domestic Product (%) ........ 5Table 1.3: Foreign Trade and Investment Indicators, 1991-93, by Region ........................ 7Table 2.1: Profile of Intermodal Industries ............................................................. 12Table 2.2: Government Agencies and Their Affiliated SOEs .......................................... 13Table 2.3: Aggregate Container Volumes in China .......................................................... 14Table 2.4: Inland Penetration of Seaborne Containers Entering China Through Ocean
and Land Gateways ............................................................. 15Table 2.5: Container Cycle Times in Elapsed Days La ..................................................... 17Table 2.6: Transport and Logistics Costs ............................................................. 18Table 2.7: Ranking of Services ............................................................. 19Table 4.1: Barriers and Recommended Actions ............................................................. 32Table 5.1: Bank Recommended Action Programs .................................. 44
BOXES IN TEXT
Box 2.1: Bill of Lading .................................. 11Box 2.2: The Link Between Chinese Shippers and Foreign Trade Corporations ............. 21Box 3.1: The Shanghai Experience ........................................................ 27
FIGURES IN TEXT
Figure 1.1: Regional Disparities ......................................................... 6Figure 2.1: Process of Intermodal Chains ......................................................... 9Figure 2.2: Container Cycle Time on Rail, Truck and Inland Waterway ......................... 16
MAP
IBRD 28073: Container Transport Network in China
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PREFACE
This sector study is a result of joint efforts by the Chinese government and theWorld Bank. Based on an agreement between the State Economics and TradeCommission (SETC) and the Bank in March 1994, a Chinese team of experts fromSETC, the Ministries of Railways, Communications, and Foreign Trade and EconomicCooperation, the Customs General Administration and other agencies and enterpriseslaunched a study to assess the country's container transport and border procedures, andidentify the areas needing improvement. The effort was supported by a Policy andHuman Resource Development Grant from the Japanese Government, which coveredtechnical assistance (TA) from a group of foreign experts. The study was begun in May1994 and completed in October 1995. A final version of the report will be soon sent tothe Bank.
In conjunction with the Chinese study and built on it. the Bank initiated this sectorstudy in February 1995. It describes the barriers that hinder intermodal transport andpresents a policy framework against which the country can develop an efficient andmarket-oriented system.
This report was prepared by Messrs. Shunso Tsukada (task manager), RonaldKopicki (co-task manager), Suitbertus Van der Meer (consultant) and Peter Yee(Transmode Consultants Inc..). Input to the report was provided by Messrs. TakashiMuragaki (OBPFM), Masakazu Watanabe (FSD), Bala Subramaniam (UNCTAD), SorenILennartson (consultant). David Blond, Robert West and Ms. Yvonne Taylor (of DRIMcGraw-1ill) and Ms. Bavani Krishnamurthi (consultant). Valuable assistance wasobtained from Messrs. Ye Chunhe and Chen Juemin of the Bank's Resident Mission inChina. Peer reviewers were Messrs. Hans Peters (TWUTD), Jacques Yenny (ECIIN),Robert Schware (IENTI) and Carlos De Castro (trade facilitation specialist). The reportwas edited by Ms. Barbara Koeppel. The Division Chief is Mr. Richard Scurfield, andthe Department Director is Nicholas C. Hope. Valuable comments were provided byMessrs./Mss. Albert Keidel. Robin Carruthers. Tilly Chang, Hennie Deboeck, ZafarKhan, Alfred Nickesen and Toshiro Tsutsumi.
Special thanks are directed to the initiator and organizer of the TA program,Mr. Ma Liqiang, the Deputy Director of SETC, the heads of the Chinese study team,Prof. Wang Derong and Ms. Wang Huimin and key team members, Messrs. Xia, LiuBiag Liau, Chen Shu Qun and He Ke. Gratitude is also expressed for assistance offeredby the Canadian International Development Agency, which funded the sector study.
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EXECUTIVE SUMMARY
A. INTRODUCTION
1. Over the past three decades, the growth of world trade has outpaced economicgrowth by a factor of three. In part, this remarkable surge occurred because of theintroduction of container transport, which sharply reduced the direct and indirect costs ofmoving cargo across national borders.
2. Containers offer a faster, more reliable and economical service, which is criticalfor shipping high-value products. They transfer cargo easily from one mode of transportto another, enable operators to offer door-to-door, land-sea complete service withpredictable delivery times, and reduce pilferage en route. For these reasons, 80 percent ofocean-going general cargo, measured in terms of value, and 50 percent measured in termsof weight, now move by containers. Indeed, many companies in developed countries areunwilling to place orders with factories located in areas where containers, with all theiradvantages, are unavailable.
3. China's Foreign Trade and Regional Disparities. Since China opened itseconomy to the world in 1979, foreign trade expanded sevenfold, from $13 billion to$113 billion in 1994 (in 1990 constant prices). During this time, its foreign trade mixshifted from one based on raw materials, which move in bulk lots, to one based onmanufactured products, which move in smaller lots and are therefore appropriate forcontainers. This trend is expected to continue, reflecting ongoing structural changes inthe country's foreign trade, from low- to high-value commodities. However, thisexpansion will be deterred if the transport sector fails to provide services that canaccommodate the change.
4. This remarkable growth of exports has been regionally-based. It has flourished inthe coastal areas, primarily in the southern and eastern parts of the country, while it haslagged in the interior. This inequality has reinforced existing economic disparities.Unless transport links connecting the inland regions to the coast are improved, thedisparities will most likely deepen. At present, while inland provinces account for63 percent of the population and 46 percent of overall income, they produce only17 percent of China's exports.
5. China's Container Transport. Container shipping began relatively late (in1978) and grew steadily over the next decade. However, from 1990 to 1994, it soared: Inthese years alone, throughput rose from 1.5 million TEU (20-foot equivalent units) to 5.1million TEU, averaging 36 percent a year. Nevertheless. this phenomenal growth isconfined to coastal regions. Only 8 percent of seaborne containers travel beyond theseprovinces. Indeed, most containers are stripped in ports and their cargoes are carried in
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breakbulk to inland destinations. Thus, the greatest benefits of container transport haveyet to be realized.
6. The purpose of this sector study is to explore policies the country could developto move seaborne containers from ocean gateways to inland provinces and thus improvethe latter's opportunity to participate in China's export growth. Indeed, if an efficientinland container transport system could be developed, the price of exporting andimporting goods could be reduced by 2 percent-6 percent. Although these figures appearsmall, they are large enough to significantly affect the exporters' competitiveness in tightmarkets.
B. BARRIERS TO CONTAINER TRANSPORT
7. In general, Chinese container services operate below world standards. Forexample, an October 1995 survey indicted that foreign shippers gave China's intermodalsystem a "3" on a scale of one-to-ten, while those in the United States and Hong Kongwere rated "8.8." This poor performance is due to five institutional and physical barriers.
(a) Uncoordinated and Duplicated Government Responsibilities/Regulations. Government agencies still have vestiges of the commandeconomy and are structured along modal lines. Many are involved in theintermodal transport system, approach the process from their ownperspective, and pass laws and regulations without coordinating with theothers. The result is an array of overlapping jurisdictions and fragmentedlegal structures. Moreover, the agencies control every aspect of containertransport and function both as regulators and operators, either bythemselves or through their affiliate enterprises, which creates collusiverelationships between the state and enterprises.
(b) Inadequate Transport Links between Interior Regions and GatewayCities. The shortage of transport capacity is a long-standing problem.The lack of rail capacity has deprived shippers of access to cost-effectivelong-distance service, the most critical element for moving cargo to andfrom inland destinations. Further, service is often irregular and of poorquality. Trucking service is also poor, partly due to the equipment butmainly to the quality of the highways, most of which were originallydesigned for local traffic and do not accommodate tractor trailers easily.Inland waterway service is also inadequate because of a lack of containerhandling facilities.
(c) Lack of Effective Competition, Particularly in Intermediate Services.In almost all subsectors, the state-owned enterprises (SOEs) dominate.This is a particularly grave problem for the interrnediary industriesbecause of the critical role of freight forwarders and shipping agents inintermodal transport. Although these industries were theoretically openedto outside firms in the early 1990s, the China Ocean Shipping Company
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(COSCO) and China National Foreign Trade Transportation Group(Sinotrans) groups still have market shares of 75 percent and 20 percent,respectively, among the shipping agencies, and 20 percent and 60 percent,respectively, among freight forwarders. This dominance allows them toprovide intermodal service without considering clients' needs.
(d) Cumbersome Border Procedures. Although these have improved sincethe mid-1980s, border procedures still delay containers at points of entry.More inspections are required in China than in other countries: Besidesthe usual inspections for customs, animals/plants and health quarantine,authorities have also required commodity inspections, with respect tointernational/bilateral agreements, and the tally of containers, to certifythat each is transferred from the terminal operator to the shipping line.Further, the inconsistent way that regulations are applied, along with alack of transparency, confuses foreign shippers and delays the process.
(e) Lack of Container Handling Facilities; Poorly Developed InformationSystems. Unlike the coastal cities, which have a full contingent ofcontainer freight stations, trucks and empty containers, interior provinceslack such facilities and equipment. Thus, inland shippers have to wait forempty containers to be sent from the coast to the interior, which adds tothe time and costs. Similarly, information systems and other technologyare problematic: For example, the way in which containers are sent,received and tracked (the equipment interchange and receipt [EIR]system), is ineffective because transport operators do not honor contractsto return containers by specific dates. This occurs because the agreementsare difficult to enforce.
C. RECOMMENDATIONS TO REMOVE THE BARRIERS
8. The study recommends 13 courses of action to remove the barriers. These includethe following:
Redefine the role of the government
(a) During the transition from a command to a market economy, theGovernment should establish an intermodal system in which market forcesplay a greater part in determining prices and resource allocations. To thisend, efforts should be made to separate the Government's regulatory andoperational functions, creating an "arm's length" relationship with itsSOEs;
(b) The Government's capacity to coordinate activities should bestrengthened. To accomplish this, the inter-agency committee (the
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National Container Cooperation Task Force) should be expanded so it canbetter deal with the issues surrounding border procedures;
(c) All laws and regulations should be reviewed so as to identify, modify oreliminate those that hinder competition and impose costly administrativerequirements;
Maximize the use of existing transport infrastructure
(d) Although lack of infrastructure is a key issue in the intermodal system, andaddressing it will take a decade, much can still be done to move containersfurther inland. To this end, container line-haul services. particularly thoseof the railway, could be improved if a dedicated service was introduced.Further, authorities should explore greater use of the Yangtze River, whichoffers considerable opportunities for transporting containers.
(e) Container handling capacity at both the sending and receiving ends (incities with regularly scheduled long-haul services) should be improved bydeveloping transshipment and handling facilities;
Establish user-oriented, competitive intermodal transport services
(f) Until now, foreign operators (which are larger and have greater capacity tocompete) have not been able to compete with the giant SOEs thatdominate intermodal transport. Because they could provide shippers withhigh-quality alternatives, particularly in intermediary services, they shouldbe allowed to enter the market and conduct business in a communalmanner;
(g) To create competition and ultimately improve the quality of service, thelarge SOEs should be broken up and transformed into groups of smallercompanies (which could compete among themselves). Over the long term,these smaller companies should be spun off from the group;
(h) Prices of container transport services should be reviewed and restructuredso as to attract Chinese shippers who are not yet using containers;
Simplify border clearance procedures and the documentation process
(i) To simplify clearance procedures at the borders, authorities shouldintroduce a one-stop checking system in which Customs officials judgewhether other inspections are required. Also, the requirements for abonded transit system should be simplified and inspections should bedeferred until cargo reaches the inland destination. Further, commodityinspections and tallying requirements should not be mandatory.
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(j) Standardized shipping and trade documents, developed in the Shanghaipilot program, should be applied throughout the system;
(k) An electronic data interchange system (EDI) should be introduced tomodernize administrative and commercial procedures. This effort couldstart at the municipal level, and, if successful, be expanded nationwide;
Upgrade technology and promote the inflow of funds to accomplish this
(1) New container-handling technologies, particularly the EIR processingsystem and container tracking system, should be introduced at majorinternodal hubs and along corridors that handle container traffic;
(m) To mobilize financial resources, joint ventures with foreign investors, aswell as leasing and improved access to financial institutions, should beexplored.
D. ROLE OF THE GOVERNMENT
9. To introduce the 13 recommended courses of action listed above, the reportsuggests various programs, along with the time-frames and the agencies responsible forimplementing them (see Table). Some of the actions can be initiated in the short term(1-3 years) because the Government has already begun to move in these areas. Thoserecommended for the medium term (3-5 years) are equally important, but will take longerto launch.
10. To implement the programs, the lead agency will need to coordinate theconflicting interests of various agencies, among other tasks. Thus, a priority has been tocreate a coordinating body, as outlined in para. 8. The immediate concern of this groupwould be to develop and adopt the above action programs.
11. The World Bank stands ready to support the Government in this new strategy.
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TABLE: BANK RECOMMENDED ACTION PROGRAMS
Recommended course of Time Suggestedaction Specific activities frame Responsibilities
Separate regulatory from * Establish an "arms-length" relationship between the Govemment and Medium SETC/Ministriesoperational functions enterprises
Strengthen coordinating - Strengthen the coordinating function of NCCTF and expand it to Short SETC/Ministriesfunction include trade facilitation
* Improve coordination between terminal/transport operators in Medium Operatorstransshipment of containers and in scheduling of service provision
Reformulate a legal * Review the existing laws and regulations and revise those that hinder Medium SETC/Ministriessystem competition and delay container processing
Maximize use of existing Develop a master plan for Yangtze River container transport Short SPCinfrastructure
* Compile an inventory of traffic bottlenecks along highways and Short Municipalitiesprepare investment plans to remove them* Adopt interprovincial licensing for long-haul trucking and allow the Short MOCprivate sector to haul containers* Apply the new wagon allocation system nationwide Short MOR* Operationalize two rail container transport companies Medium MOR* Introduce a separate registration system for tractors and trailers Short Public Security Bureau
Develop intemmodal hubs Promote investments in container handling facilities and facilitate Medium Municipalitiesinvestments in load center cities
Establish user-oriented, * Eliminate restrictions on the scope of business carried out by foreign Medium MOFTEC/MOCcompetitive intermodal freight forwarders affiliated with foreign shipping linesservices * Remove entry restrictions to non-SOE shipping agencies Short MOC
Reform intermediary Transform major intermediary SOEs into group(s) of smaller and Medium COSCO/SinotransSOEs more manageable enterprises
* Confine the functions of holding companies to setting overall Medium COSCO/Sinotranspolicies
Restructure intermodal Review pficing schedules for container services Short SPC/Ministriespricing Progressively relax Govemment controls on container service prices Medium SPC/Ministries
Streamline border Establish a one-stop checking system Medium CGA/MOH/MOAinspections Facilitate bonded transit to inland destinations Short CGA
* Reform the charging system for animal/plant inspections and health Medium MOA/MOH/MOFquarantines* Lengthen the service hours for border procedures Short SETC/Ministries* Remove commodity inspections and tallying from mandator border Medium CIB/STCinspections* Relax entry restrictions into commodity inspections and tallying Medium CIB/STCmarkets
Adopt simplified Ensure broader use of uniform shipping/trade documents Short MOC/MOFTECdocuments Adopt waybills for trade/shipping-related transactions and/or Medium MOC/MOFTEC
introduce electronic form of bills of lading
Provide electronic data * Refine EDI-related standards, including EDIFACT Short MOC/CGA/MOFTECinterchange (EDI) Experiment with municipality-based EDls Shon Municipalities
* Establish a nationwide EDI system Medium SETC/MOC/CGA/MOFTEC
Upgrade the technology Facilitate the import of tractor trailers Medium MOFTEC/CGAbase and facilities Establish an enforceable FIR system Short MOC
Strengthen financing * Create an environment conducive to JV investment Short SETC/MOFTECcapability Establish a legal and judicial framework for leasing Medium MOFTEC/MOC
* Channel funds into the intermodal sector areas through Medium BanksfMunicipalitiesintermediation
Note: Short termn imnplies one to three years, and medium term, three to five years.
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1. CONTAINER TRANSPORT AND CHINA'S FOREIGNTRADE
* With its long coastline and enormous hinterland, China has a great need of aneffective intermodal container transport system. At present, however, containertransport is confined mainly to the coastal regions. This has been one of the majorfactors that keep the interior provinces from participating in China's recent exportboom; in turn, this reinforces the existing economic disparities between the coastaland interior provinces. Thus, this study analyzes the barriers to efficient intermodaltransport and recommends actions to address them.
* This chapter describes two phenomena shaping today's dynamically changing worldtrade. These include:
0 The container revolution, which occurred during the last three decades anddramatically changed the international transport system.
0 The practice of logistics management, applied by manufacturers and retailersalike.
* It also describes the nature of China's foreign trade, its use of container transport,and how current practice contributes to regional disparities.
A. INTRODUCTION
1.1 Since China opened its economy to the world, foreign trade has been pivotal to itsgrowth: Over the last 15 years, the export-to-gross domestic product (GDP) ratioincreased from less than 10 percent to 26 percent. This rapid expansion was largelyfueled by direct foreign investment. Such investment has mainly been in export-orientedmanufacturing, which accelerated the shift toward higher-value trade that is suited tocontainer transport.
1.2 With this shift, China significantly increased the percentage of its containerizedexports: The containerization rate' reached 13 percent in terms of weight and is estimatedto be over 60 percent in value.
1"Containerization rate" in terms of value or weight is defined as the percentage of containerized goodsto total value or weight of goods.
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1.3 Despite the country's long coastline and enormous hinterland, the growth ofexports and the use of containers have largely been limited to the coastal areas andassociated with oceangoing shipping: Over 92 percent of seaborne containers do nottravel beyond the coastal provinces. Therefore, although the economy as a whole reapsthe benefits, the interior provinces have not participated in the export boom. This, inturn, reinforces the economic disparities between coastal and interior regions.
1.4 The purpose of this report is to explore the issues the country must address tomove containers from gateway cities to inland production centers. This discussion willinclude ways to streamline border procedures, which hinder the speed and ease withwhich containers are processed. In so doing, the study will help (a) alleviate transportbottlenecks and (b) minimize regional disparities in export activities, objectives of theBank's Country Assistance Strategy.
1.5 The report builds on the "Transport Logistics Study" carried out by a Chineseteam under the State Economic and Trade Commission (SETC) with technical assistancefrom foreign experts.2 While the first study reviewed the nature of the container systemand border inspections, and identified specific areas that needed to be developed, this newreport, prepared by the World Bank, defines the policy framework and courses of actionthat can foster these changes.
1.6 The study contains six chapters. The first provides a background, describing thepatterns of world trade and macroeconomic issues that affect or are affected by thedevelopment of container transport. Chapter 2 describes the current container transportsystem, focusing on the organization of intermodal industries, the inland movement ofseaborne containers, and shippers' perspectives about China's transport. Chapter 3discusses the barriers that prevent intermodal services from being delivered efficiently.Chapter 4 recommends courses of action to remove the barriers. Chapter 5 summarizesthe Government's and Bank's roles in the process of producing an efficient intermodalsystem.
B. THE CONTAINER REVOLUTION
1.7 Since the first oceangoing operation between Port Newark to Rotterdam, BremerHaven and Grangemouth in 1956, international container transport has developed rapidly(see Table 1. 1). Because shippers insist on this form of transport, ports around the worldhave had to accommodate them; and, because the mode is highly capital-intensive(requiring container ships, special berths equipped with gantry cranes, and ship-to-railtransshipment facilities), containerization has become a self-reinforcing process. Somemajor ports will only accept general cargo in containers, while major shipping lines onlyguarantee delivery times for container cargo. Thus, 80 percent of the world's deep-sea
2 The final report will be available in the summer of 1996.
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general cargo, measured in terms of value, and 50 percent measured in terms of weight,move in containers.
TABLE 1.1: WORLD CONTAINER TRADE DEVELOPMENT
Year Loaded container trade L/ Port throughput(million TEU) (million TEU)
1970 2.1 6.31975 6.1 18.31980 12.8 37.31985 19.3 36.71990 24.8 77.91995 32.6/b 96.5Jb
La Loaded containers, net of domestic and transshipment traffic volumes./b Estimated.
1.8 Because containers can be easily transferred from one mode of transport toanother, they have enabled transport operators to offer faster and more reliable service:They move from origin to destination on a door-to-door basis under one bill of lading,and they reduce the amount of pilferage. Moreover, they shrink economic distancesbetween coastal ports and inland manufacturing centers, which stimulates import andexport industries in the hinterland. For example, in the midwest of the United States,intermodal container transport altered the locational preferences of entire industrialsectors over the past two decades. Indeed, it is clear that container transport profoundlyaffected that country's cargo transport and foreign trade.
1.9 Today, multinationals prefer to deal with producers in countries that have gooddistribution systems-those with reliable transport infrastructure and services as well asefficient border procedures-so as to minimize the costs and risks associated with theinternational distribution of cargo. These corporations are increasingly selective aboutwhere to locate regional production and distribution centers and often move from onecountry to another to obtain less costly but reliable service (among other reasons). Forexample, over the last 10 years, the frontiers of light industry production moved fromHong Kong, Taiwan (China) and Korea to Thailand and Malaysia, and then to Indonesiaand India.
C. LOGISTICS MANAGEMENT
1.10 The concept of logistics management derived from practices employed by themilitary to move personnel, arms and food in a systematic manner. During the Gulf War,for example, US forces served 122 million meals in Kuwait. Delivering three meals aday to each soldier required extensive planning, organization, mobilization of humanresources and equipment.
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1.11 In commerce, the tern- refers to planning and managing the flow of raw materials,in-process inventories and finished goods along with the information needed from thepoint of origin to the point of consumption.
1.12 As manufacturers expanded their markets abroad, they had to reduce theirproducts' cycle time (the point from which orders are placed, through design andmanufacturing to shipment), which meant improving the use of assets and level of service(managing logistics effectively). In so doing, they could respond more quickly to marketchanges.
1.13 Second, they sought to reduce their working capital through tight inventorycontrol. Because 35 to 50 percent3 is usually tied up in inventory, which can be rawmaterials, work-in-progress, and finished goods waiting to be delivered, they employedthe just-in-time (JIT) concept: It required suppliers to deliver the exact units and amountsneeded at a specified time determined by a manufacturer's production schedule. Thisinvolved extremely tight scheduling within the chain between those who supplyintermediary products and those who produce the final product.
1.14 Third, they stressed customer service, whereby firms try to differentiate theirproducts/services from others and in so doing, provide buyers with significant value-added benefits. This required a commitment to reliable deliveries as well as ancillaryservices such as shipment tracing and paperless purchase orders.
1.15 The concept also involved tight management throughout the chain of supply:Close links were created between suppliers in one country, production centers in a secondand distribution centers in the home country through the use of information technologies,such as electronic data interchange (EDI).
1.16 State-of-the-art logistics were also practiced by international retailers such asBenetton and Federated Department Stores, which contracted for the production of theirapparel with Asian manufacturers, who, together with retailers, tried to reduce the cycletime and quickly replenish the items that sell most rapidly during peak seasons. Retailerssuch as these need to have enough inventory in their outlets to satisfy customers but notso much that they are left with surplus at the end of each fashion season. This just-in-time, just-enough management of the supply chain required tight inventory control,timely feedback on buyer preferences and service-responsive transport providers.
D. CHANGING REQUIREMENTS OF CHINA'S FOREIGN TRADE
1.17 From 1990 to 1994 alone, exports doubled, from $62 billion to $112 billion (inconstant 1990 prices), raising the export/GDP ratio from 19 percent to 26 percent. Thus,although China differs greatly from other countries due to its population size and the
3 James F. Robeson, "The Logistics Handbook," New York, 1994.
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complexity of its economy, the country is beginning to look more like the other fast-growing newly industrialized economies (see Table 1.2).
TABLE 1.2: EXPORTS OF GOODS AND SERVICES RELATIVE TO GROSS DOMESTIC
PRODUCT (%)
Years China Korea Thailand Indonesia Taiwan (China)
1990 19.1 29.8 34.0 27.4 47.71991 20.9 28.1 35.4 28.1 48.51992 22.5 28.9 36.0 28.9 44.51993 24.1 29.4 37.0 27.6 45.71994 26.4 - 38.1 28.3 45.0Source: Bank Economic and Social Database; and Country Assistance Strategy document.
1.18 From the early 1980s through 1994, China's foreign trade mix shifted from onebased on raw materials, usually transported in bulk, to one based on manufacturedproducts, usually moved in containers, in the oceangoing leg of travel. These products,which include textiles, electrical appliances, footwear and toys, accounted for 79 percentof the country's exports in 1994. And, as the value-to-weight ratio of its traded productsincreases (China's containerized export cargo over the past four years rose, on average,from $4,900 to $6,650 per ton), such trade is ever more suitable for container transport-not only to foreign destinations, but to inland destinations, as well.
1.19 This structural change in China's foreign trade was largely the result of foreigndirect investment (FDI), including that by multinationals. In gross terms, it grew fromvirtually none in 1980 to $33 billion in 1994 and now accounts for half of all FDI indeveloping countries. The first phase began in the 1980s and was concentrated inGuangdong province because of its proximity to Hong Kong and ethnic/linguistic links.Later, it flowed to Fujian province, particularly from Taiwan (China), because of strongethnic ties between these two regions. Then, as port infrastructure was built along theChinese coast in the late 1980s and early 1990s and more shipping services were madeavailable from mainland ports to foreign markets, FDI began to spread along the easternand northern coasts. Most was directed toward export industries, much of this in specialeconomic zones (SEZs), and is now a driving force in the boom: For example, in 1993,28 percent of exports and 40 percent of imports were attributed to activities of foreign-funded enterprises; these usually demand better transport and logistics systems to ensurethat needed inputs/products arrive on time and that exports meet production andmarketing schedules.
1.20 The advantages China offers as a trading and investment partner are: (a) its hugepool of inexpensive and literate labor; (b) a potentially large domestic market hungry forconsumer products; and (c) a high savings rate that allows foreign technologies to beadopted and manufacturing capability to expand. However, as China increasinglyintegrates in world trade, its comparative advantage will need to be based not only thesefeatures but on the quality of its services, such as good order-to-door cycle time, door-to-
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door reliable transport, competitive transaction costs tL clear cargoes, and minimumlosses in transit.
E. REGIONAL DISPARITIES
1.21 As mentioned earlier, the recent surge in exports increased the degree to whichcoastal regions, primarily in southern and eastern China, participated in this expandedforeign trade, while interior provinces fell progressively behind: Interior provincesaccount for 63 percent of China's population and 46 percent of its overall income, butonly 17 percent of foreign trade. Figure 1. I presents the disparities in terms of per capitaGDP and exports for the seven regions in China.4
FIGURE 1.1: REGIONAL DISPARITIES
Regional Disparity: GDP and Exports per Capita (1993) /a
784
699
700 6
600
6 500 aAE 392| | o400300 292 0 Per capita GDP
2 Per capita exporb 200
100
0
0~~~~~~~
S I
Region
Za The Seven Regions comprise:1. South Hinterland: Sichuan, Guizhou, Yunnan and Guangxi;2. Central Core: Henan, Anhui, Jianxi, Hubei and Hunan;3. Far West: Xinjiang, Tibet, Qinghai, Gansu and Ningxia;4. North Hinterland: Heilongjiang, Jilin, Inner Mongolia, Shanxi and Shaanxi;5. North Coast: Liaoning, Hebei (includes Beijing and Tianjin), Shandong;6. East Coast: Jiangsu (includes Shanghai) and Zhejiang;7. South Coast: Fujian, Guangdong and Hainan.
4 World Bank, China: Regional Disparities, Washington, D.C., World Bank, 1995.
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1.22 These disparities are mainly the result of the greater distance from the ports to theinterior regions, which led FDI to flow to the coastal areas. The importance of FDIcannot be overstated: 28 percent of exports and 40 percent of imports were linked toactivities of foreign-funded enterprises (see Table 1.3).
TABLE 1.3: FOREIGN TRADE AND INVESTIMENT INDICATORS, 1991-93, BY REGION
Trade Ministry Data. Customs Data. 1993 Foreign-Funded Foreign Direct Investment1991 (S million) 1993 ($ million) Enterprise Trade Share 1992 Level % of fixed
Imports Surpl./Deficit Imports Surpl./Deficit Exports Imports ($ million) investment
China Total 63.790 8,120 103,950 -12.188 28% 40% 11,292 8.2%Far West 150 662 1,143 -262 5% 7% 1 00%North Hinterland 1.440 2.477 5.213 1.761 4% 18% 252 1.7%South Hinterland 1.080 1.516 3,534 -275 7% 26% 343 2.5%Central Core 1,030 3.323 4,953 -359 8% 32% 543 2.7%North Coast 10,450 8.392 19,478 -4.066 21% 32% 2.091 6.4%EastCoast 12,240 4.272 19.664 -1.834 24% 42% 2,197 7.9%South Coast 11.790 5.708 49.964 -7.153 40% 48% 5,578 25.2%
Source: China: Regional Disparities (the World Bank, 1995).
1.23 The disparities can also be traced to the preferential policies and treatmentconferred on coastal provinces in the 1980s. At first, SEZs were established, beginningwith Shenzhen in 1980, followed by Zhuhai. Shantou, Xiamen and Hainan. In 1992, freetrade zones were introduced in four cities-Dalian, Tianjin, Shanghai and Shenzhen. Inthe same year, in an attempt to extend these benefits to inland regions. the Governmentdesignated a large region along the Yangtze River, from Shanghai to Chongqing inSichuan Province, as a sixth SEZ.
1.24 Due to these policies, most export industries located within these zones. Ingeneral, they import raw materials and intermediate products, instead of obtaining themfrom nearby provinces within China, and low-cost, skilled labor transforms them intofinished products for re-export. This pattern developed largely because inland transportis inadequate and it has created two distinct Chinese economies: One is growing rapidlyand linked to the global economy, wvhile the second is growing slowly and detached fromboth the global economy and high-growth internal markets. Thus, unless transport links(including container service) to and from the interior are improved, regional disparities inexports, investment and growth are likely to intensifv over the next decade.
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2. CHINA'S CONTAINER TRANSPORT SYSTEM
* This chapter describes China's container transport system, focusing on theintermodal industries, the inland movement of seabome containers and shippers'perspectives about the quality of service. It concludes that:
0 The Government dominates container transport, permeating every aspect ofthe market through its role as regulator and operator.
0 Container traffic through the mainland ports has grown significantly, at36 percent a year from 1990 to 1994. However, inland traffic lags behind;only 24 percent of seabome containers travel beyond port cities, and only8 percent cross beyond the coastal provinces.
0 The container transport system operates below world standards:International shippers give it a rating of 3, on a scale of 1 to 10. while thosein the United States and Hong Kong were rated 8.8.
A. ORGANIZATION OF CONTAINER TRANSPORT: THE INTERMODAL CHAIN
2.1 Because containers with commodities to be exported from China cross borders,the process involves various steps and entities (see Figure 2. 1). These include:
(a) Obtaining Export Licenses. Companies involved in international tradefirst must obtain export licenses from the Ministry of Foreign Trade andEconomic Cooperation (MOFTEC). Once this is accomplished, Chineseshippers must apply to the People's Bank of China to open foreigncurrency accounts;
(b) Arranging for Payment. When foreign buyers agree to import goodsfrom China (usually from foreign trade corporations licensed byMOFTEC), they enter into contracts for trade: They instruct their banks toissue letters of credit5 to the Chinese sellers' banks. These banks theninform the sellers that credit is available. Once the sellers satisfy the termsand conditions in the letters of credit, preparations begin to ship the goods;
A letter of credit is defined as a document authorizing a bank to pay the bearer a specified sum ofmoney upon receipt of a document that proves the commodities ordered by a buyer have been shipped.It provides a useful way of settling foreign trade transactions.
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FIGuRE 2.1: PROCESS OF INTERMODAL CHAINS
Activities and Players in Containerized Freight Movement
Activities Principal Players
Export/lmport Licensing | MOFrEC
Contract BetweenExporters and Importers Shippers (both Chinese and Foreign)
lr m
[Arrangements forTransport, Container Freight Forwarder, Shipping AgentHandling and Inspections
?Haulage from Shipper's Trucker/Railway/Inland WaterwayPremises to Container Freight ForwarderFreight Station (CFS)
Consolidation and Packing CFS Operatorat CFSCFSOprao
1 -Border Inspections by Agencies for Customs, Animal/PlantRelevant Agencies Commodity Inspections, & Tally
, _~~~.9
Hauling to ContainerTerminal (CT) at Ports Trucker
iContainer Processing itt Terminal Operator~CT
Shipment to International Shipping LinesDestination
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(c) Selecting Freight Forwarders. The sellers must then hire freightforwarders (licensed by MOFTEC) to handle the transport arrangementsand provide them with whatever information is needed. The forwarderscontact shipping agents, licensed by the Ministry of Communications(MOC), to book space in oceangoing vessels, and then arrange for thecargo to be picked up. In this process, freight forwarders arrange forhaulage from the sellers' premises to container freight stations;
(d) Hauling Goods Inland. Goods are carried by trucking firms licensed byprovincial communications departments, railway operators, or sometimesby inland waterway operators in breakbulk to container freight stationsnear the ports. At the same time, containers are provided at the freightstations by the freight forwarders who secure them from shipping lines orcontainer leasing companies;
(e) Consolidating and Packing Containers. At the freight stations,containers are packed with the goods to be exported. If these are small-sized (less-than-container-load-LCL) cargoes, they are consolidated withother LCL cargoes to make a container-load and then packed into acontainer;
(f) Inspecting Cargo at Borders. Freight forwarders then arrange for thenecessary inspections-whether of commodities, plants and animals,health or Customs-with local offices of the Commodity InspectionBureau, the Ministry of Agriculture (MOA), the Ministry of Health(MOH), and Customs General Administration (CGA), at the containerfreight station or other designated places. Customs then seals them;
(g) Hauling Cargo to Container Terminals. When container termninaloperators (licensed by MOC) in the ports are ready to receive thecontainers for loading onto vessels, freight forwarders arrange for haulageby truck from the freight stations to the container terminals;
(h) Processing Containers at Terminals. At the terminal gate, containersare checked with regard to their physical condition and passed on to theterminal operator, along with an EIR that records those findings. Theterminal operator then coordinates with the shipping line to loadcontainers onto the vessel. While waiting for the vessel to arrive,containers are stacked in the adjacent yard. They are then loaded intovessels, counted and certified by the China Ocean Shipping TallyCompany (an MOC affiliate);
(i) Shipping to Foreign Ports. Once a container is loaded and the vesselembarks for foreign destinations. the shipping agent issues a bill of ladingto the forwarder, on behalf of the shipping line (see Box 2.1), whichcertifies that a particular cargo has left the port. The forwarder, in turn,passes the bill of lading on to the Chinese seller, who takes it to a bank andreceives payment, even before the goods arrive at the ultimate destination.
- -~~~~~~-1
Box 2.1: BILL OF LADING
The most fundamental of all shipping documents in international trade is the bill of lading (B/L). It isdefined as a document issued by a carrier to a shipper, acknowledging receipt of goods, and stating the pointsof pick-up and delivery, value declared for carriage, freight charges and tenns and conditions of transport.
The bill of lading is negotiable. Its delivery serves to transfer title to the goods named in the bills. Toobtain the goods that have been shipped, buyers must present an original B/L. Since freight forwarders mailthe B/L to the buyers, in some cases, mailing of the bill takes more time than shipping, and a faxed B/L is notvalid.
Because of these requirements, an increasing number of buyers and sellers are using waybills.However, the waybill is not a document of title, and buyers do not have to produce them to claim the goods.(See Chapter 4 for a more detailed discussion on waybills.)
B. PARTICIPANTS IN THE INTERMODAL CHAIN
2.2 Intermodal Industries. Container transport involves four types of participants.These include: (a) transport operators, such as oceangoing shipping lines, railway lines,
truck operators, inland waterway service providers; (b) intermediary service providers,such as freight forwarders, shipping agents and tally companies; (c) operators at containerfreight stations (CFS) and terminals; and (d) shippers (see Table 2.1). As the tableindicates, the services are dominated by the SOEs, with only limited participation by theprivate sector. Where the latter is involved, it mainly is in foreign-funded joint ventures(JVs), in four of the intermodal markets (trucking, CFSs, container terminals at ports, andfreight forwarding).
2.3 Government Agencies. Three types of Government agencies are involved indifferent capacities. They include: (a) agencies such as SETC and State PlanningCommission (SPC) that coordinate policies and investments; (b) line ministries such asMOC, Ministry of Railways (MOR), and MOFTEC that regulate industry activities;(c) agencies such as CGA, MOA, MOH, and China Import and Export CommodityInspection Bureau (CIB) that carry out border inspections; and (d) Public Security Bureau(PSB) which regulates the use of vehicles. Each agency assumes defined responsibilities(see Table 2.2).
2.4 The Government dominates almost every aspect of container operations. Lineministries cover not only safety regulations and border controls, but also economicregulations such as market entry and pricing. Also, they are involved as operators, eitheralone or through their affiliated enterprises.
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TABLE 2.1: PROFILE OF INTERMODAL INDUSTRIES
Oversight Private SectorIndustrv Agency Brief Profile of Industry Participation
Oceangoing MOC The industry is dominated by Chinese shipping lines - COSCO (50%) 120 JV shippingshipping and Sinotrans (20%), provincial lines of Guangzhou. Shanghai & companies (end of
Tianjin (15-20%). All of these lines are SOEs. 1995)
Railway MOR MOR is the sole operator. Container operations are still designed for Nonedomestic containers with minimal handling of International Stan-dards Organization (ISO) containers (these account for 5% of totalcontainers handled by MOR). In 1994, 110,000 TEU were handled.
Trucking MOC Large freight forwarders and provincial trucking SOEs are major A number of foreign-operators: Sinotrans is the largest, with a 1,400 tractor trailer fleet, funded JVs.which is one third of the country's total.
Inland MOC There are 7-8 container operators along the Yangtze River. The Many operate on thewaterway largest is Changjiang Shipping Corporation. Many more operate Pearl Riverservices between the Hong Kong and Guangzhou areas. along the Pearl River.
Freight MOFTEC Freight forwarders arrange transport services and border inspections 100 JV forwardersforwarding for shippers. More than 800 forwarders are licensed by MOFTEC (by and 10 wholly
the end of 1995). Most are affiliated with Sinotrans or COSCO, and foreign-ownedsome are provincial or municipal SOEs. The Sinotrans group has a forwarders (end ofmarket share of 60% and COSCO has 20%. 1995)
Shipping MOC Shipping agents represent the shipping lines; they sell space on Noneagents vessels, contract with shippers, quote tariffs, and issue bills of lading.
Over 170 shipping agents are licensed by MOC (by the end of 1995).Penavico, a subsidiary of COSCO, has 75% of market share, whileSinoAgent, a subsidiary of Sinotrans, has a little over 20%.
Container MOC It is at these facilities where small cargoes are consolidated into A number of foreignfreight container loads, and containers are packed or stripped. Often, border funded IV CFSs instations inspections occur here. Many operators are affiliated with major the peripheries of(CFS) freight forwarders or provincial and municipal SOEs. major ports.
Container MOC CT operators process containers from terminal gates to ships; they use 10 JV terminalterminals heavy equipment such as transtainers, tractor trailers and cranes. operators (Shanghai(CT) Most CT operators are affiliated with port authorities. Each major & Yantian ports)
port has 1-2 operators.
Tally MOC Tally operators verify quantities of containers taken on or off vessels; Noneservices also, they document the hand-over from shipping lines to terminal
operators. China Ocean Shipping tally Company is the sole operator.
Foreign MOFTEC Enterprises are licensed by MOFTEC as FTCs. Of the 3,000 FTCs, Probably nonetrade most are SOEs at the central and local levels.corporations(FTC)
Note: JV = Joint Venture.
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TABLE 2.2: GOVERNMENT AGENCIES AND THEIR AFFILIATED SOEs
Agency Responsibilities and Affiliated SOEs
SETC * A coordinating agency, one echelon above the line ministries and provincial govemments; also asecretariat for the National Container Cooperation Task Force, a recently established ad-hoc committeefor promoting cooperation among agencies involved in container transport.
* Responsible for economic operations (mainly short- and medium-term).
SPC * A coordinating agency, one echelon above the line ministries and provincial govemments.* Responsible for long-term investment planning, extensively involved in developing transport
infrastructure.* Regulates prices of major public utilities, including transport.
MOC * Regulates all modes of transport except railway (ocean-going shipping, inland waterway, coastalshipping, trucking).
* Regulates several intermodal services: shipping agencies, terminal operations, container yards, freightstations, and tallying.
* Responsible for developing highway networks and ports* Its major affiliated SOEs are:
* COSCO, which provides intermodal services through its subsidiaries such as:COSFRE (freight forwarding);Penavico (shipping agency and freight forwarding);China Road Transport Company (trucking)
* Changjiang Shipping Corporation: inland waterway along Yangtze River* China Ocean Shipping Tally Company (STC): tallying
MOR * Provides rail service through its 12 regional administrations. while its headquarters plans, manages andoperates the national rail system
* Operations are highly regulated by central govemment (wages by the Ministry of Labor, tariffs andmajor investments by the SPC)
* Its affiliated SOEs are:* CR Foreign Service Company: freight forwarding* China Railway Container Transport Center: rail-based container transport service* Sinorail Intermodal Transport Company: rail-based container transport service
MOFTEC * Responsible for administering extemal trade, including export/import licenses* Regulates intemational freight forwarding* Licenses foreign trade corporations* Its major affiliated SOEs are:
* Sinotrans: freight forwarding and ocean going shipping* China Maritime Shipping Agent commonly known as SinoAgent, a subsidiary of
SINOTRANS: freight forwarding* 12 foreign trade corporations
CGA * Evaluates and collects import duties and compiles foreign trade statistics* Enforces standards on the physical condition and safety of containers* Promotes Customs brokerage services
MOA * Inspects animals/plants
MOH * Inspects for health quarantine
PSB * Administer vehicle registration of tractor/trailer and other trucks.
CIB * Inspects export and import commodities
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C. SEABORNE CONTAINER TRAFFIC
2.5 Oceangoing container shipping in China began later than in other Pacific Rimcountries: The first regularly scheduled service was launched by COSCO in 1978between Shanghai and several cities in Australia. Since then, it steadily increased,fostered by 14 port cities6 being designated as "open cities" in 1984. From 1985 to 1993,the volume handled at ocean gateways grew from 0.6 million TEU to 3.8 million TEU,with an average annual growth rate of 27 percent (Table 2.3).
TABLE 2.3: AGGREGATE CONTAINER VOLUMES IN CHINA(Containers, both empty and loaded, in terms of '000 TEU)
Land Gateway Ocean GatewayYear Shenzhen Other /a Seaport/b L Total
1980 55 0 65 1201985 150 7 572 7291990 1,300 20 1,500 2,8201993 4,350 20 3,829 8,100
Annual Growth Rate1980-93 40% - 37% 38%1985-93 52% 14% 27% 35%1990-93 50% 0% 37% 42%
/a Others include: Macau (highway), Manzhouli (to Russia-rail); Erlian (to Mongolia -rail), Sui FenHei (to Russia near the Democratic People's Republic of Korea-rail), and Gong Bei (highway).
/b Seaports include river ports directly visited by ocean-going vessels./c Seaports handled 5.07 million TEU in 1994.
Source: Technical Assistance Report on Transport Logistics Study.
2.6 This trade is centered at about 35 seaports. The four largest are in Shanghai,Tianjin, Qingdao, and Dalian, which handled 934,000 TEU, 482,000 TEU, 303,000 TEU,and 256,000 TEU, respectively, in 1993. Although the ports are predominantly served byChinese shipping lines, foreign lines have also begun to operate. These include APL,Sealand, Maersk and NYK. Their market share varies by port (e.g., 5 percent at Tianjinand 35 percent at Qingdao), and is estimated to be around 10 percent, overall.
6 Dalian, Qinhuangdao, Tianjin, Yantai. Qingdao, Lianyunguan. Nantong, Shanghai, Ningbo, Wenzhou,Fuzhou, Guangzhou, Zhangjing and Behai.
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2.7 An even larger volume of China's container trade is handled through theShenzhen gateway to and from Hong Kong7 by highway. This land route handled 4.3million TEU in 1993, 11 percent more than all the Chinese ports combined. This largershare reflects the rapid growth of foreign trade in the southern coastal provinces and thefast and reliable service at Hong Kong container terminals.
D. INLAND CONTAINER MOVEMENT
2.8 Container Traffic. Containers are penetrating the country's interior, but only toa very limited degree. As shown in Table 2.4, the highest rate' is in the coastal regions(63 percent), with the central core region and the hinterlands both registering 8 percent,and the far west, just I percent. This reflects China's dual economy, caused by the shiftin the coastal provinces from inward-oriented self-sufficiency to international commercialintegration.
TABLE 2.4: INLAND PENETRATION OF SEABORNE CONTAINERS ENTERING CHINATHROUGH OCEAN AND LAND GATEWAYS
Cargo Destined to Cargo Carried by Inland ContainerRegion Regions (TEU) La Container (TEU) Lb Penetration (%)
Far West 486 5 1.0North Hinterland 30,858 1,712 5.5South Hinterland 19,042 2,420 12.7Central Core 50,039 4,170 8.3North Coast 847,884 437,494/c 51.6/cEast Coast 1.248,196 760,663/c 60.9/cSouth Coast 3.208,496 2,155,877Lc 67.2/c
Total 5,405,001 3,362,341 62.2
L Volume of cargo expressed in TEU entering China through gateways, both ocean and land, andtransported inland either in containers or breakbulk.
Lb These figures represent the volume of loaded containers./c These figures account only for containers which travel outside port cities, but remain within each
region.
Source: Chinese team on Transport Logistics Study.
7 The main focus of this study is on the inland movement of seaborne containers entering China throughits ports. Containers passing through Shenzhen by truck are already moving directly to nearby inlanddestinations in door-to door service.
8 The penetration rate is defined as the percentage of loaded containers that travel outside the port citiesover the total number handled at the ports and land gateways.
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2.9 As shown in the above table, the average container penetration rate is relativelyhigh (62.2 percent), but this is because almost all cargo entering through the Shenzhenland gateway moves in containers. However, the rate of those entering through sea portsis still low: It is estimated that only 24 percent of containers that land at the seaportstravel beyond port cities and only 8 percent move beyond coastal provinces. Of theformer, 93 percent are carried by truck, 4 percent by inland waterway and 3 percent byrail. Most stay at the port for packing or stripping and the containerized goods aretransported as breakbulk cargo by truck (85 percent of the total) or rail (15 percent).Thus, port-to-door container movement is uncommon and occurs mainly in the coastalregions, particularly where the cities are near the ports.
2.10 Container Cycle Time. Cycle time refers to the period it takes for a container tomove from a ship until it returns, empty, to the shipping agent at the port, and is a goodindicator of how well the system operates. In 1994, a survey was conducted of Chinesefreight forwarders, which involved container flow data on 100,000 boxes (a 40-footcontainer is counted as two boxes). The results are summarized below.
FIGURE 2.2: CONTAINER CYCLE TIME ON RAIL, TRUCK AND INLAND WATERWAY
35%
-4 Highway30% -U=Rail
25% -\--Waterway
20%
15%IL
10%
5%
0%v CD C LO 0 0C 0 C> 0 Ct L Do 0 Lo C oV ' _' -' N. N t ) tO 10 10) (D (D N< N
J N - {D - CD am CD - (O - (D0A_) _0 N N') £ L e 0 1D ID
No. of days
2.11 The average cycle time for containers transported by trucks was about 11 days, bybarge, 19 days and by rail, 23 days (see Figure 2.2). As with any distribution, there arevariations around the mean and in this case, the short and long cycle times can beregarded as good and poor performance respectively, while the mean is average, where noadditional inspections are required and the line-haul waiting for inland transport is notexceptionally long. The distributions for travel by truck are tighter around the meanscompared to those of rail and waterways. The standard deviation for truck is shortest (10days), against 12 days for rail and 14 days for inland waterway, which indicates thatinland waterways and rail are less reliable in terms of delivery time, compared with road.
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2.12 In order to identify which activities consume the most time and how they differfor various modes of transport, average cycle time was analyzed in terms of componentactivities (Table 2.5). Inbound containers spent from 7-10 days in port completingseveral procedures and waiting to be transferred to the next mode of transport, to movethe cargo inland. The major reason for the three-day differential (between 7 and 1 0 days)was due to the time the containers sat before being loaded on the railway or barges: Thewait was approximately three days for each, while only one day for trucks.
TABLE 2.5: CONTAINER CYCLE TIMES IN ELAPSED DAYS /a
Activity Time Elapsed Cumulative TimeTruck Rail Barge Truck Rail Barge
1. Shipping agents send arrival notices to consignees. 1.0 1.0 1.0 1.0 1.0 1.0
2. Vessel berths and discharges containers. 1.0 1.0 1.0 2.0 2.0 2.0
3. Consignees send arrival notices, bills of lading and other 1.3 1.3 1.0 3.3 3.3 3.0commercial documents to freight forwarders;Freight forwarders present arrival notices and bills of ladingto shipping agents;Shipping agents stamp arrival notices and return documents tofreight forwarders;Freight forwarders stamp the delivery order.
4. Freight forwarders prepare and hand in Customs declarations; 1.0 1.0 1.0 4.3 4.3 4.0Customs inspections and clearance.
5. Health quarantine inspections and clearance: 1.7 2.3 1.0 6.0 6.7 5.0Commodity, plant and animal inspections and clearance:Tallying container goods.
6. Forwarders show delivery orders to shipping agents and 1.0 1.0 1.0 7.0 7.7 6.0arrange for container leases through EIR;Forwarders arrange for line-haul transport service and submitpick up plans to terminal operators.
7. Containers are picked up; 1.0 3.0 3.0 8.0 10.7 9.0EIR (out copy) is handed to the port gate (Waiting Time)
8. Line-haul to inland destinations. 0.3 3.7 4.0 8.3 14.3 13.0
9. Arrive at inland CFS/Container Yard (CY); 0.7 1.3 1.0 9.0 15.7 14.0Inland Customs processing;Container stripping.
10. Containers return to container yards at gateways. 1.0 11.3 4.0 10.0 27.0 18.0
11. Complete EiRs and return procedures. 0.3 0.7 1.0 10.3 27.7 19.0
Average distance in kilometers. 377 844 112.5
L/ Based upon a survey of 10 (6 highway, 3 railway and I waterway) corridors from Tianjin, Qingdao. Shanghai andGuangzhou gateways. The time taken for each activity was based on the average case, where physical inspectionsby border agencies were not required.
2.13 Cost to Shippers. The movement of containers from the ports to inlanddestinations and back to the ports incurs two costs, which ultimately affect thecompetitiveness of goods in foreign markets: (a) container transport costs and(b) logistics costs (tied-up capital during the time in which containers are processed).
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These costs, particularly for logistics, vary significantly according to the value ofcommodities and mode of transport. Table 2.6 illustrates the main components oftransport and logistics costs, based on three representative cases: (a) high-value cargotransported by truck; (b) medium-value cargo, by rail; and (c) low-value cargo, by inlandwaterway. Use of trucks costs shippers seven times more than other modes; also,logistics costs differ significantly from commodity to commodity, fall under the range of10 to 25 percent of total transport and logistics costs combined. The issue of cost,particularly for logistics, is critical when measuring the Chinese container system againstinternational standards (see para. 2.21).
TABLE 2.6: TRANSPORT AND LOGISTICS COSTS
Type of cargo High-value cargo Medium-value cargo Low-value cargoRoute Qingdao-Zhengzhou Tianjin-Baotou Shanghai-WuhanDistance (km) 836 976 1,125Commodity Motorcycle Plywood Polyester fiberUnit value (Y'000/TEU) 631 154 49Unit tons/TEU) 8 22 4Mode Truck Rail Inland water
Y % Y % Y %
Transport cost (YfTEU) 15,498 86.9 2.522 76.2 2,786 89.5Container handling at port & CFSs including storage 202 1.1 322 9.7 193 6.2Border inspection charges 240 1 3 224 6.8 240 7.7Line haul. loading-unloading. & container destuffing 8.091 45.4 1,251 37.8 1,620 52.0Cost of retuming container to port (line-haul & handling) 6,219 34.9 605 18.3 600 19.3Other charges 746 4.2 120 3.6 133 4 3
Logistics costs (Y/TEU) 2,338 13.1 786 23.8 327 10.5Order cost 26 26 26Capital cost in transit & storage 1.945 519 199Capital cost of lost & damaged 237 81 22Capital cost of safety stock 130 160 80
Total transport& logistics cost (YrTEU) 17.836 100.0 3.308 100.0 3.113 100.0
% of transport & logistics cost over the value of commodity 2.8 2.1 6.4
Source: Technical Assistance Report on Transport Logistics Study in China.
E. INTERNATIONAL NORMS
2.14 Given the highly competitive global environment, Chinese traders will soon needto raise their standards. To do so. they could be guided by conditions in North Americaand Hong Kong. In the United States and Canada. transport operators have pioneered thebest practices in intermnodal service for long-haul traffic between the ports and manyinland container centers. Those in Hong Kong have also adopted best practices and,because of their ethnic connection with China, their experiences might be more readilyaccepted.
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2.15 Based on performance surveys in North America and Hong Kong, the systems aresuperior to those in China for the following reasons:
(a) Transport times are remarkably shorter. It generally takes three or fourtimes longer to process containers in China than in North America,depending on the length of the trip (except for the land gateway to HongKong), mainly due to the way in which cargo is processed at the ports: Ittakes I to 2 days to move imports and 2 to 3 days to move exports inNorth America and Hong Kong, while in China, it takes 7 to 10 days and 5to 8 days, respectively. China's port processing times exceed those inNorth America and Hong Kong by a factor of about 5 for imports andalmost 3 for exports;
(b) The longer time in China is partly due to the slow clearance of documents.In North America, containers do not stop at the port for the paperwork tobe cleared; rather, this is done before containers arrive or while they arein-transit under bond to the inland CFS/Container Yard (CY); also, thetransfer to long-distance rail carriers takes much longer-three days inChina to one day in North America;
(c) Long-distance line-haul time is also greater: North American expresstrains can cover 1,500-2,000 km in two days, whereas Chinese expressfreight trains cover over 1,000-1,400 km.
F. PERFORMANCE OF CHINA'S CONTAINER OPERATIONS
2.16 To evaluate China's container transport, operations were reviewed from the users'perspectives. Surveys of major foreign shippers. shipping lines and freight forwardersbased in the United States, Japan and Hong Kong were conducted in August 1994 andOctober 1995.
2.17 Foreign Shippers' Perspectives. Because shippers in market economies are thekey agents of change, dictating the terms and conditions upon which services are offeredand delivered by transport operators, it is critical to ascertain their needs. The October1995 survey of foreign shippers indicated they generally valued service quality more thancost (see Table 2.7).
TABLE 2.7: RANKING OF SERVICES
Criteria Score La
On-time delivery 86%Tariffs 85%Cargo tracking 61%Care in handling 50%Transit time 46%Geographic coverage 22%
L These scores are weighted.
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2.18 The survey also demonstrated that foreign shippers find China's containertransport system to be well below international standards: They rated the intermodal andtrade clearance system a 3 on a scale of 10, while those of the United States and HongKong were given an 8.8. The reasons for this dissatisfaction were the following:
(a) Transport infrastructure is weak, offering poor access to the inlandregions. Trucking service is of low quality, and rail service is limited. Inthe inland areas, there are few container freight stations, yards and trucks;
(b) Border inspections are arbitrary and antiquated; these cause uncertaintieswith respect to clearing cargo and delay the containers' release. Also,shippers are concerned about the lack of pre-clearance procedures, thatcontainers are regarded as international commodities, and that documentsare prepared and processed manually;
(c) Container tracking capability is particularly poor; shippers are oftenuninformed about their containers' whereabouts. Shippers attribute this tothe rudimentary information system and poorly trained staff, the lack of areliable recovery system, improper practices such as the unwillingness toreturn empty containers (because the owners and contractual obligationsare unknown), and the low priority that railways give to the treatment ofempty containers;
(d) The intermodal transport system is not integrated. Rather. services are stillfragmented, the fleet is poorly managed, and, above all, there is no use ofmodern information technology or streamlined procedures to support thecontinuous movement of containers.
2.19 Chinese Shippers' Perspectives. Chinese shippers (the foreign tradingcorporations) have a different perspective. They are more tolerant and expect rather littlewith regard to logistics and other services, largely due to a lack of internationalexperience. This outlook is reinforced by their close links with the largely monopolistictransport SOEs. Thus, until they change, their business practices in foreign trade willgenerally be of lower standard than those of their international counterparts; and,transport logistics will not command the level of attention given it by foreign shippers(Box 2.2).
2.20 These conditions may create problems since the logistical requirements of foreigntraders are becoming more sophisticated: For example, an empirical survey found thatmany new exporters underestimated the logistical requirements of foreign buyers, whoattached great importance to product quality and timely delivery.
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Box 2.2: THE LINK BETWEEN CHINESE SHIPPERS AND FOREIGN TRADECORPORATIONS
Before 1979, all trade was carried out by a dozen monopolies, called foreign trading corporations.Licensed by MOFTEC, they were involved in both export and import. Since that time, as part of thedecentralization policy, their number increased significantly. New ones emerged as existing corporationswere split into specialized trading companies; and, general trading companies were created at theprovincial and municipal levels. At present, about 3,000 operate, ranging from those with annual tradevolumes in excess of $12 billion (e.g., the China National Chemicals Import and Export Corporation-SinoChem), to small firms with trade volumes of as low as a few million dollars. They account for at least80 percent of China's exports and over 90 percent of its imports and operate at the central, provincial andlocal government levels.
Many of the new, small corporations are dynamic and innovative and alert clients to newinformation about product lines, packaging, new materials and sources of raw materials. Also, they helptrain workers from local enterprises. However, many of the giant trading corporations still conductbusiness inefficiently and are poorly managed. For their part, foreign buyers found that many of their staffare inadequately trained, lack expertise and are poorly motivated.
2.21 Cost of Poor Intermodal Transport. A critical element in total costs iscontainer cycle time, since longer transit times translate into higher logistics costs or tieup capital. The cost of a poor inland container system was estimated as the differencebetween the logistics cost for the existing system and one that adopts internationalstandards, using the analyses presented earlier in the chapter. Results suggest that thebenefits that would have accrued from a modern inland distribution system would havebeen about $8 billion over 10 years (see Annex 3). However, the estimate onlyconsidered the savings from logistics (shorter cycle times), and did not include thosefrom reduced damage and theft, nor from the developmental impact on the interiorregions. Thus, the economic benefits of an advanced intermodal system would be fargreater than the above figure and could be greater than $20 billion over 10 years.
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3. BARRIERS TO THE MOVEMENT OF CONTAINERS
. This chapter presents five barriers to the movement of containers to inlanddestinations. These include:
0 Institutional problems, based on agencies' competing interests, therequirements of an intermodal system, and poor coordination amongmultiple actors.
0 Inadequate transport links (rail, trucks and barges) to the interior.
0 Ineffective competition and the lack of attention to shippers' needs, due tothe dominance of the SOEs.
O Cumbersome and duplicated border procedures that create unnecessarydelays.
0 Inadequate facilities to handle containers, a shortage of tractor trailers, andthe low level of information technology.
A. INSTITUTIONAL PROBLEMS
3.1 Because the container system was superimposed on the existing network ofhighways, railways and waterways, the institutions designed along modal lines could noteasily accommodate the new requirements. Also, rules were promulgated in anuncoordinated fashion over years by various agencies, which created overlappingjurisdictions: For example, several agencies (the Commodity Inspection Bureau, StateShip Inspection Bureau and Harbor Superintendent) are required to inspect containers forsafety and structural integrity.
3.2 The tight relationship between the Government and its affiliated enterprises posesyet another problem. For example, while MOC is charged with regulating shippingagencies, it is also responsible for the China Ocean Shipping Agency (Penavico), which isone of its SOEs. Obviously, this raises conflicts of interest vis-a-vis other operators.Similarly, one ministry (MOFTEC) represents the interests of both shippers andintermodal operators: As mentioned earlier, it oversees corporations that are involved inmost of the country's foreign trade, while it simultaneously tends to the interests ofSinotrans, its affiliated freight-forwarding SOE. Given this reality, trading companiesfeel obligated to contract with Sinotrans for transport service.
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3.3 By definition, intermodal transport involves various agencies and this translatesinto coordination problems. To resolve them. the Government created the NationalContainer Cooperation Task Force (NCCTF) in 1992. a committee chaired by SETC andconsisting of MOC, MOR, MOFTEC. CGA and the Ministry of Internal Trade.However, it still has no legal mandate to coordinate actions or resolve differences amongthe agencies.
3.4 The problems related to poor coordination are more evident at the operationallevel and arise when different entities arrange transshipments from one mode to another.Until now, these agencies have scheduled their facilities and equipment at their ownconvenience, without accommodating the others' schedules. This means shippers mustwait an extra few days at transshipment points. Another coordination issue relates toserial processing, whereby each step in the process (of moving freight across borders)must be done sequentially (in a certain order), rather than simultaneously, which wouldbe more flexible. Another example of the lack of coordination involves rail-portconnections: Major ports are equipped with rail sidings, but they are underutilized forcontainer transport because authorities have not worked out the scheduling arrangements.
B. INADEQUATE TRANSPORT LINKS TO THE INTERIOR
3.5 Although the country has extensive inland waterways and rail networks, and isbuilding road infrastructure in order to better distribute goods and passengers (see Map1), all three need to be improved to handle container transport more efficiently.
3.6 Rail Service. A shortage of rail capacity is a significant barrier to movement inthe intermodal chain. To deal with the shortage, MOR created a cumbersome system bywhich shippers must book railway wagon space one month in advance.9 To improve thesituation, the NMinistrv relaxed these requirements in 1995. Under the new regime,shippers need not book in advance. and wagons are allocated according to the spaceavailable to those who pay a surcharge of about 10 percent. However, this system onlyapplies to traffic destined for or moving within eight northern railway administrations,'0
which are not home to the major export activities.
9 Until this year, there were three categories of rail cargo: (a) mandatory cargo, which is coal to becarried from Shanxi to coastal regions (accounting for 12 percent of rail cargo) and which must bebooked in advance; (b) in-plan cargo, which requires advanced booking requirements. accounting for50 to 60 percent: and (c) out-of-plan cargo, to which rail wagons would be allocated on "space-available" basis, accounting for 28 to 38 percent. ISO containers are still regarded as in-plan cargowhich means shippers must apply to the railway one month before their intended cargo delivery date.
MOR's railwav system consists of 12 regional administrations nationwide. Eight. which are in thenorth, are in the booking-allocation system that is being applied on a pilot basis. The four located in thesouth (Shanghai. Luzhou, Chengdu. and Guangzhou areas) are not yet participating, despite the factthat most of the shipping emanates from the Guangzhou and Shanghai administrations.
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3.7 Indeed, rail container operations are not designed to serve the needs ofinternational shippers. Until now, rail-based operations have served domestic containers,with international containers accounting for only 5 percent of the total handled.Accommodating international container traffic would mean that space would have to becommitted in advance, service would need to be provided on tight schedules and shipperswould need to receive status reports-all of which requires a highly integrated andspecialized operation. To fill some of these needs, when the Seventh Railway Projectwas prepared, it was agreed that MOR would establish two container transport companies(the China Railway Container Transport Company-CRC, and Sinorail IntermodalTransport Company-SIT) that would lease rolling stock, and MOR would continue toallocate rail lines. Although CRC has not yet been established as a full-fledged limitedliability company under the new railway company law, the China Railway ContainerTransport Center started providing international unit train service" in December 1994between Kowloon and Wuhan/Zhengzhou in cooperation with the Hong Kong-basedKowloon Canton Railway Corporation.'2 It also began pilot operations for ISOcontainers between Qingdao and Zhengzhou in November 1995. SIT, which was createdin 1995 as a limited-liability company, began providing ISO container service along theTianjin-Xian corridor in December 1995, but still operates under MOR's control andrestrictions.
3.8 Trucking Services. Regulations for trucking have been significantly relaxedsince the mid-I 980s; as part of the process, administration of the subsector was devolvedto provincial and local communications departments. At the time, road transport serviceswere short-haul operations and could be adequately administered at the local level. But,as some of the highway network improved and economic activities grew, distances withinthe service area also expanded, as operators frequently crossed into other provinces. Theproblem is that long-haul operators are subject to added regulations (imposed by eachsubdivision in which they travel): For example, they must obtain licenses fromprovincial communication departments both where the trips begin and end.'3 Anotherproblem is that because criteria for licensing new entrants have not been well defined,they can be interpreted differently by provincial and local authorities, which can createproblems for operators who haul cargo among different provinces.
3.9 Still another issue is that tractors and trailers cannot be registered separately. Thisrestriction, imposed by the Public Security Bureau, constrains intermodal flexibility andreduces capital productivity. If they were registered separately, an empty trailer could be
Unit train service refers to the practice by which all railway wagons leave the same terminal togetherand arrive at the destination as a unit.
12 In 1995, approximately 5,000 TEUs were handled along this line, but container traffic handled hasleveled off.
3 "Efficiency Improvement in the Road Transport Sector," NEA Transport Research, 1994.
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loaded, while the tractor (head) is productively engaged, carrying cargo on another trailer.The savings that could be obtained this way, primarily from reducing waiting time, wouldamount to 15 to 20 percent of the operating costs or a 15 to 20 percent increase in annualdistances (since tractors would not have to wait for trailers to be unloaded and reloaded).Operators also complain about numerous roadside checks and charges which affect theefficiency of trucking services and increase their operating costs.
3.10 Inland Waterway Services. These have not been used much to transportcontainers, largely because most rivers are not navigable for long distances. However,the Yangtze could provide a continuous corridor and a good alternative to rail andhighway transport: It is not as congested as the highways, can accommodate long-haulswell and can carry heavy loads. Also, it extends through regions that are denselypopulated and industrialized. However, it has not been used to its fullest because it lacksdedicated container facilities, and services have not been coordinated systematically.Some believe the problem rests with the slow speed of about 20 km/hr, which results intrips of about four days from Shanghai to Wuhan (distance 1,125 km), and a shorter timeof three days for downstream travel. However, the Yangtze could provide reliableservice, and thus constitute a commercially viable alternative.
3.11 Containers were introduced on the Yangtze in 1986 and traffic increased to700,000 TEUs a year by 1995. A dozen operators, the largest being a joint venture byCOSCO and the Changjiang Shipping Corporation (primarily to move COSCOcontainers), now provide the service on self-propelled barges. While entry restrictionshave been relaxed significantly, which should promote competition, price controls stillremain and these deter potential foreign investment in the subsector on the Yangtze andelsewhere.
C. INEFFECTIVE COMPETITION
3.12 Although the transport system has clear physical limitations, carriers andproviders of intermediate services could still improve their practices. At present, theseremain at a rather low level because the companies enjoy monopoly or near-monopolystatus: Rail service is provided by MOR, trucking service is dominated by Sinotrans,COSCO and provincial trucking SOEs, and inland waterway shipping on the YangtzeRiver is largely in the hands of MOC's affiliate, the Changjiang Shipping Corporation.And, as pricing is largely controlled by the Government, the companies have littleincentive to compete and have only limited concern for the clients' needs.
3.13 The SOEs' dominance creates a particularly serious problem in intermediaryservices. Although the freight forwarding market was formally opened to the privatesector in the early 1990s, real competition has yet to evolve: Instead, the Sinotrans andCOSCO groups enjoy 80 percent of the freight forwarding market. Further, independentfreight forwarders find it more attractive to book through Sinotrans and COSCO, merelyserving as cargo brokers. For their part, independent firms could not compete effectivelyagainst these giants because of their inability to secure the necessary capacity in the
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transport system. Also, the activities of foreign-based freight forwarders or joint venturesare often limited: Although the Government allows major foreign shipping lines toestablish their freight forwarding arms in China, they may only handle the parentcompanies' products.'4
3.14 Restrictions on shipping agencies are even more sweeping: MOC's 1990 Rule onInternational Shipping Agency bars foreign or joint ventures from entering the shippingmarket, limiting it solely to SOEs. Thus, the above two SOEs enjoy 95 percent of themarket.
3.15 Given such market concentration and weak competition, freight forwarders andshipping agents function essentially as allocators of the scarce transport capacities,representing the interests of transport operators. The most successful are those with thebest access to transport capacity, not those who best accommodate shippers' needs.Hence, value-added service and reliability, features that win business in competitivemarkets, are not practiced by most participants.
3.16 Equally problematic is the fact that major components of internodal services arehighly regulated: In particular, the railways are subject to strict Government control(SPC approves all of MOR's tariffs, except for ancillary service charges). As a result,MOR is highly restricted in the degree to which it can differentiate prices and set tariffs.This, in turn, limits its capacity to respond to market changes.
3.17 Rail tariffs and surcharges for container services are not structured in a way thatattracts shippers: For example, the current rates for International Standards Organization(ISO) container cargo are twice as high as for wagon-load general cargo. One of thereasons for this is that freight forwarders are charged for the back-haul of emptycontainers, which adds another cost.'5
3.18 Joint ventures with foreign partners have been accorded more freedom to setprices but it is unclear how this operates, in practice. Nor is it clear to what extent the
'4 Based on US/China shipping agreements, freight forwarders of US shipping companies (APL andSealand) were permitted in early 1996 to handle not only the cargo of their parent companies, but alsothat of other companies.
'5 In the case of a newly started container unit-train service between Tianjin and Zhengzhou, the containerfreight consists of: (i) railway construction fund (2.3-2.5 fen per ton-km); (ii) container tariff (3.5-3.8fen per ton-km) which is higher by 0.7-0.8 fen than that of box car tariff; (iii) fast train servicesurcharge [30% of the sum of (i) and (ii)]; and (iv) service fee to be charged by freight forwarders orintermodal operators such as SIT [10-30 percent of the sum of (i), (ii), and (iii)], while that for box carsdoes (i) and (ii) (box car tariff). This results in 60-70 percent difference in freight between containerand box car. If the relocation charge for empty container (half of container tariff) on the back-haul isadded to this container tariff, together with container handling charges at the terminals (Y 64 per TEUcontainer), container transport service easily costs twice more than box car service does.
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state-owned railway enterprises (i.e., CRC) and joint ventures with domestic partners(i.e., SIT) are free of Government control on railway pricing.
3.19 The degree of Government control varies according to the mode of transport.While inland waterway tariffs and shipping agency charges are controlled by MOC, thetrucking industry has been given broader freedom: Truck operators may raise or reducetheir prices to within 20 percent of MOC's reference tariffs and international freightforwarders may set service charges themselves.
D. CUMBERSOME BORDER PROCEDURES
3.20 As earlier chapters indicated, containers remain longer in Chinese ports than inthose in North America or Hong Kong. Most of the time is spent waiting at nearbycontainer freight stations to clear complicated border procedures. In an experiment tocorrect this in Shanghai, port authorities adopted some international practices anddeveloped standardized shipping documents (see Box 3.1). However, a number ofcumbersome rules and practices remain (see para. 3.21-3.29).
3.21 Although Customs has substantially streamlined clearance procedures (such asadopting a selective cargo inspection regime and introducing risk analyses based oninformation about shippers and consignees), foreign shippers still experience problems.Mainly these are due to a lack of transparency and the degree to which different portshave adopted the new procedures. Thus, shippers are confused about which rules applywhere, and believe they are applied inconsistently.
Box 3.1: THE SHANGHAI EXPERIENCE
Under MOC, the Shanghai Municipality experimented with ways to facilitate trade in 1989. Thisinvolved many parties in the cargo clearance process (for example, the port authority, the localcommunications commission and SOEs such as Sinotrans and COSCO). It developed and tested simplifiedadministrative and cargo procedures and developed three standard documents: Shipping Order/DockReceipts, Arrival Notice/Delivery Order/Delivery Records, and Equipment Interchange In/Out Receipts.
The pilot also tested the concept of joint offices: To coordinate various measures, the offices ofvarious authorities at the port were located in the same building, whereas they were dispersed throughoutthe city, before. This allowed Customs, the three inspection authorities, Port Authority, bank and insuranceentities to complete the paperwork in considerably less time. However, they still conduct activities atseparate windows, and clients must approach them sequentially to clear their imports or exports.
Since the pilot was successful, the main components were introduced in the ports at Tianjin,Dalian and Qingdao.
3.22 Other Customs practices were introduced, but are not yet fully implemented.These include:
(a) The release of goods with simplified declarations, pending detailed onesthat would arrive later, is limited and used only in exceptional cases;
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(b) Although bonded transit'6 to and from inland clearance stations isencouraged to relieve pressure on Customs at gateways, it is practicedinfrequently. However, it could save considerable time as it wouldeliminate the need for cargo to be cleared at Customs offices at the port.
(c) Attempts have been made in some regions to strengthen the function ofCustoms brokers, but they have not yet been recognized as independentintermediaries. Partly because of this, some local Customs agenciesrequire clients to pre-enter their export/import declarations throughcomputer terminals owned by the Customs-approved brokers or freightforwarders. But, at the same time, local Customs offices still require thatclients submit manually-prepared declaration forms. Thus, when shippersuse the Customs brokers, this becomes a duplicated step in the clearanceprocess, rather than a shortcut.
3.23 Other border procedures-commodity inspections, health quarantine,animal/plant inspections and tallies-also delay the processing of containers. First, allcontainers (even empty ones) must be inspected, at which time a starnping fee is charged.Most of these procedures are based on documents, but occasionally the containers arephysically inspected, at which time another fee is charged. Indeed, because the agenciespartly finance their operations from the fees charged for the inspections, this provides anincentive for frequent and overly thorough examinations.
3.24 These multiple inspections, along with the Customs procedures, are carried outsequentially, and consume time. Clients must wait at four different offices and payseparate inspection fees. This translates into duplicated checking of declaration formsand supporting documents, and several decision-making points to determine whetherphysical inspection and other actions are required.
3.25 The commodity inspection is carried out by the China Import and ExportCommodity Inspection Bureau to ensure that certain commodities meet the prescribedstandards and quality determined by international and bilateral agreements; also, tocertify the quality of exports or imports, as requested by shippers and consignees. InOrganization for Economic Cooperation and Development (OECD) countries, suchinspections are not required.
3.26 In China, tallying is another step in the container hand-over procedures betweenshipping lines and terminal operators. It is required as part of normal border proceduresand must be carried out by the China Ocean Shipping Tally Company. However, inOECD countries, it is only done when shippers or consignees want a neutral body to
16 Bonded transit refers to the practice by which Customs takes a bond to cover the cargo from the port tothe inland destination in the event the consignee does not pay for the goods once they arrive.
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certify the weight or volume of the imported/exported commodities (which is not often).It is performed on a commercial basis.
3.27 Documentation and Computerization. Another critical issue for internationaltrade and shipping is the documentation. A UN Economic Committee for Europe(UN/ECE) report observed that inefficient trade/shipping documents can cost as much as8 to 15 percent of the total value of an international transaction, indicating the magnitudeof savings to be obtained by simplifying the process.
3.28 As detailed in Annex 2, extensive efforts have been made over decades tostandardize the documents used among the trading partners. Since the mid-I 980s, Chinahas adopted many international standards, including the "United Nations Electronic DataInterchange for Administration, Commerce and Transport (EDIFACT)"; which lays outthe method by which data is exchanged electronically. The Shanghai experiment wasanother example of an attempt to adopt international standards; document formats werealigned for this purpose, but the design principles have not always been followed. Also,paper size, accuracy of printing, margins, line and character spacing do not allow thedocuments to adapt to modern technology, such as computer printouts.
3.29 Paper documents are extensively used for presentation or surrender (of cargo).This paper-based procedure, along with the lack of standardization and poor alignment offorms, has impeded computerization and delayed international trade and shipping. Infact, where exports travel only a short distance by sea, the goods often arrive before thedocuments, and the receiver does not have enough time to prepare them. One result isthat arrival notices are sent late to consignees, which, in turn, means they have less timeto gather the documents they need (such as bills of lading, commercial invoices andpacking lists) to collect their goods.
E. INADEQUATE FACILITIES AND Low TECHNOLOGY BASE
3.30 Container handling facilities are in short supply in the interior. This creates asupply imbalance between the coastal and inland regions, contributing to the inferiorquality of service to shippers in the hinterland. Thus, container packing and strippinghave to be performed mainly on the coast and containerized cargo can only be transportedin breakbulk for the inland portion of the journey. This slows the inland movement ofcontainer freight and also causes greater loss and damage of goods. In addition, thescarcity of facilities will limit the supply of empty containers in the future: Instead, theywill have to be supplied by the container yards on the coast, which translates into longerresponse times.
3.31 The railway is inadequately equipped, since the system was not designed forcontainer traffic. Initial efforts have been made to upgrade container terminals (such as atXian, Zhengzhou, and Shenyang). However, several major terminals still need to beexpanded and upgraded (such as introducing 40 TEU container handling capability). Flatcars are also in short supply, which means that gondola cars are used continually; becausethese are heavier, railway tracks must be maintained more frequently.
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3.32 Due to a shortage of tractor trailers, low-body flat bed trucks are substitute forthem, creating problems of safety and efficiency. Also, although domesticallymanufactured diesel-powered tractor trailers are easier to acquire, they perform poorly:The technology is old, based on those designed in eastern Europe, and is one generationbehind that used in OECD countries. Power/weight ratios for multiple axle trucks rangebetween 3.8 and 5 in China, while the OECD designs (that can haul containers overimproved roads) are over 6. Further, they break much more frequently than the importedvarieties. However, imported tractor trailers are hard to come by, partly because of thehigh import duties (those for heavy-duty trucks of 14 to 20 tons are 40 percent).
3.33 Another barrier is created by the absence of a workable system through whichcontainers can be exchanged, often referred to as an Equipment Interchange and Receipt(EIR) system. Because of the nature of intermodal transport, containers must betransferred from one party to another along with the responsibility to maintain them ingood condition. Although MOC set rules for this in 1992 that are largely consistent withinternational practices, foreign shipping lines are still reluctant to let their containersmove inland. This is partly due to the problems involved in enforcing the EIR contract(which would require an effective mechanism to seize leased property).
3.34 This reluctance also stems from the lack of reliable inforrnation about the locationand status of containers. In OECD countries, shipping lines and other carriers usecontainer tracking systems to manage their assets and provide clients with necessaryinformation about the whereabouts of their cargo along the entire intermodal supplychain. In the United States, companies that specialize in information services performthis function. However, in China, such services have yet to be developed.
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4. REMOVING THE BARRIERS TO INLAND CONTAINERTRANSPORT
This chapter presents guidelines for developing an efficient inland containertransport system in China. The guidelines incorporate the following principles:
0 Given the country's limited transport capacity, existing infrastructure shouldbe used to the fullest. In particular, the potential of the Yangtze Rivershould be tapped more vigorously.
0 Line-haul service between major inland load centers and gateway ports,particularly by rail, should be expanded.
0 The two giant SOE groups that dominate the transport intermediary marketshould be exposed to more direct competition with foreign-funded operators.
0 Border inspections should be streamlined and modernized, with proceduressuch as those used in OECD countries.
0 The transport system should allow for the transfer of containers betweenvarious modes; to this end, paper work is needed to document the handoveramong different parties, along with computer-based tracking mechanisms.
4.1 As seen in Chapter 2, the lack of an advanced intermodal transport system willcost the Chinese economy significantly in terms of reduced logistical efficiency (seeAnnex 3). Thus, it is essential to improve container transport and rationalize the borderprocedures. To this end, the barriers identified in Chapter 3 have to be removed. Chapter4 recommends 13 courses of action (see Table 4.1). It should be noted that many of theseissues pertain to problems in the economy as a whole and cannot be resolved in thecontext of container transport alone.
A. REDEFINE THE ROLE OF GOVERNMENT
4.2 For a transport system to be viable, it needs an institutional framework that candeal with intermodal issues in an integrated manner. In China, this will mean redefiningthe role of Government agencies.
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TABLE 4.1: BARRIERS AND RECOMMENDED ACTIONS
BARRIERSUncoordinated Inadequate Lack of effective Cumbersome Inadequate
Recommended course of action Government transport links to competition and border facilities and lowresponsibilities interior regions user orientation procedures technology base
Redefine the role of GovernmentI. Separate regulatory from xx x
operational functions2. Strengthen GOC's coordinating xx x x
functions3. Reformulate legal instruments xx x x
Maximize the use of existinginfrastructure4. Explore greater use of the xx x x
Yangtze River and improve railline-haul services
5. Develop intermodal hubs xx xx
Establish user-oriented,competitive intermodal services6. Create effective competition in xx
intermodal markets7. Reform intermodal SOEs x xx8. Restructure interrnodat prices x xx
Improve border procedures9. Simplify inspections xx10. Adopt standard documents xxI1. Introduce EDI xx x
Upgrade technology, ease theinflow of funds12. Introduce technology in interior x x xx
regions13. Explore joint ventures. leasing, x x xx
financial intermediaries
xx: Most relevant and effective actions to remove the barriers.x: Actions with somewhat less impact.
Separate regulatory from operational functions
4.3 The country's outmoded institutional/regulatory framework, which is a residual ofthe country's centrally planned economy, is a major barrier to establishing an efficientand market-oriented intermodal transport system. Thus, during the transition from acommand to a market-oriented economy, the Government will need to shift its effortsfrom micro-managing the system to assuming a more indirect role. Indeed, its main taskshould be to establish a competitive market in which enterprises can adjust their activitiesaccording to market signals. In this respect, it will be particularly important for theGovernment to draw a clear line between regulatory and operational functions, thusestablishing an arm's-length relationship between it and the SOEs engaged in containertransport services. The first step in this direction would be to convert the transport SOEsinto limited-liability companies, thus ensuring autonomous corporate governance.
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Strengthen the Government's capacity to coordinate intermodal policy/issues
4.4 Because intermodal transport involves various sectors and regulatory agencies, theGovernment must devise ways to coordinate their activities. Over the last decade,different ministries have tried to develop intermodal systems; however, their efforts havebeen limited by jurisdictional disputes and many cross-ministerial issues remainunresolved. As mentioned earlier, the NCCTF mechanism is too weak to effectivelycoordinate the policies of different regional and single-modal interests. Thus, it isrecommended that the NCCTF be upgraded to a standing body with a clear mandate tocoordinate container transport policy. It should also be expanded to cover tradefacilitation issues. Finally, it should have a mechanism (for example, an advisory body tothe NCCTF) through which it can obtain input from related parties including the privatesector.
Reformulate the legal framework
4.5 Because of the Government's vertically segmented structure and the involvementof countless agencies in interrnodal transport, many regulations were duplicated over thepast decade and are now inconsistent. Thus, they must be reviewed and streamlined. Inaddition, some regulations prevent competition from developing: For example, aprovision of MOC's "Regulations on International Shipping Agencies" allows only SOEsto enter the shipping market. Moreover, the Government controls the setting of tariffs.Such rules need to be modified or eliminated and new ones approved to resolvecommercial disputes, protect consumers and create an environment conducive to foreigninvestment in transport.
4.6 Another problem that requires immediate attention is that laws and regulations areenforced inconsistently. Indeed, shippers complain these are often arbitrary andunpredictable, yet they have no avenues of recourse. Thus, local staff should be trainedin how to interpret them, and higher authorities should launch transparent reviews forthose who are dissatisfied with previous administrative decisions.
B. DEVELOP CONTAINER TRANSPORT LINKS
4.7 Although the country is investing massively in transport, it will be years beforecontainers will be able to move easily from ports to inland destinations. Until then,existing capacity must be utilized to its fullest potential.
Make better use of existing transport infrastructure
4.8 Transport services could be improved considerably without a large expansion intransport capacity. Rail service is the most essential mode and the pilot wagon allocationsystem, introduced in eight northern regional administrations, should be applied to otherregions as soon as is feasible. Further, although MOR recently launched new unit trainservices for international containers, these operations should be more competitive. In thisregard, the two recently created container companies (affiliated with MOR) should beautonomous, have full responsibility for their operations, and provided with equal access
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to rail lines and rolling stock. Also, the companies should be given greater freedom to settariffs.
4.9 However, given the chronic shortage of rail lines, trucks will continue to play animportant role in long-haul intermodal transport. To improve this service, MOC shouldbe empowered to issue interprovincial licenses to replace the individual ones nowrequired by the provinces at both ends of the route. In addition, import duties on tractortrailers should be lowered, as this will allow domestic trucking companies to import thoseof better quality. Similarly, highway capacity could be increased greatly without largeinvestments if authorities focused on removing bottlenecks created by narrow bridges andcongested intersections. Further, vehicle registration requirements for the tractor trailercombinations should replicate those introduced in an experiment along the Qingdao andLuoyang corridor, where operators were allowed to register tractors and trailersseparately.
4.10 Use of the inland waterways, particularly the Yangtze River, could open a vastpart of the industrial and commercial hinterland to container transport. However, thiswill mean constructing transshipment facilities at key locations and relaxing tariffcontrols and restrictions on foreign joint ventures (see Chapter 3) in order to promotecommercial operations (that could help develop this underused natural resource).
Develop intermodal hubs
4.11 Intermodal hubs, which coordinate transshipments, consolidation and Customsfiuctions, need to be established if seaborne containers are to be distributed efficiently-particularly where container traffic reaches a certain critical mass. However, theinvestments should be made by companies in the freight transport sector, and theGovernment should limit itself to creating an enviromnent that could foster suchinvestment. For example, it could designate the areas or zones where container handlingfacilities could be located; these areas would be chosen because of their proximity tomajor transport networks and environmental concerns. Also, local governments couldperform a crucial task if they eliminated traffic bottlenecks (as suggested above), as thiswould improve the access to container terminals and facilities.
C. STIMULATE COMPETITION
4.12 Under the current monopolistic and oligopolistic conditions, a handful of SOEsdetermine major elements of trade, such as prices and the quality of service. This can beredressed if other viable companies are allowed to compete.
Create effective competition in intermodal markets, particularly in intermodalservice
4.13 Because large SOEs dominate the intermodal market, new entrants have a hardtime competing and this, in turn, means the market has yet to become shipper-oriented.The best way to introduce competition would be to allow foreign-funded enterprises orjoint ventures to develop, as they could challenge the SOEs by providing shippers withhigh-quality alternatives. Current restrictions that limit entry and the scope of business
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(for example, foreign-funded freight forwarders created by shipping lines are onlyallowed to handle the parent company's cargo) should be relaxed and the market left todetermine which firms will be used and what they will offer.
4.14 In developing efficient intermodal services, the role of intermediaries is critical:They match buyers' needs with available services, set prices that clear the transportmarket, and fill under-utilized transport capacity. Nevertheless, their role is still limitedin China and the few that operate are not oriented to meeting shippers' needs.
Promote the reform of the SOEs
4.15 During the transition to a market economy, competition can be achieved if theSOEs are reformed. Previously, they dominated the market because of their close tieswith Government agencies (developed during the era of the planned economy) and theselinks continue to frustrate competition for intermodal services and market-based capitalallocations. To encourage competition, the following should be addressed:
(a) Large SOEs, particularly the freight forwarders, should be restructuredinto smaller, market-oriented enterprises and allowed to compete witheach other. If holding companies are created, the relationship between theparent and affiliates should be at arn's length, with the new companiesbeing allowed to manage autonomously. Also, their operations should bemore transparent: They will need modem accounting systems supportedby independent audits, municipalities will need to assume the SOEs'social security obligations, redundant labor will need to be released, anddirect and indirect Government subsidies should be ended. These changescould be introduced in the following manner:
(i) Each enterprise would be evaluated to identify the units thatoperate at a loss and assets are evaluated.
(ii) A comprehensive plan would be devised to restructure theenterprises that would identify their market segments, theorganizational structures to be established, and the method bywhich to achieve them. It would also address ways to deal withredundant labor and social security obligations, which includepensions.
(iii) Several pilot programs would be introduced to test variousrestructuring plans, which might involve creating regionally-basedor line-of-business companies. The restructuring plan would bereviewed and modified as needed, based on the results of the pilotprograms.
(iv) The restructuring plan would apply throughout the corporation.
(b) Smaller SOEs, found in the trucking, freight forwarding and container-handling subsectors, would need a different approach. Given thecompetitive nature of these services, the entities would need greater
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market discipline. This is particularly valid since a growing number ofnonstate enterprises have entered the market with which the SOEs willneed to compete on equal footing (with respect to independentmanagement and social obligations). As recommended in the Bank sectorstudy,'" an effective starting point would be to sell the SOEs to domesticand foreign operators and investors. This would involve the following:
(i) Determining the firms' current status, areas of activity and assetvalue.
(ii) Selecting an agent (usually a bank) to handle the sales.
(iii) Choosing a sales strategy, which could include installment buy-outschemes for workers and managers (say, over five years),transparent negotiations with outside investors, and/or auctions.
(iv) Notifying potential buyers of the conditions and schedule of salesand the firms' characteristics, as well as providing a prospectuscontaining financial and commercial information. The agentwould evaluate ways in which the sales could occur (such asauctions) and determine an acceptable price range against whichoffers would be evaluated.
(v) Comparing official bids and approving the sale. Once sales arecompleted, the proceeds could be used for clearly specified ends,such as covering the social liabilities that would be transferred tothe municipalities.
Restructure intermodal prices
4.16 Market mechanisms have not yet functioned effectively in intermodal transportbecause the Government has controlled prices. Thus, such control, particularly for rail,inland waterways and shipping agencies should be progressively phased out in order toallow markets to set prices. However, until intermodal markets mature, Governmentagencies should revamp the current pricing structure in the following ways:
(a) Tariffs and surcharges should be reviewed and, where necessary, adjustedto facilitate container services: Where they do not reflect real costs orassure reasonable rates of return, they should be changed;
(b) During the transitional period, authorities or professional associationsshould track production costs and occasionally provide cost information toclients and providers of service. Also, authorities could periodicallypublish reference prices (lists of the average prices charged) and
'7 "China: Reformn of State-Ownered Enterprises" (the World Bank, 1996).
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explanations of how they are calculated, to serve as guidelines both toproviders and clients;
(c) Companies offering services should make their rate scales public (asopposed to the system in the United States, where contracts areconfidential); this will foster competition and allow shippers to makebetter choices.
D. IMPROVE BORDER PROCEDURES
4.17 Even if intermodal transport functioned well, cumbersome border procedures anddocumentation requirements would still create excessive delays: In a typical internationalshipping/trade transaction, the documentation, data entry and validation processes requiremore than 10 actors (such as trading partners, agents, carriers and Government agencies).Thus, the time needed to clear Customs could be significantly reduced if the process weresimplified and made more consistent with international practices.
Streamline cross-border inspection procedures by adopting international bestpractices
4.18 Corrective actions could be launched by several agencies, either jointly orindependently. The most critical are the following:
Customs inspections:
(a) The array of inspections should be replaced by a one-stop checkingprocess during which all aspects would be carried out at the same time andplace. If this is not feasible, the Customs office that carries out firstinspections should be authorized to determine if other inspections (forexample, for animals/plants) are needed. Where none is required, thisagency's stamp (on the release document) should suffice for all otheragencies;
(b) At present, Customs services and other border inspections are provided forfive and half hours a day. This should be extended to 24 hours, to avoiddelays;
(c) The practice of processing of Customs declarations before the cargoarrives should be introduced; this short-cut should include safeguardsagainst the smuggling of drugs and weapons so as not to compromise theagency's objectives;
(d) Procedures for the bonded transit system (the system by which Customsinspections and payment of duties on imported goods can be deferred untilthey reach their inland destination) should be simplified;
(e) Armed with appropriate information, Customs could allow reputableshippers and consignees to defer payments;
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(f) To ensure that rules are applied consistently, local staff need to be trainedextensively;
(g) Customs brokers should be allowed to conduct business on a broadergeographical basis. This would allow containers to leave the country froma different port than the one through which they entered. Further, the useof brokers should not be mandatory.
Animal/plant inspections and health quarantine:
The current system, where health quarantine and animal/plant inspectionsare funded through the fees charged, should be changed to one funded bythe Government budget. This would remove the incentive for authorities toinspect more frequently than necessary.
Commodity inspections and tallying:
(a) The list of commodities to be inspected should be reviewed and those thatno longer need to be examined should be removed;
(b) Commodity inspections and tallying should not be part of mandatoryborder procedures. Instead, they should follow international practices andbe provided on a commercial basis at the request of importers, exportersand transport operators to certify to third parties that the quality andquantity of exported/imported commodities comply with the descriptionsin the shipping/trade documents;
(c) Until these practices are introduced, inspections should be carried out atfactories, wherever possible, rather than at ports;
(d) The current monopoly by the China Transport and Export CommodityInspection Bureau and the China Ocean Shipping and Tally Companyshould be ended.
Use standardized documents and waybills for international shipping
4.19 The Shanghai experiment developed uniform shipping/trade documents. As theseare further refined, they should be adopted nationwide.
4.20 Another step that will simplify and speed the process is the use of nonnegotiabletransport documents-known as sea waybills-commonly used in Europe and NorthAmerica, and between the two continents: Waybills can be faxed from one continent toanother, and importers do not have to wait for a bill of lading to arrive by mail. Further,they offer a suitable starting point for the eventual replacement of paper documents byelectronic data.
4.21 Recently, a system was developed to send bills of lading electronically, andauthorities should explore its applicability where bills of lading are necessary to transfercommodities from one party to another.
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Use electronic data interchange (EDI) for foreign trade transactions and borderinspections
4.22 The use of EDI (by those involved in international transport and foreign trade)helps simplify the documentation process; the same data can be used by the differenttrading partners connected to the same EDI network. Already, severalagencies/enterprises have developed their own internal document processing system butthese still need to be linked to each other and to different trading partners. Third-partyinformation services would ease communications among them and minimize the manualentry of data with all the errors and delays this involves.
4.23 Shanghai, Qingdao and Tianjin municipalities have established EDI committeesand conducted feasibility studies of EDI centers for their regions. These should besupported by a national body, say, the EDIFACT Board or a new organization, that couldset technical standards and advise on how regional programs could be integrated into ageographically broader or national system. While the regional pilot programs need not beconfigured identically, they should meet the following requirements:
(a) They should be based on standard messages and applications;
(b) Each pilot should be able to connect with the others in an efficient manner;
(c) The system should be flexible, able to grow both in volume and functions;it should also respond to changes in technology and international practices.
E. IMPROVE TECHNOLOGY AND FACILITIES
4.24 As noted earlier, China's intermodal transport system lags behind the worldstandard, and this needs to be addressed.
Provide and upgrade container handling facilities/equipment and the technologybase
4.25 Container-handling facilities and equipment in the interior are inadequate, partlydue to a lack of demand for them and to limited access to capital markets. Thus, morefacilities should be developed at inland load centers where long-distance haul service isavailable.
4.26 Moreover, because container transport is technology-intensive, the use of moderntechnology would substantially enhance efficiency, provided there would be enoughcontainer traffic: the railway, for example, could benefit immensely from the use ofarticulated and skeletized flat cars, road-rail equipment and other container haulingtechnologies.
4.27 Road transport could also be improved. As noted earlier, Chinese trucks performwell below OECD standards. Imported tractors have more powerful engines, are morereliable and fuel efficient. Thus, barriers to imported tractors should be removed (boththe requirements for importing them and the level of import duties).
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4.28 If containers are to move inland, an Equipment Interchange and Receipt (EIR)system must be developed. Although MOC has already set out the basic rules for such asystem and defined who is to be responsible, contracts are occasionally not enforced.Thus, measures must be taken to ensure they are observed.
4.29 In addition to an EIR system, a container tracking system must also be introduced.At present, information management technology is evolving in ways that allows transportoperators and trading partners to track containers from their origin to destination andpredict with high degrees of confidence the estimated time of arrival of inbound loads.Thus, the broader use of tracking systems should be encouraged.
Expand the financing capability of intermodal enterprises
4.30 In market economies, business expansion and modernization are financedprincipally through debt or equity financing. However, since capital markets andfinancial institutions are still underdeveloped in China, most intermodal enterprises relyon internally generated finances. Thus, the World Bank could help channel investmentfunds into this rapidly emerging field through intermediation, either by commercial banksor provincial governments.
4.31 Joint ventures (JVs) with foreign investors offer another approach to mobilizingcapital, and they have the added attraction of transferring technology and managementskills. However, regulations on JVs in this sector lack transparency. Moreover,procedures through which they are approved are cumbersome and costly, and discourageforeign investors. Thus, authorities should simplify the procedures for establishing JVsand make the regulations that pertain to them more transparent.
4.32 Leasing is another important way to raise finances. While it is an attractivealternative to bank lending for large enterprises, it is particularly valid for small-to-medium-size enterprises, because banks are reluctant to lend to them (as they have littlecollateral and have difficulty proving their creditworthiness). Through leasing, they canavoid the normal collateral requirements that banks typically impose. However, mostforeign leasing companies are reluctant to enter the Chinese market until a stronger legalsystem is set in place-one that legitimizes the seizure of collateral and enforcement ofcontracts. Still, if measures are put in place that minimize the risk of defaults,"8 leasingcould be an effective alternative to bank borrowing. This is particularly true with respectto container transport, since much of the high-performance equipment has to be imported.
18 Many foreign-funded joint ventures have failed to develop leasing businesses in China due to thedifficulties in securing regular payments from the lessees and, in the case of default, in seizing theleased assets. A US leasing firm (GE Capital) recently established a JV with Shanghai Municipality tolease construction equipment on some of the municipality's projects. However, the JV maintains andoperates the equipment itself, thereby keeping control over its assets.
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5. IMPLEMENTING RECOMMENDED ACTIONS
* To implement the agenda discussed in Chapter 4, China will need to reform policiesand invest in an efficient intermodal system. The Bank should assist the ChineseGovernment in these two areas.
* To ensure the agenda can be smoothly implemented, the report recommends that theGovernment prepare action programs that specify, among other things, the agenciesthat will be responsible and the time needed for implementation.
A. ACTION PROGRAMS FOR POLICY REFORM
5.1 Discussions were held with SETC and other agencies in late 1995 and early 1996and general agreement was reached on the need to reform the intermodal system alongthe lines described in the previous chapter. The next step will be for the Government todevelop action programs to bring about the reforms. To this end, Table 5.1 suggestsvarious actions and areas of focus, the time frames and the agencies that could beinvolved. Some actions could be introduced in the short term (1-3 years) and others inthe medium term (3-5 years).
5.2 To develop and implement the action programs, the lead agency will need to focuson two key functions. First, it must coordinate the conflicting interests of variousagencies. Second, it must take a leadership role in reforming the current intermodalsystem. To this end, the Government has established a vice-ministerial, inter-agencygroup, chaired by the SETC and made up of representatives from the SPC, MOR, MOC,MOA, MOH, Ministry of Domestic Trade, PSB and China Import and ExportCommodity Inspection Bureau. The actions it has taken thus far include:
(a) Introducing the inter-provincial licensing system for long-haul trucking;
(b) Introducing a new national system to register tractors and trailersseparately;
(c) Beginning pilot programs in Tianjin and Qingdao to streamline borderinspections: these are now conducted in one place, simultaneously;
(d) Beginning a pilot program in Tianjin to simplify procedures for bondedtransit to inland destinations;
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(e) Beginning pilot programs in Shenzhen, Qingdao, and Tianjin of round-the-clock inspection services;
(f) Easing entry restrictions for non-SOE shipping agents by revising theMOC Rules on International Shipping Agents;
(g) Relaxing restrictions imposed on freight forwarders affiliated with foreignshipping companies with respect to their scope of business (to date, thenew restrictions apply only to US shipping lines).
5.3 In addition to these initiatives, the group will need to address the even morechallenging issue of creating a competitive environment. This will require far-reachingand broad-based reforms as listed in Table 5.1. Some of the reforms should be testedbefore the changes are adopted widely. Thus, the Government should select a few areasor corridors where some existing rules could be modified or suspended. This gradualapproach is particularly appropriate where the activities will involve changing enterprisesand relaxing controls over foreign intermediary operators.
5.4 For the action programs to succeed, institutional capability will need to beimproved. Policymakers will need to know more about container transport in general,intermodal operators will need better management and operational skills, and shipperswill need to better understand the importance of logistics in international trade. Trainingprograms should be introduced at all three levels.
B. PHYSICAL DEVELOPMENTS
5.5 If a world-class intermodal transport system is to be established, the abovereforms should be accompanied by investments in physical development. But, theimmediate focus should be on developing a system in which containers can move acrossmodes in an efficient and reliable manner. Thus, high-priority investments are needed to:
(a) Modernize line-haul services that connect certain inland load centers toocean gateway cities. These investments would be made for: (i) rail-basedunit train services designed to carry ISO containers on selected corridors;(ii) container barge services along the Yangtze River; and (iii) container-on-chassis highway service from intermodal hubs to secondarydistribution centers;
(b) Enhance container-handling capability at major coastal and inlandintermodal hubs. Specifically, fumds would be used to construct andexpand container freight stations, transshipment facilities, and containerterminals at both ends of line-haul service. It should be stressed that thesefacilities should be developed only where line-haul service is alreadyavailable or planned for the near term;
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(c) Upgrade the technology base for managing containers and processingtrade-related documents. It is particularly important to develop EDI torationalize border inspections and process shipping documents smoothly.Technology to track containers is also needed so as to integrate the inlandcontainer transport system with international chains;
(d) Improve access to container terminals and transfer facilities and minimizethe risk of traffic accidents caused by the increased truck travel. Theseinvestments, which need not be large, could be used to widen access roadsto ports and rail terminals, widen intersections to allow tractor trailers thespace they need to turn, and construct sidewalks and bridges to separatepassenger and freight traffic.
5.6 The primary investors should be public or private enterprises that provide ororganize intermodal transport, although financing for "d" would be primarily arranged bylocal governments. Domestic enterprises, which are mostly state-owned, seem interestedin investing in this emerging segment of the freight market, but lack the funds (as domany of the SOEs). Further, their access to funds is limited. For this reason, the Bankand other multilateral agencies could facilitate their investments. Other potentialinvestors could be foreign operators; however, they are still reluctant to do this,particularly in the interior provinces, because they sense a lack of support for container-handling operations. To promote this, authorities need to create an environment in whichcommercial operations are supported.
C. ROLE OF THE BANK
5.7 To develop efficient intermodal transport, a dual approach is needed thatcombines policy reforrn and physical investment. The World Bank is well-positioned toassist China in both areas. Thus, the Bank should support the Government's efforts tocreate the conditions under which a commercially oriented system can flourish, helping itintroduce the various programs mentioned above. Its early involvement in the physicaldevelopment could attract investment from the private sector, particularly from foreignoperators.
5.8 Assistance through lending in this subsector is in line with the Bank's CountryAssistance Strategy (CAS), which aims to alleviate infrastructure bottlenecks. Byenhancing the efficiency of existing transport and ensuring smoother transshipmentamong different transport modes, the Bank would contribute to this goal. Also, the CASseeks to promote "greater equity between the rapidly growing coastal provinces and theless dynamic inland provinces," and lending for inland container transport would haveconsiderable impact in this area.
TABLE 5.1: BANK RECOMMENDED ACTION PROGRAMS
Recommended course Time Suggestedof action Specific activities frame Responsibilities Actions taken to date
Separate regulatory Establish an "arms-length" relationship between the Medium SETC/Ministries A number of SOEs, including COSCO and MOR affiliates,from operational Govemment and enterprises have been converted into limited liability companies.finctions
Strengthen Strengthen the coordinating function of NCCTF and expand it Short SETC/Ministries A vice-ministerial coordinating group was established incoordinating function to include trade facilitation Jan. 1996 to coordinate container transport and facilitate
border inspections. r* Improve coordination between terminal/transport operators in Medium Operators Vwtransshipment of containers and in scheduling of serviceprovision
Reformulate a legal Review the existing laws and regulations and revise those that Medium SETC/Ministries SETC began discussions with the Law Office of the Statesystem hinder competition and delay container processing Council in late 1995.
Maximize use of Develop a master plan for Yangtze River container transport Short SPC A study was begun in early 1996 with technical assistanceexisting infrastructure from Netherlands.d
* Compile an inventory of traffic bonlenecks along highways Short Municipalities f hand prepare investment plans to remove them O
* Adopt interprovincial licensing for long-haul trucking and Short MOC MOC introduced this licensing system in Jan. 1996allow the private sector to haul containers
* Apply the new wagon allocation system nationwide Short MOR 8 out of 12 administrations introduced a new wagon Zallocation system in 1995. Guangzhou and Luzhouadministrations will follow sometime in 1996.
* Operationalize two rail container transport companies Medium MOR CRC and SIT were established in Jan. 1995. SIT and CRCbegan operating in Dec. 1995 on the Tianjin/Xian corridor.However, the commercial and arm's length relationship hasnot yet been established between these companies andMOR.
* Introduce a separate registration system for tractors and Short Public Security This was launched in Jan. 1996, nationwide.trailers Bureau O
Develop intermodal * Promote investments in container handling facilities and Medium Municipalitieshubs facilitate investments in load center cities
Establish user- Eliminate restrictions on the scope of business carried out by Medium MOFrEC/MOC Based on China/US shipping negotiation in early 1996,oriented, competitive foreign freight forwarders affiliated with foreign shipping freight forwarders affiliated with Sealand and APL (USintermodal services lines shipping lines) are able to expand their operations.
* Remove entry restrictions to non-SOE shipping agencies Short MOC MOC approved 13 foreign shipping agents in 1995. Theregulations are being revised.
Reform intermediary * Transform major intermediary SOEs into group(s) of smaller Medium COSCO/Sinotrans eSOEs and more manageable enterprises
* Confine the funictions of holding companies to setting overall Mcdium COSCO/Sinotrans
Recomnuended course Time Suggestedof action Specific activities frame Responsibilities Actions taken to date
Restructure intermodal * Review pricing schedules for container services Short SPC/Ministriespricing
* Progressively relax Govemment controls on container service Medium SPC/Ministriesprices
Streamline border Establish a one-stop checking system Medium CGA/MOH/MOA Ajoint inspection system was introduced in Tianjin andinspections Qingdao in 1995
* Facilitate bonded transit to inland destinations Short CGA Bonded transit from ocean-going to coastal shipping beganon a pilot basis at Qingdao, Yentian, Dalian, Tianjin, andNimbo ports. Bonded transit to inland destinations wasbegun on a pilot basis in Tianjin and Beijing.
* Reform the charging system for animal/plant inspections and Medium MOA/MOH/MOFhealth quarantines
* Lengthen the service hours for border procedures Shon SETC/Ministries 24-hour service has been provided in Shenzhen, Qingdao,and Tianjin since 1995.
* Remove commodity inspections and tallying 1rom mandatory Medium CIB/S1Cborder inspections
* Relax entry restrictions into commodity inspections and Medium CIB/STC A commodity inspection market was opened in early 1996tallying markets to qualified entities other than CIB
Adopt simplified Ensure broader use of uniform shipping/trade documents Short MOC/MOFTEC Uniform documents were adopted in Tianjin, Qingdao,documents Shanghai, and Minbo, and by COSCO.
* Adopt waybills for trade/shipping-related transactions and/or Medium MOC/MOFTECintroduce electronic form of bills of lading
Provide electronic data * Refine EDI-related standards, including EDIFACT Short MOC/CGA/MOFTE EDIFACT and other UN/ECE standards were adopted,interchange (EDI) C nationwide.
* Experiment with municipality-based EDis Short Municipalities Shanghai and Qingdao have drawn up development plans.
* Establish a nationwide EDI system Medium SETC/MOC/CGA/
MOFTEC
Upgrade the Facilitate the import of tractor trailers Medium MOFTEC/CGAtechnology base andfacilities
* Establish an enforceable EIR system Shon MOC MOC began a study to improve the EIR system.
Strengthen financing Create an environment conducive to JV investment Short SETC/MOFTEC
capability * Establish a legal and judicial framework for leasing Medium MOFTEC/MOC
* Channel funds into the intermodal sector areas through Medium Banks/Municipalitiesintermediation -
Notes: Short term implies one to three years, and medium term, three to five years.
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ANNEX 1: DESCRIPTION OF COSCO AND SINOTRANSGROUPS
A. BACKGROUND
1. Multimodal transport is a relatively new phenomenon and the history of itsdevelopment in China must necessarily trace back to the entities that are now regarded asthe primary multimodal transport operators but were not so at the time. The original entitiesof the China Ocean Shipping Company (COSCO) group and the China National ForeignTrade Transportation Group (Sinotrans) were founded, at different times, not too long afterthe founding of the People's Republic of China in 1949. With the new governmentphilosophy of centralized planning, all goods transport under foreign trade was required tobe provided by a single company and accordingly Sinotrans was founded in 1950 by thestate. At the time, too, the country had no fleet of its own and there was little oceanshipping business. To meet the growing demand in China's foreign trade transportation andto provide agency services to foreign vessels calling at Chinese ports, the China OceanShipping Agency (Penavico) was established by the state in 1953. It was eight years later,in 1961, that COSCO was formed to provide a merchant shipping fleet for the country.With the formation of COSCO and the complementarity of its shipping business with theshipping agency business. Penavico was merged into COSCO and became a subsidiary.
2. All three were established as state enterprises, with Sinotrans operating under theleadership of MOFTEC (or its equivalent at the time) and both Penavico and COSCO underthe purview of the MOC (or its equivalent at the time). From these early beginnings theyproceeded to grow and expand their activities in line with the policies of the centralgovernment and the growth of the economy. Sinotrans, as a company organizingcomprehensive transport for the movement of international trade, gradually established anetwork of relationships with carriers at home and abroad, built warehouses around thecountry, and then extended the operations to running its own trucks and ships. Penavico,prior to merging with COSCO, consolidated its industry position by acquiring the fewremaining shipping agencies left in the country. COSCO as the state company responsiblefor the development of the ocean shipping fleet became not only the preferred carrier for thecountry's foreign cargoes but was also instrumental in spawning new industries inshipbuilding and ancillary shipping services such as bunkering, etc.
3. As these companies grew, they began to encroach into each other's business area,thus creating a situation where freight forwarding, shipping agency, trucking andwarehousing, and maritime shipping, were common to all but with varying degrees ofmarket presence. This situation began to evolve with the open door policy in 1979 and
- 48 - ANNEX 1
subsequent economic reform programs, creating an environment that encouraged theenterprises to collaborate with one another and to form commercial alliances. Sinotrans andPenavico began a collaboration that resulted, in the mid-1980s, in an agreement thatallowed them to get into one each other's business; that is, an exchange deal which enabledPenavico to venture into freight forwarding and Sinotrans to venture into shipping agency.COSCO, by virtue of being a shipping company, had also developed a business departmentin freight forwarding for its container shipping lines in 1985. By 1988, the freightforwarding department became a wholly owned company of COSCO.
4. By 1993, COSCO and Sinotrans reorganized themselves and the former came to beknown as the COSCO Group while the latter became the Sinotrans Group. In the process,the COSCO Group's container shipping department was created as a separate companycalled COSCON.
B. STATUS AND SCOPE OF BUSINESS
5. Both the Sinotrans Group and COSCO Group are classified as China Corporations,a status accorded by the state as first-level corporations, which receive the highest rankingin the government. In accordance with this standing, both are registered at the NationalIndustry and Commerce General Bureau in Beijing and not the local bureau. Each has aseal bearing the national emblem and its business liability is guaranteed by the state. Asstate enterprises, the COSCO Group operates under the purview of MOC and the SinotransGroup operates under the leadership of MOFTEC.
6. The major business of the Sinotrans Group is the transportation of commercial andnoncommercial goods by sea, rail, road and air. It is also engaged in ocean shipping,trucking, air transportation, ship chartering, shipping agency, container leasing, storage andwarehousing, etc. The Group has also diversified into banking, investment, insurance,tourism, advertising, real estate development, hotels, restaurants, etc. It provides door-to-door services and operates as a multimodal transport operator.
7. Considered the biggest freight forwarder in China, Sinotrans has facilities in nearlyevery facet of transportation, except rail, and retails its services to shippers and other freightforwarders. The Sinotrans Group has 99 branches, 392 subbranches, and joint ventures inChina and abroad and has business relationships with more than 400 freight forwarders,ship agents, chartering brokers and shipping companies to help it form a comprehensiveforeign trade transportation network. Sinotrans operates a fleet totaling 2.5 milliondeadweight tons (dwt), 1 I port terminals, 170 trucking fleets, and 160 warehouses.
8. The COSCO Group is primarily engaged in shipping, shipping agency, freightforwarding, marine bunker supply, and road transportation. In addition, its activities spanfinance, tourism, air transport, property, warehousing, port management, trade, insurance,marine electronic engineering, etc.
9. The COSCO Group has over 300 subsidiaries in China and abroad, including 70overseas companies. With maritime transport as its core business, the Group operates a
- 49 - ANNEX I
fleet of 600 vessels of 15 million dwt., consisting of container vessels, roll-on/roll-offs(ro/ros), general cargo ships, forest products carriers, refrigerated ships, passenger vessels,bulk carriers and oil tankers. The fleet serves more than 1,000 ports in over 150 countriesand regions.
C. ORGANIZATIONAL STRUCTURE AND RELATIONSHIPS
Sinotrans Group
10. The main business arm of Sinotrans Group is the Sinotrans Corporation. Inaddition, there are 11 subsidiaries operating out of the head office comprising of ChinaNational Chartering Corp. (previously a MOFTEC enterprise operating independently),China Marine Shipping Agency, China Business Marine Corporation Ltd. (owns andmanages ships), Sinotrans Airfreight Forwarding Co., Sinotrans Transbridge FreightForwarding Corp., Transgrand Trade Co. (import and export trading), and othersubsidiaries. There are also 56 subsidiaries in various provinces, municipalities,autonomous regions and ports, 45 joint ventures at home, 109 overseas enterprises in Asia,Europe, Africa. North America and Australia, and 17 representative offices abroad.
11. Like many state enterprises, the management of Sinotrans Group is still evolving.The following developments reflect the situation. In the past, the head office exercisedcomplete control and management of the subsidiaries. The subsidiaries were operated like adepartment within a company. Personnel and financing activities were directly controlledby head office. Capital expenditures were to be decided and approved by the head office.Profits were handed to the head office which in turn handed them to MOF.
12. With the advent of economic reform, the head office became more flexible. At first,personnel management was shared with the local government, in the sense that seniorpersonnel of subsidiary companies were selected and decided jointly by both sides whileless senior personnel would be decided solely by the subsidiary companies. Financialreporting and management remained the same, with the net profits handed over to the headoffice and local taxes reported to the local government. It was not until 1994 that morefundamental changes in financial reporting and management began to take place. Thischange was brought about by the requirement of a new tax regime legislated by the NationalPeople's Congress, which essentially replaced the previous system of transferring profits bythe new tax system of returning dues to the central and local governments. Also, the headoffice became more flexible and granted greater independence and autonomy to thesubsidiaries. The subsidiaries were encouraged to run its business as an independent entitywith its own accounting system and decision-making process. The subsidiaries wererequired to hand in about 10 percent of their revenues, which are negotiable, to the parentcompany as a management fee.
COSCO Group
13. At the core of the Group lies COSCO, as well as three major operating unitsrepresented by Penavico, China Marine Bunker Supply Company and China Road
-50 - ANNEX I
Transportation Company. China Marine Bunker Supply and China Road TransportationCompany were previously operating as independent enterprises under the purview of MOC.
14. COSCO, as the main operating arm of the Group, has many subsidiaries comprisingthe following:
* COSCON* COSFRE* Guangzhou Ocean Shipping Company* Shanghai Ocean Shipping Company* Tianjin Ocean Shipping Company* Qingdao Ocean Shipping Company* Dalian Ocean Shipping Company
Lianyungang Ocean Shipping Company* Shenzhen Ocean Shipping Company* Xiamen Ocean Shipping Company
Various wholly owned and joint venture companies in finance, investment,insurance, trade, real estate development, etc.
15. Maritime transport and freight forwarding dominates COSCO's activities throughCOSCON, COSFRE and the eight shipping companies based in Guangzhou, Shanghai,Tianjin, Qingdao, Dalian, Lianyungang, Shenzhen and Xiamen.
16. In the freight forwarding area, COSCON and COSFRE work very closely together,often with the latter having an office wherever COSCON has a business presence. Inpractice COSFRE works directly for COSCON, and its operations are also managed byCOSCON. Personnel and financial affairs are directly managed by COSCO instead.COSFRE is being nurtured to be an important container freight forwarder, taking over alarge volume of Penavico&s freight forwarding business.
17. In the shipping agency area, Penavico has always had an independent mode ofoperation. Penavico operates its 52 branches directly and these branches report to the headoffice on all matters of business. However, personnel and financial affairs are controlled bythe parent COSCO Group (in practice, Penavico continues to report its financial matters toCOSCO as the Group company is founded only recently).
- 51- ANNEX2
ANNEX 2: INTERNATIONAL EFFORTS FOR TRADEFACILITATION
1. Documentation associated with international trade transactions has developed in anunstructured manner in response to the need to exchange goods and services betweencountries with different regulatory framework. The advent of modem transportation hasaccentuated this process. International trade transactions generate a massive transfer ofinformation along the trade, transport and payment chain. Along the chain there areexporters, importers, customs authorities, banks, forwarding agents, insurers, governmentagencies and others, all creating, transmitting, receiving, processing, checking and filing themany information elements related to the goods being traded. To move one consignment,up to 50 parties in two or more countries are typically involved, with an average of 50documents in over 360 copies per shipment. The cost of complying with outmodedregulations and control procedures and related paperwork can be very high in terms of lostincome and trade opportunities. It is reported that in some developing countries the cost oftrade logistics could be as much as 8 to 12 percent of the value of goods.' In a fiercelycompetitive world, even small savings through better trade and transport facilitation couldresult in improved competitiveness and increased trade.
2. Trade facilitation includes systematic rationalization of procedures, informationflows and documentation related to trade and transport in a country, and provides importantoperational tools to reduce paper work and procedures and expedite transfers of documentsand settlement of payments, thus helping to reduce the transaction costs involved. Sinceseveral agencies are involved both nationally and internationally, measures to improve thecoordination and harmonization of practices and procedures would be effective only whenthe agencies involved in international and intersectoral level cooperate in the developmentof appropriate solutions. In order to foster international cooperation in trade facilitationissues, the United Nations (UN) and other international bodies have actively been involved,for over three decades, in pursuing the simplification and harmonization of tradedocumentation and procedures. Among these bodies, the UN Economic Commission forEurope (ECE) has been the forerunner and leader in these efforts.
3. In 1960, ECE established an expert group to explore possible ways to simplify andstandardize export documents. It was agreed that the group should focus on establishing a
In the case of com transport in Philippines for example, the transit costs amount to about 37 percent ofvalue. See Carlos F. de Castro, Trade and Transport Facilitation Guidelines, World Bank, Washington,D.C. 1995. p.24.
- 52 - ANNEX2
basis for designing standard, aligned series of external trade documents. The group wasreorganized in 1971 into a Working Party on the Facilitation of International TradeProcedures. The working party concluded that establishing standards for documents couldonly solve a part of the documentation problem, and that the root cause of the problem canbe traced to the different administrative and commercial procedures. The proceduralproblems arose because of the infornation required by each party involved in the externaltrade transaction for its own use and the way in which it was transferred among the parties.
4. The efforts of ECE led ultimately to the formulation of United Nations Layout Key(UJNLK). The UNLK can be found in most of the international trade documents in usetoday. The UNLK uses rationalized methods for document preparation, where inputinformation is typed only once for a full set of export documents. The United Kingdom andSweden led the implementation of recommendations on document alignment. By the mid-1980s, the use of aligned documents based on the UJNLK became widespread, and arecurrently updated and maintained worldwide. The UNLK also became the basis for theEuropean Union's single administrative document (SAD).
5. Work on the UNLK brought out the importance of standardizing "data elements"and developing standard codes. Standard data elements allow information to be copiedfrom one form to another with some assurance that it has the same meaning and that it willfit into the allocated space. Examples of data elements are "shipping marks and containernumbers," "importer," "duty/tax rate," "quantity," "Custom value," etc. In addition, dataelements that are represented on forms by codes can be interpreted around the world in aconsistent manner. A number of standard codes related to international trade have beendeveloped. The LOCODE for the location of containers in ports and other locations is onesuch code. The standardized data elements, and associated code lists and relevantrecommendations are compiled in the United Nations Trade Data Element Directory(UJNTDED). International Standards Organization (ISO), an active participant in thestandardization efforts of the other international bodies, has published the UNLK andAligned Invoice Layout Keys for International Trade as ISO standards. The directory isavailable in the diskette form to member countries upon request.
6. The maintenance of standardized data facilitated the computerization of such data,which began in 1983 and is being constantly updated and also led to the development ofstandards for electronic exchange (EDI), known as "United Nations Electronic DataInterchange for Administration, Commerce and Transport (EDIFACT). ECE approvedthe EDIFACT standard in 1986, and the EDIFACT syntax was adopted as an ISO standardin 1987. Six regional EDIFACT boards are now functioning, covering the Central andEastern Europe, Pan American, Western European, Asia, Australia/New Zealand andAfrican Regions. Forty-five countries including Australia, Brazil, Canada, France,Germany, Hong Kong, India, Italy, Japan, Korea, Malaysia, Mexico, The Netherlands,People's Republic of China, Singapore, Chinese Taipei, United Kingdom and United Statesare presently involved in the EDIFACT development process, and this number will increaseas more countries join realizing the advantages of the EDIFACT.
-53 - ANNEX2
7. The EDIFACT has also helped to develop standard messages,2 which offer thebusiness community a truly viable standard. Some of the standard messages include:customs cargo report message, customs declaration message, just-in-time deliverymessage), etc.
8. Another initiative taken by ECE towards trade facilitation is the establishment ofnational trade facilitation organs that comprise representatives from both the private andpublic sector involved in the international trade. It is expected to provide a "framework forpermanent consultation and cooperation among the various parties interested in facilitationof intemational trade,"3 particularly in the areas of regulations, customs procedures andtrade procedures. There are now more than 37 national trade facilitation organizationsworking in France, United Kingdom, Thailand, Sweden, Bulgaria, Japan, Switzerland,Romania and Finland, to name a just a few countries.
9. While ECE is well known for its pioneering work on trade facilitation, there areother organizations that have worked closely with ECE and contributed towardsdevelopments in trade facilitation. The United Nations Conference on Trade andDevelopment (UNCTAD) has supplemented the work of ECE. Through variousprograms, UNCTAD provides support for trade facilitation measures in developingcountries and countries in transition. It started its facilitation program in 1971 through aspecial program for facilitation (FALPRO), providing advisory services, conductingfacilitation workshops and providing technical assistance in establishing computerizedcustoms systems and in the harmonization of trade documents. UNCTAD has developed acomputer system software for automated customs data management known as"ASYCUDA." The Special Program on Trade Efficiency (SPTE) is the successor toFALPRO and is actively involved in promoting EDIFACT standards, assisting developingcountries to negotiate transit facilitation agreements, and more importantly promoting tradeefficiency through its trade point (single window for a variety of trade transactions andadministrative clearance) offering modem information technology and linking buyers andsellers trough a global commercial network.
10. In simplifying container related customs and other procedures, World CustomsOrganization (WCO), previously known as the Customs Cooperation Council has playeda significant role. WCO has issued: Customs Convention on Containers developingtechnical specifications for containers, standard contracting procedure and compliancerelating to approval, terms of admission, and handling of containers, along withInternational Convention of the Harmonized Commodity Description and Coding Systemand International Convention on the Simplification and Harmonization of CustomsProcedures (the Kyoto Convention) for universal application of relatively simple standard
2 EDIFACT message is the electronic form of trade documents based on the UNLK.
3 United Nations Economic Commission for Europe, "National Facilitation Organs," RecommendationNo. 4, October 1974.
-54 - ANNEX2
customs provisions. It also actively contributes to the development of EDI messages relatedto Customs matters.
11. Nongovernmental organizations also participated in the international tradefacilitation efforts. The International Chamber of Commerce (ICC) has been a majorplayer in this effort. It has developed standard Industry and Commerce Terms(INCOTERMS) to provide a set of international rules for the interpretation of the mostcommonly used terms in foreign trade.4 This has helped minimize the possibilities ofcommercial disputes stenmming from ambiguities of different interpretations of contractterms in different countries. ICC and UJNCTAD developed the UNCTAD/ICC rules formultimodal transport documents, which have been incorporated in the InternationalAssociation of Freight forwarders (FIATA) combined transport bill of lading.
12. In China the involvement of multiple Chinese government departments andagencies in the clearance of cargoes, without proper coordination, results in delays inprocessing export/import cargo. Many of the documnents have to be filled by hand and inthe Chinese language. Some of the documentation paper size formats do not conform to theECE ISO standards. The use of EDI is limited to a few large organizations and the numberof UN standard messages now approved and in use by these companies are still limited.With China due to become a member of the World Trade Organization (WTO), it isimperative that the trade procedures and other trade facilitation measures follow bestpractices similar to those of China's trading partners worldwide. This should be undertakenat the earliest for China to avoid additional costs and loss of trade due to nonstandardtrading practices. This is all the more important in the context of increasing regionalcooperation among the pacific rim countries, such as Asia Pacific Economic Cooperation(APEC) where China is a major player.
4 Carlos F. de Castro, Trade and Transport Logistics Facilitation Guidelines, World Bank, Washington,D.C., 1993, p.5 .
-55 - ANNEX3
ANNEX 3: COST OF INEFFICIENT CONTAINERTRANSPORT SYSTEM
1. Trade and transport impediments translate into problems for producers andconsumers, as well as added cost to the national economy. In evaluating such economiccosts, this study uses the concept offorgone benefits in terms of the value of internationaltrade that would be lost by the Chinese producers and consumers. Forgone benefits arederived through a quantitative comparison of the existing (and slowly evolving) transportsystem in China (defined as the base case) and a hypothetical alternative future systemrepresenting the imposition of world standard logistics and infrastructural upgrades to thecurrent system.
2. The idea of forgone benefits obtained through a modern world-class transportsystem can also be viewed as incremental benefits over the existing system. The existingsystem would then serve as the base case, a reference point which represents a "business-as-usual approach" that is similar to the practice of "muddling through." Therefore, forgonebenefits in this analysis are with reference to the lost opportunities associated with the basecase in relation to the world-class alternative.
3. There are three categories of benefits measured in terms of growth in internationaltrade resulting from the modernization of the existing system. The first such benefit wouldaccrue from shorter container cycle times of finished products. All else constant, suchreductions would lead to a decrease in the overall logistics costs to the system users (bothexporters and importers) and consequently stimulate the international trade.
4. Secondly, benefits would accrue from reduction in inventory costs as a result offrequent shipments that lower inventory requirements. Lower inventory costs would freeup working capital, which could be put to altemative economic use. More importantly, itcould also lower the prices of exports and imports with a positive impact on internationaltrade. This category of benefit is not quantified for want of data. However, taking intoaccount the fact that, on average, 30 percent of inventory comprises raw materials, another30 percent work in process inventory, and the remaining 40 percent finished product, theseunquantified benefits not included in the analysis are likely to be at least of the samemagnitude as those obtained from shorter cycle times.
5. The third type of forgone benefits relates to reduced damage and theft, which occurmuch less frequently with containerized cargo. This category of benefits is likely to be evenlarger than any of the above two categories of benefits in China. This category of benefitscould not also be quantified for want of data and hence not included in the analysis.
- 56 - ANNEX3
6. Thus, the only quantifiable forgone benefit is consumers' and producers' surplusderived from shorter container cycle times. The first step for calculating this forgonebenefits is the estimation of the container cycle times for the existing (and slowlyevolving) transport system in China (base case) and for a hypothetical alternative futuresystem representing the imposition of world standard logistics system. Essentially, bycomparing the current Chinese and world standard processing times for each of theidentified regions, a baseline for the construction of an estimation procedure can beestablished.
7. A decrease in container processing times reduces the time cargo sits in inventory.This, in turn, lowers the implicit logistics cost of cargo delivery for both consumers andproducers. Container processing times for the base case and alternative future can betranslated directly to logistics costs; the difference between the two representing thepotential reduction in logistics costs available through the imposition of world standardtrade and transport practices.
8. Using a method developed by Vanags (1977), the potential transport costreduction computed is translated to plant gate (producer) and c.i.f. (consumer) pricechanges. The basic reasoning underlying Vanags' methodology is that the magnitude andrelative strength of market forces involved in the trade of goods ultimately determines theimpact transport cost reductions have on prices. If, through the struggle of market forces,a reduction in logistics costs leads to a net price increase (decrease) for regional producer-exporters (consumer-importers), the region benefits from the improvements. If, on theother hand, price changes are simply absorbed by overseas markets, affected regionsexperience no welfare gain. Note that one of the key determinants in the quantitativeapplication of this methodology is supply and demand elasticity for both domestic andinternational markets. For this study, elasticity values are set based on the estimates donein the sector work on trade reform of the Bank.
9. The price changes predicted through the application of Vanags' methodology arethen translated to output (consumption) changes for producers (consumers) using theassumed elasticity estimates. In turn, the predicted price and output changes arecombined to derive the potential net revenue (producer) and consumer surplus (consumer)benefits available through the imposition of world standard transport development (i.e.,"business-as-usual" as represented in the base case). Note that, in order to stream anddiscount the computed forgone benefits over a reasonable time period, a discount rate andhorizon period of 10 percent and 10 years, respectively, are used.
10. The above analysis was conducted for seven regions encompassing the whole ofChina:
Far West: Xinjiang, Tibet, Qinghai, Gansu, NingxiaNorth Hinterland: Heilongjiang, Jilin, Inner Mongolia, Shanxi, ShaanxiSouth Hinterland: Sichuan, Guizhou, Yunnan, GuangxiCentral Core: Henan, Anhui, Jiangxi, Hubei, Hunan
-57 - ANNEX3
North Coast: Liaoning, Hebei (including Beijing and Tianjin), ShandongEast Coast: Jiangsu (including Shanghai), ZhejiangSouth Coast: Fujian, Guangdong, Hainan
11. As presented in Figure 1, the total, combined forgone benefits to China ofmaintaining the status quo across the horizon period is estimated at approximately $7.8billion (about $3.7 billion for imports and $4.1 billion for exports). Since each of theunquantified benefits described in earlier paragraphs are expected to be at least of thesame magnitude as the benefits derived from shorter cycle times, the total cost to theChinese economy in terms of forgone benefits over a period of 10 years can be estimatedto be two to three times higher than the above figure.
12. From a regional standpoint, the results reflect the primary influences of relativetraffic flow changes and container cargo processing improvements. For example,although the North Hinterland represents only one-fourth of the traffic flows of the EastCoast (approximately 300,000 TEU movements versus 1.1 million, respectively), thecomparative change in cargo processing times (11 versus 4.5 days on average) raises thevalue of forgone benefits for the North Hinterland to within about two-thirds of the EastCoast. In proportional terms, then, the North Hinterland benefits far more than the EastCoast from improvements in the current transport system.
13. Similar observations can be drawn through a comparison of the Central Core andNorth Coast regions. Although the Central Core represents only one-third of the trafficvolumes of the North Coast, the forgone benefits estimates are quite close. Again,relative differences in container cargo processing times bias the results towards theCentral Core.
14. Other notable observations include:
* Since the Port of Hong Kong already provides world-standard services, theSouth Coast benefits little from improvements in the existing transportsystem;
* Since the South Hinterland and Far West regions carry little container cargo,little or no benefits accrue.
15. In sum, the findings reflect an expected pattern: the regions that currently sufferthe most from poor transport service will benefit the most from an overall improvementin transport logistics. Thus, while container volumes may be far greater in the coastalregions, the relative impact of a superior transport system is clearly biased towardhinterland regions (with the exception of geographically isolated regions such as the FarWest).
- 58 - ANNEX3
FIGURE 1: CONTAINERIZABLE FREIGHT AND FORGONE BENEFITS BY REGION
3000
2500
2000
1500. eeis( million)
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- 59 -
REFERENCES
China Transport Logistics Study Group, Transmode Consultants Inc. and SorenLennartsson, "China: Transport Logistics Study." Draft, October 1995.
de Castro, Carlos. Trade and Transport Logistics Facilitation Guidelines. SSATPWorking Paper No.4. World Bank, October 1993.
Peters, Hans. India's Growing Conflict between Trade and Transport. Policy, Planningand Research Working Paper. World Bank, January 1990.
. Service: The New Focus in Internal Manufacturing and Trade. PolicyResearch Working Paper. World Bank, August 1992.
NEA Transportation and Training, "China: Efficiency Improvement in the RoadTransport Sector." Final Report, December 1994.
Robeson, James F. The Logistics Handbook. New York, 1994.
World Bank, "China: Reform of State-Owned Enterprises." Report No. 14924-CHA,December 1995.
, "China: Regional Disparities." Report No. 14496-CHA, June 1995.
,"India: Staff Appraisal Report, Container Transport Logistics Project." ReportNo. 12780-IN, May 1995.
, "China: Staff Appraisal Report, Seventh Railway Project." Report No. 13795-CHA, April 1995.
, "China: Strategies for Road Freight Service Development." Report No. 12600-CHA, February 1995.
, "China: Internal Market Development and Regulation." Report No. 12291-CHA, March 1994.
, "China: Highway Development and Management Issues, Options, andStrategies." Report No. 1 1819-CHA, February 1994.
, "China: Strategic Issues for Ports and Shipping." Report No. 11771-CHA,December 1993.
, "China's Railway Strategy." Report No. 10592-CHA, February 1993.
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